-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CN+hXLAKVsgfbPga2tj1tNAii6vSW+9MbxntTxjWHBkfOkY4P5ayUT+MLjleX6oJ mkiPgjVikePIfvH+EKKWQw== 0000912057-97-002518.txt : 19970203 0000912057-97-002518.hdr.sgml : 19970203 ACCESSION NUMBER: 0000912057-97-002518 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19970131 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEA SYSTEMS INC CENTRAL INDEX KEY: 0001031798 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770394711 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-20791 FILM NUMBER: 97514829 BUSINESS ADDRESS: STREET 1: 385 MOFFETT PARK DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087434000 MAIL ADDRESS: STREET 1: 385 MOFFETT PARK DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94089 SB-2 1 SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- BEA SYSTEMS, INC. (Name of small business issuer in its charter) DELAWARE 7372-9907 77-0394711 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification Incorporation or Organization) Number)
385 MOFFETT PARK DRIVE, SUITE 105 SUNNYVALE, CALIFORNIA 94089-1208 (408) 743-4000 (Address and telephone number of principal executive offices and principal place of business) ---------------- WILLIAM T. COLEMAN III CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 385 MOFFETT PARK DRIVE, SUITE 105 SUNNYVALE, CALIFORNIA 94089-1208 (408) 743-4000 (Name, address and telephone number of agent for service) ---------------- COPIES TO: MICHAEL C. PHILLIPS, ESQ. BARRY E. TAYLOR, ESQ. KEVIN A. FAULKNER, ESQ. ROBERT G. O'CONNOR, ESQ. CORI M. ALLEN, ESQ. J. RANDALL LEWIS, ESQ. Morrison & Foerster LLP Wilson Sonsini Goodrich & Rosati 755 Page Mill Road Professional Corporation Palo Alto, CA 94304-1018 650 Page Mill Road Palo Alto, CA 94304-1050
---------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ---------------- 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 delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ---------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE Common Stock, $.001 par value $40,250,000 $12,197
(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE The Prospectus relating to the shares being registered hereby to be used in connection with a United States offering (the "U.S. Prospectus") is set forth following this page. The Prospectus to be used in a concurrent international offering (the "International Prospectus") will consist of alternate pages set forth following the U.S. Prospectus and the balance of the pages included in the U.S. Prospectus for which no alternate is provided. The U.S. Prospectus and the International Prospectus are identical except that they contain different outside front cover, inside front cover and outside back cover pages and different descriptions of the plan of distribution (contained under the caption "Underwriting" in both the U.S. Prospectus and the International Prospectus). Alternate pages for the International Prospectus will be filed by amendment and will be separately designated. 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. SUBJECT TO COMPLETION, DATED JANUARY 31, 1997 SHARES [LOGO] BEA SYSTEMS, INC. COMMON STOCK (PAR VALUE $0.001) ------------------ Of the shares of Common Stock offered, shares are being offered hereby in the United States and shares are being offered in a concurrent international offering outside the United States. The initial public offering price and the aggregate underwriting discount per share will be identical for both offerings. All of the shares of Common Stock offered hereby are being issued and sold by the Company. See "Underwriting". Prior to the offerings, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $ and $ . For factors to be considered in determining the initial public offering price, see "Underwriting". SEE "RISK FACTORS" ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol "BEAS". ------------------ 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. ------------------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE DISCOUNT(1) COMPANY(2) ---------------- ------------- ---------------- Per Share............................................................ $ $ $ Total(3)............................................................. $ $ $
- -------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Before deducting estimated expenses of $1,700,000 payable by the Company. (3) The Company has granted the U.S. Underwriters an option for 30 days to purchase up to an additional shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. Additionally, the Company has granted the International Underwriters a similar option with respect to an additional shares as part of the concurrent international offering. If such options are exercised in full, the total initial public offering price, underwriting discount and proceeds to Company will be $ , $ and $ , respectively. See "Underwriting". ------------------ The shares offered hereby are offered severally by the U.S. Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares will be ready for delivery in New York, New York, on or about , 1997 against payment therefor in immediately available funds. GOLDMAN, SACHS & CO. ALEX. BROWN & SONS INCORPORATED ROBERTSON, STEPHENS & COMPANY SOUNDVIEW FINANCIAL GROUP, INC. ------------ The date of this Prospectus is , 1997 Set forth on the left hand side of the inside front cover page are three square boxes, side by side, each bearing the inscription "SERVER." Set forth on top of these squares are twelve other squares of equal size, partially overlapping each other and connected to the three other boxes by four lines emanating from each square. Three of the twelve squares bear the inscription "SERVER." Underneath the graphic is set forth the caption "BEFORE BEA." Set forth on the right hand side of the inside front cover is an identical graphic, with the exception of a horizontal rectangular box bearing the caption "BEA ENTERPRISE TRANSACTION FRAMEWORK" inserted between the lower three squares and the other twelve squares. The three lower squares are connected to the rectangular box by three lines, one emanating from each square. The twelve other squares are connected to the rectangular box by twelve lines, one emanating from each square. Underneath the graphic is set forth a caption which reads "AFTER BEA." Above the two graphics across the length of the page is set forth the caption "THE BEA ENTERPRISE MIDDLEWARE SOLUTION:." Underneath the two graphics, across the length of the page is set forth the caption "SIMPLIFYING AND PROVIDING RELIABILITY TO THE PROCESSING OF COMPLEX BUSINESS TRANSACTIONS." Below this caption is set forth the following text: "Building, deploying, managing and expanding distributed mission-critical computer software applications across large enterprises is an increasingly important business requirement for large organizations. By coordinating these applications among the many distributed clients and servers supporting enterprise applications, the BEA Enterprise Transaction Framework provides an integrated middleware platform that is scalable, reliable, and flexible." The Company intends to furnish to its stockholders annual reports containing audited consolidated financial statements and quarterly reports containing unaudited consolidated financial information for the first three fiscal quarters of each fiscal year of the Company. ------------------ IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------ BEA, BEA Builder, BEA Connect, BEA Jolt, BEA Manager, Enterprise Middleware Solutions and Jolt are trademarks of the Company. The Company has licensed worldwide rights to TUXEDO, which is a registered trademark of Novell, Inc. in the United States and other countries. This Prospectus contains other product names, trade names and trademarks of the Company and of other organizations. 2 The inside cover gatefold is divided into two equal halves by a horizontal bar containing the caption "BEA ENTERPRISE TRANSACTION FRAMEWORK." Above the bar are set forth four clusters of pictures, connected to the dividing bar by four lines, one emanating from each cluster. The cluster on the left consists of three identical pictures, partially superimposed, depicting a man working on a laptop computer. The cluster bears the captions "ELECTRONIC COMMERCE," "INTERNET BROWSER" and "BEA JOLT." A cloud superimposed by a lightning symbol intersects the line connecting the cluster to the dividing bar. To the right of this cluster is set forth a second cluster consisting of two pictures, one of which depicts a desktop computer and one of which depicts the interior of a warehouse. This cluster bears the caption "MANUFACTURING," "PC CLIENT" and "BEA TUXEDO." To the right of this cluster is set forth a third cluster consisting of a picture of two persons sitting at a desk and talking, and a caption reading "HUMAN RESOURCES," "PC CLIENT" and "BEA TUXEDO." The cluster on the right contains three identical, partially superimposed pictures representing a mainframe computer. The cluster bears the captions "MAINFRAME" and "DATABASES." Below the dividing bar are set forth five clusters of pictures, connected to the dividing bar by five lines, one emanating from each cluster. The cluster on the left consists of three identical, partially superimposed pictures of an automated check-out counter and a hand sliding a credit card. This cluster bears the captions "POINT OF SALE" and "PC CLIENT." To the right of this cluster is set forth a second cluster consisting of a picture of a person working on a laptop computer and the captions "THIRD PARTY SALES" and "PC CLIENT." To the right of this cluster is set forth a third cluster depicting a CD superimposed on a hundred dollar bill, an electronic ticker and a number of documents. The cluster contains the captions "FINANCE," "PC CLIENT" and "BEA TUXEDO." To the right of this cluster is set forth a cluster consisting of two pictures, one depicting a person wearing a head-set and microphone and one depicting a laptop computer. The cluster contains a caption reading "THIRD PARTY SALES" and "PC CLIENT." The cluster on the right consists of three identical, partially superimposed pictures of a computer room containing a number of servers. The cluster contains the caption "UNIX, NT SERVERS" and "DATABASES." Set forth in the upper left-hand corner of the gatefold is a caption reading "LARGE ORGANIZATIONS USE BEA'S MIDDLEWARE AS THE PLATFORM TO RUN THEIR MOST CRITICAL APPLICATIONS." In the upper right-hand corner of the gatefold is set forth the following text: "BEA's products and services are used as the software infrastructure to support and integrate a company's most important business applications. Using the BEA Enterprise Transaction Framework as the infrastructure for its applications, a company provides its business applications with transaction integrity and security, and integration with widely disparate database, client, and server technologies. This infrastructure can be used in a wide variety of distributed computing environments from legacy mainframes to internet clients. The BEA solution also provides highly scalable technology to handle thousands of users simultaneously, and integration with packaged software including those that use BEA's middleware." PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK AND A CONVERTIBLE NOTE INTO SHARES OF COMMON STOCK EFFECTIVE AUTOMATICALLY UPON THE CLOSING OF THE OFFERINGS AND (II) ASSUMES NO EXERCISE OF THE U.S. UNDERWRITERS' OR INTERNATIONAL UNDERWRITERS' OVER-ALLOTMENT OPTIONS. SEE "UNDERWRITING." THE COMPANY BEA Systems, Inc. ("BEA" or the "Company") designs, develops, markets and supports software used by large organizations to enable and support their most critical business processes. The Company's Enterprise Transaction Framework is an integrated middleware software platform for developing, deploying and managing distributed mission-critical computer software applications. The core of the BEA Enterprise Transaction Framework is BEA TUXEDO, a software engine that manages transactions and communications for enterprise-wide applications, enabling organizations to realize the benefits offered by distributed computing environments while preserving the traditional advantages of mainframe-based systems. BEA products provide a middleware software infrastructure that supports thousands of simultaneous users distributed worldwide. In addition to its software products, BEA provides its customers with complete solutions through a range of professional services offerings. BEA's products are marketed and sold worldwide, principally through the Company's direct sales force and also indirectly through third parties. BEA's products have been adopted in a wide variety of industries, including banking and finance, manufacturing, retail, technology, telecommunications and transportation. For the nine months ended October 31, 1996, BEA sold new product licenses to over 170 customers, including over 50 new customers. The total number of customers using products that have been acquired and developed by BEA is greater than 600 worldwide. These customers include: The AT&T Corp., Bell Communications Research, Inc., Damark International Inc., Discover Card Trust, Federal Express Corp., Fidelity Investments, Gap Inc., J.J. Kenney, McKesson Corp., Motorola Inc., Nippon Telephone & Telegraph, Northwest Airlines Corp., U.K. Employment Services, Union Bank of Switzerland and Walgreens Co. In addition, independent software vendors ("ISVs"), such as PeopleSoft Inc. and Clarify, Inc., embed BEA TUXEDO into their own product offerings in order to improve the scalability, portability and interoperability of their products. Over the past decade, the information systems of many organizations have been evolving from traditional mainframe systems to distributed computing environments. This evolution has been driven by the benefits offered by distributed computing, including lower incremental technology costs, faster application development and deployment, increased flexibility and improved access to business information. However, the inherent technical and business limitations of distributed computing have generally precluded its use for complex, large-scale, mission-critical applications, such as airline reservations, credit card processing and customer billing and support systems, that enable and support fundamental business processes. These shortcomings include the limited scalability, reliability and interoperability of distributed computing environments. In addition, it has been difficult to integrate distributed computing technologies with existing mission-critical applications, limiting organizations' ability to leverage their substantial investments in legacy systems and existing personnel and skills. BEA's products and services enable companies to overcome the limitations of distributed computing for mission-critical applications. BEA's Enterprise Transaction Framework, based upon time-tested and market-proven BEA TUXEDO technology, provides a middleware solution that addresses the scalability, manageability, platform independence, interoperability, integrity, reliability and security requirements of complex, large-scale, distributed computing in the heterogeneous environments present in most major organizations. The BEA solution allows companies to leverage their substantial 3 investments in legacy systems, significantly extending the useful lives of mainframe and programmer assets while exploiting the benefits offered by distributed computing. The Company's objective is to establish its middleware solutions as the industry standard for developing, deploying and managing distributed mission-critical applications. To this end, BEA intends to enhance its technological leadership by adding new functionality to its products; expand its global distribution facilities to complement its direct sales, services, training and support capabilities; promote the embedding of BEA TUXEDO into the product offerings of ISVs to accelerate the acceptance of its products; leverage strategic partnerships to augment the efforts of its direct sales force; and provide the software and services necessary to conduct safe, reliable transactions over the Internet. The Company acquired worldwide exclusive rights to TUXEDO from Novell, Inc. in February 1996, acquired Information Management Company and Independence Technologies, Inc., two leading distributors of TUXEDO, in September 1995 and November 1995, respectively, and acquired a number of other TUXEDO distribution, sales and support organizations between May 1996 and December 1996. Such acquisitions are referred to herein as the "Acquisitions." See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Company Background" and Consolidated Financial Statements. References herein to "BEA" or the "Company" refer to BEA Systems, Inc., its subsidiaries and predecessor entities acquired in the Acquisitions. The Company was incorporated in Delaware in January 1995 under the name BEA Enterprises, Inc. and changed its name to BEA Systems, Inc. in September 1995. The Company's headquarters are located at 385 Moffett Park Drive, Sunnyvale, California 94089-1208, and its telephone number is (408) 743-4000. RISK FACTORS For a discussion of considerations relevant to an investment in the Common Stock, see "Risk Factors." THE OFFERINGS Common Stock offered by the Company.......... shares Common Stock to be outstanding after the shares(1) Offerings................................... Use of proceeds.............................. For repayment of certain borrowings under a credit line and payment of certain obligations incurred in connection with the Acquisitions, and for working capital and general corporate purposes and possible acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... BEAS
- -------------- (1) Based on the number of shares of Common Stock outstanding as of October 31, 1996, as calculated on a pro forma basis to give effect to the conversion of all shares of Preferred Stock and a convertible note upon completion of the Offerings based on an assumed initial public offering price of $ . Excludes (i) 6,343,000 shares issuable upon exercise of options outstanding as of October 31, 1996, having a weighted average exercise price of $0.382 per share, under the Company's 1995 Flexible Stock Incentive Plan and (ii) 917,450 shares issuable upon exercise of options granted from November 1, 1996 to January 15, 1997, (having a weighted average exercise price of $5.35 per share, and (iii) 5,985,800 additional shares authorized for issuance under the Company's 1995 Flexible Stock Incentive Plan, 1997 Stock Incentive Plan and 1997 Employee Stock Purchase Plan (collectively, the "Stock Plans"). See "Management--Stock Plans" and Note 11 of Notes to BEA Systems, Inc. Consolidated Financial Statements. 4 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL NINE MONTHS HISTORICAL PRO FORMA ENDED PRO FORMA NINE YEAR ENDED YEAR ENDED OCTOBER 31, MONTHS ENDED JANUARY 31, JANUARY 31, ---------------------- OCTOBER 31, 1996(1) 1996(1)(2) 1995(1) 1996 1996(2) ------------ ------------ ----------- --------- --------------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License Revenues.............................. $ 3,569 $ 524 $ 26,855 Service Revenues.............................. 1,564 230 9,494 ------------ ------------ ----------- --------- --------------- Total Revenues.............................. 5,133 $ 33,561 754 36,349 $ 37,366 Total Cost of Revenues(3)....................... 2,704 15,712 487 12,498 13,379 ------------ ------------ ----------- --------- --------------- Gross Margin.................................... 2,429 17,849 267 23,851 23,987 Operating Expenses: Research and Development...................... 3,244 10,059 531 12,781 12,781 Sales and Marketing........................... 2,572 15,102 973 20,814 21,171 General and Administrative.................... 3,058 6,519 796 9,019 9,084 Write-Off of In-Process Research and Development................................. 11,194 -- 6,060 62,248 -- ------------ ------------ ----------- --------- --------------- Total Operating Expenses.................... 20,068 31,681 8,360 104,862 43,036 Income (Loss) from Operations................... (17,639) (13,832) (8,093) (81,011) (19,049) Other Income (Expense).......................... 48 61 5 95 95 Interest Expense................................ 89 6,795 21 4,941 4,951 ------------ ------------ ----------- --------- --------------- Income (Loss) before Income Taxes............... (17,680) (20,566) (8,109) (85,857) (23,905) Provision for Income Taxes...................... 60 60 -- 300 326 ------------ ------------ ----------- --------- --------------- Net Income (Loss)............................... $ (17,740) $ (20,626) $ (8,109) $ (86,157) $ (24,231) ------------ ------------ ----------- --------- --------------- ------------ ------------ ----------- --------- --------------- Pro Forma Net Income (Loss) Per Share(4)........ $ (0.58) $ (0.68) $ (1.72) $ (0.48) ------------ ------------ --------- --------------- ------------ ------------ --------- --------------- Pro Forma Shares Used in Computing Net Income (Loss) Per Share(4)........................... 30,385 30,385 50,107 50,107 ------------ ------------ --------- --------------- ------------ ------------ --------- --------------- OCTOBER 31, 1996 -------------------------- ACTUAL AS ADJUSTED(5) --------- --------------- CONSOLIDATED BALANCE SHEET DATA: Cash and Cash Equivalents....................... $ 1,628 $ 32,478 Working Capital................................. (30,018) 832 Total Assets.................................... 48,463 79,313 Long-Term Obligations (Less Current Portion).... 52,361 47,859 Stockholders' Equity (Deficit).................. (73,715) (25,900)
- ------------------ (1) Also includes results of operations from incorporation (January 20, 1995) through January 31, 1995. (2) Pro forma to give effect to the acquisitions of IMC, ITI, TUXEDO Systems Group and USL France as if they occurred on February 1, 1995 for the pro forma as adjusted results for the year ended January 31, 1996, and February 1, 1996 for the pro forma nine months ended October 31, 1996. The pro forma adjustments include (i) the elimination of revenues and expenses which occurred between the entities prior to their acquisition by BEA, (ii) amortization of intangible assets acquired for the full period, (iii) an increase in interest expense resulting from debt issued to acquire IMC and TUXEDO Systems Group, (iv) exclusion of material non-recurring charges relating to write-offs of in-process research and development and an extraordinary gain resulting from the forgiveness of debt. Additionally, the pro forma as adjusted results for the year ended January 31, 1996 include Company management's adjustments to reflect estimated expenses in excess of direct salaries and benefits for TUXEDO Systems Group. See "Selected Unaudited Pro Forma Operating Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Consolidated Results of Operations." (3) Includes expenses attributable to amortization of intangible assets resulting from prior acquisitions in the amounts of $1.1 million, $ , $116,000, $5.3 million and $ million, respectively. (4) See Note 1 of Notes to BEA Systems, Inc. Consolidated Financial Statements for an explanation of the method used to determine the number of shares used in computing net income (loss) per share. (5) Adjusted to reflect the sale of shares offered by the Company hereby, based on an assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom. 5 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. LIMITED OPERATING HISTORY; NO ASSURANCE OF PROFITABILITY The Company was incorporated in January 1995 and, accordingly, has a limited operating history upon which an evaluation of the Company and its prospects can be based. Revenues generated by the Company to date have been derived primarily from sales of BEA TUXEDO, a product to which the Company acquired worldwide rights in February 1996, and from fees for related services. Since its inception, the Company has acquired a number of businesses and other products in addition to BEA TUXEDO. Prior to the consummation of these acquisitions, the Company had no revenues and limited business activities. Accordingly, the Company is subject to the risks inherent both in the operation of a new business enterprise and the integration of a number of previously separate and independent business operations, and there can be no assurance that the Company will be able to address these risks successfully. Although the Company has experienced recent substantial revenue growth, the Company has incurred significant net losses since its inception, including losses of approximately $17.7 million and $86.2 million during the fiscal year ended January 31, 1996 and the nine months ended October 31, 1996, respectively. At October 31, 1996, the Company had an accumulated deficit of approximately $104.5 million. In addition, in connection with certain acquisitions, the Company recorded approximately $99 million as intangible assets, approximately $80 million of which has already been amortized and expensed and approximately $19 million of which is expected to be amortized and expensed in future periods through the Company's fiscal year ending January 31, 2001. The amounts of such intangible assets to be expensed in future periods, which will not be separately reported but will be included primarily in cost of sales, are expected to be $2.3 million per fiscal quarter in 1997 and are expected to average $1.3 million per fiscal quarter in 1998. To the extent the Company makes acquisitions of businesses, products and technologies in the future, the Company may report additional, potentially significant, amortization expenses related thereto. There can be no assurance that the Company will be profitable in any future period, and recent operating results should not be considered indicative of future financial performance. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company expects that it will experience significant fluctuations in future quarterly operating results as a result of many factors, including, among others: the size and timing of orders; introduction or enhancement of products by the Company or its competitors; market acceptance of middleware products; the lengthy sales and implementation cycle for the Company's products and the potential for significant delays; market acceptance of new products and product enhancements; technological changes in computer systems and environments; the structure and timing of future acquisitions of businesses, products and technologies, if any; increased competition; the ability of the Company to develop, introduce and market new products on a timely basis; changes in the Company's or its competitors' pricing policies; customer order deferrals in anticipation of future new products and product enhancements, if any; the Company's success in expanding its sales and marketing programs; mix of products and services sold; mix of distribution channels; ability to meet the service requirements of its customers; costs associated with acquisitions; loss of key personnel; fluctuations in foreign currency exchange rates; and general economic conditions. As a result of all of these factors, the Company believes that quarterly revenues and operating results are difficult to forecast and period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. 6 Because the Company generally ships software products within a short period after receipt of an order, it will not at any given time have a material backlog of unfilled orders, and revenues in any quarter will be substantially dependent on orders booked and shipped in that quarter. In addition, the Company historically has recognized, and expects to continue to recognize, a significant portion of license revenue in the last month of each fiscal quarter. The Company anticipates that it will derive a substantial portion of its revenues from increasingly large orders, as customers deploy BEA products throughout their organizations. Any inability of the Company to generate large orders, or any delay or loss of such orders in a particular quarter, will materially adversely affect the Company's revenues and, more significantly on a percentage basis, its net income or loss in that quarter. The Company's expense levels are based, in part, on its expectations of future revenues. The Company expects to increase expense levels in each of the next several quarters, primarily to support increased sales, services and customer support efforts and research and development efforts, and to build greater infrastructure in its international offices, particularly in finance and administration functions. The Company is generally unable to reduce expenses significantly in the short term to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall of revenues in relation to the Company's expectations or any material delay of large orders would have a material adverse effect on the Company's business, operating results and financial condition. Due to all the foregoing factors, it is likely that in some future quarters the Company's operating results will not meet the expectations of public stock market analysts and investors. As a result, the market price of the Company's Common Stock would be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PRODUCT CONCENTRATION; DEPENDENCE ON GROWTH OF MARKET FOR MIDDLEWARE; NOVELL RELATIONSHIP Revenues generated by the Company to date have been derived primarily from sales of BEA TUXEDO, a product to which the Company acquired worldwide rights in February 1996, and from fees for related services. These products and services are expected to continue to account for a substantial majority of the Company's revenues for the foreseeable future. As a result, factors adversely affecting the pricing of or demand for BEA TUXEDO, such as competition or technological change, could have a material adverse effect on the Company's business, operating results and financial condition. The Company's success is dependent in significant part on the Company's middleware software products achieving market acceptance by large organizations with substantial legacy mainframe systems. All of the Company's business is in the market for middleware and related services, which is still an emerging market that is characterized by continuing technological developments, evolving industry standards and changing customer requirements. The Company's future financial performance will depend in large part on continued growth in the number of companies extending their mainframe-based, mission-critical applications to an enterprise-wide distributed computing environment through the use of middleware technology. There can be no assurance that the market for middleware technology and related services will continue to grow. If the middleware market fails to grow or grows more slowly than the Company currently anticipates, or if the Company experiences increased competition in this market, the Company's business, operating results and financial condition will be materially adversely affected. Under the terms of the Company's license agreement with Novell, Inc. ("Novell") for the BEA TUXEDO product (the "Novell Agreement"), the Company is required to make aggregate annual payments to Novell of $32 million and $33 million during the calendar years 1997 and 1998, respectively, and, to acquire perpetual rights to TUXEDO, a final payment of $12 million in January 1999. In connection with the Novell Agreement, Warburg, Pincus Ventures, L.P., the Company's principal stockholder has guaranteed payment obligations to Novell. See Note 6 of Notes to BEA Systems, Inc. Consolidated Financial Statements. In addition, the Novell Agreement requires BEA to employ at least 47 developers devoted to BEA TUXEDO product development at December 31, 1997 and 62 such developers at December 31, 1998. There can be no assurance that the Company will employ the required minimum number of BEA TUXEDO developers. Any failure to make the required payments or any failure by the Company to achieve minimum contractual employment levels under the Novell 7 Agreement would result in a loss of the Company's rights to BEA TUXEDO, which would have a material adverse effect on the Company's business, operating results and financial condition. See "--Substantial Future Capital Needs," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Products." LENGTHY SALES AND IMPLEMENTATION CYCLE The Company's products are typically used to integrate applications that are critical to a customer's business, and the purchase of the Company's products is often part of a customer's implementation of a distributed computing environment. In such cases, the sales and implementation of the Company's middleware software products are included in a larger decision-making process within a customer's organization which can cause orders of the Company's products to be delayed or be subject to numerous factors beyond the Company's control. During the nine months ended October 31, 1996, license fees per customer for BEA products generally ranged from $95,000 to $1.7 million and averaged $395,000. The Company expects that licenses for BEA TUXEDO will increase in size and the implementation of the Company's products will become more complex as customers use BEA TUXEDO for larger and more sophisticated installations. For these and other reasons, the sales and implementation cycle associated with the licensing of the Company's products is very lengthy and is subject to a number of significant delays over which the Company has little or no control. Following the signing of a license contract for BEA products, a customer's implementation consists of a pre-deployment and a deployment phase. Approximately 10 to 30 percent of the revenues from most customers is realized during the pre-deployment phase and is usually weighted toward professional services and training. The remaining portion of revenues is realized during the deployment stage and predominantly consists of license fees. While the sales and implementation cycle varies substantially from customer to customer, for initial sales it has ranged from 18 to 24 months from the initial contact to the completion of the deployment phase. Any significant or ongoing failure by the Company to achieve such sales or any delays in the implementation process could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Sales, Marketing and Services." COMPETITION The market for middleware software and related services is highly competitive. The Company's competitors are diverse and offer a variety of solutions directed at various segments of the middleware software marketplace. These competitors include database vendors such as Oracle Corporation ("Oracle"), IBM Corporation ("IBM") and others, which offer their own development tools for use with their proprietary databases, as well as companies offering and developing middleware software products and related services or application development tools that compete with products offered by the Company. In addition, internal development groups within prospective customers' organizations may develop software and hardware systems that may substitute for those offered by the Company. A number of the Company's competitors and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition and a larger installed base of customers than the Company. The Company's principal competitors currently are database vendors that advocate client/server networks driven by the database server and software tool vendors that offer development tools designed to enable customers to create distributed mission-critical applications. Oracle is the primary relational database vendor offering products that are intended to serve as alternatives to the Company's enterprise middleware solutions. Currently, the software development tool vendors typically emphasize the broad versatility of their toolsets and, in some cases, offer complementary middleware software that supports these tools and performs messaging and other basic middleware functions. There can be no assurance that the Company will compete successfully with database vendors and software tool vendors, or that the products offered by such vendors will not achieve greater market acceptance than the Company's products. 8 Microsoft has announced that it will provide middleware functionality in future versions of its Windows NT operating system and has recently announced the release of a product that includes certain middleware functionality. The bundling of middleware functionality in Windows NT will require the Company to compete with Microsoft in the Windows NT marketplace, where Microsoft will have certain inherent advantages due to its significantly greater financial, technical, marketing and other resources, greater name recognition, its substantial installed base and the integration of its enterprise middleware functionality with Windows NT. If Microsoft successfully incorporates middleware functionality into Windows NT or separately offers middleware applications, the Company will need to differentiate its products based on functionality, interoperability with non-Microsoft platforms, performance and reliability and establish its products as more effective solutions to customers' needs. There can be no assurance that the Company will be able to successfully differentiate its products from those offered by Microsoft, or that Microsoft's entry into the middleware market will not materially adversely affect the Company's business, operating results and financial condition. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of the Company's current and prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could materially adversely affect the Company's ability to sell additional licenses and maintenance and support renewals on terms favorable to the Company. Further, competitive pressures could require the Company to reduce the price of its products and related services, which could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon the Company's business, operating results and financial condition. See "Business-- Competition." DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL The Company's future performance depends to a significant degree upon the continued service of its key members of management, as well as marketing, sales, consulting and product development personnel. The loss of any of William T. Coleman III, the Company's President, Chairman and Chief Executive Officer, Edward W. Scott, Jr., the Company's Executive Vice President of Worldwide Field Operations, or Alfred S. Chuang, the Company's Chief Technical Officer and Executive Vice President of Product Development, or one or more of the Company's other key personnel, would have a material adverse effect on the Company's business, operating results and financial condition. The Company believes its future success will also depend in large part upon its ability to attract and retain highly skilled management, marketing, sales, consulting and product development personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to retain its key employees or that it will be successful in attracting, assimilating and retaining them in the future. As the Company seeks to expand its worldwide support organization, hiring of qualified technical personnel in foreign countries will be difficult due to the limited number of qualified professionals. Failure to attract, assimilate and retain key personnel would have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Novell Agreement requires the Company to employ a minimum number of research and development personnel. See "--Product Concentration; Dependence on Growth of Market for Middleware; Novell Relationship" and "Business--Employees." EXPANDING DISTRIBUTION CHANNELS AND RELIANCE ON THIRD PARTIES To date, the Company has sold its products principally through its direct sales force, as well as through indirect sales channels, such as independent software vendors ("ISVs"), hardware OEMs, systems integrators, independent consultants and distributors. The Company's ability to achieve significant revenue growth in the future will depend in large part on its success in expanding its direct sales force and in further establishing and maintaining relationships with distributors, OEMs and ISVs. In 9 particular, a significant element of the Company's strategy is to embed its technology in products offered by the Company's ISV customers. The Company intends to seek distribution arrangements with other ISVs to embed the Company's technology in their products and expects that these arrangements will account for a significant portion of the Company's revenues in future periods. Although the Company is currently investing, and plans to continue to invest, significant resources to expand its direct sales force and to develop relationships with distributors and ISVs, the Company has at times experienced and continues to experience difficulty in recruiting qualified sales personnel and in establishing necessary third-party relationships. There can be no assurance that the Company will be able to successfully expand its direct sales force or other distribution channels, secure license agreements with additional ISVs on commercially reasonable terms or at all, or otherwise further develop its relationships with distributors and ISVs, or that any such expansion or additional license agreements would result in an increase in revenues. Although the Company believes that its investments in the expansion of its direct sales force and in the establishment of other distribution channels through third parties ultimately will improve the Company's operating results, to the extent that such investments are made and revenues do not correspondingly increase, the Company's business, operating results and financial condition will be materially and adversely affected. See "Business--Sales, Marketing and Services." INTERNATIONAL OPERATIONS International revenues accounted for 11% and 31% of total revenues in the fiscal year ended January 31, 1996 and the nine months ended October 31, 1996, respectively. The Company believes that its success depends upon continued expansion of its international operations. As of December 31, 1996, the Company had sales and service offices in Brisbane, Capetown, Espoo (Finland), Hong Kong, Johannesburg, London, Munich, Paris, Sao Paulo, Sydney, Toronto, Yokohama and Zaventem (Belgium). At December 31, 1996, the Company also had 13 resellers in 11 locations outside the United States. The Company's international business involves a number of risks, including lack of acceptance of localized products; cultural differences in the conduct of business; longer accounts receivable payment cycles; greater difficulty in accounts receivable collection; seasonality due to the slow-down in European business activity during the summer months; unexpected changes in regulatory requirements; royalties and withholding taxes that restrict the repatriation of earnings; tariffs and other trade barriers; difficulty hiring qualified personnel; economic and political conditions in each country; management of an enterprise spread over various countries; and the burden of complying with a wide variety of foreign laws. In addition, the Company has acquired or otherwise established 13 foreign offices since inception and is seeking to integrate each of these offices into the Company's overall administrative and financial reporting structure, which is anticipated to result in the hiring of additional personnel in many of these international offices. The Company's international sales are generated primarily through its international sales subsidiaries, and most are currently denominated in local currency, creating a risk of foreign currency translation gains and losses. To the extent profit is generated or losses are incurred in foreign countries, the Company's effective income tax rate may be materially and adversely affected. In future periods, the Company may determine to increase the percentage of international sales of its products at prices denominated in U.S. dollars. In such event, fluctuations in currency exchange rates may render the price of the Company's products unaffordable or uncompetitive. Such an event could have a material adverse effect on the Company's business, financial condition and results of operations. In some markets, localization of the Company's products is essential to achieve market penetration. The Company may incur substantial costs and experience delays in localizing its products, and there can be no assurance that any localized product will generate significant revenues. There can be no assurance that any of the factors described herein will not have a material adverse effect on the Company's future international sales and, consequently, its business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Sales, Marketing and Services" and Note 12 of Notes to BEA Systems, Inc. Consolidated Financial Statements. 10 PAST AND FUTURE ACQUISITIONS From its inception in January 1995 through October 1996, the Company has concluded the acquisition of eight companies, divisions or products. Although the Company anticipates that the integration of these companies, divisions or products will not adversely affect the Company's operating results, this integration will involve the assimilation of conflicting operations and products, which will divert the attention of the Company's management team and may have a material adverse effect on the Company's operating results in future quarters. In addition, in connection with the acquisition of certain companies, divisions or products, the Company is required to make certain future payments, including aggregate annual payments to Novell of $32 million and $33 million during the calendar years 1997 and 1998 and a final payment of $12 million in January 1999 in connection with the Company's acquisition of TUXEDO. Any failure to make such payments or otherwise perform the Company's other continuing obligations relative to these acquisitions would result in the Company's loss of certain of its rights in the acquired businesses or products and would have a material adverse effect on the Company's business, operating results and financial condition. The Company intends to make additional acquisitions in the future, although there can be no assurance that suitable companies, divisions or products will be available for acquisition. Such acquisitions entail numerous risks, including an inability to successfully assimilate acquired operations and products, diversion of management's attention, difficulties and uncertainties in transitioning the business relationships from the acquired entity to the Company and loss of key employees of acquired companies. In addition, future acquisitions by the Company may result in dilutive issuances of equity securities, the incurrence of debt, large one-time expenses, and the creation of goodwill or other intangible assets that could result in significant amortization expense. These factors could have a material adverse effect on the Company's business, operating results and financial condition. See "--Product Concentration; Dependence on Growth of Market for Middleware; Novell Relationship," "--Substantial Future Capital Needs," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 of Notes to BEA Systems, Inc. Consolidated Financial Statements. MANAGEMENT OF GROWTH The Company currently is experiencing a period of rapid and substantial growth that has placed, and is expected to continue to place, a strain on the Company's administrative, financial and operational resources. The Company's revenues have increased from $5.1 million for the year ended January 31, 1996 to $36.3 million for the nine months ended October 31, 1996, and the number of Company employees has increased from 120 employees in three offices in the United States at January 31, 1996 to 371 employees in 22 offices in 12 countries at October 31, 1996. The Company's ability to manage its staff and growth effectively will require it to continue to improve its operational, financial and management controls, reporting systems and procedures, to train, motivate and manage its employees and, as required, to install new management information and control systems. In that regard, the Company is currently installing and implementing a new management information system that is designed to integrate financial and other reporting among the Company's multiple domestic and foreign offices. In addition, the Company intends to significantly increase its administrative staff in its foreign offices, particularly in the area of finance, and to improve financial reporting and controls for the Company's international operations. There can be no assurance that the Company will be able to implement improvements to its management information and control systems in an efficient or timely manner or that, during the course of this implementation, deficiencies in existing systems and controls will not be discovered. If management of the Company is unable to manage growth effectively, the Company's business, operating results and financial condition will be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL FUTURE CAPITAL NEEDS The Company will require substantial additional funds to satisfy its payment obligations to Novell related to its acquisition of TUXEDO. Under the Novell Agreement, the Company is required to make 11 aggregate payments of $32 million and $33 million during the years ended December 31, 1997 and 1998, respectively, and, to acquire perpetual rights to TUXEDO, a final payment of $12 million in January 1999. Payment obligations have been guaranteed by the Company's principal stockholder, Warburg, Pincus Ventures LLC ("Warburg"). See Note 6 of Notes to BEA Systems, Inc. Consolidated Financial Statements. As of October 31, 1996, the Company had $1.6 million in cash, cash equivalents and short-term investments. The Company believes that the net proceeds of the Offerings, together with its cash, cash equivalents and short-term investments, the Warburg guaranty, available borrowings under its lines of credit and cash from operations, will be sufficient to meet its working capital requirements, including the payment obligations under the Novell Agreement, through at least January 31, 1998. Thereafter, the Company expects that it will require substantial additional capital to meet its $33 million and $12 million payment obligations to Novell in 1998 and January 1999, respectively. Depending upon the Company's success in achieving continued revenue growth from sales of BEA TUXEDO and services related thereto, the Company may require additional equity or debt financing earlier than currently anticipated in order to fund its working capital and other requirements. There can be no assurance that additional financing will be available or, if available, that it will be on terms satisfactory to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS The market for the Company's products is highly fragmented, competitive with alternative computing architectures, and characterized by continuing technological development, evolving industry standards and changing customer requirements. The introduction of products embodying new technologies, the emergence of new industry standards or changes in customer requirements could render the Company's existing products obsolete and unmarketable. As a result, the Company's success depends upon its ability to enhance existing products, respond to changing customer requirements, and develop and introduce in a timely manner new products that keep pace with technological developments and emerging industry standards. Customer requirements include, but are not limited to, operability across distributed and changing heterogeneous hardware platforms, operating systems, relational databases and networks. For example, although BEA TUXEDO interoperates with applications on over 40 operating platforms, as certain of the Company's customers start to utilize emerging platforms, it will be necessary for the Company to further enhance its products to interoperate with applications on these emerging platforms. There can be no assurance that the Company's products will adequately address the changing needs of the marketplace or that the Company will be successful in developing and marketing enhancements to its existing products or new products incorporating new technology on a timely basis. Failure to develop and introduce new products, or enhancements to existing products, in a timely manner in response to changing market conditions or customer requirements, will materially and adversely affect the Company's business, operating results and financial condition. The Company's BEA Jolt product is designed to enable the extension of enterprise-wide, mission-critical applications to Internet and intranet environments. Although BEA Jolt has not accounted for a significant portion of the Company's revenues to date, the Company intends to release enhanced versions of BEA Jolt with greater functionality during the fiscal year ended January 31, 1998, and the Company's objective is to increase license revenues from the BEA Jolt product, both in absolute dollars and as a percentage of the Company's revenues in future periods, although there can be no assurance of such increase. The success of BEA Jolt depends upon, among other things, the future growth of the Internet for commercial transactions. There can be no assurance that communication or commerce over the Internet will become widespread, or that the Internet will prove to be a viable commercial marketplace. If BEA Jolt fails to adequately address customer concerns regarding the use of the Internet for commerce, or if the Internet otherwise does not prove to be a viable commercial marketplace, the success of the BEA Jolt product will be materially and adversely affected. In addition, the current version of BEA Jolt operates through Java-based applets, and the Company anticipates that future versions of 12 BEA Jolt will similarly operate through Java. Accordingly, the success of BEA Jolt depends upon the continued widespread demand for Java-enabled World Wide Web browsers. See "Business--Products and --Research and Development." SOFTWARE DEFECTS Software products as complex as those offered by the Company frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Despite product testing, the Company's recently introduced products or any products may contain defects or software errors and, as a result, the Company may experience delayed or lost revenues during the period required to correct any defects or errors. Any such defects or errors could result in adverse customer reactions, negative publicity regarding the Company and its products, harm to the Company's reputation, or loss of or delay in market acceptance, or could require expensive product changes, any of which could have a material adverse effect upon the Company's business, operating results and financial condition. See "Business--Products and --Research and Development." PRODUCT LIABILITY The Company markets its products to customers for developing, building, deploying and managing distributed mission-critical computer software applications. The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. 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. Although the Company has not experienced any product liability claims to date, the sale and support of its products by the Company may entail the risk of such claims, which could be substantial in light of the use of such products in mission-critical applications. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT The Company's success depends upon its proprietary technology. The Company relies on a combination of copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect its proprietary rights. The Company presently has three issued patents and two pending patent applications, as well as an exclusive license to one patent and one pending patent application. No assurance can be given that competitors will not successfully challenge the validity or scope of the Company's patents and that such patents will provide a competitive advantage to the Company. As part of its confidentiality procedures, the Company generally enters into non-disclosure agreements with its employees, distributors and corporate partners, and license agreements with respect to its software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization, or to develop similar technology independently. In particular, the Company has, in the past, provided certain hardware OEMs with access to its source code, and any unauthorized publication or proliferation of this source code could materially adversely affect the Company's business, operating results and financial condition. Policing unauthorized use of the Company's products is difficult and, although 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. Effective protection of intellectual property rights is unavailable or limited in certain foreign countries. There can be no assurance that the Company's protection of its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or design around any patents issued to the Company or other intellectual property rights of the Company. 13 The Company is not aware that any of its products infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim such infringement by the Company with respect to current or future products. The Company expects that software product developers will increasingly be subject to such claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in the industry segment overlaps. Any such claims, with or without merit, could result in costly litigation that could absorb significant management time, which could have a material adverse effect on the Company's business, operating results and financial condition. Such claims might require the Company to enter into royalty or license agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. See "Business--Intellectual Property." NO PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offerings, there has been no public market for shares of the Common Stock, and there can be no assurance that an active public trading market will develop following completion of the Offerings or, if developed, that such market will be sustained. The initial public offering price of the shares of Common Stock will be determined by negotiation between the Company and representatives of the Underwriters and will not necessarily reflect the market price of the Common Stock following this offering. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The market price for the Common Stock following the Offerings will be affected by a number of factors, including the announcement of new products or product enhancements by the Company or its competitors, quarterly variations in the Company's or its competitors' results of operations, changes in earnings estimates or recommendations by securities analysts, developments in the Company's industry, general market conditions and other factors, including factors unrelated to the operating performance of the Company or its competitors. In addition, stock prices for many companies in the technology and emerging growth sectors have experienced wide fluctuations that have often been unrelated to the operating performance of such companies. Such factors and fluctuations, as well as general economic, political and market conditions, such as recessions, may materially adversely affect the market price of the Company's Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market following the Offerings could adversely affect the market price for the Company's Common Stock. The number of shares of Common Stock available for sale in the public market is limited by restrictions under the Securities Act of 1933, as amended (the "Securities Act") and lock-up agreements under which the holders of such shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the effective date of the Offerings without the prior written consent of Goldman Sachs. However, Goldman Sachs may, in its sole discretion and at any time, without notice, release all or any portion of the securities subject to lock-up agreements. As a result of these restrictions, based on shares outstanding and options granted as of October 31, 1996, the shares offered hereby will be eligible for sale on the date of this Prospectus, shares will be eligible for sale 180 days after the date of this Prospectus and shares will be eligible for sale pursuant to Rule 144 upon the expiration of their respective two-year holding periods. In addition, the Commission has proposed revisions to Rule 144 and Rule 144(k), the effect of which would be to shorten the holding period under Rule 144 from two years to one year and to shorten the holding period under Rule 144(k) from three years to two years. If enacted, these proposed revisions would increase, potentially substantially, the number of shares that would be available for sale in the public market 180 days after the date of this Prospectus. In addition, the Company intends to register on a registration statement on Form S-8 shares of Common Stock subject to outstanding options or reserved for issuance under the Company's 1995 Flexible Stock Incentive Plan, 1997 Stock Incentive Plan and 1997 Employee Stock 14 Purchase Plan and shares previously issued pursuant to the 1995 Stock Plan, which shares will be eligible for sale upon expiration of the lock-up agreements referred to above, subject to vesting and exercisability restrictions. Furthermore, upon expiration of the lock-up agreements referred to above, holders of approximately shares of Common Stock will be entitled to certain registration rights with respect to such shares. If such holders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, the sale of such shares could have a material adverse effect on the market price for the Company's Common Stock and could materially adversely affect the Company's ability to raise additional capital when or if required. See "Shares Eligible for Future Sale." ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW The Company's Board of Directors has the authority to issue up to 40,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting and conversion rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. In addition, the Board of Directors has the authority to issue undesignated Preferred Stock and, subject to certain limitations, to determine the rights, preferences, privileges and restrictions, including voting rights, of such shares without any further vote or action by the stockholders. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, the Company is subject to the antitakeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control of the Company. Further, certain provisions of the Company's Certificate of Incorporation and Bylaws and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock--Preferred Stock and --Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law." CONTROL BY MANAGEMENT AND CURRENT STOCKHOLDERS After the Offerings, the Company's officers and directors, and their affiliates, in the aggregate, will control % of the Company's Common Stock with full voting rights and will beneficially own % of the Company's Common Stock. In particular, Warburg will control % of the Company's Common Stock with full voting rights and will beneficially own % of the Company's Common Stock. As a result, these stockholders will be able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The voting power of Warburg and the Company's officers and directors under certain circumstances could have the effect of delaying or preventing a change in control of the Company. See "Principal Stockholders" and "Description of Capital Stock." DILUTION The initial public offering price will be substantially higher than the book value per share of Common Stock. Investors purchasing shares of Common Stock in this offering will experience immediate and substantial dilution in net tangible book value of $ per share. The Company has issued options at prices significantly below the public offering price. To the extent outstanding options to purchase shares of Common Stock are exercised, there will be further dilution in net tangible book value. See "Dilution." 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock being offered hereby are estimated to be approximately $30,850,000 ($35,732,500 if the Underwriters' over-allotment options are exercised in full). The net proceeds of the Offerings are expected to be used for repayment of amounts borrowed by the Company under its revolving credit line and for the payment of certain obligations incurred in connection with acquisitions. Depending upon the level of the Company's borrowings thereunder, up to $10 million will be used to repay the revolving credit line. Approximately $4.5 million will be used to repay the entire amount due at the Offerings under a note issued by the Company in September 1995 and subsequently increased in the principal amount of $4.2 million with interest at 8% to the founder of an operating subsidiary acquired by the Company. The $16.3 million balance of the net proceeds is expected to be used to make payments toward the $32 million due to Novell in calendar year 1997. Any remaining proceeds will be added to working capital and used for general corporate purposes. The Company may also use a portion of the net proceeds to fund acquisitions of complementary businesses, products or technologies. Pending such uses, the net proceeds of the Offerings will be invested in investment grade, interest-bearing instruments. The Company believes the net proceeds of the Offerings together with its current cash balances, borrowings available under its lines of credit and cash flow from operations will be sufficient to meet its working capital requirements, including the payment obligations related to acquisitions through at least January 31, 1998. Thereafter, the Company expects that it will require substantial additional capital to meet payment obligations to Novell of $33 million during the calendar year 1998 and a final payment of $12 million in January 1999 to acquire perpetual rights to TUXEDO. See "Risk Factors--Past and Future Acquisitions and --Substantial Future Capital Needs" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain earnings, if any, to support the development of its business and does not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results and current and anticipated cash needs. In addition, an existing loan agreement prohibits the Company from paying cash dividends without the lender's consent. See Note 6 of Notes to BEA Systems, Inc. Consolidated Financial Statements. 16 CAPITALIZATION The following table sets forth the capitalization of the Company (i) as of October 31, 1996, (ii) on a pro forma basis to give effect to the conversion into Common Stock upon completion of the Offerings of all outstanding Preferred Stock and a convertible note in the principal amount of $ , based on an assumed initial public offering price of and the filing of the Company's Amended and Restated Certificate of Incorporation to increase the authorized shares of Common Stock and to adjust the authorized shares of Preferred Stock prior to the Closing of the Offerings and (iii) as further adjusted to give effect to the sale by the Company of shares of Common Stock offered by the Company hereby at an assumed initial public offering price of per share and the receipt of estimated net proceeds therefrom. This table should be read in conjunction with the Consolidated Financial Statements and notes thereto and "Selected Consolidated Financial Data" included elsewhere in this Prospectus.
OCTOBER 31, 1996 ---------------------------------------- ACTUAL PRO FORMA AS ADJUSTED ------------ ------------ ------------ (IN THOUSANDS) Notes Payable and Capital Lease Obligations........................... $ 52,361 $ 52,361 $ 47,859 Series B Redeemable Convertible Preferred Stock, $0.001 par value: Authorized shares--20,000,000 Issued and outstanding shares--6,060,000 at January 31, 1996 and 16,347,800 at October 31, 1996, respectively, none pro forma; and as adjusted....................................................... 16,965 -- -- Stockholders' Equity: Series A Preferred Stock, $.001 par value; 20,000,000 shares authorized, 17,166,000 shares issued and outstanding, actual; 20,000,000 shares authorized, no shares issued and outstanding, pro forma and as adjusted......................................... 17 -- -- Common Stock, $.001 par value; 80,000,000 shares authorized, 10,347,750 shares issued and outstanding, actual; 80,000,000 shares authorized, shares issued and outstanding pro forma; shares authorized, shares issued and outstanding, as adjusted(1)....................................... 10 47 51 Additional Paid-in Capital............................................ 32,223 49,168 79,924 Notes Receivable from Stockholders.................................... (544) (544) (544) Cumulative Translation Adjustment..................................... (1) (1) (1) Deferred Compensation related to Stock Options........................ (906) (906) (906) Accumulated Deficit................................................... (104,514) (104,514) (104,514) ------------ ------------ ------------ Total Stockholders' Equity (Deficit)................................ (73,715) (56,750) (25,900) ------------ ------------ ------------ Total Capitalization.............................................. $ (4,389) $ (4,389) $ 21,869 ------------ ------------ ------------ ------------ ------------ ------------
- -------------- (1) Excludes (i) 6,343,000 shares issuable upon exercise of options outstanding as of October 31, 1996 having a weighted average exercise price of $0.382 per share under the Company's 1995 Flexible Stock Incentive Plan, (ii) 917,450 shares issuable upon exercise of options granted from November 1, 1996 to January 15, 1997, having a weighted average exercise price of $5.35 per share, and (iii) 5,985,800 additional shares authorized for issuance under the Stock Plans. See "Management--Stock Plans and --Executive Compensation" and Note 11 of Notes to BEA Systems, Inc. Consolidated Financial Statements. 17 DILUTION At October 31, 1996, the Company's net tangible book value was $ or approximately $ per share. Pro forma net tangible book value per share represents the amount of the Company's total assets less net intangibles (less total liabilities) divided by shares of Common Stock (on a pro forma basis to give effect to the conversion upon completion of the Offerings of all shares of Preferred Stock and a convertible note in the principal amount of $ based on an assumed initial public offering price of $ per share) outstanding at October 31, 1996. Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the Offerings made hereby and the pro forma net tangible book value per share of Common Stock immediately after completion of the Offerings. After giving effect to the sale by the Company of shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share, and the application of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company as of October 31, 1996 would have been $ or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to the purchasers of Common Stock in the Offerings, as illustrated in the following table: Assumed initial public offering price per share....... $ Pro forma net tangible book value per share as of October 31, 1996.................................. $ Increase attributable to new investors.............. --------- Pro forma net tangible book value per share after the Offerings............................................ $ --------- Dilution per share to new investors................... $ --------- ---------
The following table sets forth, on a pro forma basis as of October 31, 1996, the differences between the existing stockholders and the purchasers of shares in the Offerings (at an assumed initial public offering price of $ per share and before deducting the estimated underwriting discount and offering expenses) with respect to the number of shares purchased from the Company, the total consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION ---------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ----------- ----------- --------- -------------- Existing stockholders.................... % $ % $ New investors(1)......................... --------- ----- ----------- --------- Total.................................. 100.0% $ 100.0% ----- --------- ----- ---------
- -------------- The above computations assume no exercise of options after October 31, 1996. Excludes (i) 6,343,000 shares issuable upon exercise of options outstanding as of October 31, 1996 having a weighted average exercise price of $0.382 per share under the Company's 1995 Flexible Stock Incentive Plan, (ii) 917,450 shares issuable upon exercise of options granted from November 1, 1996 to January 15, 1997, having a weighted average exercise price of $5.35 per share, and (iii) 5,985,800 additional shares authorized for issuance under the Stock Plans. To the extent that outstanding options are exercised, there will be further dilution to new investors. See "Capitalization," "Management--Stock Plans and - --Executive Compensation" and Note 11 of Notes to BEA Systems, Inc. Consolidated Financial Statements. 18 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data of the Company should be read in conjunction with the consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The consolidated statement of operations data of the Company for the year ended January 31, 1996 and the nine months ended October 31, 1996, and the consolidated balance sheet data of the Company at January 31, 1996 and October 31, 1996 are derived from, and qualified by reference to, the Company's consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors, included elsewhere in this Prospectus. The statement of operations data for the nine months ended October 31, 1995 have been derived from, and qualified by reference to, the unaudited consolidated financial statements included elsewhere in this Prospectus. The unaudited consolidated financial statements include, in the opinion of management, all normal recurring adjustments that the Company considers necessary for a fair presentation of its results of operations for such period. The unaudited pro forma statement of operations data for the year ended January 31, 1996 and the nine months ended October 31, 1996 has been derived from audited and unaudited financial data of the Company and companies and a product it acquired, some of which are included elsewhere in this Prospectus, and gives unaudited pro forma effect to the Company's acquisition of the acquired businesses as if such acquisitions occurred at the beginning of the periods presented. The historical results of operations for the nine months ended October 31, 1996 are not necessarily indicative of the results that may be expected for the year ending January 31, 1997 or any future periods. 19
HISTORICAL NINE MONTHS HISTORICAL PRO FORMA ENDED PRO FORMA NINE YEAR ENDED YEAR ENDED OCTOBER 31, MONTHS ENDED JANUARY 31, JANUARY 31, -------------------- OCTOBER 31, 1996(1) 1996(1)(2) 1995(1) 1996 1996(2) ------------ ------------ --------- --------- --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License Revenues.............................. $ 3,569 $ 524 $ 26,855 Service Revenues.............................. 1,564 230 9,494 ------------ ------------ --------- --------- --------------- Total Revenues.............................. 5,133 $ 33,561 754 36,349 $ 37,366 Total Cost of Revenues(3)....................... 2,704 15,712 487 12,498 13,379 ------------ ------------ --------- --------- --------------- Gross Margin.................................... 2,429 17,849 267 23,851 23,987 Operating Expenses: Research and Development...................... 3,244 10,059 531 12,781 12,781 Sales and Marketing........................... 2,572 15,102 973 20,814 21,171 General and Administrative.................... 3,058 6,519 796 9,019 9,084 Write-Off of In-Process Research and Development................................. 11,194 -- 6,060 62,248 -- ------------ ------------ --------- --------- --------------- Total Operating Expenses.................... 20,068 31,681 8,360 104,862 43,036 Income (Loss) from Operations................... (17,639) (13,832) (8,093) (81,011) (19,049) Other Income (Expense).......................... 48 61 5 95 95 Interest Expense................................ 89 6,795 21 4,941 4,951 ------------ ------------ --------- --------- --------------- Income (Loss) before Income Taxes............... (17,680) (20,566) (8,109) (85,857) (23,905) Provision for Income Taxes...................... 60 60 -- 300 326 ------------ ------------ --------- --------- --------------- Net Income (Loss)............................... $ (17,740) $ (20,626) $ (8,109) $ (86,157) $ (24,231) ------------ ------------ --------- --------- --------------- ------------ ------------ --------- --------- --------------- Pro Forma Net Income (Loss) Per Share(4)........ $ (0.58) $ (0.68) $ (1.72) $ (0.48) ------------ ------------ --------- --------------- ------------ ------------ --------- --------------- Pro Forma Shares Used in Computing Net Income (Loss) Per Share(4)........................... 30,385 30,385 50,107 50,107 ------------ ------------ --------- --------------- ------------ ------------ --------- --------------- CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END): Cash and Cash Equivalents....................... $ 4,549 $ 1,628 Working Capital................................. 2,510 (30,018) Total Assets.................................... 18,953 48,463 Long-Term Obligations (Less Current Portion).... 4,287 52,361 Stockholders' Equity (Deficit).................. 2,038 (73,715)
- ------------------ (1) Also includes results of operations from incorporation (January 20, 1995) through January 31, 1995. (2) Pro forma to give effect to the acquisitions of IMC, ITI, TUXEDO Systems Group and USL France as if they occurred on February 1, 1995 for the pro forma as adjusted results for the year ended January 31, 1996, and February 1, 1996 for the pro forma nine months ended October 31, 1996. The pro forma adjustments include (i) the elimination of revenues and expenses which occurred between the entities prior to their acquisition by BEA, (ii) amortization of intangible assets acquired for the full period, (iii) an increase in interest expense resulting from debt issued to acquire IMC and TUXEDO Systems Group, (iv) exclusion of material non-recurring charges relating to write-offs of in-process research and development and an extraordinary gain resulting from the forgiveness of debt. Additionally, the pro forma as adjusted results for the year ended January 31, 1996 include Company management's adjustments to reflect estimated expenses in excess of direct salaries and benefits for TUXEDO Systems Group. See "Selected Unaudited Pro Forma Operating Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Consolidated Results of Operations." (3) Includes expenses attributable to amortization of intangible assets resulting from prior acquisitions in the amounts of $1.1 million, $ , $116,000, $5.3 million and $ million, respectively. (4) See Note 1 of Notes to BEA Systems, Inc. Consolidated Financial Statements for an explanation of the method used to determine the number of shares used in computing net income (loss) per share. 20 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 THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. COMPANY BACKGROUND The Company was founded in January 1995 to address the growing need of large organizations to extend mission-critical applications beyond legacy mainframe systems to distributed computing environments. To address this problem, the Company evaluated the growing market for middleware solutions in an effort to identify a robust, scalable software product that would enable interoperable, seamless processing of applications between the mainframe and distributed environments within an organization. The Company identified the TUXEDO product, all rights to which were owned by Novell, as a middleware infrastructure solution capable of meeting this need and serving as a standard for extending the functionality of mainframes to distributed computing environments. To implement its strategy, the Company first acquired two leading United States resellers of TUXEDO and then acquired a worldwide exclusive license to TUXEDO from Novell. Through these and a number of subsequent acquisitions, the Company has built a worldwide organization that now owns or controls substantially all of the development, distribution and marketing rights to TUXEDO as well as several other products that comprise the BEA Enterprise Transaction Framework. From January 1995 to September 1995, the Company pursued the acquisition of two leading resellers of Novell's TUXEDO product, which culminated in the acquisition of Information Management Company ("IMC") in September 1995 and Independence Technologies, Inc. ("ITI") in November 1995. Both IMC and ITI were authorized resellers of Novell's TUXEDO product line and had established sales and support organizations that enabled BEA to provide direct sales and support throughout all of North America. In September 1995, the Company also acquired TP Blue from VI Systems, Inc. TP Blue complements BEA TUXEDO in that it enables the integration of legacy mainframe applications into distributed computing environments. In February 1996, BEA acquired exclusive worldwide rights to TUXEDO from Novell. Novell had originally obtained TUXEDO through its acquisition in 1993 of UNIX Systems Laboratories from AT&T, which originally developed TUXEDO in its Bell Labs division. Under the terms of the Novell Agreement, the Company obtained worldwide exclusive rights to TUXEDO in exchange for a series of fixed payments totaling $90 million over the original three-year term of the agreement and was granted an option, exercisable in January 1999, to acquire perpetual rights to the TUXEDO product line. Under the terms of the Novell Agreement, Novell retains the right to market TUXEDO in combination with its Netware product. The Company is obligated to make payments of $32 million and $33 million in calendar years 1997 and 1998, respectively, and will be required to pay an additional $12 million on exercise of its January 1999 option. For financial reporting purposes, the purchase price allocation to assets acquired in the acquisition of TUXEDO has been determined based on the assumed exercise by the Company of its option in January 1999 to acquire the perpetual worldwide rights to TUXEDO. As part of the Company's original licensing of TUXEDO, Novell transferred to the Company approximately 53 employees engaged in the development, marketing and support of the TUXEDO product line, as well as all of Novell's rights and obligations under its agreements with worldwide distributors and resellers for TUXEDO. At October 31, 1996, the Company had a development staff of 89, which included the original four architects, as well as many of the original developers, of TUXEDO. See "Risk Factors--Product Concentration; Dependence on Growth of Market for Middleware; Novell Relationship." 21 As part of its strategy to rapidly build an international sales and support organization, BEA further acquired, between May 1996 and December 1996, a number of sales and support organizations located in France, South Africa, Finland and Australia. See "Risk Factors--Limited Operating History; No Assurance of Profitability and --Past and Future Acquisitions." OVERVIEW The Company's total revenues consist of license revenues and service revenues. License revenues are derived primarily from sales of BEA TUXEDO and accounted for 74% of total revenues in the nine months ended October 31, 1996. Service revenues are derived primarily from a full range of services complementing the Company's products, including software maintenance and support, training and consulting projects, and accounted for 26% of total revenues in the nine months ended October 31, 1996. Sales of BEA TUXEDO and related services are expected to continue to account for a substantial majority of the Company's revenues for the forseeable future. See "Risk Factors--Product Concentration; Dependence on Growth of Market for Middleware; Novell Relationship." Because the Company generally ships software products within a short period after receipt of an order, it will not at any given time have a material backlog of unfilled orders, and revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. In addition, the Company historically has recognized, and expects to continue to recognize, a significant portion of license revenues in the last month of each fiscal quarter. The Company anticipates that it will derive a substantial portion of its revenues from increasingly large orders, as customers deploy BEA products throughout their organizations. Any inability of the Company to generate large orders, or any delay or loss of large orders in a particular quarter, will materially adversely affect the Company's revenues and, more significantly on a percentage basis, its net income or loss in that quarter. See "Risk Factors--Potential Fluctuations in Quarterly Operating Results." Historically, the Company's revenues have been generated primarily through its direct sales force. The Company has also developed strategic relationships with a number of organizations, including hardware manufacturers, packaged application software developers, systems integrators and independent consultants, independent software tool vendors and distributors. For their sales and marketing efforts, these organizations are typically granted a discount from the Company's standard list price or are paid a commission on sales. Revenues and operating margins may fluctuate in any period due to the mix of license revenues derived from sales for which a discount is granted or for which commissions are paid. See "Risk Factors--Expanding Distribution Channel and Reliance on Third Parties." The Company recognizes license revenues in accordance with American Institute of Certified Public Accountants Statement of Position 91-1, SOFTWARE REVENUE RECOGNITION. Revenues from software license agreements are recognized at the time of product shipment, provided there are no vendor obligations remaining to be fulfilled and collectibility is probable. Typically, the Company's software licenses do not include significant ongoing vendor obligations. Therefore, the Company generally recognizes all revenues from software licenses in the period in which the product is shipped. Service revenues from customer maintenance fees for ongoing customer support and product updates are recognized ratably over the maintenance term, which is typically twelve months. Payments for maintenance fees are generally received in advance and recognized ratably. Service revenues from training and consulting are recognized when the services are performed. Revenues from development agreements are recognized upon achievement of contractual milestones or on a percentage of completion basis. International revenues, which the Company defines as revenues derived from sales outside of North America, accounted for 11% and 31% of total revenues in the fiscal year ended January 31, 1996 and the nine months ended October 31, 1996, respectively. The Company's international sales are generated 22 primarily through its international sales subsidiaries and most are currently denominated in local currency, creating a risk of foreign currency translation gains and losses. In future periods, the Company may determine to make more sales of its products in international markets at prices denominated in U.S. dollars. In such event, fluctuations in currency exchange rates may render the price of the Company's products unaffordable or uncompetitive. Such an event could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--International Operations." CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth, as a percentage of total revenues, historical and pro forma consolidated statement of operations for the periods indicated:
PRO FORMA HISTORICAL PRO FORMA HISTORICAL NINE MONTHS NINE MONTHS YEAR ENDED YEAR ENDED ENDED OCTOBER 31, ENDED JANUARY 31, JANUARY 31, -------------------------- OCTOBER 31, 1996 1996 1995 1996 1996 ----------- ----------- ------------ ----------- ----------- Revenues: License Revenues................. 70% 70% 74% Service Revenues................. 30 30 26 --- --- ------ --- --- Total Revenues................. 100 100% 100 100 100% Total Cost of Revenues(1).......... 53 47 64 34 36 --- --- ------ --- --- Gross Margin....................... 47 53 36 66 64 Operating Expenses: Research and Development......... 63 30 70 35 34 Sales and Marketing.............. 50 45 129 58 57 General and Administrative....... 60 19 106 25 24 Write-Off of In-Process Research and Development................ 218 -- 804 171 -- --- --- ------ --- --- Total Operating Expenses....... 391 94 1,109 289 115 --- --- ------ --- --- Income (Loss) from Operations...... (344) (41) (1,073) (223) (51) Other Income (Expense)............. 1 -- 1 -- -- Interest Expense................... 2 20 3 13 13 --- --- ------ --- --- Income (Loss) before Income Taxes.. (345) (61) (1,075) (236) (64) Provision for Income Taxes......... 1 -- 1 1 1 --- --- ------ --- --- Net Income (Loss).................. (346)% (61)% (1,075)% (237)% (65)% --- --- ------ --- --- --- --- ------ --- ---
- -------------- (1) Includes amortization of intangibles of 17%, 3%, 15%, 14% and 14% of total revenues, respectively, as a result of the Acquisitions. 23 HISTORICAL CONSOLIDATED RESULTS OF OPERATIONS NINE MONTHS ENDED OCTOBER 31, 1995 AND 1996 REVENUES The Company's revenues are derived primarily from fees for software licenses and to a lesser extent from services. The Company's revenues were $754,000 and $36.3 million for the nine months ended October 31, 1995 and 1996, respectively. LICENSE REVENUES. License revenues were $524,000 and $26.9 million for the nine months ended October 31, 1995 and 1996, respectively, representing 69% and 74% of total revenues in the respective periods. The increase in dollar amount was primarily due to the Company's inclusion of IMC for a full year of operations, and its subsequent acquisitions of ITI, TUXEDO, USL Finance, S.A. (France) ("USL France") and Client Server Technologies OY (Finland) ("CST"), as well as market acceptance of BEA TUXEDO and related products. SERVICE REVENUES. Service revenues were $230,000 and $9.5 million for the nine months ended October 31, 1995 and 1996, respectively, representing 31% and 26% of total revenues in the respective periods. The increase in dollar amount was primarily due to the Company's inclusion of IMC for a full year of operations, and its subsequent acquisitions, and to the increase in consulting, training and maintenance fees associated with the increased sales of the Company's software licenses. The Company expects that service revenues will increase as a percentage of total revenues in future periods, as the Company continues to leverage its existing customer base by providing additional services to assist customers in enhancing their uses of the Company's products. COST OF REVENUES Cost of revenues is comprised of cost of licenses and cost of services. COST OF LICENSES. Cost of licenses consists primarily of amortization of intangible assets related to acquisitions and license fees and royalties paid to third party software providers as well as product media, product duplication and shipping. Amortization of intangible assets resulted from the acquisition of IMC, in the nine months ended October 31, 1995 and 1996, as well as to the acquisitions of ITI, TUXEDO, USL France and CST in the nine months ended October 31, 1996. Amortization of intangible assets totaled $1.1 million in the twelve months ended January 31, 1996 and is expected to total $8.4 million for the twelve months ending January 31, 1997, $9.2 million for the twelve months ending January 31, 1998, $4.9 million for the twelve months ending January 31, 1999 and $1.4 million for the remaining balance of intangible assets through the year ending January 31, 2002. COST OF SERVICES. Cost of services consists primarily of personnel-related costs incurred in providing consulting services, training and maintenance to its customers. Cost of services were $163,000 and $4.8 million for the nine months ended October 31, 1995 and 1996, respectively, representing 71% and 51% of total service revenues for each period, respectively. The decrease in absolute dollars was due primarily to the Company's acquisitions and increased operating activity resulting, in part, from such acquisitions. The decrease in costs as a percentage of related service revenues for the nine months ended October 31, 1996 over the same period in 1995 is the result of a significant increase in total revenues offset by a relatively smaller increase in cost of services related to the hiring of additional consulting and support personnel in response to an anticipated increase in the number of customers. The Company has also invested substantial resources in a worldwide 7x24x365 Customer Support organization to provide a high level of maintenance service to the Company's customers. The Company expects service margins to improve to the extent service revenues continue to increase. 24 OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses include salaries, commissions, advertising, direct mail, seminars, public relations, trade shows, travel and other related selling and marketing expenses. Sales and marketing expenses were $973,000 and $20.8 million for the nine months ended October 31, 1995 and 1996, respectively, representing 129% and 58% of total revenues for each period, respectively. The increase in absolute dollars was due primarily to the Company's acquisitions, expansion of the Company's direct sales force and an increase in marketing personnel and activities. The decrease in sales and marketing expenses as a percentage of total revenues was primarily due to the substantial increase in revenues during the period. The Company believes that the dollar amount of sales and marketing expenses will continue to increase as the Company expands its sales and marketing organization. RESEARCH AND DEVELOPMENT. Research and development expenses include engineering personnel and related expenses as well as consulting costs associated with new product development and enhancement of existing products. In accordance with Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. To date, the establishment of technological feasibility of the Company's products and general release of such software have substantially coincided. As a result, software development costs qualifying for capitalization have been insignificant, and therefore, the Company has not capitalized any software development costs. Research and development expenses were $531,000 and $12.8 million for the nine months ended October 31, 1995 and 1996, respectively, representing 70% and 35% of total revenues in each period, respectively. The increase in dollar amount was attributed to an increase in personnel and related expenses. The decrease in research and development expenses as a percentage of total revenues was primarily due to the substantial increase in revenues. The Company expects that that dollar amount of research and development expenses will continue to increase as the Company continues to commit substantial resources to product development and engineering in future periods. GENERAL AND ADMINISTRATIVE. General and administrative expenses include personnel costs for administration, finance, human resources, information technology and general management, as well as amortization of goodwill related to the purchase of IMC. General and administrative expenses were $796,000 and $9.0 million for the nine months ended October 31, 1995 and 1996, respectively, representing 106% and 25% of total revenues for each period, respectively. The increase in dollar amount was attributed to the expansion of the Company's general and administrative staff and associated expenses necessary to manage and support the Company's growth. Amortization of goodwill totaled $47,000 in the nine months ended October 31, 1995 and will total $187,000 per year through September 30, 2000. The decrease in general and administrative expenses as a percentage of total revenues was primarily due to the substantial increase in revenues. The Company expects that the dollar amount of general and administrative expenses will continue to increase in the future as the Company expands its staffing and incurs higher costs associated with being a public company. WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. Write-off of in-process research and development is related to the Acquisitions and totaled $6.1 million for the nine months ended October 31, 1995, consisting of IMC ($5.2 million) and certain technology acquired from VI Systems ($860,000). The total of $62.2 million for the nine months ended October 31, 1996 included the acquisitions of TUXEDO ($60.9 million) and CST ($1.3 million). See Note 2 of Notes to BEA Systems, Inc. Consolidated Financial Statements. 25 PROVISION FOR INCOME TAXES The Company has experienced operating losses to date and incurred tax expense of $0 and $300,000 for the nine months ended October 31, 1995 and 1996, respectively. The tax expense is comprised primarily of foreign income tax withholding. YEARS ENDED JANUARY 31, 1996 AND DECEMBER 31, 1994 As discussed under "--Company Background," the Company was incorporated in January 1995, acquired exclusive rights to BEA TUXEDO in February 1996, and has concluded a number of other acquisitions of businesses, products and technologies since its incorporation. Accordingly, the Company believes that a comparison of its operating results for the year ended January 31, 1996 and those of IMC for the year ended December 31, 1994 is not meaningful and that the results for such periods should not be relied upon as any indication of the Company's future performance. Prospective investors in this offering are referred to the information under the caption "--Selected Quarterly Financial Data" and "--Selected Pro Forma Operating Results" in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as "Selected Consolidated Financial Data" and the consolidated financial statements and notes thereto included elsewhere herein for a discussion of the Company's operating results in recent periods. 26 SELECTED QUARTERLY FINANCIAL DATA The following tables set forth certain unaudited quarterly financial data for the five most recent quarters and the percentage of total revenues represented by each line item. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the selected quarterly information when read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere herein. In view of the Acquisitions and other factors, the Company believes that quarterly total revenues and operating results should not be relied upon as indications of future performance or results for the entire fiscal year.
QUARTER ENDED ------------------------------------------------------- OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31, 1995 1996 1996 1996 1996 --------- --------- ---------- --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License Revenues................................... $ 524 $ 3,071 $ 5,484 $ 9,678 $ 11,693 Service Revenues................................... 230 1,309 1,367 3,804 4,323 --------- --------- ---------- --------- ---------- Total Revenues................................... 754 4,380 6,851 13,482 16,016 Total Cost of Revenues............................... 487 2,217 2,494 4,243 5,761 --------- --------- ---------- --------- ---------- Gross Margin......................................... 267 2,163 4,357 9,239 10,255 Operating Expenses: Research and Development........................... 366 2,713 3,097 4,673 5,011 Sales and Marketing................................ 892 1,598 3,912 6,450 10,452 General and Administrative......................... 642 2,122 2,579 2,778 3,662 Write-off of In-Process Research and Development... 6,060 5,274 60,948 1,300 -- --------- --------- ---------- --------- ---------- Total Operating Expenses......................... 7,960 11,707 70,536 15,201 19,125 --------- --------- ---------- --------- ---------- Income (Loss) from Operations........................ (7,693) (9,544) (66,179) (5,962) (8,870) Other Income (Expense)............................... 4 42 (117) 1 211 Interest Expense..................................... 21 68 1,117 1,765 2,059 --------- --------- ---------- --------- ---------- Income (Loss) before Income Taxes.................... (7,710) (9,570) (67,413) (7,726) (10,718) Provision for Income Taxes........................... -- 60 38 116 146 --------- --------- ---------- --------- ---------- Net Income (Loss).................................... $ (7,710) $ (9,630) $ (67,451) $ (7,842) $ (10,864) --------- --------- ---------- --------- ---------- --------- --------- ---------- --------- ---------- Pro Forma Net Income (Loss) Per Share................ $ (0.26) $ (0.20) $ (1.37) $ (0.16) $ (0.21) --------- --------- ---------- --------- ---------- --------- --------- ---------- --------- ---------- Pro Forma Shares Used In Computing Net Income (Loss) Per Share.......................................... 29,278 49,231 49,303 49,666 51,351 --------- --------- ---------- --------- ---------- --------- --------- ---------- --------- ----------
27
QUARTER ENDED ----------------------------------------------------- OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31, 1995 1996 1996 1996 1996 -------- -------- --------- -------- -------- AS A PERCENTAGE OF TOTAL REVENUES: Revenues: License Revenues................. 69% 70% 80% 72% 73% Service Revenues................. 31 30 20 28 27 -------- --- --------- --- --- Total Revenues................. 100 100 100 100 100 Total Cost of Revenues............. 65 51 36 31 36 -------- --- --------- --- --- Gross Margin....................... 35 49 64 69 64 Operating Expenses: Research and Development......... 48 62 45 35 31 Sales and Marketing.............. 118 37 57 48 65 General and Administrative....... 85 48 38 20 23 Write-off of In-Process Research and Development................ 804 120 890 10 -- -------- --- --------- --- --- Total Operating Expenses....... 1,055 267 1030 113 119 -------- --- --------- --- --- Income (Loss) from Operations...... (1,020) (218) (966) (44) (55) Other Income (Expense)............. -- 1 (2) -- 1 Interest Expense................... 3 2 16 13 13 -------- --- --------- --- --- Income (Loss) before Income Taxes............................ (1,023) (219) (984) (57) (67) Provision for Income Taxes......... -- 1 1 1 1 -------- --- --------- --- --- Net Income (Loss).................. (1,023)% (220)% (985)% (58)% (68)% -------- --- --------- --- --- -------- --- --------- --- ---
Total revenues have increased each quarter over the past five quarters from $754,000 in the quarter ended October 31, 1995 to $16.0 million in the quarter ended October 31, 1996. These increases were primarily attributable to the acquisition of BEA TUXEDO in February 1996 and other Acquisitions during the period, increasing market acceptance of BEA TUXEDO and related services, the expansion of the Company's direct and indirect sales organizations and growth in order sizes for the Company's products. Gross margin increased from 35% in the quarter ended October 31, 1995 to 64% in the quarter ended October 31, 1996. This increase resulted primarily from the increase in total revenues during the period as compared to the relatively fixed level of amortization charges included in cost of revenues during this period. However, gross margin decreased in the quarter ended October 31, 1996 to 64% as the Company accelerated its hiring of consulting and support personnel in this period to support the Company's anticipated revenue growth. Total operating expenses have varied substantially both in absolute dollars and as a percentage of total revenues during the period, due primarily to large one time write-offs of in-process research and development. These write-offs occurred in the quarters ended October 31, 1995, January 31, 1996, April 30, 1996 and July 31, 1996. Excluding one-time write-offs for in-process research and development, the dollar amounts of operating expenses have increased in each successive quarter during the period. However, such expenses decreased as a percentage of total revenues during the four quarters ended July 31, 1996. During the quarter ended October 31, 1996, total operating expenses (excluding write-offs) increased to 19% of total revenues from 103% of total revenues, due to expenses associated with increased hiring of sales personnel in anticipation of increased demand for the Company's products and costs related to acquisition of distributors in France and Finland. While the Company expects operating expenses to increase in absolute dollars over the next several quarters, to 28 the extent that revenues increase, management believes that operating expenses as a percentage of sales will decline. The Company expects that it will experience significant fluctuations in future quarterly operating results as a result of many factors, including, among others: the size and timing of orders; introduction or enhancement of products by the Company or its competitors; market acceptance of middleware products; the lengthy sales and implementation cycle for the Company's products and the potential for significant delays; market acceptance of new products and product enhancements; technological changes in computer systems and environments; the structure and timing of future acquisitions of businesses, products and technologies, if any; increased competition; the ability of the Company to develop, introduce and market new products on a timely basis; changes in the Company's or its competitors' pricing policies; customer order deferrals in anticipation of future new products and product enhancements, if any; the Company's success in expanding its sales and marketing programs; mix of products and services sold; mix of distribution channels; ability to meet the service requirements of its customers; costs associated with acquisitions; loss of key personnel; fluctuations in foreign currency exchange rates; and general economic conditions. As a result of all of these factors, the Company believes that quarterly revenues and operating results are difficult to forecast and period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. SELECTED UNAUDITED PRO FORMA OPERATING RESULTS The selected unaudited pro forma condensed consolidated financial information for the Company set forth below gives effect to the acquisition of IMC, ITI, TUXEDO Systems Group and USL France. The historical and unaudited pro forma financial information set forth below has been derived from, and is qualified by reference to, the consolidated financial statements of the Company, IMC, ITI, TUXEDO Systems Group and USL France and should be read in conjunction with those consolidated financial statements and the notes thereto. The unaudited pro forma condensed consolidated statements of operations data for the year ended January 31, 1996 set forth below gives effect to such acquisitions as if they had occurred on February 1, 1995. The unaudited pro forma condensed consolidated statements of operations data for the nine months ended October 31, 1996 gives effect to the acquisitions as if they had occurred on February 1, 1996. The unaudited pro forma condensed consolidated financial information set forth below reflects certain adjustments, including, among others, adjustments (i) to eliminate revenues and expenses which occurred between the entities prior to their acquisition by BEA, (ii) to reflect the amortization of purchased intangible assets as though the business had been combined for the full period, (iii) exclude write-offs of in-process research and development and extraordinary gain, which are considered material, non-recurring items and (iv) reflect increased interest expense resulting from debt to acquire IMC and TUXEDO Systems Group. The information set forth below should be read in conjunction with the other information contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements of BEA, IMC, ITI, TUXEDO Systems Group and USL. The unaudited pro forma condensed consolidated financial information set forth below does not purport to represent what the consolidated results of operations or financial condition of the Company would have been if BEA had acquired IMC, ITI, TUXEDO Systems Group and USL France on such dates or to project the future consolidated results of operations or financial condition of the Company. See "Risk Factors--Past and Future Acquisitions." 29 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATION FOR THE YEAR ENDED JANUARY 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
IMC FOR THE ITI FOR THE PERIOD FROM PERIOD FROM BEA COMPANY FEBRUARY 1, FEBRUARY 1, TUXEDO FOR PRO FORMA FOR THE YEAR 1995 TO 1995 TO THE YEAR BUSINESS ENDED JANUARY SEPTEMBER 29, NOVEMBER 1, ENDED OCTOBER COMBINATION 31, 1996 1995 1995 28, 1995(E) ADJUSTMENTS PRO FORMA ------------- --------------- ------------- ------------- --------------- ------------- Total Revenues............... $ 5,133 $ 4,172 $ 5,346 $ 20,371 $ (1,461)(a) $ 33,561 Total Cost of Revenues....... 2,704 1,891 2,324 5,627 (a)(b 12,546 ------------- ------- ------------- ------------- ------- ------------- Gross Margin................. 2,429 2,281 3,022 20,371 (7,088) 21,015 Operating Expenses: Research and Development... 3,244 665 1,350 3,017 8,276 Sales and Marketing........ 2,572 1,153 1,663 1,055 6,443 General and Administrative........... 3,058 1,410 1,138 128(c) 5,734 Write-off of In-Process Research and Development.............. 11,194 (11,194)(d) ------------- ------- ------------- ------------- ------- ------------- Total Operating Expenses............... 20,068 3,228 4,151 4,072 (11,066) 20,453 ------------- ------- ------------- ------------- ------- ------------- Income (Loss) from Operations................. (17,639) (947) (1,129) 16,299 3,978 562 Other Income (Expense)....... 48 (2) 1,050 (1,035)(d) 61 Interest Income (Expense).... (89) (13) (23) (6,670)(f) (6,795) ------------- ------- ------------- ------------- ------- ------------- Income (Loss) before Income Taxes...................... (17,680) (962) (102) 16,299 (3,727) (6,172) Provision for Income Taxes... 60 60 ------------- ------- ------------- ------------- ------- ------------- Net Income (Loss)............ $ (17,740) $ (962) $ (102) $ 16,299 $ (3,727) $ (6,232) ------------- ------- ------------- ------------- ------- ------------- ------------- ------- ------------- ------------- ------- ------------- Pro forma net loss per common share(g)................... $ (0.21) ------------- ------------- Pro forma weighted average number of common shares outstanding(g)............. 30,385 ------------- ------------- Pro forma as adjusted net loss per common share(g)... Pro forma as adjusted weighted average number of common shares outstanding(g)............. MANAGEMENT'S PRO FORMA AS BUSINESS ADJUSTED FOR YEAR COMBINATION ENDED JANUARY 31, ADJUSTMENTS 1996 -------------- ----------------- Total Revenues............... $ $ 33,561 Total Cost of Revenues....... 3,166(h) 15,712 -------------- -------- Gross Margin................. (3,166) 17,849 Operating Expenses: Research and Development... 1,783(i) 10,059 Sales and Marketing........ 8,660(j) 15,102 General and Administrative........... 785(j) 6,519 Write-off of In-Process Research and Development.............. -------------- -------- Total Operating Expenses............... 11,228 31,681 -------------- -------- Income (Loss) from Operations................. (14,394) (13,832) Other Income (Expense)....... 61 Interest Income (Expense).... (6,795) -------------- -------- Income (Loss) before Income Taxes...................... (14,394) (20,566) Provision for Income Taxes... 60 -------------- -------- Net Income (Loss)............ $ (14,394) $ (20,626) -------------- -------- -------------- -------- Pro forma net loss per common share(g)................... Pro forma weighted average number of common shares outstanding(g)............. Pro forma as adjusted net loss per common share(g)... $ (0.68) -------- -------- Pro forma as adjusted weighted average number of common shares outstanding(g)............. 30,385 -------- --------
- -------------- PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1996, ARE AS FOLLOWS: (a) Reflects the elimination of revenues and related cost of revenues on transactions between the entities prior to acquisition by the Company. (b) Reflects the amortization of acquired distribution rights, developed technology and trademarks and tradenames. (c) Reflects amortization of goodwill arising from the IMC acquisition. 30 (d) The unaudited pro forma condensed consolidated financial statements of operations for the year ended January 31, 1996 do not include the $11,194,000 in-process research and development write-offs relating to the acquisitions of IMC and ITI, or the extraordinary gain of $1,035,000 relating to forgiveness of debt at ITI, since they are considered material non-recurring charges. The write-offs are included in the actual historical consolidated statements of operations in the period in which they were incurred. (e) As the operating results of USL France for its year ended October 28, 1995 were consolidated in the operations of TUXEDO for the year ended October 28, 1995, separate unaudited pro forma operating results for USL have not been presented for the year ended January 31, 1996. (f) Interest expense has been increased to reflect pro forma interest expense on debt incurred in connection with the acquisitions of IMC and TUXEDO. (g) Pro forma net loss per share and pro forma as adjusted net loss per share is computed by dividing pro forma net loss and pro forma as adjusted net loss by the pro forma weighted average number of shares used elsewhere in this Prospectus. MANAGEMENT ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1996, ARE AS FOLLOWS: (h) Prior to acquisition by the Company, IMC and ITI provided customer support in all but the most technically difficult situations, at which point customers were referred to Novell's corporate-wide customer support organization. Since the Company was unable to substantiate costs incurred by Novell required to provide these services, an estimate of the costs to provide these services has been made based on the Company's actual customer support cost experience. (i) The costs included by Novell for the twelve months ended October 28, 1995 included only salaries and benefits expenses. The Company has provided an estimate, based on its own experience, for other expenses incurred by its research and development departments, primarily for costs such as outside professional services, facilities and other office costs and depreciation on equipment employed. (j) The costs included by Novell for the twelve months ended October 28, 1995 included only salaries and benefits expenses for the domestic marketing organization. However, the costs of bringing TUXEDO to customers include the costs of the sales organization, as well as other expenses associated with marketing including travel, trade shows, facilities and depreciation expense. Additionally, there are certain other general and administrative expenses associated with the TUXEDO business such as the costs of finance, facilities and human resources departments and depreciation on property and equipment. These sales and marketing, as well as general and administrative expenses, were included in Novell's overall operating results but could not be directly identified with TUXEDO. The Company has made estimates, based on its own experience, of costs incurred related to these expenses. 31 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
USL FOR THE PRO FORMA BEA FOR THE PERIOD FROM PRO FORMA FOR THE NINE NINE MONTHS FEBRUARY 1, BUSINESS MONTHS ENDED ENDED OCTOBER 1995 TO MAY COMBINATION OCTOBER 31, 31, 1996 5, 1995 ADJUSTMENTS 1996 ------------- ------------ -------------- ------------ Total Revenues........................................ $ 36,349 $ 1,368 $ (351)(a) $ 37,366 Total Cost of Revenues................................ 12,498 888 (7)(a) 13,379 ------------- ------------ -------------- ------------ Gross Margin.......................................... 23,851 480 (344) 23,987 Operating Expenses: Research and Development............................ 12,781 -- 12,781 Sales and Marketing................................. 20,814 357 21,171 General and Administrative.......................... 9,019 65 9,084 Write-off of In-Process Research and Development.... 62,248 (62,248)(b) -- ------------- ------------ -------------- ------------ Total Operating Expenses.......................... 104,862 422 (62,248) 43,036 ------------- ------------ -------------- ------------ Income (Loss) from Operations......................... (81,011) 58 61,904 (19,049) Interest Expense...................................... 4,941 10 -- 4,951 Other Income (Expense)................................ 95 -- -- 95 ------------- ------------ -------------- ------------ Income (Loss) before Income Taxes..................... (85,857) 48 61,904 (23,905) Provision for Income Taxes............................ 300 26 -- 326 ------------- ------------ -------------- ------------ Net Income (Loss)..................................... $ (86,157) $ 22 $ 61,904 $ (24,231) ------------- ------------ -------------- ------------ ------------- ------------ -------------- ------------ Pro forma net loss per common share(c)................ $ (0.48) ------------ ------------ Pro forma weighted average number of common shares outstanding(c)...................................... 50,107 ------------ ------------
- -------------- PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31, 1996, ARE AS FOLLOWS: (a) Reflects the elimination of revenues and related cost of revenue on transactions between the entities prior to acquisition by the Company. (b) The unaudited pro forma condensed consolidated financial statements of operations for the nine months ended October 31, 1996 do not include the in-process research and development write-offs relating to the acquisitions of TUXEDO ($60.9 million) and CST ($1.3 million), since they are conisdered material non-recurring charges. The write-offs are included in the actual historical consolidated statements of operations in the period in which they were incurred. (c) Pro forma net loss per share is computed by dividing pro forma net loss per share by the pro forma weighted average number of shares used elsewhere in this Prospectus. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations, and acquisitions of subsidiaries and the distribution rights to TUXEDO, primarily through the private sale of equity securities of approximately $50 million, notes payable of approximately $80 million, financing of approximately $1 million under its equipment lease line, and borrowings on a revolving credit arrangement. Under the terms of the credit 32 arrangement, the Company had the ability to borrow up to $10 million based upon 80% of eligible trade receivables. At October 31, 1996, the Company had borrowed $5.5 million and had an additional borrowing availability of $1.0 million. The credit arrangement is collateralized by the assets of the Company and also contains certain financial covenants. As of October 31, 1996, the Company was in compliance with the covenants. The credit arrangement bears interest at the LIBOR rate plus 5.125% (10.39% in aggregate at October 31, 1996) and is scheduled to expire in April 1997. However, the lender has agreed to automatically renew the arrangement for one year and allow the Company to borrow up to $10 million regardless of the eligible trade receivable balance. During the year ended January 31, 1996, the Company purchased businesses and technologies for, in aggregate, $16.1 million in cash, a note payable for $2.7 million and assumed $5.4 million of other liabilities. For the nine months ended October 31, 1996, the Company purchased businesses and technologies for, in aggregate, $5.4 million in cash and the assumption of $6.6 million in liabilities. Also during the period ended October 31, 1996, BEA acquired from Novell the exclusive development and distribution rights to the TUXEDO software for a note payable of $77.3 million. The $2.7 million note payable, issued as partial consideration in the acquisition of IMC, was increased as a result of a bonus payment of $1.4 million due to revenue levels achieved by IMC subsequent to acquisition. The note accrues interest at 8%, with the principal and all accrued interest payable on the earlier of October 2000 or the successful completion of a public offering of the Company's equity securities. See "Use of Proceeds." The note payable issued for the purchase of the exclusive development and distribution rights to the TUXEDO software calls for payments aggregating $89.6 million. Interest was imputed at 8%, which resulted in the recorded liability of $77.3 million. The note is collateralized by the rights to the software. The payments owed to Novell can be discounted by 8% if paid prior to 30 days of the established due date. However, management does not currently anticipate any early payments. In the fiscal year ending January 31, 1996 and the nine months ending October 31, 1996, the Company used approximately $720,000 and $2.9 million, respectively, of cash to purchase property and equipment, primarily for leasehold improvements, personal computers and for furniture and other office equipment. The Company also acquired equipment with a cost of approximately $981,000 under a capital lease line of credit. At October 31, 1996, the Company had available borrowings of $1.0 million under the capital lease line of credit. The Company had no other material investing activities. As of October 31, 1996, the Company did not have any material commitments for capital expenditures. At October 31, 1996, the Company had $1.6 million in cash and cash equivalents and a working capital deficit of $30.0 million. Due to the relatively large dollar size of individual sales and the fact that a substantial portion of the Company's accounts receivable from license revenues have been generated within the last weeks of the quarter, the Company has experienced significant fluctuations in its average days sales outstanding. The Company believes that such fluctuations will continue in the future and will continue to affect its liquidity, working capital and financial condition. The Company believes that the net proceeds from the Offerings, together with its current cash balances, cash available under its lines of credit and cash from operations will be sufficient to meet its working capital requirements through January 31, 1998. Although operating activities may provide cash in certain periods, to the extent that the Company experiences growth in the future, the Company anticipates that its operating and investing activities may use cash. Consequently, any such growth may require the Company to obtain additional equity or debt financing. There can be no assurance that additional financing will be available or, if available, that it will be on terms satisfactory to the Company. See "Risk Factors--Substantial Future Capital Needs." 33 BUSINESS INTRODUCTION BEA Systems, Inc. ("BEA" or the "Company") designs, develops, markets and supports software used by large organizations to enable and support their most critical business processes. The Company's Enterprise Transaction Framework is an integrated middleware software platform for developing, deploying and managing distributed mission-critical computer software applications. The core of the BEA Enterprise Transaction Framework is BEA TUXEDO, a software engine that manages transactions and communications for enterprise-wide applications, enabling organizations to realize the benefits offered by distributed computing environments while preserving the traditional advantages of mainframe-based systems. BEA products provide a middleware software infrastructure that supports thousands of simultaneous users distributed worldwide. In addition to its software products, BEA provides its customers with complete solutions through a range of professional services offerings. BEA's products are marketed and sold worldwide, principally through the Company's direct sales force and also indirectly through third parties. BEA's products have been adopted in a wide variety of industries, including banking and finance, manufacturing, retail, technology, telecommunications and transportation. For the nine months ended October 31, 1996, BEA sold new product licenses to over 170 customers, including over 50 new customers. The total number of customers using products that have been acquired and developed by BEA is greater than 600 worldwide. These customers include: The AT&T Corp., Bell Communications Research, Inc., Damark International Inc., Discover Card Trust, Federal Express Corp., Fidelity Investments, Gap Inc., J.J. Kenney, McKesson Corp., Motorola Inc., Nippon Telephone & Telegraph, Northwest Airlines Corp., U.K. Employment Services, Union Bank of Switzerland and Walgreens Co. In addition, ISVs such as PeopleSoft Inc. and Clarify, Inc. embed BEA TUXEDO into their own product offerings in order to improve the scalability, portability and interoperability of their products. INDUSTRY BACKGROUND Over the past decade, the information systems of many large organizations have been evolving from traditional mainframe-based systems to distributed computing environments. This evolution has been driven by the benefits offered by distributed computing, including lower incremental technology costs; faster application development and deployment; increased flexibility; and improved access to business information. Despite these benefits, large-scale mission-critical applications that enable and support fundamental business processes, such as airline reservations, credit card processing and customer billing and support systems, have largely remained in mainframe environments. For several decades, the high levels of reliability, scalability, security, manageability and control required for these complex, transaction-intensive systems within thousands of organizations have been provided by mainframe middleware software such as IBM's Customer Information and Control Systems ("CICS"). Today, according to estimates by The Standish Group, there are more than 50,000 CICS licenses and over two billion lines of CICS code in use for mission-critical applications worldwide. These mainframe environments, however, suffer from several shortcomings, including inflexibility, lengthy development and maintenance cycles and limited, character-based user interfaces. Increasingly, these shortcomings are forcing many organizations to seek out technologies that will enable them to overcome the limitations of distributed computing for mission-critical applications while providing the robust computing infrastructure previously unavailable outside the mainframe environment. THE LIMITATIONS OF DISTRIBUTED COMPUTING FOR LARGE-SCALE MISSION-CRITICAL APPLICATIONS While some mission-critical applications have been successfully migrated to distributed computing environments, the inherent technical and business limitations of distributed computing have generally precluded its use for the complex, large-scale, transaction-intensive applications that are critical to the ongoing operations of many organizations. These limitations include the following: 34 LIMITED SCALABILITY, RELIABILITY AND INTEROPERABILITY. Distributed computing applications are generally limited in scalability to the capacity of database and application servers. Adding servers requires significant rewriting of application logic because existing applications are written in such a manner that each component must know the specific location within the system of all other components. In addition, in distributed computing environments, a significant portion of an application's business logic typically resides on the client (a desktop PC or workstation), while the database resides on one or more servers. Large amounts of data must travel over the network, limiting network performance, while application changes or updates must be deployed and monitored at each client, making effective network administration and management difficult. As a result of these factors, the addition of more clients and servers may actually lead to a decrease in system performance. Also, additional servers exponentially increase the difficulty of managing multiple resources and dynamically balancing processing loads across the network as a result of several factors, including: the risk of interruption to critical business processes due to the inability to make online changes to applications, the complexities that arise in ensuring that any changes are reflected across the network in a comprehensive and consistent manner and the need to reoptimize system performance in light of these changes. Mission-critical applications must maintain the highest levels of reliability and data and transaction integrity, all of which are very difficult to achieve in distributed computing environments. These requirements mandate comprehensive monitoring and control of all system components in order to verify the correct completion of each processing step. In addition, most of these environments are heterogeneous, requiring applications to interoperate across a variety of hardware and software platforms. The lack of scalability, reliability and interoperability has greatly limited the use of distributed computing for large-scale, mission-critical applications. DIFFICULTY IN LEVERAGING INVESTMENTS IN LEGACY TECHNOLOGY. Many organizations have significant, long-standing investments in their mainframe-based systems and the mission-critical applications running on these systems. According to IDC, approximately $250 billion has been spent to date on mainframe system hardware purchases. Distributed computing technologies have provided minimal integration or interoperability with existing mission-critical applications on the mainframe; therefore, achieving the benefits of distributed computing has generally required organizations to build entirely new applications. This typically means abandoning previous investments in legacy applications and increases the risk of costly business interruptions when organizations attempt to migrate mission-critical applications from the mainframe. DIFFICULTY IN LEVERAGING EXISTING PERSONNEL AND SKILLS. Over time, organizations have invested extensively in mainframe-based programmers and technology. The Standish Group estimates that there are currently one million COBOL programmers worldwide. These programmers are well-versed in the business logic, programming languages and development methodologies necessary to build mainframe-based mission-critical applications. The successful implementation of distributed computing, however, requires additional expertise in various other skill sets and emerging technologies. Organizations that seek to implement distributed computing for mission-critical applications are thus faced with the choice of either retraining existing programmers or replacing them with new programmers possessing the requisite skills, but who must still be trained in the organization's business processes. These alternatives are extremely costly, have no guarantee of success and raise the risk of potential disruptions to critical business processes. MIDDLEWARE AS THE MEANS TO IMPLEMENT DISTRIBUTED MISSION-CRITICAL APPLICATIONS In order to overcome the technical and business limitations of distributed computing for large-scale, mission-critical applications, organizations are turning to a new architecture that incorporates middleware--a software infrastructure that is designed to connect clients, applications and databases. A sufficiently robust middleware product would enable developers to create large-scale, mission-critical applications that can be deployed and interoperate across multiple heterogeneous platforms, 35 databases and operating systems while providing the flexibility to select those platforms that best suit a particular application environment. Such a software infrastructure would provide the traditional benefits of mainframe-based computing--scalability, reliability, security, manageability and control--while taking advantage of the opportunities offered by distributed computing. MARKET OPPORTUNITY The Company believes that robust middleware software, and the training and professional services capabilities required to support it, are crucial to enabling organizations to extend their mission-critical applications to take advantage of the benefits offered by distributed computing. The Standish Group estimates that U.S. companies spent over $60 billion in 1996 to modernize their mainframe-based applications to include distributed client/server and Internet technologies and that this annual spending rate will double by the year 2000. The Company believes that the potential benefits to organizations of distributed computing for mission-critical applications are significant. In order to be successful, however, distributed computing environments must provide many of the desirable capabilities of current mainframe-based systems and must preserve and leverage existing investments in technology and programmers. THE BEA SOLUTION BEA's products and services enable companies to overcome the limitations of distributed computing for mission-critical applications. BEA's Enterprise Transaction Framework, based upon time-tested and market-proven BEA TUXEDO technology, provides a middleware solution that addresses the scalability, manageability, platform independence, interoperability, integrity, reliability and security requirements of complex, large-scale, distributed computing in the heterogeneous environments present in most major organizations. The BEA solution allows companies to leverage their substantial investments in legacy systems, significantly extending the useful lives of mainframe and programmer assets while fully exploiting the benefits offered by distributed computing. The BEA solution provides the following benefits: PROVIDES A TESTED, PROVEN INFRASTRUCTURE FOR DISTRIBUTED MISSION-CRITICAL APPLICATIONS BEA TUXEDO, the foundation of the BEA Enterprise Transaction Framework, is a time-tested and market-proven infrastructure for distributed mission-critical applications. By providing a robust, scalable, cost-effective infrastructure--formerly available only on mainframe computers--BEA enables mission-critical applications to run in distributed computing environments. BEA TUXEDO overcomes the limitations on scalability that characterize distributed computing environments by providing a messaging and dynamic load balancing infrastructure that determines the location and syntax of any component without requiring them to be programmed within an application. This separation of business logic from location and syntax enables an arbitrary number of servers to be added to the network with processing loads being balanced dynamically, thereby providing mainframe-like scalability and flexibility. This separation also enables applications written using BEA TUXEDO to reflect more closely underlying business processes, thereby increasing an organization's flexibility with respect to the design, development, implementation and adaptability of its mission-critical applications. BEA TUXEDO's application, transaction and fault management systems combine to ensure data and transaction integrity, enabling distributed computing environments to achieve mainframe-like reliability and security. By using BEA's products and services, organizations do not have to build their own custom infrastructure solutions, a costly and time-consuming process that is often beyond their technical capabilities and resources. Instead, organizations can focus on developing and deploying their mission-critical applications, with the assurance that BEA TUXEDO will ensure their scalability, reliability, interoperability and security. 36 PRESERVES THE VALUE OF INVESTMENTS IN LEGACY SYSTEMS AND SKILLS BEA products and services preserve an organization's investment in mainframe technology and programmers while allowing customers to take advantage of the capabilities of distributed computing. Customers do not need to change or replace reliable, robust mission-critical applications in which they have made significant investments; rather, BEA's products and services enable them to extend and evolve these applications to take advantage of the benefits of distributed computing. BEA's solutions allow mainframe software to be extended to distributed computing platforms with minimal change, protecting the investment in mainframe-based systems while permitting an orderly transition to a distributed computing environment. Because BEA's products allow the mainframe to be treated as just another node on the network, programmers can continue to develop, deploy and maintain mainframe-based applications as before. This allows current programmers who are well-versed in the business processes and logic of the organization to work more efficiently without needing to be trained in the skills necessary to maintain a reliable distributed computing environment. Additionally, BEA's products enable customers to adopt and integrate new technologies--such as the Internet and object-oriented development technologies--as they emerge. ENABLES INTEROPERABILITY ACROSS A BROAD RANGE OF PLATFORMS BEA TUXEDO runs on virtually all major commercial platforms, providing interoperability across heterogeneous computing environments. This allows organizations to develop mission-critical applications that are independent of specific hardware, software and networking technologies. This interoperability enables organizations to avoid the cost, delay and technical risks associated with rewriting of applications to be compatible with new technologies and computer systems. By providing an open application programming interface for BEA TUXEDO, programmers may write applications only to that interface and can then rely on BEA TUXEDO to execute their applications across multiple platforms. Currently, BEA TUXEDO supports over 40 operating platforms, including the market-leading UNIX platforms, Windows NT and IBM MVS. BEA TUXEDO also supports all XA-compliant relational databases available as of October 31, 1996, including products from IBM Corporation, Informix Software, Inc., Microsoft Corporation, Oracle Corporation and Sybase Inc. BEA TUXEDO also works with over 40 development, testing and management tools. REDUCES TIME AND COST OF APPLICATION DEVELOPMENT AND DEPLOYMENT Application development using the BEA Enterprise Transaction Framework allows programmers to design the business logic in their applications independent of system deployment issues. Once the business logic has been programmed, the BEA Enterprise Transaction Framework provides the translations and interface conversions necessary to run the application in a distributed computing environment. This reduces the time and cost of developing and deploying applications because programmers need focus only on the business logic, while the BEA Enterprise Transaction Framework ensures that these changes are incorporated automatically in a comprehensive and consistent manner. Because of this segregation, BEA's products enable an entire worldwide system to be tuned and administered, servers to be added and deleted and the network configuration to be altered, without changing the business application. EXTENDS MISSION-CRITICAL APPLICATIONS TO THE INTERNET AND INTRANETS BEA Jolt enables the extension of enterprise-wide mission-critical applications to the Internet and intranets without reprogramming. BEA Jolt translates between Java applets and BEA TUXEDO, ensuring that transaction integrity is maintained despite unreliable connections and the Internet's inherent inability to retain the current state of a transaction. By enabling Internet and intranet applications to meet the stringent scalability, reliability and availability requirements for mission-critical applications, many of 37 the challenges of electronic commerce can be overcome. See "Risk Factors--Technological Change; Dependence on New Products and Product Enhancements." THE BEA STRATEGY The Company's strategy is to leverage its current leadership position in distributed transaction processing in order to establish its middleware solutions as the industry standard for developing, deploying and managing large-scale mission-critical applications for distributed environments. The key elements of the Company's strategy are: ENHANCE BEA'S TECHNOLOGY LEADERSHIP The BEA Enterprise Transaction Framework is based upon BEA TUXEDO, a market-tested and proven technology initially developed at AT&T Bell Labs in 1984. The Company, which acquired the rights to TUXEDO in February 1996, intends to continue to invest in the enhancement of its core BEA TUXEDO technology. BEA expects to add new functionality to all components of the BEA Enterprise Transaction Framework. Over the course of the next 12 months, planned releases of BEA products will extend these products beyond Java to encompass standard object-oriented programming models (e.g. the Common Object Request Broker Architecture ("CORBA") and Microsoft's Distributed Component Object Model ("DCOM")), improve Internet electronic commerce capabilities and increase the number of platforms supported to more than 50. EXPAND BEA'S GLOBAL SOLUTIONS CHANNEL Due to the strategic nature of the Company's products, customers require BEA to provide complete global services and support. As of October 31, 1996, the Company had 22 offices in 12 countries worldwide and intends to continue to expand its global distribution facilities to provide the direct sales, services, training and support necessary to enable customers to develop, deploy and manage distributed mission-critical applications. In addition, the Company will continue to develop third-party relationships to augment its sales, services, training and support capabilities. PROMOTE THE EMBEDDING OF BEA TUXEDO IN ISV APPLICATIONS BEA will continue to work with ISVs to embed BEA TUXEDO into their product offerings. By licensing its products in this manner, the Company aims to accelerate the acceptance of BEA's products and establish these products as the de facto standard middleware solution. ISVs can benefit significantly from embedding BEA software into their product offerings, enabling them to scale the number of clients supported, eliminate most hardware porting concerns and provide interoperability with other applications based on the BEA Enterprise Transaction Framework. ISVs that have already embedded BEA software into their products include Clarify Inc., Cycare Systems, Inc., Filoli Information Systems and PeopleSoft Inc. LEVERAGE STRATEGIC PARTNERSHIPS The sale of middleware solutions for distributed mission-critical applications requires significant expertise and time spent with potential customers. By leveraging its strategic partnerships with hardware OEMs, ISVs, systems integrators and consultants, the Company is able to extend the reach of its direct sales force. The Company intends to strengthen existing relationships with key industry players, such as Andersen Consulting, Hewlett-Packard Corporation and Sun Microsystems, as well as develop new relationships, in order to increase market awareness and demand and shorten the sales cycle for BEA's products. 38 FACILITATE THE EMERGENCE OF ELECTRONIC COMMERCE OVER THE INTERNET The Company intends to provide the software and services necessary to enable businesses to conduct safe, reliable commercial transactions over the Internet while making use of their existing mission-critical applications. In order to provide robust commerce over the Internet, an application must be able to accommodate unreliable connections, massive scalability requirements and an inherent inability to retain the current state of a transaction. With BEA Jolt and the BEA Enterprise Transaction Framework, the Company provides both the middleware infrastructure and Java-based technology to meet these technical challenges and to enable an organization to extend its mission-critical applications to the Internet and intranets without reprogramming. See "Risk Factors--Technological Changes; Dependence on New Products and Product Enhancements." MARKETS AND CUSTOMERS The total number of licensees using BEA TUXEDO and related products is greater than 1,200 worldwide. For the nine months ended October 31, 1996, BEA sold new product licenses to over 170 customers, including over 50 new customers. The Company's target end-user customers are organizations with sophisticated, high-end information systems with numerous, often geographically dispersed users and diverse, heterogeneous computing environments. Customers are generally mainframe-reliant or have large-scale client/server implementations that handle very high volumes of business transactions. The Company's customers use BEA products as a middleware platform for developing, deploying and managing mission-critical applications key to the customer's business. The following is a representative list of the organizations that accounted for at least $100,000 in revenues to the Company during the nine months ended October 31, 1996:
TELECOMMUNICATIONS BANKING AND FINANCE GOVERNMENT - --------------------------- --------------------------- --------------------------- Alltel Corp. Banco del Atlantico Finnish Ministry of Labor Ameritech Corp. Cybercash, Inc. Finnish Post AT&T Corp. First Datacard Greek Ministry of Finance AT&T Wireless Societe Generale Swedish Police Bell Atlantic Corp. Swiss Life Swedish Tax Office Bell Communications RBC Dominion Swedish Labor Union Research, Inc. Union Bancaire Privee United Utilities Cincinnati Bell Information Union Bank of Switzerland United States Postal Systems, Inc. DISTRIBUTION AND Service Deutsche Telecom TRANSPORTATION RETAIL France Telecom Federal Express Corp. Broadway & Seymour Inc. Lucent Technologies Inc. McKesson Corp. Shopright Checkers MCI Communications Corp. Northwest Airlines Corp. Walgreens Co. Motorola Inc. Renault Nynex Cablecommunication Group Inc. Nippon Telephone and Telegraph Pacific Bell Southern New England Telecommunications Corporation Telecom Finland
In addition to direct sales to end-user customers, BEA works with systems and software integrators that incorporate BEA products for resale. The Company also sells BEA TUXEDO to software and 39 computer hardware providers to embed into their application software or software toolsets. These customers include the following organizations:
HARDWARE OEMS ISVS SYSTEMS INTEGRATORS/CONSULTANTS - --------------------------------- --------------------------------- --------------------------------- Bull Compagnie des Machines CableData Andersen Consulting Data General Corporation Clarify Inc. Cambridge Technology Partners Digital Equipment Corp. Cylink Corporation Computer Science Corporation ICL plc Filoli Information Systems Electronic Data Systems Sequent Computer Systems Inc. Minnesota Mining and Corporation Sun Microsystems Manufacturing Co. Tangent Computer, Inc. Tandem Computers Inc. Nomad Software Unisys Corp. PeopleSoft Inc. Sybase Inc.
See "Risk Factors--Expanding Distribution Channels and Reliance on Third Parties" The following examples illustrate how some organizations are using BEA products as a middleware framework to provide the infrastructure for enabling mission-critical distributed transaction processing applications. AT&T AT&T's Consumer Customer Care system for bill inquiry and order entry supports 7,500 services and 1,500 sales/customer contact positions 24 hours a day, seven days a week and is key to AT&T's overall customer satisfaction efforts. When AT&T decided to reengineer these applications to make use of distributed systems, BEA TUXEDO was selected as the middleware solution to provide reliable communications among the Customer Care system's many applications. The decision to use BEA TUXEDO was based on the product's asynchronous messaging technology and data-dependent routing capabilities, and its ability to support multiple processors in a flexible configuration. In the AT&T implementation of BEA TUXEDO, each processor is viewed as an independent domain. By providing independent application services that can be used by all domains, BEA TUXEDO isolates the impact of single processor failures, which has enabled high availability applications to be supported without redundant hardware. Overall, through this reengineering effort, AT&T is lowering unit costs and improving customer and employee satisfaction in support of bill inquiry and order entry functions. BANCO DEL ATLANTICO Banco del Atlantico ("B.A."), the fifth largest bank in Mexico, needed an information system that would allow it to leverage its legacy Unisys platform with its newly acquired Hewlett-Packard distributed systems. B.A. had over 4,000 personal computers and more than 100 local area networks running on heterogeneous platforms at its branch banks and headquarters in Mexico City. B.A. chose to invest in a middleware solution to increase total reliability and security, allow for more consistent performance, and solve key connectivity issues relating to integrating legacy and distributed systems. B.A. initially evaluated BEA TUXEDO and several other products and chose BEA TUXEDO because of its reliability and ability to provide seamless integration among all of B.A.'s platforms. BEA TUXEDO provides a common layer in the B.A. infrastructure to direct the complex interactions between applications and systems. Currently, all of B.A.'s telephone banking applications and customer information database applications are supported by BEA TUXEDO. DAMARK After years of growth, Damark, a major catalog direct marketing company, reached an earnings plateau in early 1994, despite increased sales. Damark was experiencing increasing paper and postage 40 costs, which represent significant elements of its direct marketing efforts to 10 million prospective customers. The challenge faced by its IT department was to find the most efficient, cost-effective way to receive and fill customer orders, which at times reach fifteen thousand per day. The IT department evaluated middleware solutions that were capable of handling peak order volume and scaling to incorporate multiple call centers around the United States. Damark's specific requirements included guaranteed message delivery for both asynchronous or synchronous communications, a single development interface for all components, operational manageability and off-the-shelf, proven technology. Through a solution that combined BEA TUXEDO and Oracle relational databases. Through a solution that combined BEA TUXEDO and Oracle relational databases, Damark was able to connect its toll-free call representatives directly to the prospective customer's information database, thereby significantly improving overall representative efficiency. In addition, Damark uses BEA TUXEDO to minimize system downtime, as users are transferred within 30 seconds from a failed node to another node capable of handling the requested transaction. PACIFIC BELL Pacific Bell has undertaken a multi-billion dollar project to upgrade its infrastructure in efforts to meet the increasing demands of customers and advanced technologies, such as Internet access. The project, which Pacific Bell calls the Advanced Communication Network (ACN), involves running fiber optic cable to all households and businesses in California and Nevada. To support the enhanced telecommunications infrastructure, Pacific Bell is developing an advanced computer infrastructure that includes on-line customer care and billing systems. This is considered to be a highly competitive, mission-critical distributed system that requires a robust transaction management system. Pacific Bell evaluated several alternative solutions in the market and selected BEA TUXEDO, which was able to meet all of Pacific Bell's requirements for transaction management, including load balancing, data-dependent routing, guaranteed transaction integrity and support for heterogeneous computing environments. Pacific Bell selected BEA TUXEDO because of its time-tested market-proven technology and efficient memory usage on the desktop. Once in full production, this system is expected to enable Pacific Bell to scale its customer care and billing systems to regularly support the tens of thousands of Pacific Bell customers, increasing customer satisfaction and overall service. In addition, the flexibility of the system is expected to allow Pacific Bell to enhance its product and service offering capabilities, making advanced technologies more readily available to the customer. BEA TUXEDO has become a critical integrated component of Pacific Bell's on-line customer care and billing systems, and has already helped the company save on additional consulting, personnel and technology costs. PEOPLESOFT PeopleSoft, a leading provider of enterprise software supporting human resources, financial and manufacturing applications on open systems, needed a software framework to strengthen its ability to implement applications across multiple sites and computing environments. PeopleSoft investigated multiple technologies, including a number of middleware products. PeopleSoft decided to base PeopleSoft Release 6 and future applications on BEA technology, selecting BEA TUXEDO because of its request/reply and publish/subscribe messaging capabilities, and its strengths in handling high-volume transaction processing with high availability and reliability. By using BEA TUXEDO as its middleware infrastructure, PeopleSoft is able to deliver multi-tier global applications. PeopleSoft is making use of the multiple communication capabilities within the BEA TUXEDO framework based on the need of applications to process transactions in either a real-time or asynchronous mode. In addition, end users can use BEA TUXEDO to enable custom applications to interoperate with the packaged PeopleSoft applications. PeopleSoft 6, the first PeopleSoft release using BEA TUXEDO, began shipping to customers in December 1996. 41 UNITED KINGDOM EMPLOYMENT SERVICE In 1996, the United Kingdom Employment Service ("E.S.") determined that it needed a new software application to support its labor market activities. E.S.'s existing systems were reaching the end of their product life cycles and did not have the flexibility to incorporate new technology to enhance functionality. E.S. selected BEA TUXEDO as the middleware framework for the Labour Market System ("LMS"), an application designed to replace all existing applications. LMS now links all 1,067 job centers in Great Britain, using CA-Ingres relational databases running on Sequent platforms as the core of the system. LMS has become one of the world's largest distributed systems. Thirty thousand people throughout E.S. have been trained to use the system, which processes over five million transactions per day. The integrated system enables immediate searches and displays of suitable vacancies and opportunities for job seekers, thereby improving the services that E.S. is able to offer its clients. YELLOW FREIGHT In order to be competitive in the changing environment of the freight industry, Yellow Freight must provide customers increasingly faster transit times, improved on-time performance, and undamaged freight, all at a reduced cost. Yellow Freight and its technology division embarked on a reengineering project to provide applications with a new set of capabilities: a universal view of business data to enable mission-critical business information to move in real-time ahead of freight, improved time-to-market for new business applications by providing "pre-built" application frameworks, increased scalability of application processing capacity, and an architectural model providing high, but cost-effective, levels of availability and performance. BEA TUXEDO was selcted because it offered platform independence and multiple scalability options, provided a high level of availability through an automatic restart/recovery capability, could support a high-volume transaction throughput requirements and is successfully implemented in production environments in combination with Powerbuilder and Oracle, which were the other technologies Yellow Freight selected for this project. The first enterprise-wide distributed BEA TUXEDO application implemented is used in two customer service centers supporting several hundred customer service representatives, providing 24 hours a day, seven days a week service to inbound customer calls. The application provides rapid response time, high availability, and increased scalability, while giving the Yellow Freight users the benefits of an easy-to use graphical interface. PRODUCTS The BEA Enterprise Transaction Framework is an integrated middleware software platform for building, deploying and managing distributed mission-critical applications. The BEA Enterprise Transaction Framework provides the scalability, manageability, platform independence, interoperability, integrity, reliability and security requirements of complex, large-scale, transaction-intensive mission-critical applications in a distributed computing environment. The core of the BEA Enterprise Transaction Framework is BEA TUXEDO, a market-proven and time-tested technology first developed at AT&T Bell Labs in 1984. The Company took over development, sales and support of TUXEDO from Novell in February 1996 and has subsequently shipped BEA TUXEDO Release 6.2, BEA Connect SNA Version 1.1, BEA Connect TCP Version 1.1, and BEA Jolt Version 1.0. 42 THE BEA ENTERPRISE TRANSACTION FRAMEWORK Set forth on page is a horizontal rectangular box bearing the caption "BEA TUXEDO KERNEL." Set forth on top of this box are four square boxes each with a caption reading, from left to right, "BEA BUILDER," "BEA CONNECT," "BEA TP BLUE" and "BEA JOLT." Set forth to the left of the five aforementioned boxes is a vertical rectangular box of equal height as the combined other boxes, with a caption reading "BEA MANAGER." BEA TUXEDO BEA TUXEDO is a robust engine for developing, deploying and managing mission-critical applications in distributed computing environments. BEA TUXEDO provides distributed transaction processing and application messaging capabilities, as well as the full complement of services necessary to build and run mission-critical applications. It enables developers to create applications that interoperate across multiple hardware platforms, databases and operating systems. BEA TUXEDO provides mainframe-like performance for distributed mission-critical applications. It allows these applications to accommodate thousands of worldwide users, high-transaction throughput, multiple concurrent database access and large volumes of data, while maintaining short response times, high data integrity and security and 7x24x365 system availability. At the same time, BEA TUXEDO enables developers and systems managers to take advantage of the benefits offered by distributed computing environments, such as lower incremental technology costs, increased flexibility, faster application development and deployment and improved access to business information. BEA JOLT BEA Jolt extends the capabilities of BEA TUXEDO to the Internet and intranets, making mission-critical applications immediately accessible through these media without the need for any additional application programming. It enables Internet and intranet application developers to take full advantage of the benefits offered by the BEA Enterprise Transaction Framework and, the Company believes, provides the means for resolving many of the technical issues hindering the development of electronic commerce on the Internet. BEA Jolt ensures that transaction integrity is maintained, notwithstanding the Internet's inherent inability to retain the current state of any transaction or the frequently unreliable connections encountered by users. BEA Jolt employs a Java-based interface that allows programmers to execute service requests from any Java-enabled web browser without requiring any knowledge of detailed transaction semantics. BEA Jolt also ensures an application's security, since neither transactional programming nor semantics are accessible from the Internet or intranets. BEA TP BLUE BEA TP Blue provides mainframe-to-UNIX and mainframe-to-NT application portability, compatibility and connectivity for CICS-based transaction processing. With BEA TP Blue, organizations can extend the useful lives of CICS applications, either by seamlessly sharing the transaction processing load with UNIX- or NT-based hardware or by migrating applications and data from the mainframe to a UNIX- or NT-based distributed computing environment. BEA TP Blue preserves organizations' investments in CICS/COBOL programs and programmers, while enabling them to take advantage of UNIX- and NT-based technologies. Programmers can continue to develop and deploy mission-critical 43 applications on the mainframe using CICS/COBOL and to rely upon BEA TP Blue to connect or migrate those applications to UNIX and NT whenever necessary. BEA CONNECT BEA Connect is a family of connectivity products that allows applications to extend across heterogeneous hardware and software platforms. Designed to work in concert with all other BEA products, BEA Connect assures ready, transparent access to critical information across the network with a single, standard programming interface. BEA Connect supports a variety of mainframe-based and distributed transactional technologies, including CICS and IMS, by using standard network protocols such as TCP/IP, LU6.2/SNA or OSITP. Interfaces can also be built for connectivity with specific packaged software applications, such as SAP's R/3. BEA Connect also enables customers to write mission-critical applications that access remote application services on mainframes or other hosts via industry-standard communications mechanisms. BEA BUILDER BEA Builder enables programmers to use familiar graphical development environments, such as Visual Basic, Visual C++ and PowerBuilder, in the development of BEA TUXEDO-based applications. BEA Builder incorporates application frameworks and code generators that enhance programmers' productivity, and provides pre-programmed wizards to automate the configuration and deployment of an application. By leveraging developers' familiarity with popular development environments and adding the capabilities noted above, BEA Builder reduces the training and development needed to design and deploy distributed mission-critical applications using BEA TUXEDO. BEA MANAGER The BEA Manager family of products extends the native management capabilities of BEA TUXEDO by enabling it to integrate with, and take advantage of the capabilities of, various third-party management frameworks, including Tivoli's TME 10 NetView, Sun's Solstice and Hewlett-Packard's OpenView. BEA Manager adds application level instrumentation for performance measurement and centralized message logging, which together provide increased detection and isolation capabilities for application faults. BEA Manager also provides a set of customizable intelligent agents that reduce the human involvement required to handle routine maintenance and fault correction. Finally, BEA Manager can be deployed by existing operations staff with little additional training required. To date, the majority of the Company's license revenues have come from the BEA TUXEDO product. The Company's other products are sold as additional components of the BEA Enterprise Transaction Framework, often at the time of the initial BEA TUXEDO license sale. The core BEA TUXEDO product is priced based on the number of concurrent run-time users and has a U.S. list price of $395 per user. The additional components of the BEA Enterprise Transaction Framework are priced and licensed separately. During the nine months ended October 31, 1996, license fees per customer for BEA products generally ranged from $95,000 to more than $1.7 million and averaged approximately $395,000. Some components of the BEA Enterprise Transaction Framework, such as BEA Jolt, are priced by server class. See "Risk Factors--Product Concentration; Dependence on Growth of Market for Middleware; Novell Relationship." TECHNOLOGY TUXEDO was initially developed in 1983 within AT&T Bell Labs and released in 1984. Release 1.0 enabled an application to be partitioned into a set of cooperating client and server processes and an application programming interface ("API"). Subsequent releases built on this foundation, incorporating capabilities to support high levels of system availability, highly secured and widely distributed clients and 44 servers, interoperability across heterogeneous platforms, a graphical user interface for administration, transactional control of heterogeneous databases, implementation of both conversational and queued communications methodologies, enhanced data integrity and security and an event broker that supports the publish and subscribe paradigm. The most recent version of BEA TUXEDO, Release 6.2, conforms with industry-standard interfaces and protocols. BEA TUXEDO's modular architecture is centered on the Application Transaction Manager Interface ("ATMI"), which consists of 30 simple calls and has been adopted by The Open Group as a standard X/Open API. BEA TUXEDO supports the Open Group's Distributed Computing Environment Remote Procedure Call ("DCE RPC") interface. BEA TUXEDO's performance is publicly documented in Transaction Processing Performance Council ("TPC") benchmarks and is used by virtually all hardware and database vendors publishing audited benchmarks of their platforms. The BEA Enterprise Transaction Framework is a set of inter-related software technologies that enable the development, deployment and management of large-scale, mission-critical distributed applications. BEA technologies are typically used in conjunction with relational database management systems ("RDBMS"). The RDBMS provides a run-time environment for storing and retrieving data, while BEA provides the application server infrastructure for executing the business logic. BEA also provides a rich set of messaging services that enable reliable, efficient communications among components of a distributed application, as well as web-based access to the application services using Java and HTML. BEA technologies are hardware and operating system independent and are available on a wide variety of platforms, including Microsoft Windows and Windows NT, all major versions of UNIX, MVS Open Edition, Tandem NSK and AS/400. TRANSACTION INTEGRITY AND SECURITY Transaction integrity and security are fundamental requirements for building mission-critical applications, particularly in distributed computing environments where additional burdens are placed on the execution and management of these applications. BEA TUXEDO, through its transactional kernel, enables the resolution and execution of distributed application service requests. These application service requests are implementations of business processes, such as withdrawals and deposits in a banking application. BEA TUXEDO provides automated preparation and transmission of the underlying distributed application services in a real-time manner. It also provides automated propagation of transactions and security contexts, which enables distributed services to be automatically invoked without explicit sign-on to each server. BEA TUXEDO also provides automatic advertisement of available transaction services. This feature is critical when an application server becomes unavailable, as it prevents an application from waiting indefinitely for that particular service. The combination of these capabilities enables applications that incorporate BEA TUXEDO to achieve mainframe-like transaction integrity and security, while still taking advantage of the benefits offered by distributed computing environments. ROBUST MESSAGING--PUBLISH-AND-SUBSCRIBE MODEL Through the use of the recently developed publish-and-subscribe model, a new BEA product called the Event Broker allows applications to subscribe to events about which they are interested. BEA's Event Broker manages these subscriptions by maintaining a subscription list and managing event posting. The BEA Event Broker executes subscription actions in which subscriber and publisher maintain complete anonymity and independence. The Event Broker enables clients and servers to post events that have occurred and ensures that the appropriate applications are notified of the occurrence of those events. By combining BEA TUXEDO asynchronous messaging capability and the Event Broker, network traffic can be significantly reduced, as applications are only notified of relevant events. In addition, the complexity associated with incorporating new applications within a system is simplified by ensuring that 45 existing applications are notified of updates and that subscription lists and postings are modified accordingly. BEA TUXEDO supports five different modes of communication. In addition to the publish-and-subscribe model, these modes include asynchronous and synchronous transactions, request/ response, peer-to-peer messaging and reliable queuing. Each of these can be carried out with or without distributed transaction semantics and any combination can be utilized within a single business application. This enables BEA TUXEDO to be utilized as a message-oriented middleware platform for developing both transactional and non-transactional distributed applications. OPEN ARCHITECTURE AND PROGRAMMING API The APIs provided with the BEA Enterprise Transaction Framework are built on a common set of robust kernel services provided by BEA TUXEDO. These services provide a level of abstraction between the application programs and the underlying system facilities. They also enable transparent interoperability between components developed to different APIs. For example, a Java client can invoke a CICS transaction or an X/Open-compliant XATMI-based service via the same API call. This support of multiple programming styles also facilitates the migration of existing applications to distributed computing environments via the BEA Enterprise Transaction Framework. BEA products have been designed from the ground up to conform with industry-standard interfaces and protocols. These include both formal standards, such as X/Open, DCE and ISO, and de facto standards, such as SNA, the Java Virtual Machine, OLE and ActiveX. The Company's product development efforts continuously reflect the knowledge gained from working with customers to build large-scale, mission-critical distributed applications. An example of the benefits to the Company of these efforts is the XA implementation within BEA TUXEDO, which vendors such as Oracle and Microsoft have selected as the reference platform for their database integration efforts. The Company's products support all major RDBMS platforms, which, in addition to Oracle and Microsoft's SQL Server, include Informix, IBM DB2/6000, Sybase and CA/Ingres. SYSTEMS SERVICES BEA products provide a robust set of system services that enable distributed applications to be developed in a standard and consistent manner. These services include naming, application activation and deactivation, dynamic application reconfiguration and system fault management. In addition, the Company's products also provide a set of application level services. These services include intra-node and inter-node application communication management, application transaction management, client/ workstation handling, security management, application queue management and event management. By providing these system and application level services, the Company's products significantly reduce the amount of system and application level programming effort required. These services also enable applications developed within the BEA Enterprise Transaction Framework to interoperate across heterogeneous computing environments. MANAGEMENT INFORMATION BASE BEA's products enable distributed transaction system monitoring and management through a Management Information Base ("MIB"). This system monitors applications, databases, operating systems and networks; it also provides logging facilities, and event and performance management. The management information base enables systems administrators to set pre-defined rules or allows them to monitor and manages systems interactively through an easy-to-use graphical interface. In addition, BEA provides a Simple Network Management Protocol ("SNMP") agent kit to allow the use of any SNMP-based management tool, such as OpenView or TME. 46 APPLICATION-TO-APPLICATION CONNECTIVITY Most connectivity products on the market today only provide a low-level solution, such as connecting a UNIX system running TCP/IP to a mainframe running SNA. This leaves most of the application-level connectivity programming to the IT programmers. BEA's products, however, support high-level application-to-application connectivity for a wide variety of mainframe and distributed systems, relieving programmers of the burden previously associated with systems level programming efforts. These connectivity technologies support industry-wide networking standards, such as the OSI/TP protocol for application services or the IBM LU6.2/SNA protocol. In addition, the Company provides an IBM syncpoint-enabled transactional connectivity technology for IMS-based or CICS-based applications. The Company is also currently developing an IBM-compatible Intersystems Communication ("ISC") protocol-based connectivity technology for customers who wish to develop mainframe-style applications in a fully-distributed environment. INTERNET/INTRANET EXTENSIBILITY BEA Jolt extends BEA TUXEDO-based applications to the Internet/intranets without the need for additional application programming. BEA Jolt provides object-oriented access, from any Java-enabled browser via Java applets, to BEA TUXEDO-based applications behind an organization's firewall. Legacy mainframe environments, such as CICS, are similarly accessible using BEA Jolt and BEA Connect. BEA Jolt simplifies application design by providing object interfaces for Java, as well as turn-key access to BEA-developed Java class definitions and customized Java applets residing in the BEA Jolt repository. For ease of management, the BEA Jolt server can be administered with the same tools used to manage any resource within the BEA TUXEDO environment. RESEARCH AND DEVELOPMENT The Company has made substantial investments in technology acquisition and product development. BEA TUXEDO was originally developed by AT&T Bell Labs, and had been revised by UNIX System Labs and Novell before BEA became the developer of the product in February 1996. Important product technology for the BEA Enterprise Transaction Framework was gained through many of the Company's acquisitions. The Company will continue to review possible technology acquisitions when appropriate. See "Risk Factors--Past and Future Acquisitions" and "Management's Discussion and Analysis of Financial Condition and Results of Operation." At October 31, 1996, the Company had a development staff of 89, which included the original four architects, as well as many of the original developers, of TUXEDO. In the nine months ended October 31, 1996, product development expenses were $12.8 million. The Company's product development organization is responsible for product architecture, core technology and functionality, product testing, user interface development and expanding the ability of BEA's products to operate with the leading hardware platforms, operating systems, relational database management systems ("RDBMSs"), application development and management tools and networking and communication protocols. To date, the Company has not capitalized any software development costs and does not anticipate capitalizing any software development costs. The Company expects to continue to devote substantial resources to its product development activities, including continued support of existing and emerging hardware platforms, operating systems, RDBMSs, application development and management tools, and networking and communication protocols. BEA shipped BEA TUXEDO Release 6.1, Vol. 2 in July 1996, BEA Connect SNA Version 1.1 in August 1996, BEA Connect TCP in November 1996, and BEA TUXEDO 6.2 in December 1996. The Company released the first customer shipment of BEA Jolt Version 1.0, the first product developed exclusively by BEA, in December 1996. The Company intends to continue to extend the functionality of BEA TUXEDO and the BEA Enterprise Transaction Framework, to commit significant resources to the 47 ongoing development of BEA TUXEDO and to support existing and emerging technologies such as object-oriented technology. The market for the Company's products is highly fragmented, competitive with alternative computing architectures, and characterized by continuing technological development, evolving industry standards and changing customer requirements. The introduction of products embodying new technologies, the emergence of new industry standards or changes in customer requirements could render the Company's existing products obsolete and unmarketable. As a result, the Company's success depends upon its ability to further enhance existing products, respond to changing customer requirements, and develop and introduce in a timely manner new products that keep pace with technological developments and emerging industry standards. Customer requirements include, but are not limited to, operability across distributed and changing heterogeneous hardware platforms, operating systems, relational databases and networks. For example, although BEA TUXEDO interoperates with applications on over 40 operating platforms, as certain of the Company's customers start to utilize emerging platforms, it will be necessary for the Company to further enhance its products to interoperate with applications on these emerging platforms. There can be no assurance that the Company's products will adequately address the changing needs of the marketplace or that the Company will be successful in developing and marketing enhancements to its existing products or new products incorporating new technology on a timely basis. Failure to develop and introduce new products, or enhancements to existing products, in a timely manner in response to changing market conditions or customer requirements, will materially and adversely affect the Company's business, operating results and financial condition. SALES, MARKETING AND SERVICES The Company's sales strategy is to pursue opportunities worldwide within large organizations through its direct sales, professional services and technical support organizations, complemented by indirect sales channels such as hardware OEMs, packaged application software developers, systems integrators and independent consultants, software tool vendors and distributors. The Company currently intends to add to its direct sales, support and professional services organizations in all major markets worldwide. DIRECT SALES ORGANIZATION BEA markets its software and services primarily through its direct sales organization. As of October 31, 1996, the Company's direct sales force totaled 60 sales representatives in 22 offices worldwide. At October 31, 1996, the direct sales force was supported by 15 technical sales engineers worldwide. Field sales representatives are assigned quotas and compensated for all Company revenues, both direct and indirect, resulting from their assigned territory. Leads are generally qualified by a third party and then passed through the field sales organization. The Company typically uses a consultative, solution-oriented sales model that entails the collaboration of technical and sales personnel to formulate proposals to address specific customer requirements. Because the Company's products are typically used to integrate applications that are critical to a customer's business, the Company focuses its initial sales efforts on senior IT department personnel who are responsible for such applications. Subsequent efforts often include other senior members of a customer's executive management team. PRODUCT SALES AND IMPLEMENTATION CYCLE The license of the Company's software products is often an enterprise-wide decision by prospective customers and requires the Company to engage in a lengthy sales cycle to provide a significant level of education to prospective customers regarding the use and benefits of the Company's products. The Company's sales process consists of several phases: lead generation, initial contact, lead qualification, 48 needs assessment, proposal generation and contract negotiation. Following the signing of a license contract for BEA products, a customer's implementation consists of a pre-deployment and a deployment phase. Approximately 10 to 30 percent of the revenue from a typical customer is realized during the pre-deployment phase and is usually weighted toward professional services and training. The remaining portion of revenue is realized during the deployment stage and predominantly consists of license fees. While the sales and implementation cycle varies substantially from customer to customer, for initial sales it has ranged from 18 to 24 months from the initial contact to the completion of the deployment phase. In many cases, a customer begins a second development project using BEA products, often with substantially shortened development and deployment timeframes. Additional development projects by a particular customer are often implemented in progressively abbreviated timeframes. See "Risk Factors--Lengthy Sales and Implementation Cycle." STRATEGIC RELATIONSHIPS An important element of the Company's sales and marketing strategy is to expand its relationships with third parties to increase the market awareness, demand and acceptance of BEA and its products. The Company often benefits from third-party selling assistance and believes that, in a number of instances, its relationships with strategic partners have substantially shortened the Company's sales cycle. Partners have often generated and qualified sales leads, made initial customer contacts, assessed needs and recommended contact with the Company prior to BEA's introduction. Partners can provide customers with additional resources and expertise, especially in vertical markets, to help meet their system application development requirements. Types of partners include: HARDWARE OEMS. BEA's hardware partners often act as resellers of BEA TUXEDO, either under the BEA TUXEDO name or integrated with their own software products, or recommend BEA TUXEDO to their customers and prospects who are planning to implement high-end, mission-critical applications on their hardware platform. BEA's relationships with hardware manufacturers include Digital Equipment Corp., Fujitsu Limited, Hewlett-Packard Corporation, IBM Corporation, NEC Corporation, Pyramid Technology Corp., Sequent Computer Systems Inc., Siemens-Nixdorf Informationssysteme A.G., Sun Microsystems Inc. and Tandem Computers Inc. PACKAGED APPLICATION SOFTWARE DEVELOPERS. BEA licenses its software to packaged application software vendors. These vendors embed the software as a middleware infrastructure for the applications they supply, giving these applications increased distribution, scalability and portability across all platforms on which BEA TUXEDO runs. Customers can also easily integrate custom applications built using BEA TUXEDO into these existing packaged applications. Vendors that embed BEA TUXEDO software in their packaged applications include CableData, Clarify, Inc., Cycare Systems, Inc., Filoli Information Systems and PeopleSoft Inc. SYSTEMS INTEGRATORS AND INDEPENDENT CONSULTANTS. Systems integrators often refer their customers to BEA and may utilize BEA as a subcontractor in some situations. BEA TUXEDO has been designated by EDS as a certified framework product, and BEA seeks similar certification from other systems integrators. BEA also works cooperatively with independent consulting organizations, often being referred to prospective customers by professional services organizations with expertise in high-end transactional applications. In addition to EDS, BEA has relationships with systems integrators such as Andersen Consulting, Oracle Consulting and Perot Systems Corporation, as well as many independent consultants. INDEPENDENT SOFTWARE TOOL VENDORS. Partner ISVs integrate their tools with BEA TUXEDO to enable their customers to use these tools to build scalable distributed applications more easily. BEA has relationships with over 40 tool vendors, including Borland International Inc., BMC Software Inc., Compuware Corporation, Mercury Interactive Corporation, Microsoft Corporation, NAT Systems International, Inc., Oracle Corporation and Passport Communications, Inc. 49 DISTRIBUTORS. The Company uses distributors to sell its products in North America and major markets in Europe, Asia and Latin America to augment the efforts of its direct sales force. As of October 31, 1996, the Company was represented by 13 distributors. PROFESSIONAL SERVICES The Company's professional services organization provides a full range of consulting services to customers developing, deploying and managing mission-critical applications using BEA products. These services include architectural assistance, prototyping, implementation, legacy migration, porting, application integration, performance evaluation and tuning, and data conversions. Because of the complex nature of its customers' mission-critical applications, the Company believes that its professional services organization plays a key role in facilitating initial license sales and enabling customers to successfully develop, deploy and manage such applications. As of October 31, 1996, the Company employed 73 professional services consultants. Fees for professional services are generally charged on a time and materials basis and vary depending upon the nature and extent of services to be performed. TECHNICAL SUPPORT The Company believes that a high level of customer support is integral to the successful marketing and sale of BEA products. Mission-critical applications require rapid support response and problem resolution. The Company's direct sales to customers include a basic level of maintenance. Comprehensive 7x24x365 support contracts are also available, typically on an annual basis. In addition, the Company offers introductory and advanced classes and training programs at the Company's offices, customer sites and training centers worldwide. Telephone hotline support is offered worldwide at either a standard or around-the-clock level, depending on customer requirements. The Company maintains product and technology experts on call at all times worldwide and has support call centers located in Sunnyvale, California and Paris, France. The Company sponsors user group conferences in North America and Europe. MARKETING The Company's marketing efforts are directed at broadening the market for BEA TUXEDO and the BEA Enterprise Transaction Framework by increasing awareness of the benefits of using the Company's products to build mission-critical distributed applications. Marketing efforts are also aimed at supporting the Company's worldwide direct and indirect sales channels. Marketing personnel engage in a variety of activities including conducting public relations and product seminars, issuing newsletters, sending direct mailings, preparing sales collateral and other marketing materials, coordinating the Company's participation in industry trade shows, programs and forums, and establishing and maintaining close relationships with recognized industry analysts. The Company's senior executives are frequent speakers at industry forums in many of the major markets the Company serves. COMPETITION The market for middleware software and related services is highly competitive. The Company's competitors are diverse and offer a variety of solutions directed at various segments of the middleware software marketplace. These competitors include database vendors such as Oracle Corporation ("Oracle"), IBM Corporation ("IBM") and others, which offer their own development tools for use with their proprietary databases, as well as companies offering and developing middleware software products and related services or application development tools that compete with products offered by the Company. In addition, internal development groups within prospective customers' organizations may develop software and hardware systems that may substitute for those offered by the Company. A number of the Company's competitors and potential competitors have longer operating histories, 50 significantly greater financial, technical, marketing and other resources, greater name recognition and a larger installed base of customers than the Company. The Company's principal competitors currently are database vendors that advocate client/server networks driven by the database server and software tool vendors that offer development tools designed to enable customers to create distributed mission-critical applications. Oracle is the primary relational database vendor offering products that are intended to serve as alternatives to the Company's enterprise middleware solutions. Currently, the software development tool vendors typically emphasize the broad versatility of their toolsets and, in some cases, offer complementary middleware software that supports these tools and performs messaging and other basic middleware functions. There can be no assurance that the Company will compete successfully with database vendors and software tool vendors, or that the products offered by such vendors will not achieve greater market acceptance than the Company's products. Microsoft has announced that it will provide middleware functionality in future versions of its Windows NT operating system and has recently announced the release of a product that includes certain middleware functionality. The bundling of middleware functionality in Windows NT will require the Company to compete with Microsoft in the Windows NT marketplace, where Microsoft will have certain inherent advantages due to its significantly greater financial, technical, marketing and other resources, greater name recognition, its substantial installed base and the integration of its enterprise middleware functionality with Windows NT. If Microsoft successfully incorporates middleware functionality into Windows NT or separately offers middleware applications, the Company will need to differentiate its products based on functionality, interoperability with non-Microsoft platforms, performance and reliability and establish its products as more effective solutions to customers' needs. There can be no assurance that the Company will be able to successfully differentiate its products from those offered by Microsoft, or that Microsoft's entry into the middleware market will not materially adversely affect the Company's business, operating results and financial condition. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of the Company's current and prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could materially adversely affect the Company's ability to sell additional licenses and maintenance and support renewals on terms favorable to the Company. Further, competitive pressures could require the Company to reduce the price of its products and related services, which could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon the Company's business, operating results and financial condition. The Company believes that the principal competitive factors in the market for its products are the ability to scale to accommodate a large number of users, interoperability with major hardware and software platforms and legacy systems, cost, time to implementation, robustness and support services. Based on these factors, the Company believes its products compete favorably, although there can be no assurance that the Company can maintain its competitive position against current and potential competitors. In order to be successful in the future, the Company must continue to respond promptly and effectively to the challenges of technological change and competitors' innovations. There can be no assurance that the Company will be able to compete successfully with existing or new competitors or that competition will not have a material adverse effect on the Company's business, financial condition and results of operations. 51 INTELLECTUAL PROPERTY The Company's success depends upon its proprietary technology. The Company relies on a combination of copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect its proprietary rights. The Company presently has three issued patents and two pending patent applications, as well as an exclusive license to one patent and one pending patent application. No assurance can be given that competitors will not successfully challenge the validity or scope of the Company's patents and that such patents will provide a competitive advantage to the Company. As part of its confidentiality procedures, the Company generally enters into non-disclosure agreements with its employees, distributors and corporate partners, and license agreements with respect to its software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization, or to develop similar technology independently. In particular, the Company has, in the past, provided certain hardware OEMs with access to its source code, and any unauthorized publication or proliferation of this source code could materially adversely affect the Company's business, operating results and financial condition. Policing unauthorized use of the Company's products is difficult and, although 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. Effective protection of intellectual property rights is unavailable or limited in certain foreign countries. There can be no assurance that the Company's protection of its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or design around any patents issued to the Company or other intellectual property rights of the Company. The Company is not aware that any of its products infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim such infringement by the Company with respect to current or future products. The Company expects that software product developers will increasingly be subject to such claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in the industry segment overlaps. Any such claims, with or without merit, could result in costly litigation that could absorb significant management time, which could have a material adverse effect on the Company's business, operating results and financial condition. Such claims might require the Company to enter into royalty or license agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. EMPLOYEES At December 31, 1996, the Company had 439 full-time employees of whom 100 were primarily engaged in research and development, 301 in consulting, training, sales, support and marketing and 38 in administration and finance. None of the Company's employees is represented by a collective bargaining agreement and the Company has never experienced any work stoppage. The Company considers its relations with its employees to be good. The Company also employs a number of temporary and contract employees from time to time. At December 31, 1996, the Company employed approximately 51 temporary and contract employees. The Company's future performance depends to a significant degree upon the continued service of its key members of management, as well as key marketing, sales, consulting and product development personnel. The loss of any of William T. Coleman III, the Company's President, Chairman and Chief Executive Officer, Edward W. Scott, Jr., the Company's Executive Vice President of Worldwide Field Operations, or Alfred S. Chuang, the Company's Chief Technical Officer and Executive Vice President of Product Development, or one or more of the Company's other key personnel, would have a material adverse effect on the Company's business, operating results and financial condition. The Company 52 believes its future success will also depend in large part upon its ability to attract and retain highly skilled management, marketing, sales, consulting and product development personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key employees or that it will be successful in attracting, assimilating and retaining such personnel in the future. Hiring of qualified technical personnel in foreign countries will be difficult due to a more limited number of qualified professionals, as the Company seeks to expand its worldwide support organization. Failure to attract, assimilate and retain key personnel would have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Novell Agreement requires the Company to employ a minimum number of research and development personnel. FACILITIES The Company's primary offices are located in approximately 38,000 and 18,000 square feet of space in Sunnyvale, California and approximately 61,000 square feet in Bernards Township, New Jersey under leases expiring in January 31, 2001, June 30, 1998 and April 31, 2006, respectively. The Company has an option to extend the lease of the premises in Sunnyvale for an additional five years after the original expiration date on substantially the same terms. The Company also leases space for its sales and support offices in Atlanta, Georgia; Boston, Massachusetts; Brisbane, Australia; Capetown, South Africa; Chicago, Illinois; Dallas, Texas; Escondido, California; Espoo, Finland; Golden, Colorado; Johannesburg, South Africa; Kowloon, Hong Kong; London, England; Minneapolis, Minnesota; Munich, Germany; Paris, France; Philadelphia, Pennsylvania; Reston, Virginia; Sao Paulo, Brazil; Schaumburg, Illinois; Sydney, Australia; Toronto, Canada; Yokohama, Japan and Zaventem, Belgium. The Company believes that its existing facilities are sufficient to meet its anticipated needs for the foreseeable future. 53 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning the executive officers and directors of the Company as of October 31, 1996:
NAME AGE POSITION(S) - -------------------------- ----------- -------------------------------------------------------------------------------- William T. Coleman III 49 President, Chief Executive Officer, Chairman of the Board and Director Edward W. Scott, Jr. 58 Executive Vice President of Worldwide Field Operations, Assistant Secretary and Director Alfred S. Chuang 35 Chief Technical Officer, Executive Vice President of Product Development Steve L. Brown 43 Executive Vice President, Chief Financial Officer and Secretary Carol Bartz(1) 48 Director Cary J. Davis 30 Director Stewart K.P. Gross(2) 37 Director William H. Janeway(1) 53 Director Dean Morton(2) 64 Director
- -------------- (1) Member of Compensation Committee. (2) Member of Audit Committee. MR. COLEMAN was a founder of the Company and has been its President, Chief Executive Officer and a member of its Board of Directors since the Company's inception. Prior to founding the Company in January 1995, Mr. Coleman was employed by Sun Microsystems, Inc. from 1985 to January 1995, where his last position was Vice President and General Manager of its Sun Integration division. Mr. Coleman holds a B.S. from the Air Force Academy and an M.S. from Stanford University. MR. SCOTT is a founder of the Company and has been a member of its Board of Directors and its Executive Vice President of Worldwide Field Operations since the Company's inception. Prior to founding the Company in January 1995, Mr. Scott was employed by Pyramid Technology, Inc. as its Executive Vice President of Worldwide Sales and Marketing from September 1988 to April 1995 and by Sun Microsystems from October 1985 to September 1988. Mr. Scott has a B.A. and an M.A. from Michigan State University and a Bachelor's Degree from Oxford University. MR. CHUANG is a founder of the Company and has been its Chief Technical Officer and Executive Vice President of Product Development since the Company's inception. He served as a member of its Board of Directors from the Company's inception until September 1995. From 1986 to December 1994, Mr. Chuang worked at Sun Microsystems, Inc. in various positions, including Chief Technology Officer of Sun Integration Services and Corporate Director of Strategic Systems Development of Sun's Middleware Group. Mr. Chuang has a B.S. from the University of San Francisco and an M.S. from U.C. Davis. MR. BROWN joined the Company in August 1996 and is currently Executive Vice President, Chief Financial Officer and Secretary. From October 1994 to July 1996, Mr. Brown was employed by MicroUnity Systems Engineering, Inc., where his last position was Vice President, Finance. From 1978 to 1994, Mr. Brown was employed at the Hewlett-Packard Corporation in various controller and treasury positions. He holds a B.A. from San Diego State University and an M.B.A. from UCLA. 54 MS. BARTZ has served as a director of the Company since November 1995. From April 1992 to present, Ms. Bartz has served as the Chairman and Chief Executive Officer of Autodesk, Inc. From 1983 to April 1992, Ms. Bartz served in various positions with Sun Microsystems, Inc., most recently as Vice President of Worldwide Field Operations. Ms. Bartz is a director of Autodesk, Inc., AirTouch Communications, Cadence Design Systems, Inc., Cisco Systems, Inc. and Network Appliance, Inc. Ms. Bartz holds a B.S. from the University of Wisconsin at Madison. MR. DAVIS has served as a director of the Company since November 1995. Mr. Davis is a Vice President of Warburg, Pincus Ventures, LLC, the venture capital subsidiary of E.M. Warburg, Pincus & Company, LLC, ("EMWP") where he has been employed since October 1994. From August 1992 to September 1994, Mr. Davis was employed by Dell Computer Corporation, where his last position was Manager of Worldwide Desktop Marketing. Mr. Davis holds a B.A. from Yale University and an M.B.A. from Harvard University. MR. GROSS has served as a director of the Company since inception. Mr. Gross is a Managing Director of EMWP and has been employed by EMWP since 1987. Prior to joining EMWP, Mr. Gross was employed at Morgan Stanley & Co. Mr. Gross is a director of Vanstar Corporation, OpenVision Technologies, Inc. and several privately-held companies. Mr. Gross has a B.A. from Harvard University and an M.B.A. from Columbia University. MR. JANEWAY has served as a director of the Company since inception. Mr. Janeway has been a Managing Director of EMWP since July 1988. Prior to joining EMWP, Mr. Janeway was the Vice President and Director of Corporate Finance at F. Eberstadt & Co., Inc. from 1979 to July 1988. Mr. Janeway is a director of ECSoft Group plc, Industri-Matematik Corp., Maxis, Inc., OpenVision Technologies, Inc., Vanstar Corporation, Zilog, Inc. and several privately-held companies. Mr. Janeway has a B.A. from Princeton University and a Ph.D. from Cambridge University, where he studied as a Marshall Scholar. MR. MORTON has served as a director of the Company since March 1996. Mr. Morton was Executive Vice President, Chief Operating Officer and a Director of the Hewlett-Packard Corporation until his retirement in October 1992, where he held various positions since 1960. Mr. Morton is a director of ALZA Corporation, Raychem Corporation, Tencor Instruments, The Clorox Company, Centigram Communications Corporation, and Kaiser Foundation Health Plan, Inc. Hospitals. He is a trustee of the State Street Research Group of Funds, The State Street Research Portfolios, Inc. and The Metropolitan Series Fund. Mr. Morton holds a B.S. from Kansas State University and an M.B.A. from Harvard University. Currently all directors hold office until the next annual meeting of stockholders or until their successors are duly qualified. Upon completion of the Offerings, the Amended and Restated Certificate of Incorporation of the Company will provide for the Board of Directors to be divided into three classes, each with staggered three-year terms. As a result, only one class of directors will be elected at each annual meeting of stockholders of the Company, with the other classes continuing for the remainder of their respective three-year terms. Upon the division of the Board of Directors into three classes, in the absence of cumulative voting rights, the Company's stockholders holding a majority of the shares of Common Stock outstanding will be able to elect all the directors. See "Description of Capital Stock-- Antitakeover Effects of Provisions of the Company's Charter and Bylaws" and "Risk Factors--Control by Management and Current Stockholders." Officers are elected by and serve at the discretion of the Board of Directors. There are no family relationships among the directors or officers of the Company. BOARD COMMITTEES AUDIT COMMITTEE. The Audit Committee of the Board of Directors reviews the results and scope of the annual audit and other services provided by the Company's independent accountants, reviews and 55 evaluates the Company's internal audit and control functions, and monitors transactions between the Company and its employees, officers and directors. Stewart K.P. Gross and Dean Morton serve as members of the Audit Committee. COMPENSATION COMMITTEE. The Compensation Committee of the Board of Directors administers the 1997 Stock Incentive Plan, the 1997 Employee Stock Purchase Plan and the 1995 Flexible Stock Incentive Plan, and reviews and approves the compensation and benefits for the Company's executive officers. Carol Bartz and William H. Janeway serve as members of the Compensation Committee. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No interlocking relationship exists between any member of the Company's Board of Directors or Compensation Committee and any member of the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. DIRECTOR COMPENSATION The Company's outside directors are reimbursed for expenses incurred in connection with attending Board and Committee meetings but are not compensated for their services as Board members. The Company may also grant to directors options to purchase Common Stock of the Company pursuant to the terms of the 1997 Stock Incentive Plan. See "--Stock Plans--1997 Stock Incentive Plan." EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation of the Company's Chief Executive Officer and each of the four other most highly compensated executive officers of the Company whose aggregate cash compensation exceeded $100,000 during the year ended January 31, 1996 (collectively, the "Named Executive Officers"). There have been no option grants to or option exercises by the Named Executive Officers during the fiscal year ended January 31, 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------------- OTHER ANNUAL NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) - -------------------------------------------------------------------- ----------- ----------- ----------------- William T. Coleman III ............................................. 151,500 -- 22,500(1) President, Chief Executive Officer, Chairman of the Board and Director Edward W. Scott, Jr ................................................ 91,154 -- -- Executive Vice President and Director Alfred S. Chuang ................................................... 109,654 -- 16,500(1) Executive Vice President
- -------------- (1) Represents contributions made by the Company to the named individual's retirement plan. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with William T. Coleman, Edward W. Scott, Jr. and Alfred S. Chuang (the "Employees"), dated September 28, 1995 (the "Employment Agreements"). 56 The Employment Agreements provide that Mr. Coleman, Mr. Scott and Mr. Chuang receive a yearly salary of $180,000, $150,000 and $150,000, respectively (to be reviewed annually), and reimbursement for certain expenses. The Employees are also entitled to participate in any pension, bonus, insurance, savings or other employee benefit plans adopted by the Company. The Employment Agreements continue until the earlier of (1) September 28, 1999 or (2) termination of employment (i) by the Board of Directors for cause at any time upon 10 days' written notice, or without cause upon 24 hours' written notice; (ii) by death; (iii) by the Employee for good reason or following certain corporate transactions, or at will upon two weeks' notice; or (iv) due to disability. Upon termination of employment without cause by the Company, or for good reason by the Employee, the Company will hire the Employee as a consultant until the end of the period of employment, or for a period of two years following termination. During the Consultancy Period (as defined in the Employment Agreements), the Employee is required to be available a maximum of 40 hours per week in return for which he will be entitled to receive a monthly salary, bonus and benefits equal to the amount that he received immediately prior to the termination of employment. Upon termination of employment for cause by the Company, or at will by the Employee, the Company can require the Employee to provide consulting services for a maximum of 40 hours per week until the end of the period of employment, during which period the Employee will be paid his monthly salary on a prorated basis. Upon termination by death or disability, the Employee or his estate will under certain circumstances receive the Employee's salary and certain other benefits until the end of the period of employment. The Employment Agreements contain a covenant not to compete which provides that during the Consultancy Period, under certain circumstances the Employee cannot compete with the Company, or accept employment with a competitor of the Company. STOCK PLANS 1995 FLEXIBLE STOCK INCENTIVE PLAN The Company's 1995 Flexible Stock Incentive Plan (the "1995 Incentive Plan") was adopted by the Board of Directors and approved by the Company's stockholders in September 1995. The 1995 Incentive Plan provides for the granting to employees of the Company and of its subsidiaries of incentive stock options within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), and for the granting to employees, outside directors, consultants, and independent contractors of nonstatutory stock options. In addition, the 1995 Incentive Plan provides for the sale or grant of restricted Common Stock to eligible individuals in connection with the performance of services for the Company. The Board of Directors and the stockholders have authorized a total of 9,600,000 shares of Common Stock for issuance pursuant to the 1995 Incentive Plan. The 1995 Incentive Plan may be administered by the Board of Directors or a committee of the Board (the "Committee"). The Committee has the power to determine the terms of the options granted, including the exercise price, number of shares subject to the option and the exercisability thereof, and the form of consideration payable upon exercise. Options granted under the 1995 Incentive Plan are not transferable by the optionee other than by will or the laws of descent or distribution, and each option is exercisable during the lifetime of the optionee only by such optionee. The exercise price of all incentive stock options granted under the 1995 Incentive Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of all nonstatutory stock options granted under the 1995 Incentive Plan must be at least 85% of the fair market value of the Common Stock on the date of grant. With respect to any participant who owns stock representing more than 10% of the combined voting power of the Company or certain affiliated entities (a "10% Stockholder"), the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date. The term of incentive stock options granted under the 1995 Incentive Plan may not exceed ten years (or five years in the case of an incentive stock option granted to a 10% Stockholder). No stock option 57 granted under the 1995 Incentive Plan shall vest at a rate of less than 20% per year over 5 years from the date the option is granted. The consideration for exercising any option must consist of cash unless the Board, in its sole discretion, permits payment by check, Company shares, a promissory note or the assignment of part of the proceeds of the shares acquired upon exercise of the options. With certain exceptions, the options terminate upon termination of employment, disability or death of the employee. In the event of a merger with or into another corporation, the options will terminate upon the consummation of a merger, unless assumed or substituted by a successor corporation or its parent company. Unless terminated sooner, the 1995 Incentive Plan will terminate automatically in 2005. The Board has authority to amend, suspend or terminate the 1995 Incentive Plan, provided no such action may affect any share of Common Stock previously issued and sold or any option previously granted under the 1995 Incentive Plan. 1997 STOCK INCENTIVE PLAN The Company's 1997 Stock Incentive Plan (the "1997 Stock Incentive Plan") was adopted by the Board of Directors in January 1997 and is anticipated to be approved by the Company's stockholders prior to consummation of the Offerings. The purpose of the 1997 Stock Incentive Plan is to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants of the Company and its subsidiaries and to promote the success of the Company's business. The 1997 Stock Incentive Plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Code and the granting of nonstatutory stock options, stock appreciation rights, dividend equivalent rights, restricted stock, performance units, performance shares, and other equity-based rights ("Awards") to employees, directors and consultants of the Company. Initially, 2,500,000 shares of Common Stock are reserved for issuance under the plan. Commencing January 2, 1997, the number of shares of Common Stock reserved for issuance under the 1997 Stock Incentive Plan will be increased by a number equal to two percent (2%) of the number of shares of Common Stock outstanding as of December 31 of the immediately preceding calendar year, provided that the number of shares of Common Stock available for grant of incentive stock options shall be 2,500,000 shares, and such number shall not be subject to adjustment as described above. Where the Award agreement permits the exercise or purchase of the Award for a certain period of time following the recipient's termination of service with the Company, disability, or death, the Award will terminate to the extent not exercised or purchased on the last day of the specified period or the last day of the original term of the Award, whichever occurs first. To date, no Awards have been granted under the 1997 Stock Incentive Plan. With respect to Awards granted to directors or officers, the 1997 Stock Incentive Plan is administered by the Board of Directors or a committee designated by the Board of Directors constituted to permit such Awards to be exempt from Section 16(b) of the Securities Exchange Act of 1934, as amended, in accordance with Rule 16b-3 thereunder. With respect to Awards granted to other participants, the 1997 Stock Incentive Plan is administered by the Board of Directors or a committee designated by the Board of Directors. In each case, the Board of Directors or such committees (the "Plan Administrator") shall determine the provisions, terms and conditions of each Award, including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, shares of Common Stock, or other consideration) upon settlement of the Award, payment contingencies and satisfaction of any performance criteria. Incentive stock options are not transferable by the optionee other than by will or the laws of descent or distribution, and each incentive stock option is exercisable during the lifetime of the optionee only by such optionee. Other Awards shall be transferable to the extent provided in the agreement evidencing the Award. The exercise price of incentive stock options must be at least equal to the fair market value of the Common Stock on the date of grant, and the term of the option must not exceed ten years. The term of other Awards will be 58 determined by the Plan Administrator. With respect to an employee who owns stock possessing more than 10% of the voting power of all classes of the Company's outstanding capital stock, the exercise price of any incentive stock option must equal at least 110% of the fair market value of the Common Stock on the grant date and the term of the option must not exceed five years. The exercise or purchase price of other Awards will be such price as determined by the Plan Administrator. The consideration to be paid for the shares of Common Stock upon exercise or purchase of an Award will be determined by the Plan Administrator and may include cash, check, shares of Common Stock, a promissory note, or the assignment of part of the proceeds from the sale of shares acquired upon exercise or purchase of the Award. In the event of an acquisition of the Company through the sale of all or substantially all of its assets, a merger or other business combination, the Plan Administrator has the discretion to accelerate vesting restrictions with respect to any outstanding Awards under the 1997 Stock Incentive Plan. Unless terminated sooner, the 1997 Stock Incentive Plan will terminate automatically in 2007. The Board has the authority to amend, suspend or terminate the 1997 Stock Incentive Plan subject to stockholder approval of certain amendments and provided no such action may affect Awards previously granted under the 1997 Stock Incentive Plan. 1997 EMPLOYEE STOCK PURCHASE PLAN The Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan"), which was approved by the Board of Directors in January 1997 and is anticipated to be approved by the Company's stockholders prior to the consummation of the Offerings, is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code and to provide employees of the Company with an opportunity to purchase Common Stock through payroll deductions. An aggregate of 1,250,000 shares of the Company's Common Stock are reserved for issuance under the Stock Purchase Plan and available for purchase thereunder, subject to adjustment in the event of a stock split, stock dividend or other similar change in the Common Stock or the capital structure of the Company. All employees of the Company and its subsidiaries (including officers) whose customary employment is for more than five months in any calendar year and more than 20 hours per week are eligible to participate in the Stock Purchase Plan. Outside directors, consultants and employees subject to the rules or laws of a foreign jurisdiction that prohibit or make impractical the participation of such individuals in the Stock Purchase Plan are not eligible to participate in the Stock Purchase Plan. The Stock Purchase Plan designates Purchase Periods, Accrual Periods and Exercise Dates. Purchase Periods are generally overlapping periods of 24 months. A Purchase Period will initiate on the effective date of the Registration Statement applicable to the Offerings and additional Purchase Periods will commence each subsequent January and July. The initial Purchase Period will end on March 31, 1999. Accrual Periods are generally six months periods initially commencing on the effective date of the Offerings and ending on June 30 and December 31. Thereafter Accrual Periods will commence each January 1 and July 1. The Exercise Dates are the last days of each Accrual Period. On the first day of each Purchase Period, a participating employee is granted a purchase right which is a form of option to be automatically exercised on the forthcoming Exercise Dates within the Purchase Period during which deductions are to be made from the pay of participants (in accordance with their authorizations) and credited to their accounts under the Stock Purchase Plan. When the purchase right is exercised, the participant's withheld salary is used to purchase shares of Common Stock of the Company. The price per share at which shares of Common Stock are to be purchased under the Stock Purchase Plan during any Accrual Period is the lesser of (a) 85% of the fair market value of the Common Stock on the date of the grant of the option (the commencement of the Purchase Period) or (b) 85% of the fair market value of the Common Stock on the Exercise Date (the last day of an Accrual Period). The participant's purchase right is exercised in this manner on all four Exercise Dates arising in the Purchase 59 Period unless, on the first day of any Accrual Period, the fair market value of the Common Stock is lower than the fair market value of the Common Stock on the first day of the Purchase Period. If so, the participant's participation in the original Purchase Period is terminated, and the participant is automatically enrolled in the new Purchase Period during that day. Payroll deductions may range from 1% to 10% (in whole percentage increments) of a participant's regular base pay, exclusive of overtime, bonuses, shift-premiums or commissions. Participants may not make direct cash payments to their accounts. The maximum number of shares of Common Stock which any employee may purchase under the Stock Purchase Plan during an Accrual Period is 1,000 shares. Certain additional limitations on the amount of Common Stock which may be purchased during any calendar year are imposed by the Code. The Stock Purchase Plan will be administered by the Board of Directors or a committee designated by the Board, which will have the authority to administer the Stock Purchase Plan and to resolve all questions relating to its administration. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Bylaws provide that the Company will indemnify its directors and executive officers and may indemnify its other officers, employees and other agents to the fullest extent permitted by the Delaware General Corporation Law, as amended. The Company is also empowered under its Bylaws to enter into indemnification agreements with its directors and officers and to purchase insurance on behalf of any person whom it is required or permitted to indemnify. The Company has entered into indemnification agreements with each of its directors and executive officers and intends to obtain a policy of directors' and officers' liability insurance that insures such persons against the cost of defense, settlement or payment of a judgment under certain circumstances. In addition, the Company's Certificate of Incorporation provides that the liability of the Company's directors for monetary damages shall be eliminated to the fullest extent permissible under the Delaware General Corporation Law, as so amended. This provision in the Certificate of Incorporation does not eliminate a director's duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available. Each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of law, for acts or omissions that the director believes to be contrary to the best interests of the Company or its stockholders, for any transaction from which the director derived an improper personal benefit, for improper transactions between the director and the Company and for improper distributions to stockholders and loans to directors and officers. This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. 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 foregoing provisions, 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. 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 or threatened litigation that may result in claims for indemnification by any director or officer. 60 PRINCIPAL STOCKHOLDERS The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company's Common Stock as of October 31, 1996 as adjusted to reflect the sale of shares offered hereby, by (a) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (b) each of the Company's directors, (c) each Named Executive Officer (see "Management--Executive Compensation"), and (d) all current executive officers and directors as a group.
SHARES PERCENTAGE PRIOR PERCENTAGE AFTER NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED TO THE OFFERING THE OFFERING(2) - ------------------------------------------------------- ------------------- ----------------- ----------------- Warburg, Pincus Ventures, LLC(3)....................... William T. Coleman III(4).............................. 2,506,828 Edward W. Scott, Jr.................................... 1,671,586 Alfred S. Chuang(5).................................... 1,671,586 Stewart K.P. Gross(6).................................. William H. Janeway(6).................................. Carol Bartz(7)......................................... 100,000 * * Dean Morton(8)......................................... 100,000 * * All executive officers and directors as a group(9 persons)......................................
- -------------- * Less than 1% of the outstanding Common Stock. (1) To the Company's knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name. Except as otherwise indicated, the address of each of the persons in this table is as follows: c/o BEA Systems, Inc., 385 Moffett Park Drive, Suite 105 Sunnyvale, California 94089-1208. (2) Assumes no exercise of the underwriters' over-allotment option. If the over-allotment option is exercised in full, the Company will sell an aggregate of shares of Common Stock. (3) Includes shares of Common Stock issuable upon conversion of shares of Series A Preferred Stock on a two-for-one basis which will occur automatically upon the closing of the Offerings and shares of Common Stock issuable upon conversion of shares of Series B Preferred Stock assuming a public offering price of $ per share and proceeds to the Company, after deducting the underwriting discount and expenses, of $ per share. Includes shares issuable within 5 days after the Closing of the Offering, at Warburg's option, pursuant to a convertible line of credit extended to the Company, assuming a public offering price of $ per share and proceeds to the Company, after deducting the underwriting discount and expenses, of $ per share. The sole general partner of Warburg, Pincus Ventures, LLC. ("Warburg") is Warburg, Pincus & Co., a New York general partnership ("WP"). E.M. Warburg, Pincus & Co., LLC, a New York limited liability company ("EMWP"), manages Warburg. The members of EMWP are substantially the same as the partners of WP. Lionel I. Pincus is the managing partner of WP and the managing member of EMWP and may be deemed to control both WP and EMWP. WP has a 15% interest in the profits of Warburg as the general partner, and also owns approximately 1.5% of the limited partnership interests in Warburg. Messrs. Janeway and Gross, directors of the Company, are Managing Directors and members of EMWP and general partners of WP. As such, Messrs. Janeway and Gross may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Securities Exchange Act of 1934) in an indeterminate portion of the shares beneficially owned by Warburg and WP. See Note 7 below. The address for Warburg, Pincus Ventures, LLC is 466 Lexington Avenue, New York, New York, 10017. 61 (4) Represents 2,506,828 shares held of record by the Coleman Family Trust, dated July 12, 1995, of which William T. and Claudia L. Coleman are co-trustees. Includes 41,000 shares of which the economic ownership has been transferred to certain of Mr. Coleman's relatives. Mr. Coleman retains sole voting power and investment power of these shares. (5) Includes 90,000 shares of which the economic ownership has been transferred to certain of Mr. Chuang's relatives. Mr. Chuang retains sole voting power and investment power of these shares. (6) All of the shares indicated as owned by Mr. Janeway and Mr. Gross are owned directly by Warburg and are included because of Mr. Janeway's and Mr. Gross's affiliation with Warburg. Mr. Janeway and Mr. Gross disclaim beneficial ownership of these shares within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934. The address for Mr. Janeway and Mr. Gross is c/o Warburg, Pincus Ventures, LLC, 466 Lexington Avenue, New York, New York 10017. (7) Represents 100,000 shares of Common Stock issuable upon conversion of shares of Series A Preferred Stock on a two-for-one basis which will occur automatically upon the closings of the Offerings. The address for Mr. Morton is c/o Hewlett-Packard Corporation, 3200 Hillview Avenue, Palo Alto, California 94304. (8) Represents 100,000 shares of Common Stock issuable upon conversion of shares of Series A Preferred Stock on a two-for-one basis which will occur automatically upon the closings of the Offerings. The address for Ms. Bartz is c/o Autodesk, Inc., 111 McInnis Parkway, San Rafael, CA 94903. CERTAIN TRANSACTIONS On September 28, 1995, Warburg entered into a Stock Purchase Agreement with the Company which was subsequently amended on October 31, 1995, January 10, 1996, April 16, 1996, July 1, 1996 and September 3, 1996. As a result of these purchases, Warburg acquired an aggregate of 4,000,000 shares of Common Stock, 17,066,000 shares of Series A Preferred Stock and 16,347,800 shares of Series B Preferred Stock for an aggregate purchase price of $46,500,000. In addition, on April 24, 1996, the board approved the purchase of an aggregate of 100,000 shares of Series A Preferred Stock, convertible into 200,000 shares of Common Stock, by two directors of the Company. Both Series A and Series B Preferred Stock convert automatically into shares of Common Stock upon the closing of the Offering. The conversion ratio of the Series B Preferred Stock depends upon the initial public offering price and the proceeds to the Company after deducting the underwriting discount and expenses. In connection with these purchases the Company, certain of its directors and officers and Warburg entered into a number of ancillary agreements, such as a stockholder agreement and an investment agreement. On September 28, 1995, in connection with the Company's acquisition of its two main operating subsidiaries, the Company and Warburg, the Company's major stockholder, entered into an Assignment Agreement, under the terms of which Warburg assigned to the Company certain rights to acquire stock from stockholders of the subsidiaries, as well as a number of agreements related to the acquisitions, such as letters of intent and an Escrow Agreement, enabling the Company to acquire all outstanding stock of the two operating subsidiaries. See "Risk Factors--Past and Future Acquisitions" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations-- Overview." On January 22, 1997, the Company entered into a credit agreement with Warburg pursuant to the terms of which Warburg granted the Company a subordinated line of credit of up to $10,000,000. The agreement provides for an annual interest rate of 11% and is repayable 5 business days after the closing of the Offerings or on July 22, 1998, whichever occurs first. The loan is convertible, at Warburg's option, into shares of Common Stock within five days after the closing of the Offerings, at a conversation ratio 62 based upon the net price to the Company of the initial public offering, after deducting the underwriting discount and expenses. On February 1, 1995 and following the incorporation of the Company, the Company's three founders, William T. Coleman III, the Company's President and Chief Executive Officer and a member of its Board of Directors, Edward W. Scott, Jr., the Company's Executive Vice President for Worldwide Sales and a member of its Board of Directors and Alfred S. Chuang, the Company's Executive Vice President of Product Development and Chief Technical officer, purchased 1,200,000, 800,000 and 800,000 shares, respectively, of the Company's Common Stock at a price of $.005 per share. These shares were purchased pursuant to Restricted Stock Purchase Agreements, which provide for the repurchase of these shares under certain conditions. On September 28, 1995, Messrs. Coleman, Scott and Chuang purchased 1,306,828, 871,586 and 871,586 shares, respectively, of the Company's Common Stock at a price per share of $.285 per share, payable in part in cash and in part in the form of a recourse, five-year promissory note secured by the purchased shares pursuant to a security agreement entered into on the same date. The original principal amounts of these notes for Messrs. Coleman, Scott and Chuang were $97,446, $248,402 and $198,402, respectively. The notes bear interest at 7% per annum. These shares were purchased pursuant to Restricted Stock Purchase Agreements, which provide for the repurchase at original cost of these shares in decreasing percentages during the four year period following the date of issuance of these shares. Certain holders of Common Stock and Warburg, as the holder of shares of Common Stock issued upon conversion of the Series A and Series B Preferred Stock, are entitled to certain registration rights. See "Description of Capital Stock--Registration Rights." On December 12, 1995, Edward W. Scott, the Company's Executive Vice President of Worldwide Operations issued a promissory note in the amount of $720,000 in favor of the Company for the purpose of financing real property. The note bears interest at 7% per annum and is secured by a deed of trust covering the property acquired by Mr. Scott. Pursuant to its terms, the note is repayable within eight months after the closing of the Offerings. The Company has entered into employment agreements with certain of its directors and officers. See "Management--Employment Agreements." All future transactions, including loans, between the Company and its officers, directors, principal stockholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors on the Board of Directors. 63 DESCRIPTION OF CAPITAL STOCK Effective upon the closing of the Offerings, the Company will be authorized to issue up to 120,000,000 shares, $.001 par value, to be divided into two classes to be designated, respectively, "Common Stock" and "Preferred Stock." Of such shares authorized, 80,000,000 shares shall be designated as Common Stock, and 40,000,000 as Preferred Stock. COMMON STOCK As of December 31, 1996, there were shares of Common Stock outstanding that were held of record by approximately 20 stockholders (assuming conversion of all shares of Preferred Stock outstanding as of December 31, 1996). There will be shares of Common Stock outstanding (assuming no exercise of the U.S. Underwriters' or International Underwriters' overallotment options and no exercise of outstanding options) after giving effect to the sale of Common Stock offered to the public by the Company hereby. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. The Company does not have cumulative voting rights in the election of directors, and accordingly, holders of a majority of the shares voting are able to elect all of the directors. Subject to preferences that may be granted to any then outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor as well as any distributions to the stockholders. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets of the Company remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. Holders of Common Stock have no preemptive or other subscription of conversion rights. There are no redemption or sinking fund provisions applicable to the Common Stock. PREFERRED STOCK Effective upon the closing of the Offerings and pursuant to the Company's Certificate of Incorporation, the Board of Directors will have the authority, without further action by the stockholders, to issue up to 40,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of Common Stock, without any further vote or action by stockholders. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock after consummation of the Offerings. REGISTRATION RIGHTS Pursuant to an investor rights agreement (the "Rights Agreement") entered into in September 1995 between the Company and holders (the "Holders") of approximately 9,850,000 shares of the Company's Common Stock, 17,066,000 shares of the Company's Series A Preferred Stock and 16,347,800 shares of the Company's Series B Preferred Stock, including William T. Coleman III, Alfred S. Chuang, Edward W. Scott, Jr., and Warburg, the Holders are entitled to certain rights with respect to the registration of such shares under the Securities Act of 1933, as amended (the "Securities Act"). In addition, Warburg has an option, exercisable at Warburg's option within five days after the closing of the Offerings, to acquire a maximum of shares of Common Stock upon conversion of the outstanding amounts under a $10,000,000 line of credit extended to the Company. If the Company proposes to register any of its securities under the Securities Act, either for its own account or the 64 account of other security holders, the Company is required to notify such Holders and to use its best efforts to effect the registration, and such Holders are entitled to include at the Company's expense their Registrable Securities (as such term is defined in the Rights Agreement) in such registration, subject to certain conditions and limitations. In addition, Holders may also require the Company to file a registration statement under the Securities Act at the Company's expense with respect to their shares, and the Company is required to use its diligent reasonable efforts to effect such registration. Further, Holders may require the Company to file registration statements on Form S-3 at the Company's expense, when such form is available for use by the Company. These rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration and the right of the Company not to effect a requested registration within six months following a registered offering of the Company's securities, including the offering made hereby. See "Management--Certain Transactions." ANTITAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS Upon completion of the Offerings, the Certificate of Incorporation of the Company will provide for the Board of Directors to be divided into three classes, with staggered three-year terms. As a result, only one class of directors will be elected at each annual meeting of stockholders of the Company, with the other classes continuing for the remainder of their respective three-year terms. Stockholders will have no cumulative voting rights and the Company's stockholders representing a majority of the shares of Common Stock outstanding are able to elect all of the directors. The Company's Bylaws will also provide that all stockholder action must be effected at a duly called meeting of stockholders and not by a consent in writing; the Bylaws provide that only the Company's Chief Executive Officer and the President of the Company may call a special meeting of stockholders. The classification of the Board of Directors and lack of cumulative voting will make it more difficult for the Company's existing stockholders to replace the Board of Directors as well as for another party to obtain control of the Company by replacing the Board of Directors. Since the Board of Directors has the power to retain and discharge officers of the Company, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of the Company. These provisions are intended to enhance the likelihood of continued stability in the composition of the Board of Directors and in the policies furnished by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened change of control of the Company. These provisions are designed to reduce the vulnerability of the Company to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for the Company's shares and, as a consequence, they also may inhibit fluctuations in the market price of the Company's shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in the management of the Company. See "Risk Factors--Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law." SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW The Company is subject to Section 203 or the Delaware General Corporation Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the Board of Directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested holder, (ii) upon consummation of the transaction that that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of 65 the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (a) by persons who are directors and also officers and (b) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) at or subsequent to such time, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. In general, Section 203 defines business combination to include: (i) any merger or consolidation involving the corporation and the interested stockholder, (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder, (iii) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder, (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the corporation beneficially owned by the interested stockholder or (v) the receipt by the interested stockholder of the benefit of any loss, advances, guarantees, pledges or other financial benefits by or through the corporation. In general, Section 203 defines interested stockholder as an entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. See "Risk Factors--Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law." LISTING Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol "BEAS." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock of the Company is Boston EquiServe. Its address is 150 Royall Street, Canton, Massachusetts 02021, and its telephone number is (617) 575-3120. SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offerings, there has been no public market for the Common Stock of the Company, and any sale of substantial amounts in the open market may adversely affect the market price of the Common Stock offered hereby. Upon completion of the Offerings, the Company will have shares of Common Stock outstanding based on shares outstanding as of October 31, 1996. Of these shares, the shares sold in the Offerings will be freely transferable without restriction under the Securities Act, unless they are held by "affiliates" of the Company as that term is used under the Securities Act and the Regulations promulgated thereunder. The remaining outstanding shares were sold by the Company in reliance on exemptions from the registration requirements of the Securities Act and are restricted securities within the meaning of Rule 144 under the Securities Act. Approximately of these shares of Common Stock will be eligible for sale in the public market immediately upon the effective date of the Registration Statement of which this Prospectus is a part (the "Effective Date") in reliance on Rule 144(k) under the Securities Act. Beginning 90 days after the Effective Date, an additional approximately of these shares will become eligible for sale subject to the provisions of Rule 144 and Rule 701. Beginning 180 days after the date of this Prospectus, approximately additional shares will become eligible for sale subject to the provisions of Rule 144 or Rule 701 upon the expiration of agreements not to sell such shares entered 66 into between the Underwriters and such stockholders of the Company and such stockholders. Beginning 180 days after the date of this Prospectus, approximately additional shares subject to vested options as of the Effective Date will be available for sale subject to compliance with Rule 701 and upon the expiration of agreements not to sell such shares entered into between the Underwriters and such stockholders. In addition, the Commission has proposed revisions to Rule 144 and Rule 144(k), the effect of which would be to shorten the holding period under Rule 144 from two years to one year and to shorten the holding period under Rule 144(k) from three years to two years. If enacted, these proposed revisions would increase, potentially substantially, the number of shares that would be available for sale in the public market 180 days after the Effective Date. Any shares subject to lock-up agreements may be released at any time without notice by the Underwriters. See "Risk Factors--Shares Eligible for Future Sale." In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned restricted shares for at least two years is entitled to sell, within any three-month period commencing 90 days after the Effective Date, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately shares immediately after the Offerings) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding such sale, subject to the filing of a Form 144 with respect to such sale and certain other limitations and restrictions. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least three years, would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. Any employee, officer or director of or consultant to the Company who purchased his or her shares prior to the Effective Date or who holds vested options as of that date pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permits non-affiliates to sell their Rule 701 shares without having to comply with the public-information, holding-period, volume-limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding-period restrictions, in each case commencing 90 days after the Effective Date. However, the Company and certain officers, directors and other stockholders of the Company have agreed not to sell or otherwise dispose of any shares of Common Stock of the Company for the 180-day period after the date of this Prospectus without the prior written consent of the U.S. Underwriters and the International Underwriters. See "Underwriting." Approximately 90 days after the Effective Date, the Company intends to file a registration statement on Form S-8 under the Securities Act to register shares of Common Stock reserved for issuance under the 1995 Flexible Stock Incentive Plan, the 1997 Stock Incentive Plan, and the 1997 Employee Stock Purchase Plan, thus permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. Such registration statements will become effective immediately upon filing. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Morrison & Foerster LLP, Palo Alto, California. A partner at Morrison & Foerster LLP owns 50,000 shares of Common Stock of the Company. Certain U.S. legal matters in connection with the offerings will be passed upon for the U.S. Underwriters and the International Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The consolidated balance sheets of BEA Systems, Inc. as of January 31, 1996 and October 31, 1996, and the consolidated statements of operations, redeemable, convertible preferred stock and stockholders' equity (deficit) and cash flows for the year ended January 31, 1996 and for the nine 67 months ended October 31, 1996, 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 are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The balance sheets of Information Management Company as of December 31, 1994 and September 29, 1995, and the statements of operations and retained earnings (deficit) and cash flows for the year ended December 31, 1994 and for the nine months ended September 29, 1995, 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 are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The statements of operations and cash flows of Independent Technologies, Inc. for the period from January 1, 1995 to November 1, 1995, 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 are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The statements of revenues and direct salaries and benefits expenses for domestic TUXEDO employees of the TUXEDO Systems Group of Novell, Inc., for the year ended October 28, 1995 and the four months ended February 24, 1996, 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 are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated balance sheet of USL Finance S.A. as of May 5, 1996, and the consolidated statements of operations, shareholders' equity and cash flows for the period from November 1, 1995 to May 5, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young Audit, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form SB-2 under the Securities Act of 1933, as amended, with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Certain items are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to such exhibit. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the North Western Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, NY 10048, and copies of all or any part thereof may be obtained from such office after payment of fees prescribed by the Commission. The Commission maintains a web site at http://www.sec.gov that contains, reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 68 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS BEA SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS--YEAR ENDED JANUARY 31, 1996 AND NINE MONTHS ENDED OCTOBER 31, 1996 Report of Ernst & Young LLP, Independent Auditors.................................... F-2 Consolidated Balance Sheets........................................................ F-3 Consolidated Statements of Operations.............................................. F-4 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)................................................... F-5 Consolidated Statements of Cash Flows.............................................. F-6 Notes to Consolidated Financial Statements......................................... F-7 INFORMATION MANAGEMENT COMPANY FINANCIAL STATEMENTS--YEAR ENDED DECEMBER 31, 1994 AND NINE MONTHS ENDED SEPTEMBER 29, 1995 Report of Ernst & Young LLP, Independent Auditors.................................... F-24 Balance Sheets..................................................................... F-25 Statements of Operations and Retained Earnings (Deficit)........................... F-26 Statements of Cash Flows........................................................... F-27 Notes to Financial Statements...................................................... F-28 INDEPENDENCE TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS AND CASH FLOWS--FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 1, 1995 Report of Ernst & Young LLP, Independent Auditors.................................... F-32 Statement of Operations............................................................ F-33 Statement of Cash Flows............................................................ F-34 Notes to Statements of Operations and Cash Flows................................... F-35 TUXEDO SYSTEMS GROUP OF NOVELL, INC. STATEMENTS OF REVENUES AND DIRECT SALARIES AND BENEFITS EXPENSES FOR DOMESTIC TUXEDO EMPLOYEES--YEAR ENDED OCTOBER 28, 1995 AND FOUR MONTHS ENDED FEBRUARY 24, 1996 Report of Ernst & Young LLP, Independent Auditors.................................... F-38 Statements of Revenues and Direct Salaries and Benefits Expenses for Domestic TUXEDO Employees................................................................. F-39 Notes to Statements................................................................ F-40 USL FINANCE S.A. CONSOLIDATED FINANCIAL STATEMENTS--FOR THE PERIOD FROM NOVEMBER 1, 1995 TO MAY 5, 1996 Report of Ernst & Young Audit, Independent Auditors.................................. F-42 Consolidated Balance Sheet......................................................... F-43 Consolidated Statement of Operations............................................... F-44 Consolidated Statement of Shareholders' Equity..................................... F-45 Consolidated Statement of Cash Flows............................................... F-46 Notes to Consolidated Financial Statements......................................... F-47
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders BEA Systems, Inc. We have audited the accompanying consolidated balance sheets of BEA Systems, Inc. as of January 31, 1996 and October 31, 1996, and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders' equity (deficit), and cash flows for the year ended January 31, 1996 and for the nine months ended October 31, 1996. 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 BEA Systems, Inc. at January 31, 1996 and October 31, 1996, and the results of its operations and its cash flows for the year ended January 31, 1996 and for the nine months ended October 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Jose, California January 30, 1997 F-2 BEA SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA STOCKHOLDERS' EQUITY (DEFICIT) AT OCTOBER 31, JANUARY 31, OCTOBER 31, 1996 1996 1996 (SEE NOTE 11) ----------- ----------- --------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents..................................................... $ 4,549 $ 1,628 Accounts receivable, net of allowance for doubtful accounts of $400 at January 31, 1996 and $1,036 at October 31, 1996..................................... 3,725 19,838 Prepaid expenses and other current assets..................................... 752 1,368 ----------- ----------- Total current assets............................................................ 9,026 22,834 ----------- ----------- Property and equipment, net..................................................... 456 4,975 Acquired intangible assets, net................................................. 8,751 18,684 Note receivable from officer.................................................... 720 720 Other assets.................................................................... -- 1,250 ----------- ----------- Total assets.................................................................... $ 18,953 $ 48,463 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Borrowings under line of credit............................................... $ -- $ 5,530 Accounts payable.............................................................. 772 3,223 Accrued payroll and related liabilities....................................... 800 3,955 Other accrued liabilities..................................................... 1,032 5,992 Accrued sales tax............................................................. 949 1,410 Royalties payable............................................................. 777 976 Deferred revenue.............................................................. 2,146 6,052 Current portion of notes payable and capital lease obligations................ 40 25,714 ----------- ----------- Total current liabilities....................................................... 6,516 52,852 Notes payable and capital lease obligations..................................... 4,287 52,361 Commitments..................................................................... Series B redeemable convertible preferred stock, $0.001 par value: Authorized shares--20,000,000 Issued and outstanding shares--6,060,000 at January 31, 1996 and 16,347,800 at October 31, 1996, respectively (none pro forma); liquidation preference of $16,965 at October 31, 1996................................................. 6,112 16,965 $-- Stockholders' equity (deficit): Series A preferred stock, $0.001 par value.................................... 11 17 -- Authorized shares--20,000,000 Issued and outstanding shares--11,100,000 at January 31, 1996 and 17,166,000 at October 31, 1996, respectively (none pro forma); liquidation preference of $29,182 at October 31, 1996............................................ Common stock, $0.001 par value................................................ 8 10 47 Authorized shares--80,000,000 Issued and outstanding shares--8,274,000 at January 31, 1996 and 10,347,750 at October 31, 1996, respectively......................................... Additional paid-in capital...................................................... 20,355 32,223 49,168 Notes receivable from stockholders.............................................. (544) (544) (544) Deferred compensation........................................................... -- (906) (906) Cumulative translation adjustment............................................... -- (1) (1) Accumulated deficit............................................................. (17,792) (104,514) (104,514) ----------- ----------- --------------- Stockholders' equity (deficit).................................................. 2,038 (73,715) $(56,750) ----------- ----------- --------------- --------------- Total liabilities and stockholders' equity (deficit)............................ $ 18,953 $ 48,463 ----------- ----------- ----------- -----------
See accompanying notes. F-3 BEA SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED YEAR ENDED -------------------------- JANUARY 31, OCTOBER 31, OCTOBER 31, 1996 1995 1996 ------------ ------------ ------------ (UNAUDITED) Revenues: License............................................................... $ 3,569 $ 524 $ 26,855 Service............................................................... 1,564 230 9,494 ------------ ------------ ------------ Total revenues...................................................... 5,133 754 36,349 Cost of revenues: License............................................................... 1,929 324 7,655 Service............................................................... 775 163 4,843 ------------ ------------ ------------ Total cost of revenues.............................................. 2,704 487 12,498 ------------ ------------ ------------ Gross margin............................................................ 2,429 267 23,851 Operating expenses: Research and development.............................................. 3,244 531 12,781 Sales and marketing................................................... 2,572 973 20,814 General and administrative............................................ 3,058 796 9,019 Write-off of in-process research and development...................... 11,194 6,060 62,248 ------------ ------------ ------------ Total operating expenses................................................ 20,068 8,360 104,862 ------------ ------------ ------------ Income (loss) from operations........................................... (17,639) (8,093) (81,011) Interest expense........................................................ 89 21 4,941 Other income (expense).................................................. 48 5 95 ------------ ------------ ------------ Income (loss) before income taxes....................................... (17,680) (8,109) (85,857) Provision for income taxes.............................................. 60 -- 300 ------------ ------------ ------------ Net income (loss)....................................................... $ (17,740) $ (8,109) $ (86,157) ------------ ------------ ------------ ------------ ------------ ------------ Pro forma net income (loss) per share................................... $ (0.58) $ (1.72) ------------ ------------ ------------ ------------ Shares used in computing pro forma net income (loss) per share.......... 30,385 50,107 ------------ ------------ ------------ ------------
See accompanying notes. F-4 BEA SYSTEMS, INC. CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) YEAR ENDED JANUARY 31, 1996 AND NINE MONTHS ENDED OCTOBER 31, 1996 (IN THOUSANDS, EXCEPT SHARES)
STOCKHOLDERS' EQUITY (DEFICIT) SERIES B ------------------------------------------------------------------ REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------------- ------------------ ------------------ PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ---------- ----------- ---------- ------ ---------- ------ ---------- ----------- Issuance of common stock...... -- $-- -- $-- 8,000,000 $ 8 $ 1,446 $ -- Exercise of stock options..... -- -- -- -- 100,000 -- 1 -- Issuance of preferred stock... -- -- 11,100,000 11 -- -- 18,859 -- Issuance of Series B redeemable convertible preferred stock.............. 6,060,000 6,060 -- -- -- -- -- -- Accretion of cumulative dividends on Series B redeemable convertible preferred stock.............. -- 52 -- -- -- -- -- (52) Issuance of common stock for services..................... -- -- -- -- 174,000 -- 49 -- Net loss...................... -- -- -- -- -- -- -- (17,740) ---------- ----------- ---------- ------ ---------- ------ ---------- ----------- Balance at January 31, 1996... 6,060,000 6,112 11,100,000 11 8,274,000 8 20,355 (17,792) Issuance of preferred stock... -- -- 6,066,000 6 -- -- 10,306 -- Issuance of common stock...... -- -- -- -- 2,000,000 2 568 -- Exercise of stock options..... -- -- -- -- 3,750 -- 1 -- Issuance of Series B redeemable convertible preferred stock.............. 10,287,800 10,288 -- -- -- -- -- -- Accretion of cumulative dividends on Series B redeemable convertible preferred stock.............. -- 565 -- -- -- -- -- (565) Issuance of common stock for services..................... -- -- -- -- 70,000 -- 20 -- Deferred compensation related to grant of stock options.... -- -- -- -- -- -- 973 -- Amortization of deferred compensation................. -- -- -- -- -- -- -- -- Translation adjustment........ -- -- -- -- -- -- -- -- Net loss...................... -- -- -- -- -- -- -- (86,157) ---------- ----------- ---------- ------ ---------- ------ ---------- ----------- Balance at October 31, 1996... 16,347,800 $16,965 17,166,000 $17 10,347,750 $10 $32,223 $(104,514) ---------- ----------- ---------- ------ ---------- ------ ---------- ----------- ---------- ----------- ---------- ------ ---------- ------ ---------- ----------- STOCKHOLDERS' EQUITY (DEFICIT) --------------------------------------------------------- NOTES TOTAL RECEIVABLE CUMMULATIVE STOCKHOLDERS' FROM DEFERRED TRANSLATION EQUITY STOCKHOLDERS COMPENSATION ADJUSTMENT (DEFICIT) ------------ ------------ ----------- ------------- Issuance of common stock...... $(544) $-- --$ $ 910 Exercise of stock options..... -- -- -- 1 Issuance of preferred stock... -- -- -- 18,870 Issuance of Series B redeemable convertible preferred stock.............. -- -- -- -- Accretion of cumulative dividends on Series B redeemable convertible preferred stock.............. -- -- -- (52) Issuance of common stock for services..................... -- -- -- 49 Net loss...................... -- -- -- (17,740) ------ ------ --- ------------- Balance at January 31, 1996... (544) -- -- 2,038 Issuance of preferred stock... -- -- -- 10,312 Issuance of common stock...... -- -- -- 570 Exercise of stock options..... -- -- -- 1 Issuance of Series B redeemable convertible preferred stock.............. -- -- -- -- Accretion of cumulative dividends on Series B redeemable convertible preferred stock.............. -- -- -- (565) Issuance of common stock for services..................... -- -- -- 20 Deferred compensation related to grant of stock options.... -- (973) -- -- Amortization of deferred compensation................. -- 67 -- 67 Translation adjustment........ -- -- (1) (1) Net loss...................... -- -- -- (86,157) ------ ------ --- ------------- Balance at October 31, 1996... $(544) $(906) $(1) $ (73,715) ------ ------ --- ------------- ------ ------ --- -------------
See accompanying notes. F-5 BEA SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM INCORPORATION (JANUARY 20, 1995) TO NINE MONTHS -------------------------- ENDED JANUARY 31, OCTOBER 31, OCTOBER 31, 1996 1995 1996 ------------ ------------ ------------- (UNAUDITED) OPERATING ACTIVITIES Net loss............................................................... $ (17,740) $ (8,109) $ (86,157) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........................................ 39 12 1,226 Amortization of deferred compensation................................ -- -- 67 Amortization of intangible assets acquired and write-off of in-process research and development................................ 12,302 6,223 67,689 Issuance of note for compensation.................................... 1,429 -- -- Issuance of common stock for services................................ 49 -- 20 Changes in assets and liabilities: Interest accrued................................................... 89 -- 254 Accounts receivable................................................ (1,510) (329) (9,526) Prepaid expenses and other current assets.......................... (576) (44) 375 Note receivable from officer....................................... (720) -- -- Other assets....................................................... -- -- (1,250) Accounts payable................................................... 772 329 1,976 Accrued payroll and related liabilities............................ 80 (232) 3,155 Other accrued liabilities.......................................... (4,261) (1,670) (867) Accrued sales tax.................................................. 949 600 461 Royalties payable.................................................. 777 -- 199 Deferred revenue................................................... 2,146 349 3,093 ------------ ------------ ------------- Net cash used in operating activities.................................. (6,175) (2,871) (19,285) ------------ ------------ ------------- INVESTING ACTIVITIES Acquisition of property and equipment.................................. (67) (105) (3,200) Acquisition of businesses, net of cash acquired........................ (15,050) (8,140) (2,348) ------------ ------------ ------------- Net cash provided by (used in) investing activities.................... (15,117) (8,245) (5,548) ------------ ------------ ------------- FINANCING ACTIVITIES Borrowings under line of credit........................................ -- -- 5,530 Repayment of principal on notes payable and capital lease obligations........................................................... -- -- (4,788) Proceeds from issuance of common and preferred stock................... 25,841 21,340 21,171 ------------ ------------ ------------- Net cash provided by financing activities.............................. 25,841 21,340 21,913 ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents................... 4,549 10,224 (2,920) Cumulative translation adjustment...................................... -- -- (1) Cash and cash equivalents at beginning of period....................... -- -- 4,549 ------------ ------------ ------------- Cash and cash equivalents at end of period............................. $ 4,549 $ 10,224 $ 1,628 ------------ ------------ ------------- ------------ ------------ ------------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for interest............................... $ -- $ -- $ 4,325 ------------ ------------ ------------- ------------ ------------ ------------- Incurrence of capital lease obligations related to acquisition of equipment............................................................. $ -- $ -- $ 981 ------------ ------------ ------------- ------------ ------------ ------------- Notes issued to acquire businesses..................................... $ 4,262 $ -- $ 77,301 ------------ ------------ ------------- ------------ ------------ -------------
See accompanying notes. F-6 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS BEA Systems, Inc. (the "Company" or "BEA"), a Delaware corporation, was incorporated on January 20, 1995. The Company designs, develops, markets, and supports the BEA Enterprise Transaction Framework, an integrated middleware software platform for building, deploying, and managing distributed mission-critical computer software applications. In addition to its software products, the Company provides customer solutions through a range of professional services offerings. BASIS OF PRESENTATION On September 30, 1995, the Company acquired all of the shares of Information Management Company ("IMC") for approximately $12,551,000. The transaction was recorded using the purchase method of accounting. Accordingly, a new basis of accounting was established based on the purchase price. See Note 2. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. Operations of businesses acquired and accounted for as a purchase are consolidated as of the date of acquisition. The Company had no operating activity from inception through January 31, 1995. Accordingly, operating results for the year ending January 31, 1996 reflect the period from incorporation (January 20, 1995) to January 31, 1996. The Company has incurred operating losses to date and incurred a net loss of approximately $86.2 million for the nine months ended October 31, 1996. At October 31, 1996, the Company had a stockholders' deficit of approximately $73.7 million and current liabilities exceeded current assets by approximately $30.0 million. The majority shareholder of the Company has guaranteed certain payment obligations of the Company as discussed in Note 6. In addition, in January 1997, the Company received a $10,000,000 unsecured line of credit from its majority shareholder. The Company anticipates additional equity funding will be needed to finance expected operations in the fiscal year ending January 31, 1998 and for existing obligations. If such additional equity funding is not available, management believes, based on anticipated operations, that available resources combined with the majority shareholder line of credit and debt guaranty will provide sufficient resources to enable the Company to meet its obligations through at least January 31, 1998. If anticipated operations are not achieved, management has the intent and believes it has the ability to delay or reduce expenditures so as not to require additional financial resources if such resources were not available. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company sells its products to customers, typically large corporations, in a variety of industries in North America, Europe, and Asia/Pacific. The Company performs ongoing credit evaluations of its F-7 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) customers and generally does not require collateral. The Company maintains reserves for estimated credit losses and such losses have been within management's expectations. FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign subsidiaries is the local currency of the respective subsidiary. The Company translates the assets and liabilities, revenues and expense of its foreign subsidiaries to U.S. dollars at the rates of exchange in effect at the beginning of the period. Gains and losses from currency translation are included in stockholders' equity. Currency transaction gains or losses are recognized in current operations and have not been significant to the Company's operating results in any period. INTERIM FINANCIAL INFORMATION The consolidated statements of operations and cash flows for the period from incorporation to October 31, 1995 are unaudited but include all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of its operating results and cash flows for the period. Results for the interim periods are not necessarily indicative of results for the entire year. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and highly liquid investments with insignificant interest rate risk and maturities of three months or less at the date of purchase. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives ranging from three to five years. Assets under capital leases and leasehold improvements are amortized over the shorter of the asset life or the remaining lease term. The related amortization expense is included in depreciation expense. INTANGIBLE ASSETS Intangible assets consist of developed technology, distribution rights, trademarks and tradenames and goodwill related to acquisitions accounted for by the purchase method. See Note 2. Amortization of these purchased intangibles is provided on the straight-line basis over the respective useful lives of the assets ranging from thirty months for developed technology and distribution rights to sixty months for trademarks and tradenames and goodwill. Acquired in-process research and development without alternative future use is expensed as incurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts discussed below have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the F-8 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The Company maintains its cash and cash equivalents principally with major banks. At January 31, 1996 and October 31, 1996, the Company had $4.0 million and $19,000, respectively, of cash and cash equivalents invested in money market mutual funds which invest in various short-term corporate debt instruments and U.S. Treasury bills. As such, the carrying value of these investments by the Company approximate their market value, and therefore, no unrealized gains or losses exist at this date. At October 31, 1996, the carrying value of notes receivable from stockholders approximates their fair value. The fair values of notes receivable from stockholders are estimated using discounted cash flow analyses, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value of short-term and long-term debt is estimated based on current interest rates available to the Company for debt instruments with similar terms, the degree of risk, and remaining maturities. The carrying values of the loans approximate their respective fair values. PRODUCT CONCENTRATION The Company currently derives the majority of its revenue from the licensing of products in its BEA TUXEDO product line and fees from related services. These products and services are expected to continue to account for the majority of the Company's revenue for the foreseeable future. Furthermore, under the terms of its agreement with Novell, the Company is obligated to make certain payments to Novell through January 1999 as discussed in Note 6 to acquire perpetual rights to the TUXEDO product. Failure by the Company for any reason to make these payments could terminate the Company's continuing rights to BEA TUXEDO. Consequently, a reduction in demand for, or an increase in competition on these products, or a decline in sales of such products, would adversely affect operating results. REVENUE RECOGNITION The Company recognizes revenues in accordance with American Institute of Certified Public Accountants Statement of Position 91-1, SOFTWARE REVENUE RECOGNITION. Revenues from software license agreements are recognized at the time of product shipment, provided there are no vendor obligations remaining to be fulfilled and collectibility is probable. Ongoing License royalties are recognized on an as-reported basis by the Company's licensees. Service revenues include consulting services, post-contract customer support and training. Consulting revenues and the related cost of these revenues are generally recognized on a time and materials basis; however, revenue from certain fixed price contracts are recognized on the percentage of completion basis, which involves the use of estimates. Actual results could differ from those estimates and, as a result, future profitability on such contracts may be more or less than planned. The amount of consulting contracts recognized on a percentage of completion basis has not been material to date. Post-contract customer support revenues are recognized ratably over the term of the support period (generally one year), and training and other service revenues are recognized as the related services are F-9 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) provided. The unrecognized portion of amounts paid in advance for licenses and services is reported as deferred revenues. RESEARCH AND DEVELOPMENT Research and development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon the completion of a working model. Costs incurred by the Company between the completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly, the Company has charged all such costs to research and development expense in the period incurred. STOCK-BASED COMPENSATION In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("FAS 123") that also is effective for the Company's 1996 fiscal year. FAS 123 allows companies that have stock-based compensation arrangements with employees to adopt a new fair-value basis of accounting for stock options and other equity instruments, or to continue to apply the existing accounting rules under APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), but with additional financial statement disclosure. The Company has continued to account for stock-based compensation arrangements under APB 25; therefore, FAS 123 did not have a material impact on its financial position, results of operations or cash flows. NET LOSS PER SHARE Except as noted below, historical net loss per share is computed using the weighted average number of common shares outstanding. Common equivalent shares from common stock options and convertible preferred stock are excluded from the computation as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common and common equivalent shares issued during the period commencing twelve months prior to the initial filing of a proposed public offering at prices below the assumed public offering price have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method at an assumed offering price per share for stock options and the if-converted method for preferred stock). Per share information calculated on the above noted basis is as follows:
NINE MONTHS ENDED YEAR ENDED ------------------------ JANUARY 31, OCTOBER 31, OCTOBER 31, 1996 1995 1996 ----------- ----------- ----------- (UNAUDITED) Net loss per share....................................... $(0.76) $(0.37 ) $(3.11 ) ----------- ----------- ----------- Shares used in calculating net loss per share (in thousands).............................................. 23,418 22,214 27,907 ----------- ----------- ----------- ----------- ----------- -----------
F-10 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Pro forma net loss per share has been computed as described above and also gives effect, pursuant to SEC policy, to common equivalent shares from convertible preferred stock issued more than twelve months from the proposed initial public offering that will automatically convert upon completion of the Company's initial public offering (using the if-converted method) from the original date of issuance. 2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS ACQUISITION OF INFORMATION MANAGEMENT COMPANY On September 30, 1995, the Company acquired 100% of the outstanding shares of Information Management Company ("IMC"). The aggregate purchase price (including direct acquisition costs) was approximately $12,551,000 and consisted of cash, assumption of certain liabilities and issuance of notes payable to the founders of IMC. The Company has accounted for the acquisition using the purchase method, and the results of operations of IMC are included in the Company's operations since acquisition. The following is a summary of the purchase price allocation (IN THOUSANDS): Current assets and other tangible assets.......................... $ 1,438 Acquired in-process research and development...................... 5,200 Developed technology.............................................. 4,780 Trademarks and tradenames......................................... 200 Goodwill.......................................................... 933 --------- $ 12,551 --------- ---------
ACQUISITION OF INFORMATION TECHNOLOGIES, INC. On November 2, 1995, the Company acquired 100% of the outstanding shares of Independence Technologies, Inc. ("ITI"). The aggregate purchase price (including direct acquisition costs) was approximately $10,761,000 and consisted of cash and assumption of certain liabilities. The Company has accounted for the acquisition using the purchase method, and the results of operations of ITI are included in the Company's operations since acquisition. The following is a summary of the purchase price allocation (IN THOUSANDS): Current assets and other tangible assets.......................... $ 1,681 Acquired in-process research and development...................... 5,134 Developed technology.............................................. 3,946 --------- $ 10,761 --------- ---------
ACQUISITION OF TUXEDO PRODUCT LINE On February 23, 1996, the Company entered into a license agreement with Novell, Inc. ("Novell") and acquired exclusive rights to distribute and make enhancements to Novell's TUXEDO product on UNIX, Windows NT, and all non-NetWare platforms. In addition, the Company has assumed Novell's F-11 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED) obligations and rights under all contracts with TUXEDO partners, distributors and customers, and has exclusive rights to the TUXEDO trademark. The aggregate purchase price (including direct acquisition costs) was approximately $78,202,000 and consists primarily of a note payable to Novell with fixed payment terms. See Note 6. The following is a summary of the purchase price allocation (IN THOUSANDS): Receivables and other tangible assets............................. $ 4,270 Acquired in-process research and development...................... 60,948 Developed technology.............................................. 9,825 Trademarks and tradenames......................................... 3,159 --------- $ 78,202 --------- ---------
ACQUISITION OF USL FINANCE, S.A., A FRENCH CORPORATION On May 5, 1996, the Company acquired 100% of the outstanding shares of USL Finance, S.A. ("USL"), a distributor of BEA TUXEDO in France. The aggregate purchase price (including direct acquisition costs) was approximately $8,732,000 and consisted of cash and assumption of certain liabilities. The Company has accounted for the acquisition using the purchase method, and the results of operations of USL are included in the Company's operations since acquisition. The following is a summary of the purchase price allocation (IN THOUSANDS): Current assets and other tangible assets........................... $ 6,060 Distribution rights................................................ 2,672 --------- $ 8,732 --------- ---------
ACQUISITION OF CLIENT SERVER TECHNOLOGIES, OY, A FINNISH CORPORATION On June 12, 1996, the Company acquired 100% of the outstanding shares in Client Server Technologies, OY ("CST"), a distributor of BEA TUXEDO in Finland. The aggregate purchase price (including direct acquisition costs) was approximately $3,230,000 and consisted of cash and assumption of certain liabilities. The Company has accounted for the acquisition using the purchase method, and the results of operations of CST are included in the Company's operations since acquisition. The following is a summary of the purchase price allocation (IN THOUSANDS): Current assets and other tangible assets........................... $ 1,483 In-process research and development................................ 1,300 Distribution rights................................................ 389 Trademarks and tradenames.......................................... 58 --------- $ 3,230 --------- ---------
F-12 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED) The following unaudited pro forma summary represents the consolidated results of operations of the Company as if the acquisitions of IMC, ITI, TUXEDO, USL France and CST had occurred at the beginning of the periods presented and does not purport to be indicative of what would have occurred had the acquisitions been made as of those dates or the results which may occur in the future.
FOR THE YEAR ENDED NINE MONTHS JANUARY 31, ENDED OCTOBER 1996 31, 1996 ------------ ------------- (UNAUDITED, IN THOUSANDS) Pro forma net revenues........................................... $ 33,561 $ 37,366 ------------ ------------- ------------ ------------- Pro forma net loss............................................... $ (6,232) $ (24,231) ------------ ------------- ------------ ------------- Pro forma net loss per share..................................... $ (.21) $ (.48) ------------ ------------- ------------ -------------
The pro forma results include the historical operations of the Company and the historical operations of the acquired businesses adjusted to reflect the amortization of the excess purchase prices and an increase in interest expense resulting from additional debt used to finance the acquisitions. The pro forma results do not include the write-offs of in-process research and development relating to the business acquisitions or an extraordinary gain relating to the forgiveness of debt, which was recorded in the historical operations of IMC, since they are considered material non-recurring charges. The pro forma results do not include any adjustments for the Company's proposed initial public offering or other management adjustments. OTHER On August 1, 1995, the Company purchased certain technology of VI Systems, Inc. for $860,000 in cash. The entire purchase price has been charged to acquired in-process research and development on the date of acquisition as substantially all of the technology was to be incorporated in products under development and had no alternative future use. 3. ACQUIRED INTANGIBLE ASSETS Values assigned to acquired in-process research and development, distribution rights, developed technology, and trademarks and tradenames were generally determined by independent appraisals using discounted cash flow analysis. To determine the value of the in-process research and development, the Company considered, among other factors, the state of development of each project, the time and cost needed to complete each project, expected income, and associated risks which included the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility and risks related to the viability of and potential changes to future target markets. This analysis results in amounts assigned to in-process research and development projects that had not yet reached technological feasibility (as defined and utilized by the Company in assessing software capitalization) and does not have alternative future uses. To determine the value of the distribution rights, the Company considered, among other factors, the size of the current and potential future customer base, quality of existing relationships with customers, the expected income, and associated risks. F-13 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 3. ACQUIRED INTANGIBLE ASSETS (CONTINUED) Associated risks included the inherent difficulties and uncertainties in transitioning the business relationships from the acquired entity to the Company, and risks related to the viability of and potential changes to future target markets. To determine the value of the developed technology, the expected future cash flows of each existing technology product were discounted taking into account risks related to the characteristics and applications of each product, existing and future markets, and assessments of the life cycle stage of each product. Based on this analysis, the existing technology that had reached technological feasibility was capitalized.
JANUARY 31, OCTOBER 31, 1996 1996 ------------ ------------ (IN THOUSANDS) Developed technology and distribution rights...................... $ 8,726 $ 21,612 Trademarks and tradenames......................................... 200 3,417 Goodwill.......................................................... 933 933 ------------ ------------ 9,859 25,962 Accumulated amortization.......................................... (1,108) (7,278) ------------ ------------ Acquired intangible assets, net................................... $ 8,751 $ 18,684 ------------ ------------ ------------ ------------
4. PROPERTY AND EQUIPMENT Property and equipment consist of the following (IN THOUSANDS):
JANUARY 31, OCTOBER 31, 1996 1996 ------------- ------------ Computer equipment................................................ $ 384 $ 2,354 Software.......................................................... 4 932 Furniture and fixtures............................................ 48 844 Vehicles and other................................................ 37 85 Leasehold improvements............................................ 22 1,044 Equipment under capital leases.................................... -- 981 ----- ------------ 495 6,240 Accumulated depreciation and amortization......................... (39) (1,265) ----- ------------ $ 456 $ 4,975 ----- ------------ ----- ------------
There was no accumulated amortization on equipment under capital leases at October 31, 1996 as such assets were added under the lease arrangement in October, 1996. 5. OTHER ASSETS Included in other assets at October 31, 1996 is $1,250,000 invested in bank certificates of deposit (CDs) at interest rates ranging from 3.90% to 4.25%. The CDs' support letters of credit that are required as a security deposits by certain of the Company's facilities leases and other credit arrangements. F-14 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 6. LINE OF CREDIT, NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS LINE OF CREDIT At October 31, 1996, the Company had borrowed $5.5 million pursuant to a revolving line of credit with a commercial lender. The maximum credit available is $10,000,000 and borrowing availability is based on a percentage of certain accounts receivable. Additional borrowings available under the line totaled $1.0 million at October 31, 1996. The credit arrangement bears interest adjusted monthly at the LIBOR plus 5.125% (10.39% in aggregate at October 31, 1996) and is secured by substantially all assets of the Company. In addition, the loan agreement prohibits the Company from paying dividends without the lender's approval. The credit agreement has a maturity date of April, 1997 and shall automatically renew thereafter for additional one-year terms unless the Company or the lender elects to terminate the agreement. The credit arrangement was not in place at January 31, 1996. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS Notes payable and capital lease obligations consist of the following:
JANUARY 31, OCTOBER 31, 1996 1996 ------------ ------------ (IN THOUSANDS) Subordinated notes payable to founders of IMC bearing interest at 8%. Principal and interest is payable upon the earlier of a successfully completed public offering generating net proceeds of at least $20,000,000 or September 2000. Accrued interest of $89 and $343 is included at January 31, 1996 and October 31, 1996, respectively.............................................. $ 4,248 $ 4,502 Note payable to Novell with interest imputed at 8%. The note is due in quarterly installments of various amounts totalling $68,550,000, which are guaranteed by the majority shareholder of the Company, with a final payment of $12,000,000 due in January 1999 upon the Company's exercise of an option to purchase perpetual rights................................................ -- 72,461 Other notes payable, bearing interest ranging from 9%-12% per annum, payable in installments through October 31, 1997......... 79 131 Capital lease obligations......................................... -- 981 ------------ ------------ 4,327 78,075 Less amounts due within one year.................................. (40) (25,714) ------------ ------------ Long-term debt and capital obligations due after one year......... $ 4,287 $ 52,361 ------------ ------------ ------------ ------------
F-15 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 6. LINE OF CREDIT, NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED) NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED) Scheduled maturities of notes payable and capital lease obligations are as follows:
CAPITAL NOTES LEASES PAYABLE OBLIGATIONS --------- ----------- (IN THOUSANDS) Fiscal year ending January 31, 1997 (three months)...................................................................... $ 2,561 $ 95 1998..................................................................................... 27,338 365 1999..................................................................................... 42,693 365 2000..................................................................................... 4,502 439 --------- ----------- Total.................................................................................... $ 77,094 1,264 --------- --------- Less amount representing interest........................................................ (283) ----------- Present value of net minimum lease payments.............................................. 981 Less current portion..................................................................... (253) ----------- Noncurrent obligations under capital leases.............................................. $ 728 ----------- -----------
The Company has available capital lease lines totaling $1,020,000 at October 31, 1996, which availability expires June 30, 1997. 7. NOTES RECEIVABLE FROM SHAREHOLDERS In September 1995, the Company issued 3,050,000 shares of common stock to certain officers in exchange for, in aggregate, cash of $325,000 and notes receivable of $544,250. The notes bear interest at 7% compounded semi-annually and are due upon the earlier of September 28, 2000 or on thirty days or one year after termination, depending upon the circumstances of the termination. In December 1995, the Company loaned $720,000 to an officer and founder of the Company for the financing of real property. The note receivable, which is secured by a deed of trust on the real property, bears interest at 7% per annum and is due and payable on the earlier of January 1, 2001 or eight months subsequent to the closing of an underwritten public offering of the Company's common stock where the gross proceeds are $10,000,000 and the offering price is at least $5 per share. The note may be repaid at any time prior to the due date. F-16 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 8. LEASE COMMITMENTS The Company leases its facilities under operating lease arrangements. Certain of the leases provide for certain specified annual rent increases. Approximate annual minimum lease commitments are as follows:
OPERATING LEASE OBLIGATIONS --------------- (IN THOUSANDS) Fiscal year ending January 31, 1997 (three months).......................................................... $ 791 1998......................................................................... 2,808 1999......................................................................... 2,573 2000......................................................................... 2,446 2001......................................................................... 1,605 Thereafter................................................................... 9,906 --------------- Total minimum lease payments................................................. $ 20,129 --------------- ---------------
Total rental expense charged to operations for the periods from incorporation to January 31, 1996 and October 31, 1995 and for the nine months ended October 31, 1996 was approximately $184,000, $75,000, and $2.2 million, respectively. 9. INCOME TAXES The provisions for income taxes of $60,000 and $300,000 for the periods ended January 31 and October 31, 1996, respectively, represent foreign withholding taxes for which no U.S. tax benefit is currently recognizable. The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rate (34%) to income tax expense is as follows (in thousands):
JANUARY 31, OCTOBER 31, 1996 1996 ------------ ------------ Tax at U.S. statutory rate........................................ $ (6,011) $ (29,192) Nondeductible amortization of intangibles......................... 1,770 11,478 Valuation Allowance............................................... 4,241 17,714 Foreign withholding taxes......................................... 60 300 ------------ ------------ 60 300 ------------ ------------ ------------ ------------
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 F-17 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 9. INCOME TAXES (CONTINUED) purposes. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows (in thousands):
JANUARY 31, OCTOBER 31, 1996 1996 ------------ ------------ Deferred tax assets: Net operating loss carryforwards................................ $ 1,545 $ 7,476 Deferred revenue................................................ 468 562 Accruals and reserves........................................... 580 368 Property and equipment and intangibles.......................... 2,549 18,727 ------------ ------------ Total deferred tax assets................................... 5,142 27,133 Valuation allowance............................................... (5,142) (27,133) ------------ ------------ Net deferred tax assets........................................... $ -- $ -- ------------ ------------ ------------ ------------
Realization of deferred tax assets is dependent on future earnings, the timing and amount of which are uncertain. Accordingly, a valuation allowance, in an amount equal to the net deferred tax assets at January 31 and October 31, 1996, has been established to reflect these uncertainties. The valuation allowance increased by $21,991,000 in the period ended October 31, 1996. As of January 31 and October 31, 1996, the Company had net operating loss carryforwards for federal tax purposes of approximately $4,100,000 and $20,000,000, respectively, that will expire from 2010 through 2011. The Company also has state net operating loss carryforwards at January 31 and October 31, 1996 of approximately $2,300,000 and $9,600,000, respectively, expiring from 2000 through 2001. Utilization of net operating loss carryforwards may be subject to substantial limitations due to the ownership change and other limitations provided by the Internal Revenue Code and similar state provisions. These limitations may result in the expiration of net operating loss carryforwards before full utilization. 10. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK Holders of Series B Redeemable Convertible Preferred Stock (the "Series B Stock") are entitled to annual dividends, when and if declared by the Board of Directors, of $0.07 per share, payable prior and in preference to any declaration or payment of any dividend on the Series A Convertible Preferred Stock (the "Series A Stock") and the Common Stock. The right to receive such dividends are cumulative and will accrue to the extent that such dividends are not declared or paid in any year. No dividends have been declared or paid by the Company on the Series B Stock. Total accumulated dividends on the Series B Stock were approximately $617,200 at October 31, 1996. In the event of liquidation of the Company, holders of Series B Stock are entitled to receive a liquidation preference of $1.00 per share, plus all accumulated but unpaid dividends, prior and in preference to any payments made to holders of Series A Stock and common stock. The Series B Stock carries no voting rights. Each share of Series B Stock is convertible, at the option of the holder, into that number of shares of common stock obtained by dividing the amount payable to such holder in the event of liquidation by the F-18 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 10. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED) fair value of the Company's common stock, as determined by the Board of Directors, or, in the event of a conversion in connection with an initial public offering, by the per share initial public offering price, net of underwriting commissions. Each holder of Series B Stock has the right, exercisable at any time following September 30, 2001, to require the Company to redeem all or a portion of such holder's Series B Stock for $1.00 per share, plus accumulated and unpaid dividends (the "Redemption Price"). However, upon the closing of an initial public offering of the Company's common stock at an offering price of not less than $5.00 per share and gross proceeds to the Company of at least $10,000,000, each share of Series B Stock will be redeemed for the Redemption Price unless converted, at the option of the holder, into shares of common stock of the Company. Additionally, the Company may, at its option, redeem at any time any or all of the outstanding shares of the Series B Stock at the Redemption Price. 11. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK Series A Stock holders are entitled to noncumulative annual dividends, when and if declared by the Board of Directors, of $0.12 per share, payable in preference to common stock dividends, but after all cumulative dividends payable with respect to the Series B Stock have been declared and paid. No dividends have been declared or paid by the Company on the Series A Stock. In the event of liquidation of the Company, Series A Stock holders are entitled to receive a liquidation preference of $1.70 per share, plus all declared but unpaid dividends, after payment of the full liquidation preference has been made on the Series B Stock prior and in preference to any payments made to holders of common stock. Each share of Series A Stock votes equally with shares of common stock on an "if-converted" basis. Each share of Series A Stock is convertible at any time at the option of the shareholder into two shares of common stock. The conversion ratio is subject to upward adjustment upon the occurrence of certain events. Upon conversion, all declared and unpaid dividends will be paid in cash. Each share of Series A Stock automatically converts into common stock at the then-effective conversion rate in the event of an underwritten initial public offering of the Company's common stock at an offering price of not less than $5.00 per share and gross proceeds to the Company of at least $10,000,000, or upon the written consent of two-thirds of the then outstanding Series A Stock. COMMON STOCK REPURCHASE RIGHTS The Company has stock repurchase agreements with certain individuals whereby, if the stockholder ceases to be a consultant or employee of the Company, the Company has the right to repurchase the stock at the original issuance price. Such repurchase rights generally lapse over four to five years from the original date of issuance. Certain of the repurchase rights lapse upon the successful completion of an initial public offering. Common stock subject to repurchase totaled 6,057,231 shares with an aggregate repurchase price of $7,836,000 as of October 31, 1996. Series A Stock subject to repurchase at October 31, 1996 was 95,833 shares at an aggregate price of $163,000. F-19 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 11. STOCKHOLDERS' EQUITY (CONTINUED) COMMON STOCK RESERVED FOR FUTURE ISSUANCE At October 31, 1996, the Company had reserved shares of common stock for future issuance as follows: Conversion of Series A convertible preferred stock............. 34,332,000 1995 Stock Option Plan......................................... 9,252,250
In addition, the Company has reserved sufficient shares of common stock for the conversion of Series B redeemable convertible preferred stock. STOCK OPTION PLAN The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The fair value option valuation models were 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 speculative 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 estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma information regarding net income and earnings per share 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 that statement. The fair value for these options was estimated at the date of grant using a minimum value-pricing model with a risk free interest rate of 5.0% and no dividend yields. The effect of applying the minimum value method to the stock option activity did not result in pro forma net loss and loss per share that are materially different from historical amounts reported. Therefore, such pro forma information is not separately presented herein. Future pro forma net income or loss and earnings or loss per share may be materially different from actual amounts reported. The Company's 1995 Flexible Stock Incentive Plan (the "Plan") provides for the grant of incentive and nonstatutory stock options, as determined by the Board of Directors. Options are generally granted at an exercise price of not less than the fair value per share of the common stock on the date of grant. The vesting and exercise provision are determined by the Board of Directors with a maximum term of ten years. Options granted under the Plan are immediately exercisable and generally vest over a four-year period with 25% vesting after one year and 2.08% each month thereafter. Unvested shares are subject to repurchase by the Company. There were 494,425 shares vested at October 31, 1996, at an average exercise price of $0.285. At October 31, 1996, 2,909,250 shares of common stock were reserved for future grants under the Plan. The Plan also provides for the sale or bonus of common stock to eligible F-20 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 11. STOCKHOLDERS' EQUITY (CONTINUED) individuals in connection with the performance of services for the Company. During the year ended January 31, 1996 and the nine months ended October 31, 1996, the Company issued under the Plan 174,000 and 70,000 shares of Common Stock, respectively, as payment for services. Information with respect to option activity in the Plan is summarized as follows:
WEIGHTED OPTIONS PRICE AVERAGE OUTSTANDING PER SHARE PRICE ------------ -------------- ----------- Balance at January 20, 1995............................................ -- $ -- Granted.............................................................. 2,344,200 $.01 - $.285 $ 0.273 Exercised............................................................ (100,000) $0.01 $ 0.010 ------------ Balance at January 31, 1996............................................ 2,244,200 $ 0.285 Granted.............................................................. 4,086,550 $0.285 $ 0.285 186,750 $1.000 $ 1.000 235,500 $2.000 $ 2.000 Exercised............................................................ (3,750) $0.285 $ 0.285 Forfeited............................................................ (406,250) $0.285 $ 0.285 ------------ Balance at October 31, 1996............................................ 6,343,000 $ 0.382 ------------ ------------
The assumed weighted average contribution life of options at October 31, 1996 is as follows:
OUTSTANDING OPTIONS - ------------------------------------- WEIGHTED PRICE AVERAGE CONTRIBUTION PER SHARE LIFE MONTHS - ---------- ------------------------- $0.285 48 $1.00 48 $2.00 48
The Company has recorded deferred compensation of $973,000 for the difference between the grant price and the deemed fair value of certain of the Company's common stock options granted in the period ended October 31, 1996. This amount is being amortized over the vesting period of the individual options, generally four years. Compensation expense recognized in the period ended October 31, 1996 totaled $67,000 and at October 31, 1996, deferred compensation totaled $906,000. UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY Unaudited pro forma stockholders' equity at October 31, 1996 gives effect to the conversion of all shares of Series A Stock into common stock upon the close of the Company's initial public offering, as well as all shares of Series B Stock, based on an assumed initial public offering price, as the holder has indicated intent to convert such shares upon the close of the Company's initial public offering. F-21 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 12. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION The Company operates in one industry segment (the development and marketing of computer software and related services) and markets its products and services internationally through subsidiaries in Europe and Asia, and through independent distributors and resellers located worldwide. Export sales totaled $2.6 million for the year ended January 31, 1996 and $3.2 million for the nine months ended October 31, 1996. Transfers between geographic areas are accounted for at estimated amounts which are generally above cost. Such transfers are eliminated in the consolidated financial statements. Identifiable assets are those assets that can be directly associated with a particular geographic area. The following is a summary of operations within geographic areas.
YEAR ENDED NINE MONTHS ENDED JANUARY 31, 1996 OCTOBER 31, 1996 ----------------- ----------------- Revenues from unaffiliated customers United States................................................... $ 4,568 $ 25,201 Europe.......................................................... 565 10,655 Asia and other.................................................. -- 493 -------- -------- Total revenues................................................ $ 5,133 $ 36,349 -------- -------- -------- -------- Income (loss) from operations United States................................................... $ (15,639) $ (77,916) Europe.......................................................... (2,000) (1,620) Asia and other.................................................. -- (1,475) -------- -------- Total loss.................................................... $ (17,639) $ (81,011) -------- -------- -------- -------- Identifiable assets United States................................................... $ 18,953 $ 51,065 Europe.......................................................... -- 13,092 Asia and other.................................................. -- 894 Eliminations.................................................... -- (16,588) -------- -------- Total identifiable assets..................................... $ 18,953 $ 48,463 -------- -------- -------- --------
13. SUBSEQUENT EVENTS In January 1997, the Board of Directors authorized management of the Company to file a registration statement with the SEC, offering its common stock to the public. In January 1997, the Company's Board of Directors adopted, subject to stockholder approval, the 1997 Stock Option Plan under which the Company is authorized to grant up to 2,500,000 stock options with similar terms to the 1995 Flexible Stock Incentive Plan. In addition, in January 1997, the Company's Board of Directors adopted, subject to stockholder approval, the 1997 Employee Stock Purchase Plan under which an aggregate of 1,250,000 shares of common stock will be reserved. F-22 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE PERIOD FROM INCORPORATION TO OCTOBER 31, 1995 IS UNAUDITED) 13. SUBSEQUENT EVENTS (CONTINUED) In January 1997, the majority shareholder of the Company extended a $10 million unsecured line of credit to the Company, borrowing on which bears interest of 8%. The line expires on the earlier of completion of an initial public offering by the Company or July 15, 1998. In December 1996, the Company acquired 100% of the outstanding stock of Bay Technologies Pty Limited, a distributor of TUXEDO in Australia. The aggregate purchase price totaled $1,000,000 in cash, and the Company is obligated to make certain contingent payments in cash based on future revenues over the next three years. F-23 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Information Management Company We have audited the accompanying balance sheets of Information Management Company as of December 31, 1994 and September 29, 1995, and the related statements of operations and retained earnings (deficit) and cash flows for the year and nine months then ended, respectively. 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 financial position of Information Management Company at December 31, 1994 and September 29, 1995, and the results of its operations and its cash flows for the year and nine months then ended, respectively, in conformity with generally accepted accounting principles. Ernst & Young LLP MetroPark, New Jersey January 10, 1997 F-24 INFORMATION MANAGEMENT COMPANY BALANCE SHEETS ASSETS
DECEMBER 31, SEPTEMBER 29, 1994 1995 -------------- -------------- Current assets: Cash and cash equivalents...................................................... $ 30,783 $ -- Accounts receivable, less allowance for doubtful accounts of $49,000 in 1994 and $200,000 in 1995......................................................... 1,255,269 1,334,324 Prepaid expenses and other current assets...................................... 13,419 47,414 -------------- -------------- Total current assets............................................................. 1,299,471 1,381,738 Property and equipment, net...................................................... 54,936 56,402 -------------- -------------- $ 1,354,407 $ 1,438,140 -------------- -------------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Cash overdraft................................................................. $ -- $ 123,380 Line of credit................................................................. -- 522,123 Accounts payable............................................................... 37,223 259,071 Accrued compensation and related payroll liabilities........................... 213,804 107,656 Accrued royalties.............................................................. 310,102 154,545 Accrued sales taxes............................................................ 350,000 600,000 Other accrued liabilities...................................................... 55,676 112,298 Deferred revenue............................................................... 334,126 505,133 -------------- -------------- Total current liabilities........................................................ 1,300,931 2,384,206 Commitments Stockholders' equity (deficit): Common stock, no par value, 1,500 shares authorized, issued and outstanding.... 200 200 Retained earnings (deficit).................................................... 53,276 (946,266) -------------- -------------- Total stockholders' equity (deficit)............................................. 53,476 (946,066) -------------- -------------- $ 1,354,407 $ 1,438,140 -------------- -------------- -------------- --------------
See accompanying notes. F-25 INFORMATION MANAGEMENT COMPANY STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 29, 1994 1995 -------------- -------------- Revenues: License........................................................................ $ 4,365,735 $ 2,753,789 Service........................................................................ 1,069,221 1,858,759 -------------- -------------- Total revenues................................................................... 5,434,956 4,612,548 Cost of revenues: License........................................................................ 1,623,565 734,233 Service........................................................................ 887,296 1,407,760 -------------- -------------- Total cost of revenues........................................................... 2,510,861 2,141,993 -------------- -------------- Gross profit..................................................................... 2,924,095 2,470,555 Operating expenses: Research and development....................................................... 111,504 726,615 Sales and marketing............................................................ 1,513,185 1,223,783 General and administrative..................................................... 996,411 1,505,275 -------------- -------------- Total operating expenses......................................................... 2,621,100 3,455,673 -------------- -------------- Income (loss) from operations.................................................... 302,995 (985,118) Interest expense................................................................. 22,634 12,543 Other expense.................................................................... 691 1,881 -------------- -------------- Net income (loss)................................................................ 279,670 (999,542) Retained earnings (deficit) at beginning of period............................... (226,394) 53,276 -------------- -------------- Retained earnings (deficit) at end of period..................................... $ 53,276 $ (946,266) -------------- -------------- -------------- --------------
See accompanying notes. F-26 INFORMATION MANAGEMENT COMPANY STATEMENTS OF CASH FLOWS
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 29, 1994 1995 -------------- -------------- OPERATING ACTIVITIES Net income (loss)................................................................ $ 279,670 $ (999,542) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.................................................. 768 44,746 Changes in assets and liabilities: Accounts receivable, net..................................................... (1,014,717) (79,055) Prepaid expenses and other current assets.................................... 14,325 (33,995) Accounts payable and accrued expenses........................................ 26,927 172,322 Deferred revenue............................................................. 250,276 171,007 Royalties payable............................................................ 310,102 (155,557) Sales taxes payable.......................................................... 350,000 250,000 -------------- -------------- Net cash provided by (used in) operating activities.............................. 217,351 (630,074) INVESTING ACTIVITIES Purchases of property and equipment.............................................. (47,362) (46,212) -------------- -------------- Net cash used in investing activities............................................ (47,362) (46,212) -------------- -------------- FINANCING ACTIVITIES Borrowing under line of credit................................................... 1,341,627 1,646,015 Payments on line of credit....................................................... (1,481,949) (1,123,892) Cash overdraft................................................................... 123,380 -------------- -------------- Net cash (used in) provided by financing activities.............................. (140,322) 645,503 -------------- -------------- Net increase (decrease) in cash and cash equivalents............................. 29,667 (30,783) Cash and cash equivalents at beginning of period................................. 1,116 30,783 -------------- -------------- Cash and cash equivalents at end of period....................................... $ 30,783 $ -- -------------- -------------- -------------- -------------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for interest......................................... $ 22,634 $ 12,543 -------------- -------------- -------------- --------------
See accompanying notes. F-27 INFORMATION MANAGEMENT COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 29, 1995 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Information Management Company (the "Company") was incorporated in the state of Delaware in July 1990 and is located in Liberty Corner, New Jersey. The Company is engaged in providing standards-based, enterprise-wide client/server products and services. Effective September 30, 1995, the Company was purchased by BEA Systems, Inc. ("BEA"); (see Note 7). The accompanying financial statements have been prepared on the Company's historical cost basis, and do not reflect any adjustments resulting from the acquisition. REVENUE RECOGNITION Revenues from end user software license agreements are recognized at the time of product shipment, provided there are no vendor obligations remaining to be fulfilled and collectibility is probable. License fees from resellers are also recognized as revenue when the software has been shipped, provided that no significant vendor obligations remain to be fulfilled, certain customer criteria established by the Company have been met, and the fees are payable within twelve months. Services revenues include consulting services, post-contract customer support, and training. Consulting revenues and the related cost of these revenues are recognized on a time and materials basis. Support revenues are recognized pro rata over the term of the service period and training or other revenues are recognized as the related services are provided. The unrecognized portion of amounts billed or paid in advance for such services is reported as deferred revenues. CASH EQUIVALENTS The Company considers all highly liquid short-term investments with original maturities of 90 days or less when purchased to be cash equivalents. CONCENTRATION OF CREDIT RISK The Company sells its products to customers, typically large corporations, in a variety of industries, primarily in North America. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using the double-declining balance method. The estimated useful lives used in computing depreciation are as follows: Machinery and equipment.................................. 3-5 years Furniture and fixtures................................... 7 years Leasehold improvements................................... 10 years Vehicles................................................. 5 years
F-28 INFORMATION MANAGEMENT COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 29, 1995 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company has elected, with the consent of its shareholders, to be treated as an S Corporation under the Internal Revenue Code. The shareholder of an S Corporation includes the Company's income in its own income for income tax purposes. Accordingly, no federal income taxes are provided for in the accompanying financial statements. Effective January 1, 1995, the Company has also elected S Corporation status under the applicable sections of the New Jersey income tax laws. 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 from those estimates. RESEARCH AND DEVELOPMENT Research and development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon the completion of a working model. Costs incurred by the Company between the completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly, the Company has charged all such costs to research and development expenses in the accompanying statements of operations. PRODUCT CONCENTRATION The Company derives the majority of its revenue from the licensing of products in the TUXEDO product line, to which the Company has certain distribution rights from Novell Inc. ("Novell"), and fees from related services. These products and services are expected to continue to account for a majority of the Company's revenue for the foreseeable future. Consequently, a reduction in demand or an increase in competition for these products due to market factors or a decline in sales of such products would affect operating results adversely. During the year ended December 31, 1994 and the nine months ended September 29, 1995, the amount of royalties due to Novell totalled $982,500 and $687,440, respectively, and are included in cost of sales in the accompanying statements of operations. F-29 INFORMATION MANAGEMENT COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 29, 1995 2. TRANSACTIONS WITH SIGNIFICANT CUSTOMERS Customers that comprise greater than 10% of the Company's total revenues in the periods presented are as follows:
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 29, 1994 1995 ----------------- ----------------- Customer A................................................ 22% 10% Customer B................................................ 15% -- Customer C................................................ -- 12%
Revenues generated from these customers were less than 10% of total revenue in the periods where percentages are not shown. 3. PROPERTY AND EQUIPMENT The components of property and equipment at December 31, 1994 and September 29, 1995 are as follows:
1994 1995 --------- ----------- Machinery and equipment.............................................. $ 60,012 $ 82,558 Furniture and fixtures............................................... 14,486 18,685 Leasehold improvements............................................... 9,112 21,578 Vehicles............................................................. 1,060 8,061 --------- ----------- 84,670 130,882 Less accumulated depreciation and amortization....................... 29,734 74,480 --------- ----------- $ 54,936 $ 56,402 --------- ----------- --------- -----------
4. LINE OF CREDIT In March 1995, the Company entered into an accounts receivable revolving loan facility with a bank with availability up to $750,000 and renewable annually. Borrowings are limited to the borrowing base (as defined); however, the full amount of the facility was available to the Company at September 29, 1995. Advances bear interest at 1.5% above the bank's floating base rate (8% at September 29, 1995), and the Company is required to pay a fee for the unused portion equal to .5%, payable quarterly and calculated monthly. Borrowings under the facility is secured by substantially all assets of the Company and is personally guaranteed by the principal stockholders. Management estimates that the carrying value of the revolving loan facility approximates its fair value. During 1994, the Company maintained a line of credit with another bank in the amount of $350,000. This line was increased to $550,000 in January 1995 before it was replaced with the facility discussed above. F-30 INFORMATION MANAGEMENT COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 29, 1995 5. LEASES The Company leases its operating facility, certain equipment and vehicles under noncancellable operating leases that expire in 1997. The leases provide for all real estate taxes and operating expenses to be paid by the Company. Under the lease of the operating facility, the Company has the option to renew for additional terms at specified rentals. Minimum future rental payments under such leases as of September 29, 1995 are as follows: Three months ending December 31, 1995.................... $ 79,851 Year ending December 31, 1996............................ 308,779 Year ending December 31, 1997............................ 178,396 --------- Total minimum future rental payments..................... $ 567,026 --------- ---------
Total rent expense charged to operations was $107,600 and $184,221, during the year ended December 31, 1994 and the nine months ended September 29, 1995, respectively. 6. GENERAL AND ADMINISTRATIVE EXPENSES During the nine months ended September 29, 1995, the Company incurred various professional fees in conjunction with negotiations for the sale of the Company to prospective buyers, including BEA (see Note 7). These fees totaled $213,000 for the period and are included in general and administrative expenses in the accompanying statement of operations. 7. SUBSEQUENT EVENT Effective September 30, 1995, the Company was purchased by BEA, a company which develops and markets middleware solution platforms. The purchase price, excluding liabilities assumed and direct acquisition costs, was $10,010,000 of which $7,280,000 was paid in cash at the closing and $2,730,000 is payable through the issuance of a subordinated promissory note. The interest rate on this note is 8%. F-31 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors BEA Systems, Inc. We have audited the accompanying statements of operations and cash flows of Independence Technologies, Inc. for the period from January 1, 1995 to November 1, 1995. These statements of operations and cash flows are the responsibility of BEA Systems, Inc.'s management. Our responsibility is to express an opinion on these statements of operations and cash flows based on our audit. We conducted our audit in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of operations and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of operations and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the statements of operations and cash flows. We believe that our audit provides a reasonable basis for our opinion. The accompanying statements of operations and cash flows were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the registration statement on Form SB-2 of BEA Systems, Inc. as described in Note 1, and are not intended to be a complete presentation of the financial position and results of operations of Independence Technologies, Inc. In our opinion, the statements of operations and cash flows referred to above present fairly, in all material respects, the results of operations and cash flow of Independence Technologies, Inc. for the period from January 1, 1995 to November 1, 1995, in conformity with generally accepted accounting principles. Ernst & Young LLP San Jose, California January 20, 1997 F-32 INDEPENDENCE TECHNOLOGIES, INC. STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 1, 1995 Revenues: License...................................................................... $ 3,756,574 Service...................................................................... 1,960,103 ----------- Total revenues............................................................. 5,716,677 ----------- Cost of revenues: License...................................................................... 1,188,482 Service...................................................................... 1,239,911 ----------- Total cost of revenues..................................................... 2,428,393 ----------- Gross profit................................................................... 3,288,284 Operating expenses: Research and development..................................................... 1,493,622 Sales and marketing.......................................................... 1,777,710 General and administrative................................................... 1,290,768 ----------- Total operating expenses................................................... 4,562,100 ----------- Loss from operations........................................................... (1,273,816) Interest income.............................................................. 15,693 Interest expense............................................................. (31,382) ----------- Loss before extraordinary item................................................. (1,289,505) Extraordinary item--forgiveness of debt........................................ 1,035,000 ----------- Net loss....................................................................... $ (254,505) ----------- -----------
See accompanying notes. F-33 INDEPENDENCE TECHNOLOGIES, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 1, 1995
OPERATING ACTIVITIES Net loss....................................................................... $ (254,505) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................ 365,417 Gain on forgiveness of debt.................................................. (1,035,000) Changes in assets and liabilities: Accounts receivable........................................................ 33,711 Prepaid expenses and other current assets.................................. 61,126 Accounts payable........................................................... 236,063 Accrued liabilities........................................................ 714,529 ----------- Net cash provided by operating activities...................................... 121,341 ----------- INVESTING ACTIVITIES Acquisition of property and equipment.......................................... (88,963) Advances to stockholders....................................................... (2,621) ----------- Net cash used in investing activities.......................................... (91,584) ----------- FINANCING ACTIVITIES Repayments of long-term debt................................................... (14,433) Payments on capital lease obligations.......................................... (13,905) Net proceeds from issuance of common stock and warrants........................ 48,312 ----------- Net cash provided by financing activities...................................... 19,974 Net increase in cash........................................................... 49,731 Cash, beginning of period...................................................... 250,508 ----------- Cash, end of period............................................................ $ 300,239 ----------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for interest....................................... $ 18,216 ----------- ----------- Conversion of debt to common stock............................................. $ 2,466,536 ----------- -----------
See accompanying notes. F-34 INDEPENDENCE TECHNOLOGIES, INC. NOTES TO STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 1, 1995 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Independence Technologies, Inc. (the "Company") which was incorporated in July 1988 provides object-oriented software, programming products, and consulting services primarily for large, distributed on-line transaction processing applications based on the UNIX operating system. The Company also acts as a distributor of certain third party software products. BASIS OF PRESENTATION On November 1, 1995, the Company was acquired by Information Management Company ("IMC"), a wholly owned subsidiary of BEA Systems, Inc. ("BEA") for approximately $7,266,000 in cash and the assumption of certain liabilities. The accompanying financial statements have been prepared on the Company's historical cost basis, and do not reflect any adjustments resulting from the acquisition. The accompanying statements of operations and cash flows were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the registration statement on Form-SB-2 of BEA and are not intended to be a complete presentation of the financial position and results of operations of Independence Technologies, Inc. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company sells its products to customers, typically large corporations, in a variety of industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. REVENUE RECOGNITION Revenues from end user software license agreements and license fees from third-party distributors and value-added resellers are recognized at the time of product shipment, provided there are no significant vendor obligations remaining to be fulfilled and collectibility is probable. Consulting revenues and the related costs are generally recognized on a time and materials basis; however, certain fixed price contracts are recognized on the percentage of completion basis which involves the use of estimates. Actual results could differ from those estimates and, as a result, future profitability on such contracts may be more or less than estimated. The amount of consulting contracts recognized on a percentage of completion basis has not been material to date. Support revenues are recognized prorata over the term of the service period. Training and other service revenues are recognized as the related services are performed. The unrecognized portion of amounts paid for such consulting, support, and other services is reported as deferred revenues. F-35 INDEPENDENCE TECHNOLOGIES, INC. NOTES TO STATEMENTS OF OPERATIONS AND CASH FLOWS (CONTINUED) FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 1, 1995 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Assets under capital leases and leasehold improvements are amortized over the shorter of the asset life or the remaining lease term. The related amortization expense is included in depreciation expense. RESEARCH AND DEVELOPMENT Research and development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon the completion of a working model. Costs incurred by the Company between the completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly, the Company has charged all such costs to research and development expenses in the accompanying statements of operations. PRODUCT CONCENTRATION The Company derives a majority of its revenue from the licensing of products in the TUXEDO product line, to which the Company has certain distribution rights from Novell, Inc. and fees from related services. These products and services are expected to continue to account for a majority of the Company's revenue for the foreseeable future. Consequently, a reduction in demand or an increase in competition for these products due to market factors, or a decline in sales of such products, would affect operating results adversely. 2. EXTRAORDINARY ITEM On June 27, 1995, the Company entered into a settlement agreement to resolve all disputes with respect to a loan agreement with one of its creditors. In connection with this settlement agreement, the Company realized an extraordinary gain of approximately $1,035,000, representing the forgiveness of both principal and accrued interest due on the loan. 3. LEASE COMMITMENTS Facilities are leased under operating leases expiring at various dates through November 30, 1999. Certain leases have escalating rental payments and options for renewal for additional terms. Future minimum rental payments for the years ended and period ended December 31, are as follows: November 2 through December 31, 1995............................. $ 27,000 1996............................................................. 164,000 1997............................................................. 171,000 1998............................................................. 176,000 1999............................................................. 162,000 --------- Total............................................................ $ 700,000 --------- ---------
F-36 INDEPENDENCE TECHNOLOGIES, INC. NOTES TO STATEMENTS OF OPERATIONS AND CASH FLOWS (CONTINUED) FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 1, 1995 3. LEASE COMMITMENTS (CONTINUED) Rent expense was $147,916 for the period from January 1, 1995 to November 1, 1995. 4. INCOME TAXES Due to the Company's loss position, there is no provision for income taxes for the period from January 1, 1995, to November 1, 1995. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows:
NOVEMBER 1, 1995 -------------- Deferred tax assets: Net operating loss carryforwards............................................ $ 743,000 Deferred revenue............................................................ 554,000 Accruals and reserves....................................................... 527,000 Fixed assets................................................................ 39,000 -------------- Total deferred tax assets................................................. 1,863,000 Valuation allowance......................................................... (1,863,000) -------------- Net deferred tax assets....................................................... $ 0 -------------- --------------
Based upon the weight of available evidence, which includes the Company's historical operating performance, the reported cumulative net loss for the prior three years, and the uncertainties regarding future results of operations of the Company, the Company has provided a full valuation allowance against its net deferred tax assets as at this time it is more likely than not that the deferred tax assets will not be realized. The change in the valuation allowance was an increase of $7,000 for the period ended November 1, 1995. As of November 1, 1995, the Company had net operating loss carryforwards for federal and state tax purposes of approximately $2,100,000 and $200,000 which will expire from 1998 through 2009. Utilization of net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating loss carryforwards before full utilization. F-37 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Novell, Inc. We have audited the accompanying statements of revenues and direct salaries and benefits expenses for domestic Tuxedo employees of the Tuxedo Systems Group of Novell, Inc. for the year ended October 28, 1995 and the four months ended February 24, 1996. These statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, the accompanying statements were prepared solely to present the revenues and direct salaries and benefits expenses for domestic Tuxedo employees of the Tuxedo Systems Group of Novell, Inc. pursuant to the Tuxedo License and Distribution Agreement between Novell, Inc. and BEA Systems effective February 23, 1996 (as amended), and are not intended to be a complete presentation of the results of operations of the Tuxedo Systems Group of Novell, Inc. In our opinion, the statements referred to above present fairly, in all material respects, the revenues and direct salaries and benefits expenses for domestic Tuxedo employees for the year ended October 28, 1995 and the four months ended February 24, 1996, in conformity with generally accepted accounting principles. Ernst & Young LLP San Jose, California January 29, 1997 F-38 TUXEDO SYSTEMS GROUP OF NOVELL, INC. STATEMENTS OF REVENUES AND DIRECT SALARIES AND BENEFITS EXPENSES FOR DOMESTIC TUXEDO EMPLOYEES (IN THOUSANDS)
FOUR MONTHS YEAR ENDED ENDED OCTOBER 28, FEBRUARY 24, 1995 1996 ------------ ------------- Revenues............................................................................. $ 20,371 $ 3,123 Direct salaries and benefits expenses for domestic Tuxedo employees: Research and development........................................................... 3,017 1,167 Selling, general and administrative................................................ 1,055 443 ------------ ------------- 4,072 1,610 ------------ ------------- Revenues less direct salaries and benefits expenses for domestic Tuxedo employees.... $ 16,299 $ 1,513 ------------ ------------- ------------ -------------
See accompanying notes. F-39 TUXEDO SYSTEMS GROUP OF NOVELL, INC. NOTES TO STATEMENTS 1. BASIS OF PRESENTATION The Tuxedo Systems Group ("Tuxedo") was operated as a business operation of Novell, Inc. (Novell or the Company). The accompanying statements were prepared to present the revenues and direct salaries and benefits expenses for domestic Tuxedo employees, pursuant to the Tuxedo License and Distribution Agreement between Novell and BEA Systems Inc. ("BEA") effective February 23, 1996 as amended, (the "Agreement"). The statements are not intended to be a complete presentation of the results of operations of Tuxedo. The Tuxedo system is an open transaction management software used by businesses to develop and deploy multi-tier, client-server applications. Tuxedo is used to create scaleable, high performance, secure, reliable business-critical applications, as well as more general purpose client-server applications. Under the terms of the agreement, BEA became the master distributor of Tuxedo on non-Netware platforms. The principal markets for these products are in the United States, Europe, and Japan. The Tuxedo business had no separate legal status as it was an integral part of Novell's overall operations. As a result, separate financial statements were not maintained by Novell for the operations acquired by BEA. The accompanying statements have been prepared from the historical accounting records of Novell and do not purport to reflect the results of operations that would have resulted if Tuxedo had operated as an unaffiliated independent company. In addition, the accompanying statements do not reflect any adjustments resulting from the acquisition by BEA. Revenues denominated in foreign currencies have been remeasured into the functional currency in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation," (FAS 52) using the U.S. dollar as the functional currency. 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 from those estimates. 2. SIGNIFICANT ACCOUNTING POLICIES REVENUES Revenues as reported per the accompanying statements represent billings by Novell for license and service and maintenance agreements related to the Tuxedo product. Although Novell maintains reserves for returns at the consolidated level, it does not record or maintain such information at a product line level. Accordingly, adjustments have not been made to reflect estimated sales returns. No customer exceeded 10% of revenues during fiscal 1995, and one customer represented approximately 24% of revenues in the 1996 period. SOFTWARE LICENSES The Company recognizes revenue from sales of software licenses upon delivery of the software product to a customer unless the Company has significant related obligations remaining. When significant obligations remain after the software product has been delivered, revenue is not recognized F-40 TUXEDO SYSTEMS GROUP OF NOVELL, INC. NOTES TO STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) until such obligations have been completed or are no longer significant. The costs of any insignificant obligations are accrued when the related revenue is recognized. When software licenses for multiple products are sold, revenue is recognized on a per unit basis until the delivery of the first copy of each software product under the arrangement or until the expiration of the arrangement, at which time the Company recognizes any remaining license fees. POST-CONTRACT CUSTOMER SUPPORT AND SOFTWARE SERVICES Revenue from post-contract customer support is recognized over the period the customer support services are provided and software services revenue is recognized as services are performed. DIRECT SALARIES AND BENEFITS EXPENSES FOR DOMESTIC TUXEDO EMPLOYEES The accompanying statements include only direct salaries and benefits expenses for domestic Tuxedo employees during the periods presented. Substantially all of the Tuxedo domestic employees became employees of BEA under the Agreement. No allocations of corporate expenses or reflection of other direct expenses have been presented as management believes any method of allocation would be meaningless due to the immateriality of Tuxedo to Novell and accumulation of all other direct expenses is impracticable. These direct expenses are not necessarily indicative of the expenses that would have been incurred had Tuxedo operated as a stand-alone business. F-41 REPORT OF ERNST & YOUNG AUDIT, INDEPENDENT AUDITORS The Board of Directors USL Finance S.A. We have audited the accompanying consolidated balance sheet of USL Finance S.A. as of May 5, 1996 and the related consolidated statements of operations, shareholders' equity, and cash flows for the period from November 1, 1995 through May 5, 1996. 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 audit. We conducted our audit in accordance with generally accepted accounting 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of USL Finance S.A. as of May 5, 1996, and the consolidated results of its operations, and its cash flows for the period from November 1, 1995 to May 5, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG Audit Paris, France December 24, 1996 F-42 USL FINANCE S.A. CONSOLIDATED BALANCE SHEET MAY 5, 1996 (IN THOUSANDS OF U.S. DOLLARS) ASSETS Current assets: Cash and cash equivalents........................................................ $ 2,259 Accounts receivable.............................................................. 2,875 Prepaid expenses and other current assets........................................ 284 --------- Total current assets......................................................... 5,418 --------- Leasehold improvements and equipment, net........................................ 642 --------- Distribution rights, net of amortization......................................... 294 --------- Total assets................................................................. $ 6,354 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................................................. $ 405 Accrued expenses................................................................. 350 Payable to BEA Systems Inc. ..................................................... 3,091 Value-added tax payable.......................................................... 277 Deferred revenues................................................................ 411 --------- Total current liabilities.................................................... 4,534 Net deferred tax liabilities....................................................... 5 Deferred revenues.................................................................. 750 Long-term debt..................................................................... 541 Minority interests................................................................. 76 Commitments........................................................................ Shareholders' equity: Common stock, FF 100 par value; 13,220 shares issued and outstanding.................................................................... 270 Capital in excess of par value................................................... 131 Cumulative translation adjustment................................................ (24) Retained Earnings................................................................ 71 --------- Total shareholders' equity..................................................... 448 --------- Total liabilities and shareholders' equity................................... $ 6,354 --------- ---------
See accompanying notes. F-43 USL FINANCE S.A. CONSOLIDATED STATEMENT OF OPERATIONS NOVEMBER 1, 1995 THROUGH MAY 5, 1996 (IN THOUSANDS OF U.S. DOLLARS) Revenues: License.................................................................. $ 2,024 Service.................................................................. 868 ------- Total revenues............................................................. 2,892 Cost of revenues: License.................................................................. 1,044 Service.................................................................. 873 ------- Total cost of revenues..................................................... 1,917 ------- Gross profit............................................................... 975 Operating expenses: Marketing and selling.................................................... 667 General and administrative............................................... 88 Amoritzation of distribution rights...................................... 76 ------- Total operating expenses............................................... 831 ------- Income from operations..................................................... 144 Interest income............................................................ 64 Interest expense........................................................... (20) Minority interest.......................................................... (32) ------- Income before income taxes................................................. 156 Income taxes............................................................... (85) ------- Net income................................................................. $ 71 ------- -------
See accompanying notes. F-44 USL FINANCE S.A. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS OF U.S. DOLLARS)
COMMON STOCK CUMULATIVE TOTAL ---------------------- CAPITAL IN EXCESS TRANSLATION RETAINED SHAREHOLDERS' SHARES AMOUNT OF PAR VALUE ADJUSTMENT EARNINGS EQUITY --------- ----------- ------------------- ------------- ------------- --------------- Balance October 31, 1995........ 13,220 $ 270 $ 131 $ (21) $ -- $ 380 Translation adjustment........ -- -- -- (3) -- (3) Net income.................... -- -- -- -- 71 71 --------- ----- ----- --- --- ----- Balance May 5, 1996............. 13,220 $ 270 $ 131 $ (24) $ 71 $ 448 --------- ----- ----- --- --- ----- --------- ----- ----- --- --- -----
F-45 USL FINANCE S.A. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM NOVEMBER 1, 1995 TO MAY 5, 1996 (IN THOUSANDS OF U.S. DOLLARS) OPERATING ACTIVITIES Net income................................................................ $ 71 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of leasehold improvements and equipment........................................................... 48 Amortization of distribution rights................................... 76 Interests in equity investments....................................... 20 Deferred income taxes................................................. 18 Increase (decrease) in cash from: Accounts receivable................................................... 475 Prepaid expenses and other current assets............................. (174) Accounts payable and accrued expenses................................. 522 Deferred revenues..................................................... 1,199 Value-added tax payable............................................... 128 ------- Net cash provided by operating activities........................... 2,383 INVESTING ACTIVITIES Purchase of leasehold improvements and equipment.......................... (479) Proceeds from sale of equipment........................................... 6 Business acquisition, net of cash acquired................................ (541) ------- Net cash used in investing activities..................................... (1,014) FINANCING ACTIVITIES Increase in long-term debt................................................ 559 ------- Net cash provided by financing activities................................. 559 Effect of changes in foreign exchange rates on cash....................... (81) ------- Net increase in cash and cash equivalents................................. 1,847 Cash and cash equivalents at beginning of period.......................... 412 ------- Cash and cash equivalents at end of period................................ $ 2,259 ------- -------
F-46 USL FINANCE S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD FROM NOVEMBER 1, 1995 THROUGH MAY 5, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION USL Finance S.A. (the "Company") was incorporated in Paris, France in August 1995 and had no operating activity until it acquired from Novell, Inc., with effect from November 3, 1995, a 90% equity ownership in USL France S.A. (USL). The main activities of USL are the marketing and support of UNIX software products as well as offering related consulting and training services. USL's primary software product is TUXEDO, a product developed by Novell, Inc. USL's products are distributed through its direct sales force as well as through an external marketing firm. With effect from February 23, 1996, Novell, Inc. granted to BEA Systems, Inc. (BEA) certain rights and licenses relating to TUXEDO software and USL entered into a new royalty agreement with BEA. Novell, Inc. transferred to BEA its debt due by USL and related to the royalty agreement in effect between Novell, Inc. and USL before February 23, 1996. On May 5, 1996, BEA purchased 100% of the shares of USL. The accompanying financial statements have been prepared on the Company's historical cost basis, and do not reflect any adjustments resulting from the acquisition. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The Company and its subsidiary prepare their financial statements in accordance with accounting principles generally accepted in France. The consolidated financial statements have been restated in order to comply with accounting principles generally accepted in the United States and stated in U.S. dollars. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany balances and transactions have been eliminated. REVENUE RECOGNITION The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants' Statement of Position 91-1 on software revenue recognition. License fees under software license agreements with end users and distributors are recognized upon shipment if no significant vendor obligations remain and collection of the resulting receivables is deemed probable. Service revenues are derived from consulting and training services and fees earned under annual or multi-year maintenance agreements for providing updates (on an "if and when available" basis) for existing software products, user documentation, and technical support. Maintenance revenue is recognized ratably over the term of such agreements. If such services are included in the initial licensing fee, the value of the services is unbundled and recognized ratably over the related service period. Revenue from consulting and training services is recognized as the services are performed. CONCENTRATION OF CREDIT RISK The Company sells its products to customers in a variety of industries in Southern Europe, Africa, and Israel. The Company performs ongoing credit evaluations of its customers and maintains F-47 USL FINANCE S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM NOVEMBER 1, 1995 THROUGH MAY 5, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) allowances for potential credit losses. To date, such losses have been within management's expectations. Three customers accounted for 12%, 11%, and 10% of revenues, respectively. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on deposit or temporary cash investments with original maturities of 90 days or less. The Company considers all highly liquid investments with insignificant interest rate risk and purchased with an original maturity of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS At May 5, 1996, the carrying values of cash and cash equivalents approximated their market value based on the short-term maturities of these instruments. The fair value of long-term debt is estimated using current interest rates available to the Company for debt instruments with similar terms, degree of risk, and maturities. The carrying value of the loans approximate their respective fair value. FOREIGN CURRENCY TRANSLATIONS The functional currency of the Company is the French Franc ("FF"). Foreign currency transactions outstanding at the balance sheet date are translated into French Francs at year-end rates of exchange. Aggregate realized and unrealized gains or losses from foreign currency transactions are included in results of operations and amounted to a gain of $10,739. The effect of translating to U.S. Dollars is recorded as a cumulative translation adjustment. DISTRIBUTION RIGHTS Distribution rights relate to the right to distribute products in certain territories. Amortization is computed using the straight-line method over 30 months. LEASEHOLD IMPROVEMENTS AND EQUIPMENT Leasehold improvements and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: Purchase software 3 years Computer equipment 5 years Furniture and other equipment 10 years Leasehold improvements 10 years, or lease term if less
INCOME TAXES In accordance with Statement of Financial Accounting Standards No. 109, the liability method is used in accounting for income taxes. 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 the enacted tax rates and laws that will be in effect when the differences are F-48 USL FINANCE S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM NOVEMBER 1, 1995 THROUGH MAY 5, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) expected to reverse. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. 2. BUSINESS ACQUISITION AND DEBT On November 3, 1995, the Company completed a transaction with Novell, Inc. in which the Company purchased from Novell a 90% interest in USL for a consideration of FF4,500,000 (approximately $870,000), of which FF3,000,000 was paid in cash with the balance payable in installments with interest at 5% as follows: - FF500,000 due on October 31, 1998 (approximately $97,000) - FF500,000 due on October 31, 1999 (approximately $97,000) - FF500,000 due on October 31, 2000 (approximately $97,000) The acquisition was accounted for using the purchase method of accounting in accordance with APB Opinion No. 16, "Business Combinations" ("APB16"). Under APB16, purchase price allocations were made to the assets acquired and the liabilities assumed based on their respective fair value, as follows: Purchase price................................................... $ 870,406 Estimated fair value of net tangibles assets acquired............ 502,321 --------- Excess of purchase price over net tangible assets acquired....... $ 368,085
The excess of purchase price over net tangible assets acquired was allocated to distribution rights. On January 1, 1995, the Company issued FF1,300,000 (approximately $250,000) in bonds which are payable in full on November 20, 2000. Interest is payable annually at a rate of 5% beginning October 31, 1996. 3. CASH AND CASH EQUIVALENTS Cash and cash equivalents at May 5, 1996 include (in thousands): Cash held at bank............................................... $ 7 Temporary cash investments...................................... 2,252 ----------- $ 2,259 ----------- -----------
F-49 USL FINANCE S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM NOVEMBER 1, 1995 THROUGH MAY 5, 1996 4. LEASEHOLD IMPROVEMENT AND EQUIPMENT Leasehold improvement and equipment at May 5, 1996 include (in thousands): Purchased software.............................................. $ 94 Computer equipment.............................................. 276 Furniture and other equipment................................... 126 Leasehold improvements.......................................... 280 ----- 776 Accumulated depreciation and amortization....................... (134) ----- $ 642 ----- -----
Depreciation and amortization expense for the period from November 1, 1995 through May 5, 1996 was $47,904. 5. SHAREHOLDERS' EQUITY At May 5, 1996, the issued and outstanding share capital of the Company consisted of 13,220 shares with a nominal value of $19. Dividends may be distributed from the statutory retained earnings, subject to the requirements of French law and the Company's by-laws. The Company has not distributed any dividends since its inception and had no distributable retained earnings at May 5, 1996. 6. INCOME TAXES The provision for income taxes consists of the following (in thousands): Current............................................................... $ 67 Deferred.............................................................. 18 --- Provision for income taxes............................................ $ 85 --- ---
A reconciliation of income taxes computed at the French statutory rate (36.67%) to the income tax benefit is as follows (in thousands): Income taxes computed at the French statutory rate.................... $ 57 Amortization of distribution rights not deductible for tax............ 28 --- Total............................................................. $ 85 --- ---
Deferred taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. F-50 USL FINANCE S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM NOVEMBER 1, 1995 THROUGH MAY 5, 1996 6. INCOME TAXES (CONTINUED) Significant components of the Company's deferred taxes consist of the following at May 5, 1996 (in thousands): Deferred tax assets: Net operating loss carryforwards...................................... $ 8 Deferred start-up costs............................................... 11 Other................................................................. 1 --- 20 Deferred tax liabilities: Maintenance recognized as a purchase accounting adjustment............ 25 --- Net deferred tax liability.............................................. $ (5) --- ---
7. EMPLOYEE RETIREMENT PLANS The Company contributes to government pensions for personnel in France in accordance with French law based on the salaries of the individuals. There exists no actuarial liability in connection with these plans. French law also requires payment of a lump sum retirement indemnity to employees based upon years of service and compensation at retirement. Benefits do not vest prior to retirement. The Company's obligation at May 5, 1996 was immaterial. 8. OPERATING LEASE COMMITMENTS The Company leases its facilities and certain equipment under operating leases that expire through 2002. Future minimum lease payments under operating leases due for the periods from May 5, 1996 through January 31, 1997 and for fiscal years ending January 31 are as follows (in thousands): May 5, 1996 through January 31, 1997.................................... $ 156 12 month periods ending January 31, 1998................................ 208 1999.................................................................... 208 2000.................................................................... 122 2001 and thereafter..................................................... 1
Rental expense for the period from November 1, 1995 through May 5, 1996 was approximately $108,000. F-51 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the U.S. Underwriters named below (the "U.S. Underwriters"), and each of the U.S. Underwriters, for whom Goldman, Sachs & Co., Alex. Brown & Sons Incorporated, Robertson, Stephens & Company LLC, and SoundView Financial Group, Inc. are acting as representatives, has severally agreed to purchase from the Company, the respective number of shares of Common Stock set forth opposite its name below:
NUMBER OF SHARES UNDERWRITER OF COMMON STOCK - ---------------------------------------------------------------------------------------------- ------------------ Goldman, Sachs & Co. ......................................................................... Alex. Brown & Sons Incorporated............................................................... Robertson, Stephens & Company LLC............................................................. SoundView Financial Group, Inc................................................................ ------------------ Total................................................................................... ------------------ ------------------
Under the terms and conditions of the Underwriting Agreement, the U.S. Underwriters are committed to take and pay for all of the shares offered hereby (other than those covered by the U.S. Underwriters' over-allotment option described below), if any are taken. The U.S. Underwriters propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus, and in part to certain securities dealers at such price less a concession of $ per share. The U.S. Underwriters may allow, and such dealers may reallow, 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 Representatives. The Company has entered into an underwriting agreement (the "International Underwriting Agreement") with the Underwriters of the international offering (the "International Underwriters") providing for the concurrent offer and sale of shares of Common Stock in an international offering outside the United States. The offering price and aggregate underwriting discounts and commissions per share for the two offerings are identical. The closing of the offering made hereby is a condition to the closing of the international offering, and vice versa. The representatives of the International Underwriters are Goldman Sachs International, Alex. Brown & Sons Incorporated, Robertson, Stephens & Company LLC and SoundView Financial Group, Inc. Pursuant to an Agreement between the U.S. and International Underwriting Syndicates (the "Agreement Between") relating to the two offerings, each of the U.S. Underwriters named herein has agreed that, as a part of the distribution of the shares offered hereby and subject to certain exceptions, it will offer, sell or deliver shares offered hereby and any other shares of Common Stock directly or indirectly only in the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction (the "United States") and to U.S. Persons which term shall mean, for purposes of this paragraph: (a) any individual who is a resident of the United States or (b) any corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof and whose office most directly involved with the purchase is located in the United States. Each of the International Underwriters has agreed pursuant to the Agreement Between that, as part of the distribution of the shares offered as part of the international offering, and subject to certain exceptions, it will (i) not, directly or indirectly, offer, sell or deliver shares of Common Stock (a) in the Untied States or to any U.S. person or (b) to any person who it believes intends to reoffer, resell or deliver the shares in the United States or to any U.S. persons and (ii) cause any dealer to whom it may sell such shares at any concession to agree to observe a similar restriction. U-1 Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the International Underwriters of such number of shares of Common Stock as may be mutually agreed. The price of any shares so sold shall be the initial public offering price, less an amount not greater than the selling concession. The Company has granted to the U.S. Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of additional shares of Common Stock to cover over-allotments, if any. If the U.S. Underwriters exercise their over-allotment option, the U.S. Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the shares of Common Stock offered hereby. The Company has granted the International Underwriters a similar option to purchase up to an aggregate of shares of Common Stock. The Company's officers and directors, and certain other holders of shares of Common Stock and options therefor, have agreed that, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of the Prospectus, they will not offer, pledge, sell, contract to sell, sell any option to contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock without the prior written consent of a designated representative of the U.S. and International Underwriters, except for the shares of Common Stock offered in connection with the concurrent United States and international offerings. The Company has agreed, with certain limited exceptions, that, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of the Prospectus, it will not offer, sell, contract to sell, or otherwise dispose of any securities of the Company that are substantially similar to the shares offered hereby, including but not limited to any securities that are convertible into, or exchangeable for, or that represent the right to receive Common Stock or any such substantially similar securities without the prior written consent of the designated representative of the U.S. and International Underwriters, except for the shares of Common Stock offered in connection with the United States and international offerings and except that the Company may issue securities pursuant to the employee stock plans and currently outstanding options. The representatives of the Underwriters have informed the Company that they do not expect sales to accounts over which the Underwriters exercise discretionary authority to exceed five percent of the total number of shares of Common Stock offered by them. Prior to this Offering, there has been no public market for the shares. The initial public offering price will be negotiated among the Company and the representatives of the U.S. Underwriters and the International Underwriters. Among the factors to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, will be the Company's historical performance, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuations of companies in related businesses. The Common Stock will be quoted on the Nasdaq National Market under the symbol "BEAS." The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. This Prospectus may be used by the Underwriters and dealers in connection with offers and sales of Common Stock, including shares initially sold in the international offering to persons located in the United States. U-2 Set forth on the inside back cover page is a horizontal rectangular box bearing the caption "BEA TUXEDO KERNEL." Set forth on top of this box are four square boxes each with a caption reading, from left to right, "BEA BUILDER," "BEA CONNECT." "BEA TP BLUE" and "BEA JOLT." Set forth to the left of the five aforementioned boxes is a vertical rectangular box of equal height as the combined other boxes, with a caption reading "BEA MANAGER." Set forth above this graphic is a caption reading "THE BEA ENTERPRISE TRANSACTION FRAMEWORK." Set forth below the graphic is the following text: "The BEA Enterprise Transaction Framework is an integrated middleware software platform, based upon BEA TUXEDO, for developing, deploying, and managing distributed mission-critical applications. BEA TUXEDO provides distributed transaction processing and application messaging capabilities, as well as the full complement of services necessary to build and run mission-critical applications. BEA Jolt extends the capabilities of BEA TUXEDO to the Internet and intranets by providing a secured infrastructure without the need for additional application programming. The BEA TP Blue Interface provides mainframe-to-distributed applications portability, compatibility, and connectivity for TP Blue-based transaction processing. BEA Connect allows applications to access remote applications services on a variety of host-based computing environments including mainframes. BEA Builder enables programmers to use familiar development environments to develop BEA TUXEDO-based applications. BEA Manager extends the native BEA TUXEDO management capabilities by allowing it to integrate with third party management frameworks." - ---------------------------------------------- ---------------------------------------------- - ---------------------------------------------- ---------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary...................... 3 Risk Factors............................ 6 Use of Proceeds......................... 16 Dividend Policy......................... 16 Capitalization.......................... 17 Dilution................................ 18 Selected Consolidated Financial Data.... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............. 21 Business................................ 34 Management.............................. 54 Principal Stockholders.................. 61 Certain Transactions.................... 62 Description of Capital Stock............ 64 Shares Eligible for Future Sale......... 66 Legal Matters........................... 67 Experts................................. 67 Additional Information.................. 68 Index to Consolidated Financial Statements............................ F-1 Underwriting............................ U-1
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES 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. SHARES BEA SYSTEMS, INC. COMMON STOCK (PAR VALUE $0.001 PER SHARE) -------------------- [LOGO] -------------------- GOLDMAN, SACHS & CO. ALEX. BROWN & SONS INCORPORATED ROBERTSON, STEPHENS & COMPANY SOUNDVIEW FINANCIAL GROUP, INC. REPRESENTATIVES OF THE UNDERWRITERS - ---------------------------------------------- ---------------------------------------------- - ---------------------------------------------- ---------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 145 of the General Corporate Law of the State of Delaware, the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). The Registrant's Amended and Restated Bylaws (Exhibit 3.3 hereto) also provide for mandatory indemnification of its directors and executive officers, and permissive indemnification of its employees and agents, to the fullest extent permissible under Delaware law. The Registrant's Amended and Restated Certificate of Incorporation (Exhibit 3.2 hereto) provides that the liability of its directors for monetary damages shall be eliminated to the fullest extent permissible under Delaware law. Pursuant to Delaware law, this includes elimination of liability for monetary damages for breach of the directors' fiduciary duty of care to the Registrant and its Stockholders. These provisions do not eliminate the directors' duty of care and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for any transaction from which the director derived an improper personal benefit, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. Prior to the effective date of the Registration Statement, the Registrant will have entered into agreements with its directors and certain of its executive officers that require the Registrant to indemnify such persons against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director or officer of the Registrant or any of its affiliated enterprises, provided such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Registrant and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. The Registrant intends to obtain in conjunction with the effectiveness of the Registration Statement a policy of directors' and officers' liability insurance that insures the Company's directors and officers against the cost of defense, settlement or payment of a judgment under certain circumstances. The Underwriting Agreements filed as Exhibit 1.1 and Exhibit 1.2 to this Registration statement provides for indemnification by the U.S. Underwriters and the International Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act or otherwise. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses to be paid by the Registrant in connection with the distribution of the securities being registered, other than underwriting discounts and commissions, are as follows:
AMOUNT* ------------- Securities and Exchange Commission Filing Fee.................................. $ 12,197 NASD Filing Fee................................................................ 4,525 Nasdaq National Market Listing Fee............................................. 30,000 Accounting Fees and Expenses................................................... 900,000 Blue Sky Fees and Expenses..................................................... 5,000 Legal Fees and Expenses........................................................ 300,000 Transfer Agent and Registrar Fees and Expenses................................. 15,000 Printing Expenses.............................................................. 375,000 Miscellaneous Expenses......................................................... 58,278 ------------- Total...................................................................... $ 1,700,000 ------------- -------------
- -------------- * All amounts are estimates except the SEC filing fee, the NASD filing fee and the Nasdaq National Market listing fee. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Since the Registrant's inception in January 1995, the Registrant has issued and sold the following unregistered securities: 1. During the period, the Registrant granted stock options to employees, directors and consultants under its Stock Incentive Plans covering an aggregate of 7,465,650 shares of the Registrant's Common Stock, at exercise prices ranging from $0.0100 to $6.00 with a weighted average exercise price of $0.7560 per share. 2. During the period, the Registrant issued and sold an aggregate of 348,623 shares of its Common Stock to 18 employees for cash and promissory notes in the aggregate amount of $71,857.58 upon exercise of stock options granted pursuant to the Registrant's Stock Incentive Plans, at exercise prices ranging from $0.01 to $0.285 with a weighted average exercise price of $0.2061 per share. 3. During the period, the Registrant issued and sold an aggregate of 10,344,000 shares of its Common Stock to Warburg, Pincus Ventures, L.P. and certain employees, directors and consultants for an aggregate purchase price of $2,094,039.98. Of such shares of Common Stock, on February 1, 1995 and September 28, 1995, 2,506,828 shares of Common Stock were sold to William T. Coleman III for $378,466 payable $281,000 in cash and $97,446 by an installment note; 1,671,586 shares of Common Stock were sold to Edward W. Scott, Jr. for $252,402 payable $4,000 in cash and $248,402 by an installment note; and 1,671,586 shares of Common Stock were sold to Alfred S. Chuang for $252,402 payable $54,000 in cash and $198,402 by an installment note. 4. During the period, the Registrant issued and sold an aggregate of 17,166,000 shares of its Series A Preferred Stock (convertible into 34,332,000 shares of Common Stock) to Warburg, Pincus Ventures, L.P. and certain directors for an aggregate purchase price of $29,182,200. 5. During the period, the Registrant issued and sold an aggregate of 16,347,800 shares of its Series B Preferred Stock (convertible into shares of Common Stock) to Warburg, Pincus Ventures, L.P. for an aggregate purchase price of $16,347,800. The sale and issuance of securities in the transactions described in paragraphs 1 and 2 above were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated II-2 thereunder in that they were offered and sold either pursuant to written compensatory benefit plans or pursuant to a written contract relating to compensation, as provided by Rule 701. The sale and issuance of securities in the transactions described in paragraphs 3, 4 and 5 above were deemed to be exempt from registration under the Securities Act by virtue of Rule 4(2) promulgated thereunder. Appropriate legends were affixed to the stock certificates issued in the above transactions. Similar legends were imposed in connection with any subsequent sales of any such securities. No Underwriters were employed in any of the above transactions. ITEM 27. EXHIBITS The exhibits are as set forth in the Exhibit Index. ITEM 28. UNDERTAKINGS The Registrant hereby undertakes to provide the U.S. Underwriters and the International Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the U.S. Underwriters and the International Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted to directors, officers and controlling persons of the issuer pursuant to the foregoing provisions, or otherwise, the issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the issuer 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 issuer 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 Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For 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 issuer 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 the Commission declared it effective. (2) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial BONA FIDE offering of those securities. II-3 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California on January 31, 1997. BEA SYSTEMS, INC. By: /s/ WILLIAM T. COLEMAN III ----------------------------------------- William T. Coleman III PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William T. Coleman III, Edward W. Scott, Jr., Alfred S. Chuang, and Steve L. Brown as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments to this Registration Statement) and sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ------------------------------ ---------------------------- ----------------- President, Chief Executive /s/ WILLIAM T. COLEMAN III Officer, Chairman of the - ------------------------------ Board and Director January 31, 1997 William T. Coleman III (Principal Executive Officer) Executive Vice President, /s/ STEVE L. BROWN Chief Financial Officer - ------------------------------ and Secretary (Principal January 31, 1997 Steve L. Brown Financial and Accounting Officer) /s/ EDWARD W. SCOTT, JR. - ------------------------------ Director January 31, 1997 Edward W. Scott, Jr.
II-4
SIGNATURE TITLE DATE - ------------------------------ ---------------------------- ----------------- /s/ STEWART K.P. GROSS - ------------------------------ Director January 31, 1997 Stewart K.P. Gross /s/ WILLIAM H. JANEWAY - ------------------------------ Director January 31, 1997 William H. Janeway /s/ CARY J. DAVIS - ------------------------------ Director January 31, 1997 Cary J. Davis /s/ CAROL BARTZ - ------------------------------ Director January 31, 1997 Carol Bartz /s/ DEAN MORTON - ------------------------------ Director January 31, 1997 Dean Morton
II-5 EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT - ----------- -------------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement.......................................................................... 3.1 Restated Certificate of Incorporation of the Registrant, as currently in effect......................... 3.2* Form of Registrant's Amended and Restated Certificate of Incorporation to be adopted upon completion of the Offerings. 3.3 Registrant's Bylaws, as currently in effect along with Certificate of Amendment of Bylaws, dated November 1995......................................................................................... 3.4* Form of Registrant's Amended and Restated Bylaws, to be adopted upon completion of the Offerings. 4.1 Reference is made to Exhibits 3.1 and 3.2, 3.3 and 3.4.................................................. 5.1* Opinion of Morrison & Foerster LLP as to the legality of the Common Stock............................... 10.1 Investor Rights Agreement by and among the Registrant and William T. Coleman III, Alfred S. Chuang, Edward W. Scott, Jr. and Warburg, Pincus Ventures, L.P., dated September 28, 1995..................... 10.2* Form of Indemnification Agreement between the Registrant and each of its executive officers and directors. 10.3 Employment Agreement between the Registrant and William T. Coleman III dated as of September 28, 1995... 10.4 Employment Agreement between the Registrant and Edward W. Scott, Jr. dated as of September 28, 1995..... 10.5 Employment Agreement between the Registrant and Alfred S. Chuang dated as of September 28, 1995......... 10.6 Form of Promissory Notes entered into between the Registrant, William T. Coleman III, Edward W. Scott, Jr. and Alfred S. Chuang each dated September 28, 1995................................................ 10.7 Promissory Note secured by deed of trust entered into between the Registrant and Edward W. Scott, Jr. and Cheryl S. Scott, dated December 12, 1995.......................................................... 10.8+ Agreement between the Registrant and Novell, dated January 24, 1996, and Amendments thereto. 10.9 Lease Agreement between the Registrant and William H. and Leila A. Cilker dated November 15, 1995 and First Amendment thereto, dated January 19, 1996....................................................... 10.10 Stock Purchase Agreement between the Registrant and Warburg, Pincus Ventures, L.P. dated September 28, 1995, and Amendments thereto.......................................................................... 10.11 Registrant's 1995 Flexible Stock Incentive Plan, including forms of agreements thereunder............... 10.12* Registrant's 1997 Stock Incentive Plan, including forms of agreements thereunder. 10.13* Registrant's 1997 Employee Stock Purchase Plan, including forms of agreements thereunder. 10.14 Subordinated Bridge Line of Credit between the Registrant and Warburg, Pincus Ventures, L.P., dated January 22, 1997...................................................................................... 11.1 Statement regarding calculation of net income (loss) per share.......................................... 21.1 List of Significant Subsidiaries........................................................................ 23.1* Consent of Morrison & Foerster LLP. Reference is made to Exhibit 5.1.................................... 23.2 Consent of Ernst & Young LLP., Independent Auditors Reference is made to Page II-6...................... 23.3 Consent of Ernst & Young LLP., Independent Auditors Reference is made to Page II-7...................... 23.4 Consent of Ernst & Young LLP., Independent Auditors Reference is made to Page II-8...................... 23.5 Consent of Ernst & Young LLP., Independent Auditors Reference is made to Page II-9...................... 23.6 Consent of Ernst & Young Audit. Reference is made to Page II-10......................................... 24.1 Powers of Attorney. Reference is made to pages II-4 and II-5............................................ 27.1 Financial Data Schedule.................................................................................
- -------------- * To be filed by amendment. + Confidential treatment requested as to portions of this exhibit. EX-3.1 2 CERT. OF INCORPORATION EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF BEA SYSTEMS, INC. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware _______________________________________________ BEA SYSTEMS, INC. (the "Corporation"), a Corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "General Corporation Law") having filed its original Certificate of Incorporation under the name BEA Enterprises, Inc. on January 20, 1995, does hereby certify as follows: That the following resolutions amending and restating the Corporation's Certificate of Incorporation were duly adopted by the Corporation's Board of Directors and by the holders of a majority of the Corporation's outstanding stock entitled to vote thereon and if required, a majority of each class entitled to vote thereon as a class, in accordance with the provisions of Sections 242 and 245 of the General Corporation Law by written consent of the Board of Directors and the stockholders given in accordance with Sections 141 and 228, respectively of the General Corporation Law: "NOW, THEREFORE, BE IT RESOLVED, that the Certificate of Incorporation of the Corporation be amended and restated in its entirety as follows: "FIRST: The name of the corporation (hereinafter called the "Corporation") is BEA Systems, Inc. SECOND: The address, including street, number, city and county, of the registered office of the Corporation in the State of Delaware is 32 Loockerman Square, Suite L-100, City of Dover, 19901, County of Kent; and the name of the registered agent of the Corporation in the State of Delaware at such address is The Prentice-Hall Corporation System, Inc. THIRD: The nature of the business and the purposes to be conducted and promoted by the Corporation shall be to conduct any lawful business, to promote any lawful purpose, and to engage in any lawful act or activity for which Corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The Corporation is authorized to issue two classes of shares, to be designated respectively Common Stock and Preferred Stock. The total number of shares of Common Stock the Corporation shall have authority to issue is 80,000,000 and the total number of shares of Preferred Stock the Corporation shall have authority to issue is 40,000,000. The par value of the Common Stock and the Preferred Stock shall be $0.001 per share. On the filing of this Restated Certificate of Incorporation, each outstanding share of Common Stock is split up, divided, and converted into two shares of Common Stock. A description of the respective classes and series of stock and a statement of the designations, preferences, voting powers, relative, participating, optional or other special rights and privileges and the qualifications, limitations and restrictions of the Preferred and Common Stock are as follows: 1. DESIGNATION AND AMOUNT. There shall be designated a Series A Preferred Stock (the "Series A Preferred"), and the number of shares constituting such series shall be 20,000,000, and there shall be designated a Series B Preferred Stock (the "Series B Preferred"), and the number of shares constituting such series shall be 20,000,000. Shares of Series A Preferred and Series B Preferred shall have a par value of $0.001 per share. 2. DIVIDENDS AND DISTRIBUTIONS. (a) SERIES B PREFERRED. Subject to the provisions for adjustment hereinafter set forth, the holders of shares of Series B Preferred shall be entitled to receive, when, as and if declared by the Board of Directors (the "Board") out of funds legally available for the purpose, an annual cash dividend in the amount of $.07 per share (adjusted to reflect any stock split, stock dividend, combination, recapitalization and the like (collectively, a "Recapitalization") with respect to the Series B Preferred), prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock) on the Series A Preferred or the Common Stock of the Corporation. Such dividends shall be cumulative, and the right to receive such shall accrue to holders of Series B Preferred to the extent that such cumulative dividends are not declared or paid in any year. (b) SERIES A PREFERRED. Subject to the provisions for adjustment hereinafter set forth and after all cumulative dividends payable with respect to the Series B Preferred have been declared and paid in accordance with Section 2(a) above, the holders of Series A Preferred shall be entitled to receive, when, as and if declared by the Board, out of funds legally available for the purpose, an annual cash dividend in the amount of $.12 per share of Series A Preferred (as adjusted to reflect any Recapitalization with respect to the Series A Preferred), prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock) on the Common Stock of the Corporation. Such dividends shall not be cumulative, and no right shall accrue to holders of Series A Preferred by reason of the fact that dividends on such shares are not declared or paid in any year. (c) REPURCHASE OF COMMON. Notwithstanding Sections 2(a) and 2(b) hereof, the Corporation may at any time, out of funds legally available therefor, repur chase shares of Common Stock of the Corporation (i) issued to or held by employees, directors or consultants of the Corporation or its subsidiaries upon 2 termination of their employment or services, pursuant to any agreement providing for such right of repurchase, or (ii) issued to or held by any person subject to the Corporation's right of first refusal to purchase such shares where the purchase is pursuant to the exercise of such right of first refusal, in either case whether or not dividends on the Preferred Stock shall have been declared and paid or funds set aside therefor. 3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, distributions shall be made to the holders of Series A Preferred and Series B Preferred in respect of such Series A Preferred and Series B Preferred before any amount shall be paid to the holders of Common Stock in respect of such Common Stock, in the following manner: (a) SERIES B PREFERRED. The holders of Series B Preferred shall be entitled to be paid first out of the assets of the Corporation available for distribution to holders of its capital stock an amount per share equal to $1.00 per share of Series B Preferred, as adjusted to reflect any Recapitalization of the Series B Preferred, plus all cumulated and unpaid dividends, if any. If, upon the occurrence of a liquidation, dissolution or winding up, the assets and funds to be distributed among the holders of the Series B Preferred shall be insufficient to permit the payment to such holders of their full liquidation preferences, then the entire assets and funds of the Corporation legally available for distribution to the holders of capital stock shall be distributed ratably among the holders of the Series B Preferred such that the same percentage of the foregoing liquidation preference is paid to each such holder with respect to the shares of Series B Preferred such holder then holds. (b) SERIES A PREFERRED. If assets are remaining after payment of the full preferential amount with respect to the Series B Preferred set forth in Section 3(a) above, the holders of the Series A Preferred shall be entitled to then be paid out of the assets of the Corporation an amount per share equal to $1.70 per share of Series A Preferred, as adjusted to reflect any Recapitalization of the Series A Preferred, plus all declared and unpaid dividends, if any. If, upon the occurrence of a liquidation, dissolution or winding up, the assets and funds to be distributed among the holders of the Series A Preferred shall be insufficient to permit the payment to such holders of their full liquidation preferences, then the entire remaining assets and funds of the Corporation legally available for distribution to the holders of capital stock shall be distributed ratably among the holders of the Series A Preferred such that the same percentage of the foregoing liquidation preferences is paid to each such holder with respect to the shares of Series A Preferred each holder then holds. (c) COMMON STOCK. If assets are remaining after payment of the full preferential amount with respect to the Series A Preferred and the Series B Preferred set forth in Sections 3(a) and 3(b) above, then the holders of the Common Stock shall be entitled to share ratably based upon their ownership of Common Stock in all such remaining assets and surplus funds. 3 (d) EVENTS DEEMED A LIQUIDATION. For purposes of this Section 3, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by and to include the consolidation or merger of the Corporation with or into any other Corporation or the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of this Corporation, or any other reorganization of this Corporation unless the stockholders of the Corporation immediately prior to any such transaction are holders of a majority of the voting securities of the surviving or acquiring Corporation immediately thereafter (and for purposes of this calculation equity securities which any stockholder or the Corporation owned immediately prior to such merger or consolidation as a stockholder of another party to the transaction shall be disregarded). (e) VALUATION OF SECURITIES AND PROPERTY. In the event the Corporation proposes to distribute assets other than cash in connection with any liquidation, dissolution or winding up of the Corporation, the value of the assets to be distributed to the holders of shares of Series A Preferred and Series B Preferred shall be determined in good faith by the Board. Any securities not subject to investment letter or similar restrictions on free marketability shall be valued as follows: (i) If traded on a securities exchange, the value shall be deemed to be the average of the security's closing prices on such exchange over the thirty (30) day period ending three (3) days prior to the distribution; (ii) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the thirty (30) day period ending three (3) days prior to the distribution; and (iii) If there is no active public market, the value shall be the fair market value thereof as determined in good faith by the Board. The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be adjusted to make an appropriate discount from the market value determined as above in clauses (i), (ii) or (iii) to reflect the fair market value thereof as determined in good faith by the Board. The holders of at least 50% of the outstanding Series A Preferred and Series B Preferred, voting together as a single class, shall have the right to challenge any determination by the Board of fair market value pursuant to this Section 3(e), in which case the determination of fair market value shall be made by an independent appraiser selected jointly by the Board and the challenging parties, the cost of such appraisal to be borne equally by the Corporation and the challenging parties. 4 4. REDEMPTION RIGHTS. (a) HOLDER'S REDEMPTION RIGHTS. (i) Each holder of Series B Preferred ("Series B Holder") shall have the right, exercisable at any time following September 30, 2001 and upon written notice to the Corporation in accordance with Section 4(a)(iii) ("Redemption Notice"), to cause the Corporation to redeem, and the Corporation shall redeem (unless prevented by law), all or a portion of the shares of Series B Preferred then held by such Holder on such date designated by such Holder in accordance with Section 4(a)(iii) below ("Designated Redemption Date"). (ii) The price to be paid for each share of Series B Preferred redeemed pursuant to this Section 4 shall be $1.00 per share, plus an amount equal to all accrued and unpaid dividends (the "Redemption Price"). (iii) The redemption rights of each Series B Holder under this Section 4(a) shall be exercised by providing written notice to the Corporation at least ten (10) but not more than sixty (60) days prior to any Designated Redemption Date. From and after any Designated Redemption Date with respect to which the redemption rights under this Section 4(a) have been exercised, all dividends on shares of Series B Preferred to be redeemed pursuant to this Section 4(a), shall cease to accrue, and all rights of the holders thereof as stockholders of the Corporation shall cease, except the right to receive payment in full of the Redemption Price for such shares upon surrender of certificates representing such shares. Shares of the Series B Preferred redeemed by the Corporation pursuant to this Section 4(a) shall be deemed retired and may not under any circumstances thereafter be reissued or otherwise disposed of by the Corporation. (iv) At any time on or after any Designated Redemption Date, the holders of the Series B Preferred Stock to be redeemed on such date shall be entitled to receive payment of the Redemption Price therefore upon actual delivery to the Corporation or its agents of the certificates representing the shares to be redeemed. If upon any Designated Redemption Date the assets of the Corporation available for redemption shall be insufficient to pay all Series B Holders the full amounts to which they shall be entitled pursuant to this Section 4(a), the Corporation shall redeem on a PRO RATA basis such number of shares of the Series B Preferred as it shall have legally available funds to redeem, and the remainder of the shares of the Series B Preferred required to be redeemed shall be redeemed on the earliest practicable date next following the day on which the Corporation shall first have funds legally available for the redemption of such shares. On and after any Designated Redemption Date, all rights in respect of the shares of the Series B Preferred to be redeemed, except the right to receive the Redemption Price as herein provided, shall cease and terminate (unless default shall be made by the Corporation in the payment of the Redemption Price as herein provided, in which event such rights shall be exercisable until such default is cured), and such 5 shares shall no longer be deemed to be outstanding, whether or not the certificates representing such shares have been received by the Corporation. (b) MANDATORY REDEMPTION ON INITIAL PUBLIC OFFERING. (i) Upon the closing of the Initial Public Offering (as defined in Section 5(b) below), each share of Series B Preferred, unless the holder thereof shall elect to convert such holder's Series B Preferred as of such closing pursuant to Section 5(c) below, shall be redeemed by the Corporation (unless the Corporation is prevented by law from effecting such redemption). To the extent shares of Series B Preferred are to be redeemed at a later date pursuant to any provision of this Section 4, such redemption shall be accelerated pursuant to this Section 4(b) and occur as of the Closing of the Initial Public Offering. (ii) The price to be paid for each share of Series B Preferred redeemed pursuant to this Section 4(b) shall be the Redemption Price. (iii) At any time on or after the Initial Public Offering, the holders of record of shares of the Series B Preferred to be redeemed on any such date shall be entitled to receive payment of the Redemption Price for the shares being redeemed upon actual delivery to the Corporation or its agents of the certificates representing the shares to be redeemed. (iv) If upon any Initial Public Offering the assets of the Corporation available for redemption shall be insufficient to pay all holders of the Series B Preferred the full amounts to which they shall be entitled pursuant to this Section 4(b), the Corporation shall redeem on a PRO RATA basis such number of shares of the Series B Preferred as it shall have legally available funds to redeem, and the remainder of the shares of the Series B Preferred required to be redeemed shall be redeemed on the earliest practicable date next following the day on which the Corporation shall first have funds legally available for the redemption of such shares. On and after the Initial Public Offering, all rights in respect of the shares of the Series B Preferred to be redeemed, except the right to receive the Redemption Price as herein provided, shall cease and terminate (unless default shall be made by the Corporation in payment of the Initial Public Offering Price as herein provided, in which event such rights shall be exercisable until such default is cured), and such shares shall no longer be deemed to be outstanding, whether or not the certificates representing such shares have been received by the Corporation. (c) CORPORATION'S REDEMPTION RIGHTS. (i) The Corporation, at its option, may redeem, at any time and from time to time, any or all of the outstanding shares of the Series B Preferred (any such date being referred to as a "Designated Redemption Date"). Any proposed redemption of shares of the Series B Preferred pursuant to this Section 4(c) may be made only if prior notice is given by the Corporation, at least 30 but not more than 60 days 6 prior to the applicable Redemption Date, to all holders of record of shares of the Series B Preferred Stock at their respective addresses appearing on the books of the Corporation. Such notice shall specify (i) the number of shares being redeemed, and (ii) the Designated Redemption Date. From and after the Designated Redemption Date, all dividends upon the shares of the Series B Preferred to be redeemed shall cease to accrue, and all rights of the holders thereof as stockholders of the Corporation, shall cease except the right to receive payment in full of the applicable Redemption Price. (ii) The price to be paid for each share of the Series B Preferred to be redeemed pursuant to this Section 4(c) shall be the Redemption Price. Redemptions of less than all of the outstanding shares of the Series B Preferred pursuant to this Section 4(c) shall be made PRO RATA among all Series B Holders. Shares of the Series B Preferred redeemed by the Corporation pursuant to this Section 4(c) shall be deemed retired and may not under any circumstances thereafter be reissued or otherwise disposed of by the Corporation. (iii) At any time on or after any Designated Redemption Date, the Series B Holders as to those shares of the Series B Preferred to be redeemed on any such date shall be entitled to receive payment of the Redemption Price for the shares being redeemed upon actual delivery to the Corporation or its agents of the certificates representing the shares to be redeemed. (iv) If upon any Designated Redemption Date the assets of the Corporation available for redemption shall be insufficient to pay all holders of the Series B Preferred the full amounts to which they shall be entitled pursuant to this Section 4(c), the Corporation shall redeem on a PRO RATA basis such number of shares of the Series B Preferred as it shall have legally available funds to redeem, and the remainder of the shares of the Series B Preferred required to be redeemed shall be redeemed on the earliest practicable date next following the day on which the Corporation shall first have funds legally available for the redemption of such shares. On and after the Designated Redemption Date, all rights in respect of the shares of the Series B Preferred to be redeemed, except the right to receive the Redemption Price as herein provided, shall cease and terminate (unless default shall be made by the Corporation in payment of the Redemption Price as herein provided, in which event such rights shall be exercisable until such default is cured), and such shares shall no longer be deemed to be outstanding, whether or not the certificates representing such shares have been received by the Corporation. 5. CONVERSION. The holders of the Series A Preferred and the Series B Preferred have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT SERIES A PREFERRED. Each share of Series A Preferred shall initially 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 A Preferred into the number of fully paid and non-assessable 7 shares of Common Stock which results from dividing the Series A Conversion Price (as hereinafter defined) per share in effect at the time of conversion into the per share Conversion Value (as hereinafter defined) of such series. The initial Conversion Price shall be $1.70, and the Conversion Value of the Series A Preferred shall be $1.70. The initial Series A Conversion Price shall be subject to adjustment from time to time as provided in Section 5(d) hereof. Upon conversion, all declared and unpaid dividends on the Series A Preferred shall be paid in cash, to the extent legally permitted. (b) AUTOMATIC CONVERSION OF SERIES A PREFERRED. Each share of Series A Preferred shall automatically be converted into shares of Common Stock upon (i) the closing the Initial Public Offering involving the sale of securities for the account of the Corporation to the public, the gross proceeds of which exceed $10,000,000 at a price to the public of at least $5.00 per share (appropriately adjusted for any Recapitalization of the Common Stock), or (ii) the written consent of holders of not less than two-thirds (2/3) of the then-outstanding shares of Series A Preferred. For purposes of this Section 5 and Section 4 above, the "Initial Public Offering" shall mean the first firm commitment underwritten public offering of the Common Stock of the Corporation pursuant to an effective registration statement declared effective under the Securities Act of 1933, as amended (other than a registration effected by the Corporation in connection with an employee benefit plan or a Rule 145 transaction, as defined in Rule 145 of the Securities and Exchange Commission). (c) RIGHT TO CONVERT SERIES B PREFERRED. Each share of Series B Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and on or prior to the fifth (5th) day prior to the Redemption Date fixed by the Redemption Notice at the office of the Corporation or any transfer agent for the Series B Preferred into the number of fully paid and non-assessable shares of Common Stock which results from dividing the Series B Liquidation Amount (as hereinafter defined) by the Series B Conversion Value (as hereinafter defined). The Series B Liquidation Amount shall be the full amount then distributable with respect to each share of Series B Preferred pursuant to Section 3(a) hereof upon a liquidation, dissolution or winding up of the Corporation. The Series B Conversion Value shall be: (i) in the event of any conversion as of the closing of the Initial Public Offering, an amount equal to the gross proceeds per share of Common Stock paid to the Company (as reduced for underwriter commissions and discounts as calculated on a per share basis) pursuant to the Initial Public Offering; and (ii) in the event of a conversion not subject to the preceding clause (i), the fair market value of a share of the Company's Common Stock, as is determined in good faith by the Board as of the date of such conversion. (d) MECHANICS OF CONVERSION. Before any holder of Series A Preferred or Series B Preferred shall be entitled to convert the same into shares of Common Stock and to receive certificates therefor, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A Preferred, and shall give written notice to the Corporation at such office that such holder elects to convert the same; provided, however, that in the 8 event of an automatic con version pursuant to Section 5(b) hereof, the outstanding shares of Series A Preferred 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; and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless and until the certificates evidencing such shares of Series A Preferred are either 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 A Preferred, a certificate or certificates for the number of shares of Common Stock to which he or she shall be entitled as aforesaid and a check payable to the holder in the amount of any declared and unpaid dividends payable pursuant to Section 5(a) hereof, if any. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred or Series B Preferred to be converted, or, in the case of automatic conversion, immediately prior to the occurrence of the event leading to such automatic conversion, 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. (e) ADJUSTMENTS TO SERIES A CONVERSION PRICE. (i) SPECIAL DEFINITIONS. For purposes of this Section 5(e), the following definitions shall apply: (1) 'OPTIONS' shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (2) 'CONVERTIBLE SECURITIES' shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for Common Stock. (3) 'ADDITIONAL SHARES OF COMMON' shall mean all shares of Common Stock issued (or, pursuant to Section 5(e)(iii), deemed to be issued) by the Corporation after the Series A Original Issue Date, other than shares of Common Stock issued or issuable: (A) upon conversion of shares of Series A Preferred or Series B Preferred; (B) to officers, directors or employees of, or consultants to, the Corporation pursuant to a stock grant, option plan or purchase plan 9 or other employee stock incentive program or agreement approved by the Board, not to exceed 3,300,000 shares, net of repurchases and cancellations and expirations (without exercise) of options, since the incorporation of the Corporation; (C) as a dividend or distribution on Series A Preferred or Series B Preferred; (D) in a transaction described in Section 5(e)(vi); or (E) by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common by the foregoing clauses (A), (B), (C), (D) or this clause (E). (ii) 'SERIES A ORIGINAL ISSUE DATE' shall mean the first date upon which a share of Series A Preferred shall be issued by the Corporation. (iii) NO ADJUSTMENT OF SERIES A CONVERSION PRICE. No adjustment in the Conversion Price of the Series A 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 Series A Conversion Price, in effect on the date of, and immediately prior to, such issue. (iv) 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 Series A Original Issue Date 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 exercise of such Options and conversion or exchange of such Convertible Securities shall 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 Section 5(e)(v) hereof) of such Additional Shares of Common would be less than the Conversion Price 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: (A) except as provided in Section 5(e)(iii), no further adjustment in the Conversion Price shall be made upon the 10 subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the consideration payable to the Corporation, or change in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (other than under or by reason of provisions designed to protect against dilution), the Conversion Price 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; and (C) no readjustment pursuant to clause (B) above shall have the effect of increasing the Series A Conversion Price to an amount which exceeds the lower of (1) the Series A Conversion Price on the original adjustment date or (2) the Series A Conversion Price that would have resulted from any issuance of Additional Shares of Common between the original adjustment date and such readjustment date. (v) ADJUSTMENT OF SERIES A CONVERSION PRICE UPON ISSUANCE OF 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 Section 5(e)(iii)) without consideration or for a consideration per share less than the Series A Conversion Price in effect on the date of and immediately prior to such issue (such issuance price being referred to herein as the "Dilution Price"), then and in each such event the Series A Conversion Price of the Series A Preferred or the Series B Preferred, as applicable, shall be reduced 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; provided that, for the purposes of this Section 5(e)(iv), all shares of Common Stock issuable upon conversion of all outstanding Series A Preferred and Series B Preferred and all outstanding Options (provided such Options have an exercise price below the Series A Conversion Price, immediately prior to such issue) and Convertible Securities shall be deemed to be outstanding, and, immediately after any Additional Shares of Common are deemed issued pursuant to Section 5(e)(iii), such Additional Shares of Common shall be deemed to be outstanding. 11 (vi) DETERMINATION OF CONSIDERATION. For purposes of this Section 5(e), the consideration received by the Corporation for the issue of any Additional Shares of Common shall be computed as follows: (1) CASH AND PROPERTY: Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined by Board in the good faith exercise of its reasonable business judgment; and (C) 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, be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board. (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 Section 5(e)(iii)(1), relating to Options and Convertible Securities, shall be determined by dividing (A) 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 (B) 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. (vii) OTHER ADJUSTMENTS TO SERIES A CONVERSION PRICE. (1) SUBDIVISIONS, COMBINATIONS, OR CONSOLIDATIONS OF COMMON STOCK. In the event the outstanding shares of Common Stock shall be subdivided, combined or consolidated, by stock split, stock dividend, combination or like 12 event, into a greater or lesser number of shares of Common Stock, the Series A Conversion Price in effect immediately prior to such subdivision, combination, consolidation or stock dividend shall, concurrently with the effectiveness of such subdivision, combination or consolidation, be proportionately adjusted. (2) DISTRIBUTIONS OTHER THAN CASH DIVIDENDS OUT OF RETAINED EARNINGS. In case the Corporation shall distribute to holders of its Common Stock shares of its capital stock (other than Common Stock), stock or other securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of the Corporation convertible into or exchangeable for Common Stock), then, in each such case, the holders of shares of Series A Pre ferred shall, concurrently with the distribution to holders of Common Stock, receive a like distribution based upon the number of shares of Common Stock into which the Series A of Preferred is then convertible. (3) RECLASSIFICATIONS. In the case, at any time after the date hereof, of any capital reorganization or any reclassification of the stock of the Corporation (other than as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation with or into another person (other than a consolidation or merger in which the Corporation is the continuing entity and which does not result in any change in the Common Stock or which is treated as a liquidation pursuant to Section 3(c)), or of the sale or other disposition of all or substantially all the properties and assets of the Corporation, the shares of the Series A Preferred shall, after such reorganization, reclassification, consolidation, merger, sale or other disposition, be convertible into the kind and number of shares of stock or other securities or property of the Corpora tion or otherwise to which such holder would have been entitled if immediately prior to such reorganization, reclassification, consolidation, merger, sale or other disposition he had converted his shares of the Series A Preferred or Series B Preferred into Common Stock. The provisions of this clause 5(e)(vi)(3) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales or other dispositions. (f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Series A Conversion Price pursuant to this Section 5, 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 A 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 A Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Series A 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 the Series A Preferred. 13 (g) STATUS OF CONVERTED STOCK. In case any shares of Series A Preferred or Series B Preferred shall be converted pursuant to Section 5 hereof, the shares so converted shall be canceled, shall not be reissuable and shall cease to be a part of the authorized capital stock of the Corporation. (h) FRACTIONAL SHARES. In lieu of any fractional shares to which the holder of Series A Preferred or Series B Preferred would otherwise be entitled upon conversion, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of one share of Common Stock as determined by the Board. The number of whole shares issuable to each holder upon such conversion shall be determined on the basis of the number of shares of Common Stock issuable upon conversion of the total number of shares of Series A Preferred and Series B Preferred held by such holder at the time of converting into Common Stock. (i) MISCELLANEOUS. (i) All calculations under this Section 5 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be. (ii) The holders of at least 50% of the outstanding Series A Preferred, each such Series having the right to act and vote separately as a class, shall have the right to challenge any determination by the Board of fair value pursuant to this Section 5, in which case such determination of fair value shall be made by an independent appraiser selected jointly by the Board and the challenging parties, the cost of such appraisal to be borne equally by the Corporation and the challenging parties. (iii) No adjustment in the Series A Conversion Price of the Series A Preferred need be made if such adjustment would result in a change in such Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in such Series A Conversion Price. (j) NO IMPAIRMENT. The Corporation will not through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 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 Series A Preferred or Series B Preferred against impairment. (k) 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 Series A Preferred and Series B Preferred, such number of its shares of Common Stock 14 as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series A Preferred and Series B Preferred. 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 Series A Preferred, the Corporation will take such corpo rate 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. 6. VOTING RIGHTS. Except as otherwise required by law or by Section 9 hereof, the holder of each share of Common Stock issued and outstanding shall have one vote, and the holder of each share of Series A Preferred issued and outstanding shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Series A Preferred could be converted at the record date for determination of the stockholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited, such votes to be counted together with all other shares of stock of the Corporation having general voting power and not separately as a class. Except as otherwise required by law or by Section 9 hereof, the Series B Preferred shall be non-voting stock of the Corporation. Fractional votes by the holders of Series A Preferred shall not, however, be permitted, and any fractional voting rights shall (after aggregating all shares into which shares of Series A Preferred held by each holder could be converted) be rounded to the nearest whole number. 7. NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series A Preferred or Series B Preferred, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 8. NOTICES. Any notice required by the provisions of the Certificate to be given to the holders of Series A Preferred and Series B Preferred shall be deemed given when deposited in the United States mail, postage prepaid, and addressed to each holder of record at his or her address appearing on the books of this Corporation. 9. PROTECTIVE PROVISIONS. (a) SERIES A PREFERRED. So long as any shares of Series A Preferred are outstanding, the Corporation shall not, without first obtaining the approval of the holders of at least a majority of the then-outstanding shares of such series, voting as a separate class, take any action that: 15 (i) alters the rights, preferences or privileges of such series; (ii) creates any new class or series of shares that has a preference over or is on a parity with such series with respect to voting, dividends or liquidation preferences; (iii) reclassifies stock into shares having a preference over or on a parity with such series with respect to voting, dividends or liquidation preferences; (iv) repurchases, redeems or retires any shares of capital stock of the Corporation other than pursuant to contractual rights to repurchase shares of Common Stock held by employees, directors or consultants of the Corporation or its subsidiaries upon termination of their employment or services or pursuant to the exercise of a contractual right of first refusal held by the Corporation; (v) results in the consolidation or merger with or into any other Corporation or the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of this Corporation, or otherwise results in the reorganization of this Corporation unless the stockholders of this Corporation immediately prior to any such transaction are holders of a majority of the voting securities of the surviving or acquiring Corporation immediately thereafter (and for purposes of this calculation equity securities which any stockholder or the Corporation owned immediately prior to such merger or consolidation as a stockholder of another party to the transaction shall be disregarded); (vi) materially alters or changes the business of the Corporation; or (vii) increases the authorized number of directors as set forth in the Bylaws of the Corporation. (b) SERIES B PREFERRED. So long as any shares of Series B Preferred are outstanding, the Corporation shall not, without first obtaining the approval of the holders of at least a majority of the then-outstanding shares of such series, voting as a separate class, take any action that: (i) alters the rights, preferences or privileges of such series; (ii) creates any new class or series of shares that has a preference over or is on a parity with such series with respect to dividends or liquidation preferences; or 16 (iii) reclassifies stock into shares having a preference over or on a parity with respect to dividends or liquidation preferences. FIFTH: The Corporation is to have perpetual existence. SIXTH: Whenever a compromise is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors, or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the same compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class or creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. SEVENTH: For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation, and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: (a) The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the Corporation would have if there were no vacancies. No election of directors need be by written ballot. (b) After the original or other Bylaws of the Corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the State of Delaware, and, after the Corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the Bylaws of the Corporation may be exercised by the Board of Directors of the Corporation; provided, however, that any provision for the classification of directors of the Corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation Law of the State of Delaware shall be set forth in 17 an initial Bylaw or in a Bylaw adopted by the stockholders entitled to vote of the Corporation unless provisions for such classification shall be set forth in this certificate of incorporation. (c) Whenever the Corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the Corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the certificate of incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (2) of subsection (b) of Section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class. EIGHTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by the provisions of paragraph (7) of subsection (b) of Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. NINTH: The Corporation shall, to the fullest extent permitted by the provisions of Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such person. TENTH: From time to time any of the provisions of this certificate of incorporation may be amended, altered, or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this certificate of incorporation are granted subject to the provisions of this Article TENTH. RESOLVED FURTHER, that the foregoing Restated Certificate of Incorporation is hereby approved and adopted." IN WITNESS WHEREOF, BEA SYSTEMS, INC. has caused this Certificate to be signed by William T. Coleman III, its President and Chief Executive 18 Officer, and attested to by Edward W. Scott, Jr., its Secretary, this 10th day of November, 1995. BEA SYSTEMS, INC. /s/ William T. Coleman III _______________________________ William T. Coleman III President and Chief Executive Officer ATTEST: /s/ Edward W. Scott, Jr. By:______________________ Edward W. Scott, Jr. Secretary 19 20 EX-3.3 3 BYLAWS BYLAWS OF BEA ENTERPRISES, INC. A DELAWARE CORPORATION TABLE OF CONTENTS PAGE - --------------------------------------------------------------------------- ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. REGISTERED OFFICE . . . . . . . . . . . . . . . . 1 2. OTHER OFFICES . . . . . . . . . . . . . . . . . . 1 ARTICLE II STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . 1 Section .1 Place of Meetings. . . . . . . . . . . . . . . . . . . 1 Section .2 Annual Meetings . . . . . . . . . . . . . . . . . . . 1 Section .3 Special Meetings . . . . . . . . . . . . . . . . . . . 1 Section .4 Notice of Meetings . . . . . . . . . . . . . . . . . . 2 Section .5 Quorum . . . . . . . . . . . . . . . . . . . . . . . 2 Section .6 Voting Rights. . . . . . . . . . . . . . . . . . . . . 3 Section .7 List of Stockholders . . . . . . . . . . . . . . . . . 3 Section .8 Action Without Meeting . . . . . . . . . . . . . . . . 3 ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section .1 Number and Term of Office. . . . . . . . . . . . . . . 4 Section .2 Powers . . . . . . . . . . . . . . . . . . . . . . . . 4 Section .3 Vacancies. . . . . . . . . . . . . . . . . . . . . . . 4 Section .4 Resignations and Removals. . . . . . . . . . . . . . . 4 Section .5 Meetings . . . . . . . . . . . . . . . . . . . . . . . 5 Section .6 Quorum and Voting. . . . . . . . . . . . . . . . . . . 5 Section .7 Action Without Meeting . . . . . . . . . . . . . . . . 6 Section .8 Fees and Compensation . . . . . . . . . . . . . . . . 6 Section .9 Committees . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE IV OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section .1 Officers Designated. . . . . . . . . . . . . . . . . . 7 Section .2 Tenure and Duties of Officers. . . . . . . . . . . . . 7 ARTICLE V EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING OF SECURITIES OWNED BY THE CORPORATION . . . . . . . . . . . . . . . . . . 8 Section .1 Execution of Corporate Instruments. . . . . . . . . . 8 Section .2 Voting of Securities Owned by Corporation . . . . . . 9 ARTICLE VI TABLE OF CONTENTS (CONTINUED) PAGE - --------------------------------------------------------------------------- SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section .1 Form and Execution of Certificates. . . . . . . . . . 9 Section .2 Lost Certificates . . . . . . . . . . . . . . . . . . 9 Section .3 Transfer . . . . . . . . . . . . . . . . . . . . . .10 Section .4 Fixing Record Dates . . . . . . . . . . . . . . . . .10 Section .5 Registered Stockholders . . . . . . . . . . . . . . .10 ARTICLE VII OTHER SECURITIES OF THE CORPORATION . . . . . . . . . . . . . . . . . .11 ARTICLE VIII CORPORATE SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 ARTICLE XI INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS. . . . . .11 Section .1 Right to Indemnification. . . . . . . . . . . . . . .11 Section .2 Authority to Advance Expenses . . . . . . . . . . . .12 Section .3 Right of Claimant to Bring Suit . . . . . . . . . . .12 Section .4 Provisions Nonexclusive . . . . . . . . . . . . . . .13 Section .5 Authority to Insure . . . . . . . . . . . . . . . . .13 Section .6 Survival of Rights . . . . . . . . . . . . . . . . .13 Section .7 Settlement of Claims. . . . . . . . . . . . . . . . .13 Section .8 Effect of Amendment . . . . . . . . . . . . . . . . .13 Section .9 Subrogation . . . . . . . . . . . . . . . . . . . . .13 Section .10 No Duplication of Payments. . . . . . . . . . . . . .13 ARTICLE X NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 ARTICLE XI AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 EXHIBIT 3.3 BYLAWS OF BEA SYSTEMS, INC. - ------------------------------------------------------------------------------- SECTION 1. OFFICES SECTION 1.1. REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be 32 Loockerman Square, Suite L-100, City of Dover, 19901, County of Kent. SECTION 1.2. OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business at 2465 East Bayshore Road, Suite 301, Palo Alto, CA 94303, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. SECTION 2. STOCKHOLDERS' MEETINGS SECTION 2.1. PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof. Section 2.2. ANNUAL MEETINGS. The annual meetings of the stockholders of the corporation, commencing with the year 1995, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. Section 2.3. SPECIAL MEETINGS. Special Meetings of the stockholders of the corporation may be called, for any purpose or purposes, by the Chairman of the Board or the President or the Board of Directors at any time. Upon written request of any stockholder or stockholders holding in the aggregate one-TENTH of the voting power of all stockholders delivered in person or sent by registered mail to the Chairman of the Board, President or Secretary of the corporation, the Secretary shall call a special meeting of stockholders to be held at the office of the corporation required to be maintained pursuant to Section 1.2 hereof at such time as the Secretary may fix, such meeting to be held not less than ten nor more than sixty days after the receipt of such request, and if the Secretary shall neglect or refuse to call such meeting, within seven days after the receipt of such request, the stockholder making such request may do so. 1 Section 2.4. NOTICE OF MEETINGS. 1. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders, specifying the place, date and hour and purpose or purposes of the meeting, shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote thereat, directed to his address as it appears upon the books of the corporation; except that where the matter to be acted on is a merger or consolidation of the Corporation or a sale, lease or exchange of all or substantially all of its assets, such notice shall be given not less than twenty (20) nor more than sixty (60) days prior to such meeting. 2. If at any meeting action is proposed to be taken which, if taken, would entitle shareholders fulfilling the requirements of section 262(d) of the Delaware General Corporation Law to an appraisal of the fair value of their shares, the notice of such meeting shall contain a statement of that purpose and to that effect and shall be accompanied by a copy of that statutory section. 3. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken unless the adjournment is for more than thirty days, or unless after the adjournment a new record date is fixed for the adjourned meeting, in which event a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 4. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, either before or after such meeting, and to the extent permitted by law, will be waived by any stockholder by his attendance thereat, in person or by proxy. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. 5. Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it or of his legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given. 2 Section 2.5. QUORUM. 1. At all meetings of stockholders, except where otherwise provided by law, the Certificate of Incorporation, or these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. Shares, the voting of which at said meeting have been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at said meeting. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. At such adjourned meeting at which a quorum is present or represented any business may be transacted which might have been transacted at the original meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 2. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the voting power represented at any meeting at which a quorum is present shall be valid and binding upon the corporation. Section 2.6. VOTING RIGHTS. 1. Except as otherwise provided by law, only persons in whose names shares entitled to vote stand on the stock records of the corporation on the record date for determining the stockholders entitled to vote at said meeting shall be entitled to vote at such meeting. Shares standing in the names of two or more persons shall be voted or represented in accordance with the determination of the majority of such persons, or, if only one of such persons is present in person or represented by proxy, such person shall have the right to vote such shares and such shares shall be deemed to be represented for the purpose of determining a quorum. 2. Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent, which proxy shall be filed with the Secretary of the corporation at or before the meeting at which it is to be used. Said proxy so appointed need not be a stockholder. No proxy shall be voted on after three years from its date unless the proxy provides for a longer period. 3 Section 2.7. LIST OF STOCKHOLDERS. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held and which place shall be specified in the notice of the meeting, or, if not specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.8. ACTION WITHOUT MEETING. Unless otherwise provided in the certificate of incorporation, any action required by statute to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. To be effective, a written consent must be delivered to the corporation by delivery to its registered office in delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this section to the corporation, written consents signed by a sufficient number of holders to take action are delivered to the corporation in accordance with this section. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 4 Section 3. DIRECTORS Section 3.1. NUMBER AND TERM OF OFFICE. The number of directors which shall constitute the whole of the board of directors shall be not less that four (4) nor more than seven (7). With the exception of the first board of directors, which shall be elected by the incorporators, and except as provided in section 3.3 of this article iii, the directors shall be elected by a plurality vote of the shares represented in person or by proxy, at the stockholders annual meeting in each year and entitled to vote on the election of directors. Elected directors shall hold office until the next annual meeting and until their successors shall be duly elected and qualified. Directors need not be stockholders. If, for any cause, the board of directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these bylaws. Section 3.2. POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by or under the direction of the board of directors. Section 3.3. VACANCIES. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and each director so elected shall hold office for the unexpired portion of the term of the director whose place shall be vacant, and until his successor shall have been duly elected and qualified. A vacancy in the board of directors shall be deemed to exist under this section in the case of the death, removal or resignation of any director, or if the stockholders fail at any meeting of stockholders at which directors are to be elected (including any meeting referred to in section 3.4 below) to elect the number of directors then constituting the whole board. Section 3.4. RESIGNATIONS AND REMOVALS. 1. Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office for the unexpired portion of the term of the director whose place shall be vacated and until his successor shall have been duly elected and qualified. 5 2. At a special meeting of stockholders called for the purpose in the manner hereinabove provided, the Board of Directors, or any individual director, may be removed from office, with or without cause, and a new director or directors elected by a vote of stockholders holding a majority of the outstanding shares entitled to vote at an election of directors. Section 3.5. MEETINGS. 1. The annual meeting of the Board of Directors shall be held immediately after the annual stockholders' meeting and at the place where such meeting is held or at the place announced by the Chairman at such meeting. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. 2. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof. Regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolutions of the Board of Directors or the written consent of all directors. 3. Special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board or, if there is no Chairman of the Board, by the President, or by any of the directors. 4. Written notice of the time and place of all regular and special meetings of the Board of Directors shall be delivered personally to each director or sent by telegram or facsimile at least 48 hours before the start of the meeting, or sent by first class mail at lease 120 hours before the start of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat. Section 3.6. QUORUM AND VOTING. 1. A quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time in accordance with Section 3.1 of Article III of these Bylaws, but not less than one; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. 2. At each meeting of the Board at which a quorum is present all questions and business shall be determined 6 by a vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation, or these Bylaws. 3. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. 4. The transactions of any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 3.7. ACTION WITHOUT MEETING. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or of such committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the board or committee. Section 3.8. FEES AND COMPENSATION. Directors and members of committees shall not receive any salary, fees or other compensation for their services as directors. Section 3.9. COMMITTEES. 1. EXECUTIVE COMMITTEE. The Board of Directors may, by resolution passed by a majority of the whole Board, appoint an Executive Committee of not less than one member, each of whom shall be a director. The Executive Committee, to the extent permitted by law, shall have and may exercise when the Board of Directors is not in session all powers of the Board in the management of the business and affairs of the corporation, including, without limitation, the power and authority to declare a dividend or to authorize the issuance of stock, except such committee shall not have the power or authority to amend the Certificate of Incorporation, to adopt an agreement or merger or consolidation, to recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, to recommend to the stockholders of the Corporation a dissolution of the Corporation or a revocation of a dissolution, or to amend these Bylaws. 7 2. OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committee, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws. 3. TERM. The members of all committees of the Board of Directors shall serve a term coexistent with that of the Board of Directors which shall have appointed such committee. The Board, subject to the provisions of subsections (a) or (b) of this Section 3.9, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee; provided, that no committee shall consist of less than one member. The membership of a committee member shall terminate on the date of his death or voluntary resignation, but the Board may at any time for any reason remove any individual committee member and the Board may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. 4. MEETINGS. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 3.9 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter; special meetings of any such committee may be held at the principal office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof; or at any place which has been designated from time to time by resolution of such committee or by written consent of all members thereof, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time after the meeting and will be waived by any director by attendance thereat. A majority of the authorized number of members of any such committee shall constitute a 8 quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. Section 4. OFFICERS Section 4.1. OFFICERS DESIGNATED. The officers of the corporation shall be a chairman of the board of directors and a president, and one or more vice-presidents, a secretary, and a treasurer. The order of the seniority of the vice presidents shall be in the order of their nomination, unless otherwise determined by the board of directors. The board of directors or the chairman of the board or the president may also appoint one or more assistant secretaries, assistant treasurers, and such other officers and agents with such powers and duties as it or he shall deem necessary. The board of directors may assign such additional titles to one or more of the officers as they shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the board of directors. Section 4.2. TENURE AND DUTIES OF OFFICERS. 1. GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. Nothing in these Bylaws shall be construed as creating any kind of contractual right to employment with the corporation. 2. DUTIES OF THE CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors (if there be such an officer appointed) shall be the chief executive officer of the corporation and, when present, shall preside at all meetings of the shareholders and the Board of Directors. The Chairman of the Board of Directors shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. 3. DUTIES OF PRESIDENT. The President shall be the chief executive officer of the corporation in the absence of the Chairman of the Board and shall preside at all meetings of the shareholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. 9 The President shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. 4. DUTIES OF VICE-PRESIDENTS. The Vice- Presidents, in the order of their seniority, may assume and perform the duties of the President in the absence or disability of the President or whenever the office of the President is vacant. The Vice-President shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. 5. DUTIES OF SECRETARY. The Secretary shall attend all meetings of the shareholders and of the Board of Directors and any committee thereof, and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice, in conformity with these Bylaws, of all meetings of the shareholders, and of all meetings of the Board of Directors and any Committee thereof requiring notice. The Secretary shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. 6. DUTIES OF TREASURER. The Treasurer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner, and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Treasurer shall perform all other duties commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct any Assistant Treasurer to assume and perform the duties of the Treasurer in the absence or disability of the Treasurer, and each Assistant Treasurer shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. 10 Section 5. EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING OF SECURITIES OWNED BY THE CORPORATION Section 5.1. EXECUTION OF CORPORATE INSTRUMENTS. 1. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the corporation. 2. Unless otherwise specifically determined by the Board of Directors or otherwise required by law, formal contracts of the corporation, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board (if there be such an officer appointed) or by the President; such documents may also be executed by any Vice-President AND by the Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. 3. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation, or in special accounts of the corporation, shall be signed by such person or persons as the Board of Directors shall authorize so to do. Section 5.2. VOTING OF SECURITIES OWNED BY CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the board of directors or, in the absence of such authorization, by the chairman of the board (if there be such an officer appointed), or by the president, or by any vice-president. 11 Section 6. SHARES OF STOCK Section 6.1. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the certificate of incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman of the board (if there be such an officer appointed), or by the president or any vice-president and by the treasurer or assistant treasurer or the secretary or assistant secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the delaware general corporation law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 6.2. LOST CERTIFICATES. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to indemnify the corporation in such manner as it shall require and/or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. Section 6.3. TRANSFERS. Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in 12 person or by attorney duly authorized, and upon the surrender of a certificate or certificates for a like number of shares, properly endorsed. Section 6.4. FIXING RECORD DATES. 1. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the date on which the meeting is held. A determination of stockholders of record entitled notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 2. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the Delaware General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. 3. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors 13 may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 6.5. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. Section 7. OTHER SECURITIES OF THE CORPORATION All bonds, debentures and other corporate securities of the corporation, other than stock certificates, may be signed by the Chairman of the Board (if there be such an officer appointed), or the President or any Vice-President or such other person as may be authorized by the Board of Directors and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signature of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation, or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. 14 Section 8. CORPORATE SEAL The corporate seal shall consist of a die bearing the name of the corporation and the state and date of its incorporation. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 9. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS Section 9.1. RIGHT TO INDEMNIFICATION. Each person who was or is a party or is threatened to be made a party to or is involved (as a party, witness, or otherwise), in any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to employee benefit plans, whether the basis of the proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a director, officer, employee, or agent (hereafter an "agent"), shall be indemnified and held harmless by the corporation to the fullest extent authorized by the delaware general corporation law, as the same exists or may hereafter be amended or interpreted (but, in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the corporation to provide broader indemnification rights than were permitted prior thereto) against all expenses, liability, and loss (including attorneys' fees, judgments, fines, erisa excise taxes or penalties, and amounts paid or to be paid in settlement, and any interest, assessments, or other charges imposed thereon, and any federal, state, local, or foreign taxes imposed on any agent as a result of the actual or deemed receipt of any payments under this article) reasonably incurred or suffered by such person in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the foregoing in, any proceeding (hereinafter "expenses"); provided, however, that except as to actions to enforce indemnification rights pursuant to section 9.3 of this article, the corporation shall indemnify any agent seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if the proceeding (or part thereof) was authorized by the board of directors of the corporation. The right to indemnification conferred in this article shall be a contract right. Section 9.2. AUTHORITY TO ADVANCE EXPENSES. Expenses incurred by an officer or director (acting in his capacity as such) in defending a proceeding 15 shall be paid by the corporation in advance of the final disposition of such proceeding, provided, however, that if required by the delaware general corporation law, as amended, such expenses shall be advanced only upon delivery to the corporation of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this article or otherwise. Expenses incurred by other agents of the corporation (or by the directors or officers not acting in their capacity as such, including service with respect to employee benefit plans) may be advanced upon such terms and conditions as the board of directors deems appropriate. Any obligation to reimburse the corporation for expense advances shall be unsecured and no interest shall be charged thereon. Section 9.3. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under section 9.1 or 9.2 of this article is not paid in full by the corporation within 90 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense (including attorneys' fees) of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending a proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct that make it permissible under the delaware general corporation law for the corporation to indemnify the claimant for the amount claimed. The burden of proving such a defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper under the circumstances because he has met the applicable standard of conduct set forth in the delaware general corporation law, nor an actual determination by the corporation (including its board of directors, independent legal counsel, or its stockholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Section 9.4. PROVISIONS NONEXCLUSIVE. The rights conferred on any person by this article shall not be exclusive of any other rights that such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. To the extent that any provision of the certificate, agreement, or vote of the stockholders or disinterested directors is inconsistent with these bylaws, the provision, agreement, or vote shall take precedence. Section 9.5. AUTHORITY TO INSURE. The corporation may purchase and maintain insurance to protect itself and any agent against any expense, 16 whether or not the corporation would have the power to indemnify the agent against such expense under applicable law or the provisions of this article. Section 9.6. SURVIVAL OF RIGHTS. The rights provided by this article shall continue as to a person who has ceased to be an agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 9.7. SETTLEMENT OF CLAIMS. The corporation shall not be liable to indemnify any agent under this article (a) for any amounts paid in settlement of any action or claim effected without the corporation's written consent, which consent shall not be unreasonably withheld; or (b) for any judicial award if the corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. Section 9.8. EFFECT OF AMENDMENT. Any amendment, repeal, or modification of this article shall not adversely affect any right or protection of any agent existing at the time of such amendment, repeal, or modification. Section 9.9. SUBROGATION. In the event of payment under this article, the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the agent, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the corporation effectively to bring suit to enforce such rights. Section 9.10. NO DUPLICATION OF PAYMENTS. The corporation shall not be liable under this article to make any payment in connection with any claim made against the agent to the extent the agent has otherwise actually received payment (under any insurance policy, agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder. 17 Section 10. NOTICES Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, the same shall be given in writing, timely and duly deposited in the United States Mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. Any notice required to be given to any director may be given by the method hereinabove stated, or by telegram or other means of electronic transmission, except that such notice other than one which is delivered personally, shall be sent to such address or (in the case of facsimile telecommunication) facsimile telephone number as such director shall have filed in writing with the Secretary of the corporation, or, in the absence of such filing, to the last known post office address of such director. If no address of a stockholder or director be known, such notice may be sent to the office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by telegram or other means of electronic transmission shall be deemed to have been given as at the sending time recorded by the telegraph company or other electronic transmission equipment operator transmitting the same. It shall not be necessary that the same method of giving be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such a stockholder or such director to receive such notice. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation, or of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. 18 Section 11. AMENDMENTS These Bylaws may be repealed, altered or amended or new Bylaws adopted by written consent of stockholders in the manner authorized by Section 2.11 of Article II, or at any meeting of the stockholders, either annual or special, by the affirmative vote of a majority of the stock entitled to vote at such meeting. The Board of Directors shall also have the authority to repeal, alter or amend these Bylaws or adopt new Bylaws (including, without limitation, the amendment of any Bylaws setting forth the number of directors who shall constitute the whole Board of Directors) by unanimous written consent or at any annual, regular, or special meeting by the affirmative vote of a majority of the whole number of directors, subject to the power of the stockholders to change or repeal such Bylaws and provided that the Board of Directors shall not make or alter any Bylaws fixing the qualifications, classifications, or term of office of directors. 19 CERTIFICATE OF AMENDMENT OF THE BYLAWS BEA SYSTEMS, INC. November 29, 1995 The undersigned, Michael C. Phillips, hereby certifies that: 1. He is the duly elected and acting Assistant Secretary of BEA Systems, Inc., a Delaware corporation (the "Company"). 2. Effective as of the date above, Section 2.3 of the Company's Bylaws is amended in its entirety to read as follows: Special Meetings of the stockholders of the corporation may be called, for any purpose or purposes, by the Chairman of the Board or the President or the Board of Directors at any time. Upon written request of any stockholder or stockholders holding in the aggregate one-tenth of the voting power of all stockholders delivered in person or sent by registered mail to the Chairman of the Board, President or Secretary of the corporation, the Secretary shall call a special meeting of stockholders to be held at the office of the corporation required to be maintained pursuant to Section 1.2 hereof at such time as the Secretary may fix, such meeting to be held not less than ten nor more than sixty days after the receipt of such request, and if the Secretary shall neglect or refuse to call such meeting, within seven days after the receipt of such request, the stockholder making such request may do so. IN WITNESS HEREOF, the undersigned has set his hand hereto this 29th day of November. /s/ Michael C. Phillips ------------------------ Michael C. Phillips Assistant Secretary -20- CERTIFICATE OF SECRETARY The undersigned, Secretary of BEA Enterprises, Inc., a Delaware corporation, hereby certifies that the foregoing is a full, true and correct copy of the Bylaws of said Corporation, with all amendments to date of this Certificate. WITNESS the signature of the undersigned and the seal of the Corporation this 16th day of February, 1995. /s/ James W. Adkisson ____________________________________ SECRETARY -21- EX-10.1 4 INVESTOR RIGHTS AGREEMENT EXHIBIT 10.1 BEA SYSTEMS, INC. INVESTOR RIGHTS AGREEMENT This Investor Rights Agreement (the "Agreement") is made as of September 28, 1995 by and among BEA Systems, Inc., a Delaware corporation (the "Company"), and William T. Coleman III, Alfred S. Chuang, and Edward W. Scott, Jr (individually "Founder" and collectively, the "Founders") and Warburg, Pincus Ventures, L.P., a Delaware limited partnership (individually "Investor" and collectively with the Founders as the "Stockholders"). R E C I T A L S A. The Founders have organized the Company and own an aggregate of 2,925,000 shares of its Common Stock, $.001 par value (the "Founders Stock"). B. Investor is purchasing an aggregate of 1,000,000 shares of the Company's Common Stock, $.001 par value ("Investor Common Stock") and 7,900,000 shares of the Company's Series A Preferred Stock, $.001 par value (the "Preferred Stock") pursuant to a Stock Purchase Agreement of even date herewith between Investor and the Company (the "Purchase Agreement"). C. The obligations of the Company and Investor under the Purchase Agreement are conditioned, among other things, upon the execution and delivery of this Agreement by Investor and the Company. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, all parties hereto agree as follows: 1. CERTAIN DEFINITIONS. All capitalized terms used and not otherwise defined herein shall have the meanings given them in the Purchase Agreement. As used in this Agreement, the following terms shall have the following respective meanings: "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "CONVERSION STOCK" means the Common Stock issued or issuable pursuant to conversion of the Preferred Stock. 1 "HOLDER" shall mean (i) any Founder or Investor holding Registrable Securities, and (ii) any person holding Registrable Securities to whom the rights under this Agreement have been transferred in accordance with Section 5.10 hereof; provided that neither the Founders nor any of their assignees shall not be deemed Holders for the purposes of Sections 5.1 or 5.3 below. "INITIATING HOLDERS" shall mean any Holders (other than Holders who are Founders or assignees of the Founders) who in the aggregate hold not less than 50% of the Registrable Securities held by all such Holders. "PREFERRED STOCK" shall mean the Series A Preferred Stock of the Company issued pursuant to the Stock Purchase Agreement. "REGISTRABLE SECURITIES" means (i) the Conversion Stock, (ii) the Investor Common Stock; (iii) the Founders Stock; and (iv) any Common Stock of the Company issued or issuable in respect of the Conversion Stock, the Investor Common Stock or the Founders Stock upon any stock split, stock dividend, recapitalization, or similar event, or any Common Stock otherwise usable with respect to the Conversion Stock, the Investor Common Stock or the Founders Stock; provided, however, that shares of Conversion Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction. The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "REGISTRATION EXPENSES" shall mean all expenses, except as otherwise stated below, incurred by the Company in complying with Sections 5.1, 5.2 and 5.3 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company) and the reasonable fees and disbursements of one counsel for all Holders. "RESTRICTED SECURITIES" shall mean the securities of the Company required to bear the legend set forth in Section 3 hereof. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "SELLING EXPENSES" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders and, except as set 2 forth under "Registration Expenses," all fees and disbursements of counsel for any Holder. 2. RESTRICTIONS ON TRANSFERABILITY. The Preferred Stock, the Investor Common Stock, the Founders Stock, the Conversion Stock and any other securities issued in respect of the Preferred Stock, the Investor Common Stock, the Founders Stock, or the Conversion Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. Investor will cause any proposed purchaser, assignee, transferee, or pledgee of any such shares held by Investor to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement. 3. RESTRICTIVE LEGEND. Each certificate representing (i) the Preferred Stock, (ii) the Conversion Stock, (iii) the Investor Common Stock, (iv) the Founders Stock, and (v) any other securities issued in respect of the Preferred Stock, the Investor Common Stock, the Founders Stock, or the Conversion Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 4 below) be stamped or otherwise imprinted with a legend in substantially the following form (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. SUCH SHARES MAY NOT BE SOLD OR TRANS- FERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. Each Stockholder and/or Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of the Preferred Stock or the Common Stock in order to implement the restrictions on transfer established in this Agreement. 4. NOTICE OF PROPOSED TRANSFERS. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 4. Prior to any proposed sale, assignment, transfer or pledge of any Restricted 3 Securities (other than (i) a transfer not involving a change in beneficial ownership, (ii) in transactions involving the distribution without consideration of Restricted Securities by the Investor to any of its partners, or retired partners, or to the estate of any of its partners or retired partners, (iii) in transactions involving the transfer without consideration of Restricted Securities by a Founder during his lifetime by way of gift or on death by will or intestacy, (iv) in transactions involving the transfer or distribution of Restricted Securities by a corporation to any subsidiary, parent or affiliated corporation of such corporation, or (v) in transactions in compliance with Rule 144), unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied, at such holder's expense by either (i) an unqualified written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144, the appropriate restrictive legend set forth in Section 3 above, except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for such holder and the Company, such legend is not required in order to establish compliance with any provision of the Securities Act. 5. REGISTRATION. 5.1 REQUESTED REGISTRATION. (a) REQUEST FOR REGISTRATION. In case the Company shall receive from Initiating Holders a written request that the Company effect any registration, qualification or compliance with respect to not less than one-half of their shares of Registrable Securities, or any lesser number of shares if the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed ten million dollars ($10,000,000), the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements 4 or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within 20 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5.1: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (B) Prior to the earlier of September 28, 1998 or six months after the effective date of the Company's first registered public offering of its stock; (C) If the Company, within ten (10) days of the receipt of the request of the Initiating Holders, gives notice of its bona fide intention to effect the filing of a registration statement with the Commission within ninety (90) days of receipt of such request (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan); (D) During the period starting with the date of filing of, and ending on the date 180 days immediately following the effective date of, any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (E) After the Company has effected two such registrations pursuant to this Section 5.1(a), and such registrations have been declared or ordered effective; (F) Within twelve (12) months after the Company has effected such a registration pursuant to this Section 5.1(a), and such registration has been declared or ordered effective; or (G) If the Company shall furnish to such Initiating Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its stockholders for a registration statement to be filed in the near future, in which case the Company's obligation to use its best efforts to register, qualify or comply under this Section 5.1 shall be deferred for a period not to exceed 90 days from the date of receipt of written request 5 from the Initiating Holders, provided that the Company may not exercise this deferral right more than once per twelve-month period. Subject to the foregoing clauses (A) through (G), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders. (b) UNDERWRITING. In the event that a registration pursuant to Section 5.1 is for a public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 5.1(a)(i), and the right of any Holder to registration pursuant to Section 5.1 shall be conditioned upon such Holder's participation in such underwriting arrangements, and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested shall be limited to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by a majority in interest of the Initiating Holders, but subject to the Company's reasonable approval. Notwithstanding any other provision of this Section 5.1, if the managing underwriter advises the Initiating Holders that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all holders of Registrable Securities, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration, and such Registrable Securities shall not be transferred in a public distribution prior to 120 days after the effective date of such registration, or such other shorter period of time as the underwriters may require. 5.2 COMPANY REGISTRATION. (a) NOTICE OF REGISTRATION. If at any time or from time to time the Company shall determine to register any of its equity securities, either for its own account or for the account of a security holder or holders, other than (A) a registration relating solely to employee benefit plans, or (B) a registration relating solely to a Rule 145 transaction, the Company will: 6 (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 30 days after receipt of such written notice from the Company, by any Holder. (b) UNDERWRITING. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 5.2(a)(i). In such event the right of any Holder to registration pursuant to Section 5.2 shall be conditioned upon such Holder's participation in such underwriting, and the inclusion of Registrable Securities in the underwriting shall be limited to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 5.2, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities to be included in such registration (i) in the case of the Company's initial public offering, to zero, and (ii) in the case of any other offering, to an amount no less than 25% of all shares to be included in such offering; PROVIDED HOWEVER, that (x) any such limitation or "cut-back" shall be first applied to all shares proposed to be sold in such offering other than for the account of the Company which are not Registrable Securities, and (y) notwithstanding clause (x), in no event shall any shares being sold by a stockholder exercising a demand registration right similar to that granted in Section 5.1 be excluded from such offering. The Company shall so advise all Holders and other holders distributing their securities through such underwriting, and the number of shares of Registrable Securities or other securities that may be included in the registration and underwriting shall be first allocated among all the Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holder at the time of filing the Registration Statement. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Holder or holder to the nearest 100 shares. If any Holder or holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to 120 days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require. 7 (c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 5.2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. 5.3 REGISTRATION ON FORM S-3. (a) If any Holder or Holders request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities the reasonably anticipated aggregate price to the public of which would equal or exceed $2,500,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form and to cause such Registrable Securities to be qualified in such jurisdictions as such Holder or Holders may reasonably request; provided, however, that the Company shall not be required to effect more than one registration pursuant to this Section 5.3 in any six (6) month period. The Company shall inform other Holders of the proposed registration and offer them the opportunity to participate. In the event the registration is proposed to be part of a firm commitment underwritten public offering, the substantive provisions of Section 5.1(b) shall be applicable to each such registration initiated under this Section 5.3. (b) Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 5.3: (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (ii) if the Company, within ten (10) days of the receipt of the request of the initiating Holders, gives notice of its bona fide intention to effect the filing of a registration statement with the Commission within ninety (90) days of receipt of such request (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan); (iii) after the Company has effected two such registrations pursuant to Section 5.3(a), and such registrations have been declared or ordered effective; (iv) during the period starting with the date of filing of, and ending on the date 180 days immediately following the effective date of, any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is 8 actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (v) if the Company shall furnish to such Holder or Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its stockholders for registration statements to be filed in the near future, in which case the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed 90 days from the receipt of the request to file such registration by such Holder or Holders, provided that the Company may not exercise this deferral right more than once per twelve-month period. 5.4 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the Closing Date, the Company shall not enter into any agreement granting any holder or prospective holder of any securities of the Company registration rights with respect to such securities without the written consent of the holders of a majority of the Registrable Securities then outstanding, unless (i) such other registration rights are subordinate to the registration rights granted to the Holders hereunder, and (ii) the holders of such rights are subject to market standoff obligations no more favorable to such persons than those contained herein. 5.5 EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with (i) two registrations pursuant to Section 5.1, (ii) all registrations pursuant to Section 5.2, and (iii) two registrations pursuant to Section 5.3, shall be borne by the Company. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders and all other registration expenses shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. 5.6 REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least one hundred twenty (120) days or until the distribution described in the registration statement has been completed, whichever first occurs; and (b) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such Holders and underwriters may reasonably request in order to facilitate the public offering of such securities. 9 5.7 INDEMNIFICATION. (a) The Company will indemnify each Holder of Registrable Securities included in a registration pursuant to this Agreement, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any under writer within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act of 1933, the Securities Exchange Act of 1934, state securities law or any rule or regulation promulgated under the such laws applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by any Holder, controlling person or underwriter and stated to be specifically for use therein; provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement, alleged untrue statement, omission or alleged omission made in a preliminary prospectus on file with the Commission at the time the registration statement becomes effective or the amended prospectus filed with the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any underwriter, or any Holder, if there is no underwriter, if a copy of the Final Prospectus was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act, and if the Final Prospectus would have cured the defect giving rise to the loss, liability, claim or damage. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each 10 other such Holder, each of its officers, directors and partners and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein. Notwithstanding the foregoing, the liability of each Holder under this Section 5.7(b) shall be limited in an amount equal to the net proceeds of the shares sold by such Holder, unless such liability arises out of or is based on willful misconduct by such Holder. (c) Each party entitled to indemnification under this Section 5.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action, and provided further that the Indemnifying Party shall not assume the defense for matters as to which representation of both the Indemnifying Party and the Indemnified Party by the same counsel would be inappropriate due to actual or potential differing interests between them, but shall instead in such event pay the fees and costs of separate counsel for the Indemnified Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 5.8 INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. 11 5.9 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Securities Exchange Act of 1934, as amended; (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (at any time after it has become subject to such reporting requirements); and (c) So long as a Holder owns any Restricted Securities to furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public) and of the Securities Act and the Securities Exchange Act of 1934 (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 5.10 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to register securities granted Investors under Sections 5.1, 5.2 and 5.3 may be assigned to a transferee or assignee in connection with any transfer or assignment of Registrable Securities by the Investor provided that: (i) such transfer may otherwise be effected in accordance with applicable securities laws, (ii) such assignee or transferee acquires at least 500,000 shares of Preferred Stock, Investor Common Stock, Founders Stock and/or Conversion Stock held by the assignor or transferor (appropriately adjusted for recapitalizations, stock splits and the like) or such lesser number, if it constitutes all such shares held by the assignor or transferor, (iii) written notice is promptly given to the Company and (iv) such transferee agrees to be bound by the provisions of this Agreement. Notwithstanding the foregoing, the rights to cause the Company to register securities may be assigned to (A) any affiliated partnership or constituent partner or retired partner of an Investor which is a partnership, or (B) an officer, director or shareholder or a subsidiary, parent or affiliated corporation of Investor which is a corporation, or (C) a family member or trust for the benefit of a Founder who is an individual, without compliance with item (ii) above, provided written notice thereof is promptly given to the Company and the transferee agrees to be bound by the provisions of this Agreement. 12 5.11 TERMINATION OF REGISTRATION RIGHTS. The rights granted pursuant to Sections 5.2 and 5.3 of this Agreement shall terminate as to any Holder at such time as such Holder (i) can sell all of his Registrable Securities pursuant to Rule 144(k) promulgated under the Securities Act or (ii) can sell all of his Registrable Securities pursuant to Rule 144 promulgated under the Securities Act in any ninety (90) day period. 6. FINANCIAL INFORMATION. (a) The Company will provide the following reports to Investor: (i) As soon as practicable after the end of each fiscal year, and in any event within 90 days thereafter, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of operations and of cash flows and stockholders' equity of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and audited by independent public accountants of national standing selected by the Company, and a capitalization table in reasonable detail for such fiscal year. (ii) At least thirty days prior to the beginning of each fiscal year, a budget adopted by the Company's Board of Directors for the fiscal year, prepared on a monthly basis, including balance sheets and sources and applications of funds statements for such months, and, as soon as prepared, any other budgets or revised budgets prepared by the Company; (iii) Within 30 days after the end of each monthly accounting period, a consolidated condensed balance sheet of the Company and its subsidiaries, if any, as of the end of each such monthly period, and consolidated condensed statement of operations of the Company and its subsidiaries for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles (other than for accompanying notes), subject to changes resulting from year-end audit adjust ments, together with management's analysis of results and a statement of the chief financial or accounting officer of the Company explaining any differences from the budget for such monthly accounting period, and signed by the principal financial or accounting officer of the Company, and a capitalization table in reasonable detail for such monthly accounting period. 7. CONFIDENTIALITY. Investor acknowledges and agrees that any information obtained pursuant to Section 6 which may be considered "inside" non-public information will not be utilized by Investor or transferee in connection with purchases or sales of the Company's securities and will not be disclosed by any such Investor or transferee. 13 8. RIGHT OF FIRST REFUSAL. (a) The Company hereby grants to Investor and its assigns, the right of first refusal to purchase its Pro Rata Share of New Securities (as defined in this Section 8) which the Company may, from time to time, propose to sell and issue. The "Pro Rata Share", for purposes of this right of first refusal, is the ratio that (i) the sum of the number of shares of Common Stock then held by Investor or such assignee and the number of shares of Common Stock issuable upon conversion of the Preferred Stock then held by Investor or such assignees bears to (ii) the sum of the total number of shares of Common Stock (the "Conversion Stock") then outstanding and the number of shares of Common Stock issuable upon exercise or conversion of all then outstanding securities exercisable for or convertible into, directly or indirectly, Common Stock. (b) Except as set forth below, "New Securities" shall mean any shares of capital stock of the Company, including Common Stock and any series of preferred stock, whether now authorized or not, and rights, options or warrants to purchase said shares of Common Stock or preferred stock, and securities of any type whatsoever that are, or may become, convertible into or exchangeable for said shares of Common Stock or preferred stock. Notwithstand ing the foregoing, "New Securities" does not include (i) the Conversion Stock, (ii) Common Stock offered to the public generally pursuant to a registration statement under the Securities Act in connection with the Company's initial public offering, (iii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of all or substantially all of the assets or other reorganization whereby the Company or its stockholders own more than fifty percent (50%) of the voting power of the surviving or successor corporation, (iv) up to 3,300,000 shares (net of any repurchases) of the Company's Common Stock or related options, warrants or other rights to purchase such Common Stock issued on or after the date hereof to employees, officers and directors of, and consultants to, the Company, and (v) stock issued in connection with any stock split, stock dividend or recapitalization by the Company. (c) In the event the Company proposes to undertake an issuance of New Securities, it shall give Investor and such assignees written notice of its intention, describing the amount and type of New Securities, and the price and terms upon which the Company proposes to issue the same. Investor and such assignees shall have fifteen (15) days from the date of receipt of any such notice to agree to purchase up to its respective Pro Rata Share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (d) In the event all of the New Securities are not elected to be purchased by Investor within fifteen (15) days after the notice pursuant to Section 9(c) above, the Company shall have ninety (90) days thereafter to sell the New Securities not elected to be purchased by Investor at the price and upon the terms no more favorable to the purchasers of such securities than specified in the Company's notice. In the event the Company has not sold the New Securities within said ninety (90) day period, the Company shall not thereafter issue or sell any New Securities without first offering such securities in the manner provided above. 14 (e) The right of first refusal hereunder is not assignable except by Investor to its partners or other affiliates or to any party who acquires at least 500,000 shares of the Investor Common Stock, Preferred Stock and/or Conversion Stock (appropriately adjusted for recapitalizations, stock splits and the like) from Investor. 9. TERMINATION OF COVENANTS. The covenants set forth in Sections 6 and 8 shall terminate and be of no further force or effect upon the consummation of a firm commitment underwritten public offering or at such time as the Company is required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, whichever shall occur first. 10. STANDOFF AGREEMENT. In connection with the initial public offering of the Company's securities, each Holder agrees, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as may be requested by the underwriters, provided that all officers and directors of the Company who own stock of, or hold options to purchase stock of, the Company and all other persons who hold 5% or more of the then outstanding capital stock of the Company also agree to such restrictions. The Stockholders agree that the Company may instruct its transfer agent to place stop-transfer notations in its records to enforce the provisions of this Section 10. 11. DETERMINATION OF SHARE AMOUNTS AND PERCENTAGES. For the purposes of determining the minimum holdings set forth in this Agreement, including without limitation the minimum holdings pursuant to Sections 5.10 and 12, the following rules shall govern: (a) All shares held by entities affiliated with the holder shall be deemed held by such holder, and any holder which is a partnership shall be deemed to hold any shares of Preferred Stock, Investor Common Stock and/or Conversion Stock originally purchased by such holder and subsequently distributed to partners of such holder, but which have not been resold by such partners. (b) When shares of Preferred Stock are counted together with shares of Conversion Stock or shares of Common Stock, shares of Preferred Stock shall be counted on an as-converted into Common Stock basis, and the term "Conversion Stock" shall mean only the shares of Common Stock which have been issued pursuant to conversion of Preferred Stock. 15 12. AMENDMENT. Any provision of Section 5 of this Agreement may be amended or the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding or deemed to be outstanding. Any provisions of Sections 6 and 8 of this Agreement may be amended or the observance thereof so waived only with the written consent of the Company and Investor. Any provisions other than Sections 5, 6 and 8 of this Agreement may be amended or the observance thereof so waived only with the written consent of the Company and a majority of the holders of such Registrable Securities. Any amendment or waiver effected in accordance with this Section 12 shall be binding upon Investor and each Holder of Registrable Securities at the time outstanding or deemed to be outstanding (including securities into which such securities are convertible), each future holder of all such securities and the Company. 13. GOVERNING LAW. This Agreement and the legal relations between the parties arising hereunder shall be governed by and interpreted in accordance with the laws of the State of California. The parties hereto agree to submit to the jurisdiction of the federal and state courts of the State of California with respect to the breach or interpretation of this Agreement or the enforcement of any and all rights, duties, liabilities, obligations, powers, and other relations between the parties arising under this Agreement. 14. ENTIRE AGREEMENT. This Agreement constitutes the full and entire understanding and agreement between the parties regarding the matters set forth herein. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon the successors, assigns, heirs, executors and administrators of the parties hereto. 15. NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery to the party to be notified or three (3) days after deposit with the United States mail, by registered or certified mail, postage prepaid, addressed (a) if to Investor, at such Investor's address as set forth in the Purchase Agreement, or at such other address as such Investor shall have furnished to the Company in writing in accordance with this Section 15, (b) if to any other holder of Preferred Stock, the Investor Common Stock, the Founders Stock, or Conversion Stock, at such address as such holder shall have furnished the Company in writing in accordance with this Section 15, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder thereof who has so furnished an address to the Company, or (c) if to the Company, at its principal office. 16. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. The foregoing Investor Rights Agreement is hereby executed as of the date first above written. 16 "COMPANY" FOUNDERS BEA SYSTEMS, INC. By: /s/ William T. Coleman III /s/ William T. Coleman III --------------------------- -------------------------- William T. Coleman III Title: President /s/ Alfred Chuang ------------------------ -------------------------- Alfred S. Chuang /s/ Edward W. Scott, Jr. "INVESTOR" -------------------------- WARBURG, PINCUS VENTURES, L.P. Edward W. Scott, Jr. By: /s/ Stuart K. P. Gross --------------------------- Title: Partner, Warburg, Pincus & Co. ------------------------------- 17 EX-10.3 5 EMPLOYMENT AGREEMENT/COLEMAN EXHIBIT 10.3 BEA SYSTEMS, INC. EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, is entered into as of September 28, 1995, between BEA Systems, Inc., a Delaware corporation (the "Company"), and William T. Coleman III ("Employee"). R E C I T A L S --------------- A. Employee has developed a business plan for the acquisition and operation of certain businesses in the transaction processing industry and Warburg, Pincus Ventures, L.P. ("Warburg") has agreed to invest up to a maximum of $50,000,000 in the Company to provide financing for the implementation of Employee's business plan pursuant to the terms of that certain Stock Purchase Agreement dated September 28, 1995 and that certain Adjustment Agreement dated September 28, 1995 among Warburg, the Company, Employee and certain other stockholders of the Company. B. Immediately prior to the date of this Agreement, Employee owned 600,000 shares of the Common Stock of the Company and in connection with the investment by Warburg as contemplated by Recital A above, Employee has entered into that certain Restricted Stock Purchase Agreement dated September 28, 1995 (the "Stock Purchase Agreement") for the purchase of 653,414 additional shares of Common Stock in the Company. C. Company desires to obtain the services of Employee, on its own behalf and on behalf of all existing and future Affiliated Companies (defined to mean any corporation or other business entity or entities that directly or indirectly controls, is controlled by, or is under common control with the Company), and Employee desires to secure employment from the Company upon the following terms and conditions. A G R E E M E N T ----------------- ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS: 1. POSITION, PERIOD OF EMPLOYMENT. (a) PERIOD OF EMPLOYMENT. The Company hereby employs Employee to render services to the Company in the position and with the duties and responsibilities described in Section 1(b) for the period (the "Period of Employment") commencing on the date of this Agreement and ending the earlier of (i) September 28, 1999; or (ii) the date this Agreement is terminated in accordance with Section 3 below. 1 (b) President and Chief Executive Officer (or in such other position(s) as the Board of Directors of the Company (the "Board") shall designate). Employee shall devote his full time and attention and his best efforts to the performance of the services customarily incident to such office and to such other services as may be reasonably requested by the Board. The Company shall retain full direction and control of the means and methods by which Employee performs the above services and of the place(s) at which such services are to be rendered. (c) OTHER ACTIVITIES. Except upon the prior written consent of the Board, Employee, during the Period of Employment, will not (i) accept any other employment; (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that is or may be competitive with, or that might place him in a competing position to that of the Company or any Affiliated Company, as determined in the discretion of the Board; or (iii) engage in any work or business activity of any kind outside those of the Company. 2. COMPENSATION, BENEFITS, EXPENSES. (a) COMPENSATION. In consideration of the services to be rendered hereunder, including, without limitation, services to any Affiliated Company, Employee shall be paid an annual salary of One Hundred Eighty Thousand Dollars ($180,000.00), payable at the times and pursuant to the procedures regularly established, and as they may be amended, by the Company during the Period of Employment. This rate shall be reviewed annually on a calendar year basis, in accordance with the Company's salary review practices, and adjusted in the sole discretion of the Board of the Company to reflect increases in the cost of living and such other increases as are awarded in accordance with the Company's regular salary review practices for giving salary increases to similarly situated employees. (b) STOCK OPTIONS. Employee may become eligible to receive options under the Company's 1995 Flexible Stock Incentive Plan and such other option plans as the Company may from time to time adopt, as approved by the Board or a Committee thereof. (c) BONUS. Employee shall be eligible to participate in such bonus plans as the Company may from time to time adopt for the benefit of similarly situated employees of the Company. Employee's right to receive any such bonus shall be subject to the terms of any Company bonus plan for which he may become a participant and the terms determined by the Board or a Committee thereof designating him as a participant or granting him an award thereunder. (d) VACATION. Employee shall be entitled to vacation in accordance with the Company's vacation policies for similarly situated employees, as such policies may be amended from time to time. (e) BENEFITS. As he becomes eligible therefor, the Company shall provide Employee with the right to participate in and to receive benefits from all present and future life, accident, disability, medical, pension, and savings plans and all similar benefits made 2 available generally to similarly situated employees of the Company. The amount and extent of benefits to which Employee is entitled shall be governed by the specific benefit plan, as it may be amended from time to time. (f) EXPENSES. The Company shall reimburse Employee for reasonable travel and other business expenses incurred by Employee in the performance of his duties hereunder in accordance with the Company's general policies, as they may be amended from time to time during the course of this Agreement. 3. TERMINATION OF EMPLOYMENT. (a) BY DEATH. The Period of Employment shall terminate automatically upon the death of the Employee; provided however that the Company shall pay to the Employee's beneficiaries or estate, as appropriate, the compensation to which he is entitled pursuant to Sections 2(a) and 2(c) and the benefits to which he is entitled pursuant to Section 2(e) shall continue through the end of the Period of Employment, on the same time schedule as if Employee were living. For the purposes of determining the level of bonus compensation payable pursuant to said Section 2(c), Employee's beneficiaries or estate, as appropriate, shall be eligible to receive bonus payments in accordance with Section 2(c) based upon the average of the bonuses paid to Employee for the two (2) years prior to termination; PROVIDED, THAT if Employee's Period of Employment terminates prior to September 28, 1997, then such bonus payments shall be 80% of the target bonus for Employee for the year of termination as reasonably determined by the Board. Thereafter, the Company's obligations hereunder shall terminate. Nothing in this Section shall affect any entitlement of the Employee's heirs to the benefits of any life insurance plan. (b) BY DISABILITY. If the Employee shall become "permanently disabled" as determined for purposes of the disability insurance policy provided by the Company for Employee, then, to the extent permitted by law, the Period of Employment shall terminate as of the date that Employee shall be deemed to have become "permanently disabled" for purposes of such disability insurance policy, provided, however that, the compensation to which Employee is entitled pursuant to Sections 2(a) and 2(c) (net of amounts paid to Employee pursuant to said disability insurance policy) and the benefits to which he is entitled pursuant to Section 2(e) shall continue through the end of the Period of Employment, on the same time schedule as if Employee were not disabled. The amount of bonus payable to Employee pursuant to this Section 3(b) shall be calculated in the manner set forth in Section 3(a) above. Thereafter, the Company's obligations hereunder shall terminate. Employee shall continue to be receive benefits under any disability plan in which Employee is a participant to the extent permitted under the applicable plan. (c) BY COMPANY FOR CAUSE. The Company may terminate, without liability, the Period of Employment for Cause (as defined below) at any time and without notice upon ten (10) days' advance written notice to Employee. The Company shall pay Employee the compensation to which he is entitled pursuant to Section 2(a) through the end of the notice period and thereafter the Company's obligations hereunder shall terminate. The Company may 3 terminate the employment of the Employee and all of the Company's obligations under this Agreement at any time for "cause" by giving the Employee notice of such termination, with reasonable specificity of the details thereof. For the purposes of this Section 3(c), "Cause" shall mean: (i) the Employee's material misconduct which could reasonably be expected to have a material adverse effect on the business and affairs of the Company, (ii) the Employee's disregard of lawful instructions of the Company's Board of Directors consistent with the Employee's position relating to the business of the Company or neglect of duties or failure to act, which, in each case, could reasonably be expected to have a material adverse effect on the business and affairs of the Company; (iii) Employee is convicted of common law fraud, or a felony or criminal act against the Company or any Affiliate thereof or any of the assets of any of them; (iv) the Employee's abuse of alcohol or other drugs or controlled substances, or conviction of a crime involving moral turpitude, or (v) the Employee's material breach of any of the agreements contained herein. A termination pursuant to Section 3(c) (i), (ii), (iv) (other than as a result of a conviction of a crime involving moral turpitude), or (v) shall take effect 30 days after the giving of the notice contemplated hereby unless the Employee shall, during such 30-day period, remedy to the satisfaction of the Board of Directors of the Company the misconduct, disregard, abuse or breach specified of such notice; PROVIDED, HOWEVER, that such termination shall take effect immediately upon giving of such notice if the Board of Directors of the Company shall have determined that such misconduct, disregard, abuse or breach is not remediable which determination shall be stated in such notice. A determination pursuant to Section 3(c) (iii) or (iv) (as a result of a conviction of a crime involving moral turpitude) shall take effect immediately upon giving of the notice contemplated hereby. (d) AT WILL BY EMPLOYEE. At any time and subject to Section 3(g) below, Employee may terminate the Period of Employment with or without cause, on written notice to the Company. In the event Employee elects to terminate the Period of Employment pursuant to this Section 3(d), Employee shall give the Company not less than two (2) weeks notice of such termination. If the Employee terminates his employment pursuant to this Section 3(d), the Company shall pay Employee the compensation to which he is entitled pursuant to Section 2(a) through the end of the notice period and thereafter all obligations of the Company shall terminate. (e) AT WILL BY THE COMPANY. At any time, the Company may terminate the Period of Employment for any reason, without cause, upon 24 hours written notice to the Employee. In the event the Company elects to terminate the Period of Employment pursuant to this Section 3(e), the Company shall retain Employee as a consultant to the Company for a period commencing on the date of such termination and continuing until the expiration of the Period of Employment (the "Consultancy Period"), during which time Employee agrees to be available to the Company (which may include availability via telephone) to consult with officers and directors regarding the business of the Company, whenever so requested, such consultancy work not to exceed 40 hours per week. Employee shall continue to receive payment of his compensation under Sections 2(a), 2(c) and 2(f) during the Consultancy Period and his benefits described in Section 2(e); PROVIDED THAT if (i) any of the events listed in paragraph (c) of this Section 3 occur then the Company's obligations hereunder shall be governed in accordance with the applicable paragraph or (ii) Employee breaches Sections 3(h), 4 3(i) and/or 4 hereof, including a violation of his Proprietary Information and Inventions Agreement (described at Section 4 below), then all of the Company's obligations hereunder shall cease immediately. The amount of bonus payable to Employee pursuant to this Section 3(e) shall be calculated in the manner set forth in Section 3(a) above. Employee hereby agrees that the Company may dismiss him under this Section 3(e) without regard (i) to any general or specific policies (whether written or oral) of the Company relating to the employment or termination of its employees, or (ii) to any statements made to Employee, whether made orally or contained in any document, pertaining to Employee's relationship with the Company. During the Consultancy Period, Employee agrees not to compete with the business of the Company during such Consultancy Period as set forth in Section 3(i) hereof. (f) TERMINATION BY EMPLOYEE FOR GOOD REASON FOLLOWING CORPORATE TRANSACTION. At any time following a Corporate Transaction (as defined in Section 6 of the Stock Purchase Agreement) and without limitation of Employee's rights under Section 3(d) above, Employee may terminate the Period of Employment for Good Reason (as defined below) on not less than two (2) weeks written notice to the Company. In the event of a termination by Employee for Good Reason pursuant to this Section 3(f), the Company shall retain Employee as a consultant to the Company for a period commencing on the date of such termination and continuing for two (2) years thereafter (irrespective of the Consulting Period) for the compensation and benefits and subject to all of the terms set forth in Section 3(e) above (other than the term for such consultancy services). The following shall constitute a termination by Employee for "Good Reason" if: (i) there is an assignment to the Employee of any duties materially inconsistent with or which constitute a material change in the Employee's position, duties, responsibilities, or status with the Company, or a material change in the Employee's position, duties, responsibilities, or status with the Company, or a material change in the Employee's reporting responsibilities, title, or offices; or removal of the Employee from or failure to re-elect the Employee to any of such positions, except in connection with the termination for the Period of Employment for Cause, or due to disability or death; (ii) there is a reduction by the Company in the Employee's annual salary then in effect other than a reduction similar in percentage to a reduction generally applicable to similarly situated employees of the Company; or (iii) the Company acts in any way that would adversely affect the Employee's participation in or materially reduce the Employee's benefit under any benefit plan of the Company in which the Employee is participating or deprive the Employee of any material fringe benefit enjoyed by the Employee except those changes generally affecting similarly situated employees of the Company. (g) COMPANY RIGHT TO REQUIRE CONSULTING SERVICES. In the event of a termination of the Period of Employment pursuant to Section 3(c) or 3(d) above, the Company shall have the option, exercisable on written notice to Employee within twenty (20) days following such termination of the Period of Employment, to require Employee to provide consulting services upon the same terms provided in Section 3(e) above, including without limitation, Employee's duties not to compete with the Company as provided in Section 3(i), except that: (i) the Company may thereafter terminate the Consultancy Period on thirty (30) days notice to Employee; and (ii) the compensation payable to Employee during the Consultancy Period shall be equal to Employee's salary payable pursuant to Section 2(a) 5 hereof as prorated and reduced to be equal to an hourly rate (assuming forty (40) hours work weeks and forty-eight (48) full weeks of service during a year), and Employee shall be so paid by the Company at such hourly rate for such consulting services based on the greater of: (i) the actual number of hours of consulting services provided by Employee; and (ii) ten (10) hours per calendar month; provided, that if the Company requires in excess of twenty (20) hours per week of consulting, then the Company shall compensate Employee and provide benefits and bonuses as if Employee is working full time during the Consultancy Period. The Company may require up to a maximum of forty (40) hours per week of consulting services. In the event that the Company requires less than forty (40) hours of consulting services per week, then the Company may not prevent Employee from accepting other employment or engaging in any work or other activity of any kind during the Consultancy Period provided that such employment, work or activity is not competitive with the business of the Company (as defined in Section 3(i) hereof) and Employee may accept such other noncompetitive employment or engage in other noncompetitive work or business activities during the Consultancy Period. The Company acknowledges that once it chooses to require less than forty (40) hours per week of consulting services from Employee that the Company may not later unilaterally increase the consulting services required of Employee to forty (40) hours per week or restrict Employee's ability to accept other noncompetitive employment or engage in other noncompetitive work or activities without Employee's consent, which may be withheld in Employee's discretion. (h) OTHER TERMINATION OBLIGATIONS. (1) Employee hereby acknowledges and agrees that all personal property, including, without limitation, all books, manuals, records, reports, notes, contracts, computer files, lists, blueprints, and other documents, or materials, or copies thereof, proprietary information, and equipment furnished to or prepared by Employee in the course of or incident to his employment, including, without limitation, records and any other materials pertaining to the Company's proprietary information, belong to the Company and shall be promptly returned to the Company upon termination of the Period of Employment. Following termination, the Employee will not retain any written or other tangible material containing any Proprietary Information or information pertaining to the Company's proprietary information. (2) Upon termination of the Period of Employment, the Employee shall be deemed to have resigned from all offices and directorships then held with the Company or any affiliates. (3) Employee agrees that he will not, either directly or indirectly, for a period of two (2) years following the termination of the later of the Period of Employment or the Consultancy Period: (i) contact, for purposes of soliciting employment, any employee of the Company; or, (ii) contact for the purpose of inducing any termination or breach of any contractual relationship with the Company, any individual or entity that has a contractual relationship with the Company. 6 (4) Employee agrees to comply with the covenant not to compete as set forth in such Section 3(i). (i) COVENANT NOT TO COMPETE. During the Consultancy Period, Employee agrees not to compete with the business of the Company during such Consultancy Period, anywhere within, from or into the countries listed in EXHIBIT A and from or into any additional countries where the Company does business at the time of termination of Employee's employment. For purposes of this Section 3(h), Employee shall be deemed to compete if he either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity engages or participates, or makes preparations to establish, any business that conducts the same or substantially the same business as or is competitive with the business which is conducted by the Company on the date of Employee's termination, including, without limitation, work relating to Top End, Encina, Unikix, CICS/6000, CICS/9000 and any activity engaged in by the Company during the twelve months immediately preceding the date of termination of the Period of Employment or any activity contemplated by the Company on the date of such termination. Nothing contained in this Section 3(i) shall be construed to prohibit Employee from purchasing and owning (directly or indirectly) up to one percent (1%) of the capital stock or other securities of any corporation or other entity whose stock or securities are traded on any national or regional securities exchange or the national over-the-counter market and such ownership shall not constitute a violation of this Section 3(i). In the event of a termination of the Period of Employment pursuant to Section 3(c) or 3(d) above, the Company shall have the option, exercisable on written notice to Employee within twenty (20) days following such termination of the Period of Employment, to require Employee to provide consulting services upon the same terms provided in Section 3(e) above, including without limitation, Employee's duties not to compete with the Company as provided herein. 4. PROPRIETARY INFORMATION AGREEMENT. As a condition to his employment with the Company, Employee shall execute and deliver a copy of the Company's standard form Employee Proprietary Information and Inventions Agreement in substantially the form of EXHIBIT B attached hereto and incorporated herein. Any breach by Employee of such agreement shall be deemed a breach of this Agreement for purposes of Section 3(c) hereof. Employee's obligations under such Employee Proprietary Information and Inventions Agreement shall survive any termination of the Period of Employment. 5. ASSIGNMENT; SUCCESSORS AND ASSIGNS. Employee agrees that he will not assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement, nor shall Employee's rights be subject to encumbrance or the claims of creditors. Any purported assignment, transfer, or delegation shall be null and void. Nothing in this Agreement shall prevent the consolidation of the Company with, or its merger into, any other corporation, or the sale by the Company of all or substantially all of its properties or assets, or the assignment by the Company of this Agreement and the performance of its obligations hereunder to any successor in interest or any Affiliated Company. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors, 7 and permitted assigns, and shall not benefit any person or entity other than those enumerated above. Without limitation of the foregoing, any such successor in interest (including an entity which acquires substantially all the assets and the business of the Company) in such acquisition transaction or any Affiliated Company shall be bound by all of the terms and conditions of this Agreement. 6. NOTICES. All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand or mailed, postage prepaid, by certified or registered mail, return receipt requested, and addressed to the Company at: BEA Systems, Inc. 2465 E. Bayshore Road, Ste. 301 Palo Alto, CA 94303 Attn: Vice President, Finance or to the Employee at: William T. Coleman III 278 Alta Vista Avenue Los Altos, CA 94022 Notice of change of address shall be effective only when done in accordance with this Section. 7. ENTIRE AGREEMENT. The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the employment of Employee by the Company and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding involving this Agreement. 8. AMENDMENTS; WAIVERS. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by the Employee and by a duly authorized representative of the Company other than Employee. By an instrument in writing similarly executed, either party may waive compliance by the other party with any provision of this Agreement that such other party was or is obligated to comply with or perform, provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy, or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, or power provided herein or by law or in equity. 9. SEVERABILITY; ENFORCEMENT. If any provision of this Agreement, or the application thereof to any person, place, or circumstance, shall be held by a court of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Agreement and such provisions as applied to other persons, places, and circumstances shall remain in full force and effect. It is the intention of the parties that the covenants contained in Section 3(f) 8 shall be enforced to the greatest extent in time, area, and degree of participation as is permitted by the law of that jurisdiction whose law is found to be applicable to any acts allegedly in breach of these covenants. 10. GOVERNING LAW. The validity, interpretation, enforceability, and performance of this Agreement shall be governed by and construed in accordance with the law of the State of California. 11. EMPLOYEE ACKNOWLEDGMENT. Employee acknowledgs (i) that he has consulted withor has had the opportunity to consult with independent counsel of his own choice concerning this Agreement and has been advised to do so by the Company, and (ii) that he has read and understands the Agreement, is fully aware of its legal effect, and has entered into it freely based on his own judgment. 12. EXCLUSIVE. Both parties agree that this Agreement shall provide the exclusive remedies for any breach by the Company of its terms. The parties have duly executed this Agreement as of the date first written above. COMPANY: EMPLOYEE: BEA SYSTEMS, INC. By: /s/ Edward W. Scott, Jr. /s/ William T. Coleman III ------------------------------------ ------------------------------- Title: Executive Vice President William T. Coleman III --------------------------------- 9 EXHIBIT A TO EMPLOYMENT AGREEMENT Canada England France Germany Japan Spain United States 10 EX-10.4 6 EMPLOYMENT AGREEMENT/SCOTT EXHIBIT 10.4 BEA SYSTEMS, INC. EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, is entered into as of September 28, 1995, between BEA Systems, Inc., a Delaware corporation (the "Company"), and Edward W. Scott, Jr. ("Employee"). R E C I T A L S --------------- A. Employee has developed a business plan for the acquisition and operation of certain businesses in the transaction processing industry and Warburg, Pincus Ventures, L.P. ("Warburg") has agreed to invest up to a maximum of $50,000,000 in the Company to provide financing for the implementation of Employee's business plan pursuant to the terms of that certain Stock Purchase Agreement dated September 28, 1995 and that certain Adjustment Agreement dated September 28, 1995 among Warburg, the Company, Employee and certain other stockholders of the Company. B. Immediately prior to the date of this Agreement, Employee owned 400,000 shares of the Common Stock of the Company and in connection with the investment by Warburg as contemplated by Recital A above, Employee has entered into that certain Restricted Stock Purchase Agreement dated September 28, 1995 for the purchase of 435,793 additional shares of Common Stock in the Company. C. Company desires to obtain the services of Employee, on its own behalf and on behalf of all existing and future Affiliated Companies (defined to mean any corporation or other business entity or entities that directly or indirectly controls, is controlled by, or is under common control with the Company), and Employee desires to secure employment from the Company upon the following terms and conditions. A G R E E M E N T ----------------- ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS: 1. POSITION, PERIOD OF EMPLOYMENT. (a) PERIOD OF EMPLOYMENT. The Company hereby employs Employee to render services to the Company in the position and with the duties and responsibilities described in Section 1(b) for the period (the "Period of Employment") commencing on the date of this Agreement and ending the earlier of (i) September 28, 1999; or (ii) the date this Agreement is terminated in accordance with Section 3 below. 1 (b) Executive Vice President and Secretary (or in such other position(s) as the Board of Directors of the Company (the "Board") shall designate). Employee shall devote his full time and attention and his best efforts to the performance of the services customarily incident to such office and to such other services as may be reasonably requested by the Board. The Company shall retain full direction and control of the means and methods by which Employee performs the above services and of the place(s) at which such services are to be rendered. (c) OTHER ACTIVITIES. Except upon the prior written consent of the Board, Employee, during the Period of Employment, will not (i) accept any other employment; (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that is or may be competitive with, or that might place him in a competing position to that of the Company or any Affiliated Company, as determined in the discretion of the Board; or (iii) engage in any work or business activity of any kind outside those of the Company. 2. COMPENSATION, BENEFITS, EXPENSES. (a) COMPENSATION. In consideration of the services to be rendered hereunder, including, without limitation, services to any Affiliated Company, Employee shall be paid an annual salary of One Hundred Fifty Thousand Dollars ($150,000.00), payable at the times and pursuant to the procedures regularly established, and as they may be amended, by the Company during the Period of Employment. This rate shall be reviewed annually on a calendar year basis, in accordance with the Company's salary review practices, and adjusted in the sole discretion of the Board of the Company to reflect increases in the cost of living and such other increases as are awarded in accordance with the Company's regular salary review practices for giving salary increases to similarly situated employees. (b) STOCK OPTIONS. Employee may become eligible to receive options under the Company's 1995 Flexible Stock Incentive Plan and such other option plans as the Company may from time to time adopt, as approved by the Board or a Committee thereof. (c) BONUS. Employee shall be eligible to participate in such bonus plans as the Company may from time to time adopt for the benefit of similarly situated employees of the Company. Employee's right to receive any such bonus shall be subject to the terms of any Company bonus plan for which he may become a participant and the terms determined by the Board or a Committee thereof designating him as a participant or granting him an award thereunder. (d) VACATION. Employee shall be entitled to vacation in accordance with the Company's vacation policies for similarly situated employees, as such policies may be amended from time to time. (e) BENEFITS. As he becomes eligible therefor, the Company shall provide Employee with the right to participate in and to receive benefits from all present and future life, accident, disability, medical, pension, and savings plans and all similar benefits made 2 available generally to similarly situated employees of the Company. The amount and extent of benefits to which Employee is entitled shall be governed by the specific benefit plan, as it may be amended from time to time. (f) EXPENSES. The Company shall reimburse Employee for reasonable travel and other business expenses incurred by Employee in the performance of his duties hereunder in accordance with the Company's general policies, as they may be amended from time to time during the course of this Agreement. 3. TERMINATION OF EMPLOYMENT. (a) BY DEATH. The Period of Employment shall terminate automatically upon the death of the Employee; provided however that the Company shall pay to the Employee's beneficiaries or estate, as appropriate, the compensation to which he is entitled pursuant to Sections 2(a) and 2(c) and the benefits to which he is entitled pursuant to Section 2(e) shall continue through the end of the Period of Employment, on the same time schedule as if Employee were living. For the purposes of determining the level of bonus compensation payable pursuant to said Section 2(c), Employee's beneficiaries or estate, as appropriate, shall be eligible to receive bonus payments in accordance with Section 2(c) based upon the average of the bonuses paid to Employee for the two (2) years prior to termination; PROVIDED, THAT if Employee's Period of Employment terminates prior to September 28, 1997, then such bonus payments shall be 80% of the target bonus for Employee for the year of termination as reasonably determined by the Board. Thereafter, the Company's obligations hereunder shall terminate. Nothing in this Section shall affect any entitlement of the Employee's heirs to the benefits of any life insurance plan. (b) BY DISABILITY. If the Employee shall become "permanently disabled" as determined for purposes of the disability insurance policy provided by the Company for Employee, then, to the extent permitted by law, the Period of Employment shall terminate as of the date that Employee shall be deemed to have become "permanently disabled" for purposes of such disability insurance policy, provided, however that, the compensation to which Employee is entitled pursuant to Sections 2(a) and 2(c) (net of amounts paid to Employee pursuant to said disability insurance policy) and the benefits to which he is entitled pursuant to Section 2(e) shall continue through the end of the Period of Employment, on the same time schedule as if Employee were not disabled. The amount of bonus payable to Employee pursuant to this Section 3(b) shall be calculated in the manner set forth in Section 3(a) above. Thereafter, the Company's obligations hereunder shall terminate. Employee shall continue to be receive benefits under any disability plan in which Employee is a participant to the extent permitted under the applicable plan. (c) BY COMPANY FOR CAUSE. The Company may terminate, without liability, the Period of Employment for Cause (as defined below) at any time and without notice upon ten (10) days' advance written notice to Employee. The Company shall pay Employee the compensation to which he is entitled pursuant to Section 2(a) through the end of the notice period and thereafter the Company's obligations hereunder shall terminate. The Company may 3 terminate the employment of the Employee and all of the Company's obligations under this Agreement at any time for "cause" by giving the Employee notice of such termination, with reasonable specificity of the details thereof. For the purposes of this Section 3(c), "Cause" shall mean: (i) the Employee's material misconduct which could reasonably be expected to have a material adverse effect on the business and affairs of the Company, (ii) the Employee's disregard of lawful instructions of the Company's Board of Directors consistent with the Employee's position relating to the business of the Company or neglect of duties or failure to act, which, in each case, could reasonably be expected to have a material adverse effect on the business and affairs of the Company; (iii) Employee is convicted of common law fraud, or a felony or criminal act against the Company or any Affiliate thereof or any of the assets of any of them; (iv) the Employee's abuse of alcohol or other drugs or controlled substances, or conviction of a crime involving moral turpitude, or (v) the Employee's material breach of any of the agreements contained herein. A termination pursuant to Section 3(c) (i), (ii), (iv) (other than as a result of a conviction of a crime involving moral turpitude), or (v) shall take effect 30 days after the giving of the notice contemplated hereby unless the Employee shall, during such 30-day period, remedy to the satisfaction of the Board of Directors of the Company the misconduct, disregard, abuse or breach specified of such notice; PROVIDED, HOWEVER, that such termination shall take effect immediately upon giving of such notice if the Board of Directors of the Company shall have determined that such misconduct, disregard, abuse or breach is not remediable which determination shall be stated in such notice. A determination pursuant to Section 3(c) (iii) or (iv) (as a result of a conviction of a crime involving moral turpitude) shall take effect immediately upon giving of the notice contemplated hereby. (d) AT WILL BY EMPLOYEE. At any time and subject to Section 3(g) below, Employee may terminate the Period of Employment with or without cause, on written notice to the Company. In the event Employee elects to terminate the Period of Employment pursuant to this Section 3(d), Employee shall give the Company not less than two (2) weeks notice of such termination. If the Employee terminates his employment pursuant to this Section 3(d), the Company shall pay Employee the compensation to which he is entitled pursuant to Section 2(a) through the end of the notice period and thereafter all obligations of the Company shall terminate. (e) AT WILL BY THE COMPANY. At any time, the Company may terminate the Period of Employment for any reason, without cause, upon 24 hours written notice to the Employee. In the event the Company elects to terminate the Period of Employment pursuant to this Section 3(e), the Company shall retain Employee as a consultant to the Company for a period commencing on the date of such termination and continuing until the expiration of the Period of Employment (the "Consultancy Period"), during which time Employee agrees to be available to the Company (which may include availability via telephone) to consult with officers and directors regarding the business of the Company, whenever so requested, such consultancy work not to exceed 40 hours per week. Employee shall continue to receive payment of his compensation under Sections 2(a), 2(c) and 2(f) during the Consultancy Period and his benefits described in Section 2(e); PROVIDED THAT if (i) any of the events listed in paragraph (c) of this Section 3 occur then the Company's obligations hereunder shall be governed in accordance with the applicable paragraph or (ii) Employee breaches Sections 3(h), 4 3(i) and/or 4 hereof, including a violation of his Proprietary Information and Inventions Agreement (described at Section 4 below), then all of the Company's obligations hereunder shall cease immediately. The amount of bonus payable to Employee pursuant to this Section 3(e) shall be calculated in the manner set forth in Section 3(a) above. Employee hereby agrees that the Company may dismiss him under this Section 3(e) without regard (i) to any general or specific policies (whether written or oral) of the Company relating to the employment or termination of its employees, or (ii) to any statements made to Employee, whether made orally or contained in any document, pertaining to Employee's relationship with the Company. During the Consultancy Period, Employee agrees not to compete with the business of the Company during such Consultancy Period as set forth in Section 3(i) hereof. (f) TERMINATION BY EMPLOYEE FOR GOOD REASON FOLLOWING CORPORATE TRANSACTION. At any time following a Corporate Transaction (as defined in Section 6 of the Stock Purchase Agreement) and without limitation of Employee's rights under Section 3(d) above, Employee may terminate the Period of Employment for Good Reason (as defined below) on not less than two (2) weeks written notice to the Company. In the event of a termination by Employee for Good Reason pursuant to this Section 3(f), the Company shall retain Employee as a consultant to the Company for a period commencing on the date of such termination and continuing for two (2) years thereafter (irrespective of the Consulting Period) for the compensation and benefits and subject to all of the terms set forth in Section 3(e) above (other than the term for such consultancy services). The following shall constitute a termination by Employee for "Good Reason" if: (i) there is an assignment to the Employee of any duties materially inconsistent with or which constitute a material change in the Employee's position, duties, responsibilities, or status with the Company, or a material change in the Employee's position, duties, responsibilities, or status with the Company, or a material change in the Employee's reporting responsibilities, title, or offices; or removal of the Employee from or failure to re-elect the Employee to any of such positions, except in connection with the termination for the Period of Employment for Cause, or due to disability or death; (ii) there is a reduction by the Company in the Employee's annual salary then in effect other than a reduction similar in percentage to a reduction generally applicable to similarly situated employees of the Company; or (iii) the Company acts in any way that would adversely affect the Employee's participation in or materially reduce the Employee's benefit under any benefit plan of the Company in which the Employee is participating or deprive the Employee of any material fringe benefit enjoyed by the Employee except those changes generally affecting similarly situated employees of the Company. (g) COMPANY RIGHT TO REQUIRE CONSULTING SERVICES. In the event of a termination of the Period of Employment pursuant to Section 3(c) or 3(d) above, the Company shall have the option, exercisable on written notice to Employee within twenty (20) days following such termination of the Period of Employment, to require Employee to provide consulting services upon the same terms provided in Section 3(e) above, including without limitation, Employee's duties not to compete with the Company as provided in Section 3(i), except that: (i) the Company may thereafter terminate the Consultancy Period on thirty (30) days notice to Employee; and (ii) the compensation payable to Employee during the Consultancy Period shall be equal to Employee's salary payable pursuant to Section 2(a) 5 hereof as prorated and reduced to be equal to an hourly rate (assuming forty (40) hours work weeks and forty-eight (48) full weeks of service during a year), and Employee shall be so paid by the Company at such hourly rate for such consulting services based on the greater of: (i) the actual number of hours of consulting services provided by Employee; and (ii) ten (10) hours per calendar month; provided, that if the Company requires in excess of twenty (20) hours per week of consulting, then the Company shall compensate Employee and provide benefits and bonuses as if Employee is working full time during the Consultancy Period. The Company may require up to a maximum of forty (40) hours per week of consulting services. In the event that the Company requires less than forty (40) hours of consulting services per week, then the Company may not prevent Employee from accepting other employment or engaging in any work or other activity of any kind during the Consultancy Period provided that such employment, work or activity is not competitive with the business of the Company (as defined in Section 3(i) hereof) and Employee may accept such other noncompetitive employment or engage in other noncompetitive work or business activities during the Consultancy Period. The Company acknowledges that once it chooses to require less than forty (40) hours per week of consulting services from Employee that the Company may not later unilaterally increase the consulting services required of Employee to forty (40) hours per week or restrict Employee's ability to accept other noncompetitive employment or engage in other noncompetitive work or activities without Employee's consent, which may be withheld in Employee's discretion. (h) OTHER TERMINATION OBLIGATIONS. (1) Employee hereby acknowledges and agrees that all personal property, including, without limitation, all books, manuals, records, reports, notes, contracts, computer files, lists, blueprints, and other documents, or materials, or copies thereof, proprietary information, and equipment furnished to or prepared by Employee in the course of or incident to his employment, including, without limitation, records and any other materials pertaining to the Company's proprietary information, belong to the Company and shall be promptly returned to the Company upon termination of the Period of Employment. Following termination, the Employee will not retain any written or other tangible material containing any Proprietary Information or information pertaining to the Company's proprietary information. (2) Upon termination of the Period of Employment, the Employee shall be deemed to have resigned from all offices and directorships then held with the Company or any affiliates. (3) Employee agrees that he will not, either directly or indirectly, for a period of two (2) years following the termination of the later of the Period of Employment or the Consultancy Period: (i) contact, for purposes of soliciting employment, any employee of the Company; or, (ii) contact for the purpose of inducing any termination or breach of any contractual relationship with the Company, any individual or entity that has a contractual relationship with the Company. 6 (4) Employee agrees to comply with the covenant not to compete as set forth in such Section 3(i). (i) COVENANT NOT TO COMPETE. During the Consultancy Period, Employee agrees not to compete with the business of the Company during such Consultancy Period, anywhere within, from or into the countries listed in EXHIBIT A and from or into any additional countries where the Company does business at the time of termination of Employee's employment. For purposes of this Section 3(h), Employee shall be deemed to compete if he either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity engages or participates, or makes preparations to establish, any business that conducts the same or substantially the same business as or is competitive with the business which is conducted by the Company on the date of Employee's termination, including, without limitation, work relating to Top End, Encina, Unikix, CICS/6000, CICS/9000 and any activity engaged in by the Company during the twelve months immediately preceding the date of termination of the Period of Employment or any activity contemplated by the Company on the date of such termination. Nothing contained in this Section 3(i) shall be construed to prohibit Employee from purchasing and owning (directly or indirectly) up to one percent (1%) of the capital stock or other securities of any corporation or other entity whose stock or securities are traded on any national or regional securities exchange or the national over-the-counter market and such ownership shall not constitute a violation of this Section 3(i). In the event of a termination of the Period of Employment pursuant to Section 3(c) or 3(d) above, the Company shall have the option, exercisable on written notice to Employee within twenty (20) days following such termination of the Period of Employment, to require Employee to provide consulting services upon the same terms provided in Section 3(e) above, including without limitation, Employee's duties not to compete with the Company as provided herein. 4. PROPRIETARY INFORMATION AGREEMENT. As a condition to his employment with the Company, Employee shall execute and deliver a copy of the Company's standard form Employee Proprietary Information and Inventions Agreement in substantially the form of EXHIBIT B attached hereto and incorporated herein. Any breach by Employee of such agreement shall be deemed a breach of this Agreement for purposes of Section 3(c) hereof. Employee's obligations under such Employee Proprietary Information and Inventions Agreement shall survive any termination of the Period of Employment. 5. ASSIGNMENT; SUCCESSORS AND ASSIGNS. Employee agrees that he will not assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement, nor shall Employee's rights be subject to encumbrance or the claims of creditors. Any purported assignment, transfer, or delegation shall be null and void. Nothing in this Agreement shall prevent the consolidation of the Company with, or its merger into, any other corporation, or the sale by the Company of all or substantially all of its properties or assets, or the assignment by the Company of this Agreement and the performance of its obligations hereunder to any successor in interest or any Affiliated Company. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors, 7 and permitted assigns, and shall not benefit any person or entity other than those enumerated above. Without limitation of the foregoing, any such successor in interest (including an entity which acquires substantially all the assets and the business of the Company) in such acquisition transaction or any Affiliated Company shall be bound by all of the terms and conditions of this Agreement. 6. NOTICES. All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand or mailed, postage prepaid, by certified or registered mail, return receipt requested, and addressed to the Company at: BEA Systems, Inc. 2465 E. Bayshore Road, Ste. 301 Palo Alto, CA 94303 Attn: Vice President, Finance or to the Employee at: Edward W. Scott, Jr. 3464 Spring Creek Lane Milpitas, CA 95035 Notice of change of address shall be effective only when done in accordance with this Section. 7. ENTIRE AGREEMENT. The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the employment of Employee by the Company and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding involving this Agreement. 8. AMENDMENTS; WAIVERS. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by the Employee and by a duly authorized representative of the Company other than Employee. By an instrument in writing similarly executed, either party may waive compliance by the other party with any provision of this Agreement that such other party was or is obligated to comply with or perform, provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy, or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, or power provided herein or by law or in equity. 9. SEVERABILITY; ENFORCEMENT. If any provision of this Agreement, or the application thereof to any person, place, or circumstance, shall be held by a court of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Agreement and such provisions as applied to other persons, places, and circumstances shall remain in full force and effect. It is the intention of the parties that the covenants contained in Section 3(f) 8 shall be enforced to the greatest extent in time, area, and degree of participation as is permitted by the law of that jurisdiction whose law is found to be applicable to any acts allegedly in breach of these covenants. 10. GOVERNING LAW. The validity, interpretation, enforceability, and performance of this Agreement shall be governed by and construed in accordance with the law of the State of California. 11. EMPLOYEE ACKNOWLEDGMENT. Employee acknowledges (i) that he has consulted with or has had the opportunity to consult with independent counsel of his own choice concerning this Agreement and has been advised to do so by the Company, and (ii) that he has read and understands the Agreement, is fully aware of its legal effect, and has entered into it freely based on his own judgment. 12. EXCLUSIVE. Both parties agree that this Agreement shall provide the exclusive remedies for any breach by the Company of its terms. The parties have duly executed this Agreement as of the date first written above. COMPANY: EMPLOYEE: BEA SYSTEMS, INC. By: /s/ William T. Coleman III /s/ Edward W. Scott, Jr. ---------------------------------- ----------------------------- Title: President & CEO Edward W. Scott, Jr. ------------------------------- 9 EXHIBIT A TO EMPLOYMENT AGREEMENT Canada England France Germany Japan Spain United States 10 EX-10.5 7 EMPLOYMENT AGREEMENT/CHUANG EXHIBIT 10.5 BEA SYSTEMS, INC. EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, is entered into as of September 28, 1995, between BEA Systems, Inc., a Delaware corporation (the "Company"), and Alfred S. Chuang ("Employee"). R E C I T A L S --------------- A. Employee has developed a business plan for the acquisition and operation of certain businesses in the transaction processing industry and Warburg, Pincus Ventures, L.P. ("Warburg") has agreed to invest up to a maximum of $50,000,000 in the Company to provide financing for the implementation of Employee's business plan pursuant to the terms of that certain Stock Purchase Agreement dated September 28, 1995 and that certain Adjustment Agreement dated September 28, 1995 among Warburg, the Company, Employee and certain other stockholders of the Company. B. Immediately prior to the date of this Agreement, Employee owned 400,000 shares of the Common Stock of the Company and in connection with the investment by Warburg as contemplated by Recital A above, Employee has entered into that certain Restricted Stock Purchase Agreement dated September 28, 1995 for the purchase of 435,793 additional shares of Common Stock in the Company. C. Company desires to obtain the services of Employee, on its own behalf and on behalf of all existing and future Affiliated Companies (defined to mean any corporation or other business entity or entities that directly or indirectly controls, is controlled by, or is under common control with the Company), and Employee desires to secure employment from the Company upon the following terms and conditions. ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS: 1. POSITION, PERIOD OF EMPLOYMENT. (a) PERIOD OF EMPLOYMENT. The Company hereby employs Employee to render services to the Company in the position and with the duties and responsibilities described in Section 1(b) for the period (the "Period of Employment") commencing on the date of this Agreement and ending the earlier of (i) September 28, 1999; or (ii) the date this Agreement is terminated in accordance with Section 3 below. 1 (b) Executive Vice President (or in such other position(s) as the Board of Directors of the Company (the "Board") shall designate). Employee shall devote his full time and attention and his best efforts to the performance of the services customarily incident to such office and to such other services as may be reasonably requested by the Board. The Company shall retain full direction and control of the means and methods by which Employee performs the above services and of the place(s) at which such services are to be rendered. (c) OTHER ACTIVITIES. Except upon the prior written consent of the Board, Employee, during the Period of Employment, will not (i) accept any other employment; (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that is or may be competitive with, or that might place him in a competing position to that of the Company or any Affiliated Company, as determined in the discretion of the Board; or (iii) engage in any work or business activity of any kind outside those of the Company. 2. COMPENSATION, BENEFITS, EXPENSES. (a) COMPENSATION. In consideration of the services to be rendered hereunder, including, without limitation, services to any Affiliated Company, Employee shall be paid an annual salary of One Hundred Fifty Thousand Dollars ($150,000.00), payable at the times and pursuant to the procedures regularly established, and as they may be amended, by the Company during the Period of Employment. This rate shall be reviewed annually on a calendar year basis, in accordance with the Company's salary review practices, and adjusted in the sole discretion of the Board of the Company to reflect increases in the cost of living and such other increases as are awarded in accordance with the Company's regular salary review practices for giving salary increases to similarly situated employees. (b) STOCK OPTIONS. Employee may become eligible to receive options under the Company's 1995 Flexible Stock Incentive Plan and such other option plans as the Company may from time to time adopt, as approved by the Board or a Committee thereof. (c) BONUS. Employee shall be eligible to participate in such bonus plans as the Company may from time to time adopt for the benefit of similarly situated employees of the Company. Employee's right to receive any such bonus shall be subject to the terms of any Company bonus plan for which he may become a participant and the terms determined by the Board or a Committee thereof designating him as a participant or granting him an award thereunder. (d) VACATION. Employee shall be entitled to vacation in accordance with the Company's vacation policies for similarly situated employees, as such policies may be amended from time to time. (e) BENEFITS. As he becomes eligible therefor, the Company shall provide Employee with the right to participate in and to receive benefits from all present and future life, accident, disability, medical, pension, and savings plans and all similar benefits made 2 available generally to similarly situated employees of the Company. The amount and extent of benefits to which Employee is entitled shall be governed by the specific benefit plan, as it may be amended from time to time. (f) EXPENSES. The Company shall reimburse Employee for reasonable travel and other business expenses incurred by Employee in the performance of his duties hereunder in accordance with the Company's general policies, as they may be amended from time to time during the course of this Agreement. 3. TERMINATION OF EMPLOYMENT. (a) BY DEATH. The Period of Employment shall terminate automatically upon the death of the Employee; provided however that the Company shall pay to the Employee's beneficiaries or estate, as appropriate, the compensation to which he is entitled pursuant to Sections 2(a) and 2(c) and the benefits to which he is entitled pursuant to Section 2(e) shall continue through the end of the Period of Employment, on the same time schedule as if Employee were living. For the purposes of determining the level of bonus compensation payable pursuant to said Section 2(c), Employee's beneficiaries or estate, as appropriate, shall be eligible to receive bonus payments in accordance with Section 2(c) based upon the average of the bonuses paid to Employee for the two (2) years prior to termination; PROVIDED, THAT if Employee's Period of Employment terminates prior to September 28, 1997, then such bonus payments shall be 80% of the target bonus for Employee for the year of termination as reasonably determined by the Board. Thereafter, the Company's obligations hereunder shall terminate. Nothing in this Section shall affect any entitlement of the Employee's heirs to the benefits of any life insurance plan. (b) BY DISABILITY. If the Employee shall become "permanently disabled" as determined for purposes of the disability insurance policy provided by the Company for Employee, then, to the extent permitted by law, the Period of Employment shall terminate as of the date that Employee shall be deemed to have become "permanently disabled" for purposes of such disability insurance policy, provided, however that, the compensation to which Employee is entitled pursuant to Sections 2(a) and 2(c) (net of amounts paid to Employee pursuant to said disability insurance policy) and the benefits to which he is entitled pursuant to Section 2(e) shall continue through the end of the Period of Employment, on the same time schedule as if Employee were not disabled. The amount of bonus payable to Employee pursuant to this Section 3(b) shall be calculated in the manner set forth in Section 3(a) above. Thereafter, the Company's obligations hereunder shall terminate. Employee shall continue to be receive benefits under any disability plan in which Employee is a participant to the extent permitted under the applicable plan. (c) BY COMPANY FOR CAUSE. The Company may terminate, without liability, the Period of Employment for Cause (as defined below) at any time and without notice upon ten (10) days' advance written notice to Employee. The Company shall pay Employee the compensation to which he is entitled pursuant to Section 2(a) through the end of the notice period and thereafter the Company's obligations hereunder shall terminate. The Company may 3 terminate the employment of the Employee and all of the Company's obligations under this Agreement at any time for "cause" by giving the Employee notice of such termination, with reasonable specificity of the details thereof. For the purposes of this Section 3(c), "Cause" shall mean: (i) the Employee's material misconduct which could reasonably be expected to have a material adverse effect on the business and affairs of the Company, (ii) the Employee's disregard of lawful instructions of the Company's Board of Directors consistent with the Employee's position relating to the business of the Company or neglect of duties or failure to act, which, in each case, could reasonably be expected to have a material adverse effect on the business and affairs of the Company; (iii) Employee is convicted of common law fraud, or a felony or criminal act against the Company or any Affiliate thereof or any of the assets of any of them; (iv) the Employee's abuse of alcohol or other drugs or controlled substances, or conviction of a crime involving moral turpitude, or (v) the Employee's material breach of any of the agreements contained herein. A termination pursuant to Section 3(c) (i), (ii), (iv) (other than as a result of a conviction of a crime involving moral turpitude), or (v) shall take effect 30 days after the giving of the notice contemplated hereby unless the Employee shall, during such 30-day period, remedy to the satisfaction of the Board of Directors of the Company the misconduct, disregard, abuse or breach specified of such notice; PROVIDED, HOWEVER, that such termination shall take effect immediately upon giving of such notice if the Board of Directors of the Company shall have determined that such misconduct, disregard, abuse or breach is not remediable which determination shall be stated in such notice. A determination pursuant to Section 3(c) (iii) or (iv) (as a result of a conviction of a crime involving moral turpitude) shall take effect immediately upon giving of the notice contemplated hereby. (d) AT WILL BY EMPLOYEE. At any time and subject to Section 3(g) below, Employee may terminate the Period of Employment with or without cause, on written notice to the Company. In the event Employee elects to terminate the Period of Employment pursuant to this Section 3(d), Employee shall give the Company not less than two (2) weeks notice of such termination. If the Employee terminates his employment pursuant to this Section 3(d), the Company shall pay Employee the compensation to which he is entitled pursuant to Section 2(a) through the end of the notice period and thereafter all obligations of the Company shall terminate. (e) AT WILL BY THE COMPANY. At any time, the Company may terminate the Period of Employment for any reason, without cause, upon 24 hours written notice to the Employee. In the event the Company elects to terminate the Period of Employment pursuant to this Section 3(e), the Company shall retain Employee as a consultant to the Company for a period commencing on the date of such termination and continuing until the expiration of the Period of Employment (the "Consultancy Period"), during which time Employee agrees to be available to the Company (which may include availability via telephone) to consult with officers and directors regarding the business of the Company, whenever so requested, such consultancy work not to exceed 40 hours per week. Employee shall continue to receive payment of his compensation under Sections 2(a), 2(c) and 2(f) during the Consultancy Period and his benefits described in Section 2(e); PROVIDED THAT if (i) any of the events listed in paragraph (c) of this Section 3 occur then the Company's obligations hereunder shall be governed in accordance with the applicable paragraph or (ii) Employee breaches Sections 3(h), 4 3(i) and/or 4 hereof, including a violation of his Proprietary Information and Inventions Agreement (described at Section 4 below), then all of the Company's obligations hereunder shall cease immediately. The amount of bonus payable to Employee pursuant to this Section 3(e) shall be calculated in the manner set forth in Section 3(a) above. Employee hereby agrees that the Company may dismiss him under this Section 3(e) without regard (i) to any general or specific policies (whether written or oral) of the Company relating to the employment or termination of its employees, or (ii) to any statements made to Employee, whether made orally or contained in any document, pertaining to Employee's relationship with the Company. During the Consultancy Period, Employee agrees not to compete with the business of the Company during such Consultancy Period as set forth in Section 3(i) hereof. (f) TERMINATION BY EMPLOYEE FOR GOOD REASON FOLLOWING CORPORATE TRANSACTION. At any time following a Corporate Transaction (as defined in Section 6 of the Stock Purchase Agreement) and without limitation of Employee's rights under Section 3(d) above, Employee may terminate the Period of Employment for Good Reason (as defined below) on not less than two (2) weeks written notice to the Company. In the event of a termination by Employee for Good Reason pursuant to this Section 3(f), the Company shall retain Employee as a consultant to the Company for a period commencing on the date of such termination and continuing for two (2) years thereafter (irrespective of the Consulting Period) for the compensation and benefits and subject to all of the terms set forth in Section 3(e) above (other than the term for such consultancy services). The following shall constitute a termination by Employee for "Good Reason" if: (i) there is an assignment to the Employee of any duties materially inconsistent with or which constitute a material change in the Employee's position, duties, responsibilities, or status with the Company, or a material change in the Employee's position, duties, responsibilities, or status with the Company, or a material change in the Employee's reporting responsibilities, title, or offices; or removal of the Employee from or failure to re-elect the Employee to any of such positions, except in connection with the termination for the Period of Employment for Cause, or due to disability or death; (ii) there is a reduction by the Company in the Employee's annual salary then in effect other than a reduction similar in percentage to a reduction generally applicable to similarly situated employees of the Company; or (iii) the Company acts in any way that would adversely affect the Employee's participation in or materially reduce the Employee's benefit under any benefit plan of the Company in which the Employee is participating or deprive the Employee of any material fringe benefit enjoyed by the Employee except those changes generally affecting similarly situated employees of the Company. (g) COMPANY RIGHT TO REQUIRE CONSULTING SERVICES. In the event of a termination of the Period of Employment pursuant to Section 3(c) or 3(d) above, the Company shall have the option, exercisable on written notice to Employee within twenty (20) days following such termination of the Period of Employment, to require Employee to provide consulting services upon the same terms provided in Section 3(e) above, including without limitation, Employee's duties not to compete with the Company as provided in Section 3(i), except that: (i) the Company may thereafter terminate the Consultancy Period on thirty (30) days notice to Employee; and (ii) the compensation payable to Employee during the Consultancy Period shall be equal to Employee's salary payable pursuant to Section 2(a) 5 hereof as prorated and reduced to be equal to an hourly rate (assuming forty (40) hours work weeks and forty-eight (48) full weeks of service during a year), and Employee shall be so paid by the Company at such hourly rate for such consulting services based on the greater of: (i) the actual number of hours of consulting services provided by Employee; and (ii) ten (10) hours per calendar month; provided, that if the Company requires in excess of twenty (20) hours per week of consulting, then the Company shall compensate Employee and provide benefits and bonuses as if Employee is working full time during the Consultancy Period. The Company may require up to a maximum of forty (40) hours per week of consulting services. In the event that the Company requires less than forty (40) hours of consulting services per week, then the Company may not prevent Employee from accepting other employment or engaging in any work or other activity of any kind during the Consultancy Period provided that such employment, work or activity is not competitive with the business of the Company (as defined in Section 3(i) hereof) and Employee may accept such other noncompetitive employment or engage in other noncompetitive work or business activities during the Consultancy Period. The Company acknowledges that once it chooses to require less than forty (40) hours per week of consulting services from Employee that the Company may not later unilaterally increase the consulting services required of Employee to forty (40) hours per week or restrict Employee's ability to accept other noncompetitive employment or engage in other noncompetitive work or activities without Employee's consent, which may be withheld in Employee's discretion. (h) OTHER TERMINATION OBLIGATIONS. (1) Employee hereby acknowledges and agrees that all personal property, including, without limitation, all books, manuals, records, reports, notes, contracts, computer files, lists, blueprints, and other documents, or materials, or copies thereof, proprietary information, and equipment furnished to or prepared by Employee in the course of or incident to his employment, including, without limitation, records and any other materials pertaining to the Company's proprietary information, belong to the Company and shall be promptly returned to the Company upon termination of the Period of Employment. Following termination, the Employee will not retain any written or other tangible material containing any Proprietary Information or information pertaining to the Company's proprietary information. (2) Upon termination of the Period of Employment, the Employee shall be deemed to have resigned from all offices and directorships then held with the Company or any affiliates. (3) Employee agrees that he will not, either directly or indirectly, for a period of two (2) years following the termination of the later of the Period of Employment or the Consultancy Period: (i) contact, for purposes of soliciting employment, any employee of the Company; or, (ii) contact for the purpose of inducing any termination or breach of any contractual relationship with the Company, any individual or entity that has a contractual relationship with the Company. 6 (4) Employee agrees to comply with the covenant not to compete as set forth in such Section 3(i). (i) COVENANT NOT TO COMPETE. During the Consultancy Period, Employee agrees not to compete with the business of the Company during such Consultancy Period, anywhere within, from or into the countries listed in EXHIBIT A and from or into any additional countries where the Company does business at the time of termination of Employee's employment. For purposes of this Section 3(h), Employee shall be deemed to compete if he either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity engages or participates, or makes preparations to establish, any business that conducts the same or substantially the same business as or is competitive with the business which is conducted by the Company on the date of Employee's termination, including, without limitation, work relating to Top End, Encina, Unikix, CICS/6000, CICS/9000 and any activity engaged in by the Company during the twelve months immediately preceding the date of termination of the Period of Employment or any activity contemplated by the Company on the date of such termination. Nothing contained in this Section 3(i) shall be construed to prohibit Employee from purchasing and owning (directly or indirectly) up to one percent (1%) of the capital stock or other securities of any corporation or other entity whose stock or securities are traded on any national or regional securities exchange or the national over-the-counter market and such ownership shall not constitute a violation of this Section 3(i). In the event of a termination of the Period of Employment pursuant to Section 3(c) or 3(d) above, the Company shall have the option, exercisable on written notice to Employee within twenty (20) days following such termination of the Period of Employment, to require Employee to provide consulting services upon the same terms provided in Section 3(e) above, including without limitation, Employee's duties not to compete with the Company as provided herein. 4. PROPRIETARY INFORMATION AGREEMENT. As a condition to his employment with the Company, Employee shall execute and deliver a copy of the Company's standard form Employee Proprietary Information and Inventions Agreement in substantially the form of EXHIBIT B attached hereto and incorporated herein. Any breach by Employee of such agreement shall be deemed a breach of this Agreement for purposes of Section 3(c) hereof. Employee's obligations under such Employee Proprietary Information and Inventions Agreement shall survive any termination of the Period of Employment. 5. ASSIGNMENT; SUCCESSORS AND ASSIGNS. Employee agrees that he will not assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement, nor shall Employee's rights be subject to encumbrance or the claims of creditors. Any purported assignment, transfer, or delegation shall be null and void. Nothing in this Agreement shall prevent the consolidation of the Company with, or its merger into, any other corporation, or the sale by the Company of all or substantially all of its properties or assets, or the assignment by the Company of this Agreement and the performance of its obligations hereunder to any successor in interest or any Affiliated Company. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors, 7 and permitted assigns, and shall not benefit any person or entity other than those enumerated above. Without limitation of the foregoing, any such successor in interest (including an entity which acquires substantially all the assets and the business of the Company) in such acquisition transaction or any Affiliated Company shall be bound by all of the terms and conditions of this Agreement. 6. NOTICES. All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand or mailed, postage prepaid, by certified or registered mail, return receipt requested, and addressed to the Company at: BEA Systems, Inc. 2465 E. Bayshore Road, Ste. 301 Palo Alto, CA 94303 Attn: Vice President, Finance or to the Employee at: Alfred S. Chuang 1305 Victoria Terrace Sunnyvale, CA 94087 Notice of change of address shall be effective only when done in accordance with this Section. 7. ENTIRE AGREEMENT. The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the employment of Employee by the Company and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding involving this Agreement. 8. AMENDMENTS; WAIVERS. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by the Employee and by a duly authorized representative of the Company other than Employee. By an instrument in writing similarly executed, either party may waive compliance by the other party with any provision of this Agreement that such other party was or is obligated to comply with or perform, provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy, or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, or power provided herein or by law or in equity. 9. SEVERABILITY; ENFORCEMENT. If any provision of this Agreement, or the application thereof to any person, place, or circumstance, shall be held by a court of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Agreement and such provisions as applied to other persons, places, and circumstances shall remain in full force and effect. It is the intention of the parties that the covenants contained in Section 3(f) 8 shall be enforced to the greatest extent in time, area, and degree of participation as is permitted by the law of that jurisdiction whose law is found to be applicable to any acts allegedly in breach of these covenants. 10. GOVERNING LAW. The validity, interpretation, enforceability, and performance of this Agreement shall be governed by and construed in accordance with the law of the State of California. 11. EMPLOYEE ACKNOWLEDGMENT. Employee acknowledges (i) that he has consulted with or has had the opportunity to consult with independent counsel of his own choice concerning this Agreement and has been advised to do so by the Company, and (ii) that he has read and understands the Agreement, is fully aware of its legal effect, and has entered into it freely based on his own judgment. 12. EXCLUSIVE. Both parties agree that this Agreement shall provide the exclusive remedies for any breach by the Company of its terms. The parties have duly executed this Agreement as of the date first written above. COMPANY: EMPLOYEE: BEA SYSTEMS, INC. By: /s/ William T. Coleman III /s/ Alfred Chuang ---------------------------------- --------------------------- Title: President & CEO Alfred S. Chuang ------------------------------- 9 EXHIBIT A TO EMPLOYMENT AGREEMENT Canada England France Germany Japan Spain United States 10 EX-10.6 8 FORM OF PROMISSORY NOTE EXHIBIT 10.6 INSTALLMENT NOTE Palo Alto, California $________ September 28, 1995 FOR VALUE RECEIVED, ________ promises to pay to BEA Systems, Inc. a Delaware corporation (the "Company"), or order, the principal sum of ________ ($________), together with interest on the unpaid principal hereof from the date hereof at the rate of seven percent (7%) per annum, compounded semiannually. Principal and interest shall be due and payable as follows: Principal and accrued but unpaid interest shall be due and payable on the fifth anniversary of this Note, September 28, 2000; PROVIDED HOWEVER, that this Note shall accelerate and all principal and accrued but unpaid interest shall be due and payable within 30 days of the termination of ________ employment with the Company pursuant to either Section 3(c) or Section 3(d) of that certain Employment Agreement dated September 28, 1995 between the Company and ________ (the "Employment Agreement"); and PROVIDED FURTHER that all principal and accrued but unpaid interest on this Note shall be due and payable within one year of the involuntary termination of ________ employment with the Company pursuant to any of Section 3(a), Section 3(b), or Section 3(e) of the Employment Agreement. Should the undersigned fail to make full payment of any installment of principal or interest for a period of 10 days or more after the due date thereof, the whole unpaid balance on this Note of principal and interest shall become immediately due at the option of the holder of this Note. Payments of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is delivered upon the purchase of Common Stock of the Company pursuant to that certain Restricted Stock Purchase Agreement dated September 28, 1995 between the Company and the undersigned and is subject to the terms of such Agreement. This Note is secured by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. The holder of this Note shall have full recourse against the maker, and shall not be required to proceed against the collateral securing this Note in the event of default. _________________ EX-10.7 9 PROMISSORY NOTE EXHIBIT 10.7 PROMISSORY NOTE SECURED BY DEED OF TRUST $720,000 DATED December 12, 1995 FOR VALUE RECEIVED, Edward W. Scott, Jr. and Cheryl S. Scott (collectively referred to as "Borrower"), an individual residing at 3464 Spring Creek Lane, Milpitas, California 95035 promises to pay to the order of BEA Systems, Inc., a Delaware corporation ("Lender"), at its offices located at 2465 E. Bayshore Rd., Suite 301, Palo Alto, California 94303, or such other place as Lender may designate from time to time, the principal sum of SEVEN HUNDRED TWENTY THOUSAND AND NO/100 DOLLARS ($720,000.00), or such lesser amount as may be outstanding from time to time, together with interest on the unpaid principal from the date hereof at the rate of interest of seven percent (7%) per annum, compounded annually. 1. PAYMENT PROVISIONS. 1.1 PAYMENT. The principal amount of this Note, and all accrued interest shall be due and payable on the earlier of the following dates ("Maturity"): (a) Eight (8) months after the closing of the Initial Public Offering involving the sale of securities for the account of Lender to the public, the gross proceeds of which exceed $10,000,000 at a price to the public of at least $10.00 per share (appropriately adjusted for any recapitalization of the Common Stock). For purposes of this Section 1.1, the "Initial Public Offering" shall mean the first firm commitment underwritten public offering of the Common Stock of Lender pursuant to an effective registration statement declared effective under the Securities Act of 1933, as amended (other than a registration effected by Lender in connection with an employee benefit plan or a Rule 145 transaction, as defined in Rule 145 of the Securities and Exchange Commission); or (b) January 1, 2001. 1.2 VOLUNTARY PREPAYMENT. Borrower may at any time, upon seven (7) days prior written notice to Lender, prepay this Note in whole or in part. 1.3 MANDATORY PREPAYMENT. Concurrently with the execution of this Note, Borrower is entering an Account Agreement with Wells Fargo Bank (the "Account Agreement"). Borrower's obligations under the Account Agreement shall be secured by a first deed of trust on the Property (defined in Section 2 below). In the event the aggregate amount advanced to Borrower under the Account Agreement exceeds $500,000 at any one time, then Borrower shall be required to make principal payments to Lender under this Note within ten (10) days so that sum of the outstanding principal 1 balances of this Note and the Account Agreement do not exceed $1,220,000 in the aggregate. 1.4 INTEREST CALCULATIONS/PAYMENT METHOD. All computations of interest hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. Interest shall be compounded annually. Interest and principal shall be paid at Maturity. All payments hereunder shall be made in lawful money of the United States of America and shall be applied first to accrued interest and then to principal. 2. SECURITY. Payment of this Note is secured by a deed of trust (the "Deed of Trust') of even date herewith, executed by Borrower and covering that certain real property known as 3464 Spring Creek Lane, Milpitas, California 95035, (APN: 042-25-007) (the "Property"). A copy of the Deed of Trust is attached as Exhibit A hereto. The Deed of Trust shall be second only to that of Wells Fargo Bank on the Property evidenced by that certain deed of trust of even date herewith securing Borrower's obligations to Wells Fargo Bank under the Account Agreement (the "Wells Fargo Deed of Trust"). 3. GOVERNING LAW. The terms of this Note shall be construed in accordance with the laws of the State of California. 4. AMENDMENTS/WAIVERS. Any term of this Note may be amended or waived only upon the written consent of Borrower and Lender. 5. DEFAULT. All of the following shall be deemed events of default under this Note. Upon the occurrence of any such event of default, at the option of Lender (except with respect to the default described in subsection (c) below, in which case acceleration shall be automatic), the entire principal balance and accrued interest owing hereunder shall at once become due and payable without notice of default or other notices or demands of any kind whatsoever, all of which are hereby expressly waived by Borrower. Lender's failure to exercise such option to accelerate shall not be construed as a waiver of the provisions hereof as regarding any subsequent event. (a) Borrower fails to pay the entire principal balance and accrued interest owing under this Note upon Maturity; or (b) Borrower fails to pay principal and accrued interest as required under Section 1.3 hereof; or (c) Borrower receives a notice of default under the Wells Fargo Deed of Trust or the Account Agreement, which notice of default must be promptly delivered to Lender. The parties agree that a request for notice of default shall be recorded concurrently with the Deed of Trust hereunder; or 2 (d) Borrower fails fully and timely to perform or observe any other obligation or term of this Note, the Deed of Trust, the Wells Fargo Deed of Trust or the Account Agreement on its part to be performed or observed in accordance with the terms hereof or thereof; or (e) Borrower is the subject of an order for relief by the bankruptcy court, or is unable or admits in writing Borrower's inability to pay Borrower's debts as they mature, or makes an assignment for the benefit of creditors; or Borrower applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for Borrower or for all or any part of Borrower's property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of Borrower, and the appointment continues undischarged or unstayed for sixty (60) calendar days; or Borrower institutes or consents to any bankruptcy, insolvency or similar proceeding relating to Borrower or to all or any part of Borrower's property under the laws of any jurisdiction; or any similar proceeding is instituted without the consent of Borrower and continues undismissed or unstayed for sixty (60) calendar days; or any judgment, warrant, writ of attachment or execution, or similar process is issued or levied against all or any part of the property of Borrower and is not released, vacated or fully bonded within thirty (30) calendar days after its issue or levy; or (f) Borrower encumbers, sells, transfers, or conveys, or permits to be encumbered, sold, transferred, or conveyed, voluntarily or involuntarily, by agreement for sale or in any other manner, all or any portion of the property, regardless of whether the Lender has consented to any previous encumbrance, sale, transfer, or conveyance except for the Wells Fargo Deed of Trust; or (g) All or a substantial portion of the Property is condemned, seized or appropriated by a governmental body or agency. 6. EXERCISE OF POWER BY LENDER. No single or partial exercise of any power hereunder or under the Deed of Trust shall preclude other or further exercises thereof or the exercise of any other power. Lender shall at all times have the right to proceed against any portion of the security for this Note in such order and in such manner as Lender may consider appropriate, without waiving any rights with respect to any of the security. Any delay or omission on the part of Lender in exercising any right hereunder or under the Deed of Trust shall not operate as a waiver of such right, or of any other right under this Note or the Deed of Trust. 7. SUCCESSORS AND ASSIGNS. This Note shall inure to the benefit of Lender and its successors and assigns. 8. LIABILITY FOR COSTS AND EXPENSES. Borrower will be liable for all costs and expenses of collection, including reasonable attorneys' fees, incurred in collecting the money due hereunder, whether such items are incurred in or out of litigation, in or out of a bankruptcy case or proceeding, or otherwise. 3 IN WITNESS WHEREOF, this Promissory Note Secured by Deed of Trust is executed as of the date first set forth above. BORROWER: /s/ Edward W. Scott, Jr. ----------------------------- Edward W. Scott, Jr. /s/ Cheryl S. Scott ----------------------------- Cheryl S. Scott 4 EX-10.9 10 LEASE AGREEMENT W/ AMENDMENT EXHIBIT 10.9 LEASE 1. BASIC LEASE PROVISIONS. ("Basic Lease Provisions") 1.1 PARTIES. This Lease, dated, for reference purposes only, as of November 15, 1995, is made by and between WILLIAM H. AND LEILA A. CILKER (herein called "Lessor"), and BEA SYSTEMS, INC., a Delaware corporation, (herein called "Lessee"). 1.2 PREMISES. Suite Number 105, consisting of approximately twelve thousand one hundred sixty-four (12,164) usable square feet ("USF"), as measured from the centerline of shared walls to the outside surface of outside walls; thirteen thousand six hundred twenty-four (14,624) rentable square feet ("RSF") more or less, including a 12% load factor, as defined in Paragraph 1.11 and as shown on Exhibit "A1" hereto (the "Premises"). 1.3 BUILDING. Commonly described as being located at 385 Moffett Park Drive in the City of Sunnyvale, County of Santa Clara, State of California as defined in Paragraph 2.1 and as shown on Exhibit "A2" hereto (the "Building"), as measured to the dripline of the outside walls. 1.4 USE. The Premises shall be used for general office, the design, research, development, sales, storage, distribution, and marketing of computer software, including all related support and administrative functions and for no other purposes without the prior written consent of Lessor, subject to Paragraph 6. 1.5 TERM. Five (5) years commencing no later than February 1, 1996 ("Commencement Date") and ending five (5) years after the Commencement Date in accordance with Exhibit D (Commencement Date Memorandum). 1.6 BASE MONTHLY RENT. Eighteen Thousand Three Hundred Ninety-Two and No/100th Dollars ($18,392.00) per month, payable on the first day of each month, per Paragraph 4.1, commencing on the Commencement Date but no later than February 1, 1996. 1.7 BASE MONTHLY RENT INCREASE. Monthly Base Rent payable under Paragraph 1.6 above shall be adjusted as provided in Paragraph 4.1 below. 1.8 RENT PAID UPON EXECUTION. Eighteen Thousand Three Hundred Ninety-Two and No/100ths Dollars (18,392.00) for February 1, 1996. 1.9 SECURITY DEPOSIT. Twenty One Thousand One Hundred Seventeen and No/100ths Dollars ($21,117.00) payable upon execution. 1.10 LESSEE'S SHARE OF OPERATING EXPENSE INCREASE. 18.2% as defined in Paragraph 4.2. 1 1.11 LOAD FACTOR. Based on the Total Square Foot Space of the lobby, common hallways, elevator, common bathrooms, utility rooms, janitorial, storage rooms and other shared space expressed as a percentage of the total Building area measured to the outer surface of the outside walls. 2. PREMISES, BUILDING, OFFICE BUILDING PROJECT, PARKING AND COMMON AREAS. 2.1 PREMISES. The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in Paragraph 1.3 of the Basic Lease Provisions. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor for the terms, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, Paragraph 1.2, as the "Premises," including rights to the Common Areas as hereinafter specified in Paragraph 2.4. 2.2 VEHICLE PARKING. So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to use 48 parking spaces in the Common Area of the Office Building Project. Ten of these spaces shall be designated for "Visitors." If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, after making reasonable effort to notify Lessee of the prohibited activity, in addition such other rights and remedies that it may have, to remove or tow away any vehicle involved in such prohibited activity, or otherwise take action to cure such prohibited activity, and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.3 COMMON AREAS--DEFINITION. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general nonexclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, parking areas to the extent not otherwise prohibited by this Lease, roadways and walks, walkways, parkways, ramps, driveways, striping, bumpers, irrigation systems, and Common Area lighting facilities and landscaped areas. 2.4 COMMON AREA--RULES AND REGULATIONS. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit "B" with respect to the Office Building Project and Common Areas and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right to enforce said rules and regulations and 2 may, from time to time, reasonably modify or amend and enforce said rules and regulations. 2.5 COMMON AREAS--CHANGES. Lessor shall have the right in Lessor's sole discretion, from time to time: (a) To make changes to the Building exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the windows, air shafts, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and the outside walls and he roof of the Building; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to he Premises remains available; (c) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. TERM 3.1 TERM. The Term and Commencement Date of this Lease shall be as specified in Paragraph 1.5 of the Basic Lease Provisions in accordance with EXHIBIT D (Commencement Date Memorandum). 3.2 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee s agreed herein by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which 3 event the parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. 4. RENT. 4.1 BASE MONTHLY RENT. Lessee shall pay to Lessor the Base Monthly Rent for the Premises set forth in Paragraph 1.6 of the Basic Lease Provisions and this Paragraph 4.1, without offset or deduction, payable on the first day of each month (or in the event of a partial month, on the first day of such partial month). Lessee shall pay Lessor upon execution hereof the advance Base Rent described in Paragraph 1.8 of the Basic Lease Provisions. The Base Monthly Rent is subject to change based upon the final determination of the Rentable Square Feet leased. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. Tenant shall pay the Base Monthly Rent on the amount and for the months set forth below, and otherwise as provided in this Paragraph 4.1. Months 1 - 12 - $18,392 Months 13 - 24 - $19,074 Months 25 - 36 - $19,755 Months 37 - 48 - $20,436 Months 49 - 60 - $21,117 4.2 OPERATING EXPENSES. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share of Operating Expenses, as defined in Paragraph 1.10, of any increases in total Operating Expenses for any "Comparison Year," as defined in Paragraph 4.2(d) herein over the Operating Expenses for the Base Year, as hereinafter defined, during each calendar year, following the Base Year, of the term of this Lease, in accordance with the following provisions: (a) "Lessee's Share of Operating Expenses" as specified in Paragraph 1.10 of the Base Lease Provisions. Lessee's Share of Operating Expenses has been established as a percentage determined by dividing the approximate rentable square footage of the Premises by the approximate total rentable square footage of the Building. Using this same method of determination, the Lessee's Share of Operating Expenses may be redetermined by Lessor in the event of a change in the rentable square footage in the Building. 4 (b) "Operating Expenses" is defined, for purposes of this Lease, to include all costs incurred by Lessor pursuant to Paragraph 7.1 in the exercise of its reasonable discretion, for: (i) The operation, repair, maintenance, and replacement, in neat, clean, safe, good order and condition, of the Common Areas; (ii) Trash disposal, landscaping, irrigation, replacement of plants and trees, wash windows and doors, service door and window seals, janitorial services and supplies, sealing and striping the parking area, roof repairs, security services, reserve for painting the Building; (iii) Any other service to be provided by Lessor that is elsewhere in this Lease to be an "Operating Expense": (iv) The cost of the premiums for all insurance policy to be maintained by Lessor under Paragraph 8 hereof; (v) The amount of the real property taxes to be paid by Lessor under Paragraph 10.1 hereof; (vi) The cost of utilities, including water, sewer, gas, electricity, and other publicly mandated services to the Building, including fire detection systems, fire sprinkler systems and security systems; (vii) The cost of monitoring environmental matters; (viii) Replacing and/or adding any improvement mandated by any governmental agency, and any repairs or removals necessitated thereby, including seismic upgrades, amortized over its useful life according to federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgment of Lessor's accountants); (ix) Replacements of equipment or improvements to include HVAC, elevator maintenance, plumbing, including fire sprinklers, supplies, materials and equipment and tools; including maintenance, cost and upkeep of all parking and common areas; expenses incurred in an amount necessary to reduce direct expenses; and (x) A management fee attributable to the operation of the Office Building Project. (c) "Base Year" is defined, for purposes of this Lease, to be the year ending December 31, 1996, which shall be based on the months at a minimum of 95% occupancy. 5 (d) "Comparison Year" is defined, for purposes of this Lease, as each calendar year, during the term of this Lease, subsequent to the Base Year. (e) Lessee's Share of the Operating Expenses identified in Paragraph 4.2(b) shall be payable by Lessee within thirty (30) days after a statement of actual expenses is presented to Lessee by Lessor. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in Paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been supplied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. Lessee at Lessee's option shall be able to assign their Security Deposit to another company which may purchase Lessee and Lessee's business. 6. USE. 6.1 USE. The Premises shall be used and occupied only for the purpose set forth in Paragraph 1.4 of the Basic Lease Provisions or any other use which is reasonably comparable to that use and for no other purpose. 6.2 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions or record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct Lessee's business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 CONDITION OF PREMISES. Subject to EXHIBIT C attached hereto, Lessee accepts the Premises and the Office Building Project in their condition existing as 6 of the Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or further suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 6.4 HAZARDOUS MATERIALS. (a) Lessee shall not engage in any activities upon or in the Office Building Project, nor bring onto, create, or dispose of upon or in the Premises, any Hazardous Material (except for office and janitorial supplies of types and in quantities generally and reasonably used in connection with the uses of the Premises contemplated hereunder) without Lessor's prior written consent, which consent shall not be unreasonably withheld or delayed. (b) Lessee shall not engage in any activity upon or in the Premises that violates any federal, state or local laws, rules or regulations pertaining to Hazardous Material. Lessee shall promptly, at Lessee's sole cost and expense, take all investigatory or remedial actions requested or ordered for clean-up of any contamination of the Premises created or suffered by Lessee. Lessee shall comply with any and all requirements related to handling, use, storage and disposal of Hazardous Materials. (c) Lessee shall indemnify, defend and hold harmless Lessor, Lessor's agents, employees, servants, and lenders, from any and all claims, losses, liability, demands, damages, costs, offsets, lawsuits, judgments, award and expenses, including, but not limited to, attorneys' fees arising out of or in connection with any breach of Lessee's obligations under this Paragraph 6.4. (d) Lessee's obligations under this Paragraph 6.4 shall survive the ending, termination, and cancellation of this Lease, and no termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee form Lessee's obligations under this Paragraph 6.4 unless any such agreement expressly sets forth Lessor's intention to so release Lessee. (e) The term "Hazardous Material" means any chemical substance: (i) the presence of which requires investigation, regulation or remediation under any federal, state or local statute, regulation, ordinance, order, action, policy or common law; or 7 (ii) which is or becomes defined as a "hazardous waste" or "hazardous substance" under any federal, state or local stature, regulation or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 ET SEQ.) and or the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 ET SEQ.); or (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, the State of California or any political subdivision thereof; or (iv) the presence of which on the Premises poses or threatens to pose a hazard to the health or safety of persons on or about the Premises; or (v) without limitation which contains gasoline, diesel fuel or other petroleum hydrocarbons; or (vi) without limitation which contains polychlorinated bipheynols (PCBs), or asbestos; or (vii) which is considered by any government authority to be harmful, dangerous, toxic, flammable or otherwise deserving of special care. (f) Lessee warrants that they will not be using any chemical or Hazardous Material within its business. Provided that the Lessee does not have any Hazardous Material on the Premises, it shall not be responsible for Hazardous Material found on the Premises during the term of the Lease and prior to occupancy. 7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES. 7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building Project, including the Premises, interior and exterior walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or are above then Building standards. Lessor shall not be obligated to repair damage caused by negligence of Lessee or of Lessee's agents, employees, contractors, guests or invitees, or by reason of the failure of Lessee to perform or comply with any terms, conditions or covenants in this Lease, or caused by alterations, additions or improvements made by Lessee or Lessee's agents, employees or contractors, which damage Lessee shall repair at its sole expense. Lessee expressly waives the benefits of any statute now or hereafter in effect (including, without limitation, 8 the provisions of Sections 1941 and 1942 of the California Civil Code) which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises, the Building or the Common Areas in good order, condition and repair. 7.2 LESSEE'S OBLIGATIONS. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment to Lessor, as additional rent, that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located), that serves only Lessee or the Premises, to the extent such cost is attributable to any cause beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises Improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any such particular maintenance or repairs the cost of which is Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, ceilings and plumbing on the Premises clean and in good operating condition and shall leave the ceiling panels, air conditioning vents, painted surfaces, wall coverings, paneling and carpets clean and in good repair. 7.3 ALTERATIONS AND ADDITIONS. (a) Lessee shall not make any alterations, improvement, additions, Utility Installation or repair in, on or about the Premises over Ten Thousand Dollars ($10,000), without Lessor's prior written consent. As used in the Paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wallcoverings, power panels, electrical distribution systems, lighting fixtures, air conditioning and plumbing. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's 9 liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease or within one hundred twenty (120) days after lease expiration, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises over Ten Thousand Dollars ($10,000) that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do. (e) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures or Lessee), which may be made to the Premises by Lessee, including but not limited to, floor coverings, paneling, doors, drapes, built-ins, moldings, sound attenuation, and lighting, conduit, wiring outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to Paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this Paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, and other than 10 Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of Paragraph 7.2(b). (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility Installations regardless of said costs. 7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, security systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. INSURANCE; INDEMNITY. 8.1 LIABILITY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Comprehensive General Liability insurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (GL0404), or equivalent, in an amount of not less than One Million Dollars ($1,000,000) per occurrence of bodily injury and property damage combined or in a greater amount as reasonably determined by Lessor as the amount then customarily carried by owners and operators of similar properties and shall insure Lessee, and Lessor as an additional insured, against liability arising out of the use, occupancy or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 PROPERTY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost of fire and extended coverage insurance, with vandalism and malicious mischief endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, all of Lessee's personal property, fixtures, equipment and tenant improvements. 8.3 INSURANCE -- LESSOR. Lessor shall obtain and keep in force during the term of this lease a policy or policies of insurance covering loss or damage to the Office Building Project improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form, or such other form as Lessor elects, providing protection against all perils included within the classification of special causes of loss, and such other perils as Lessor deems advisable, including without limitation earthquake and flood coverage. In addition, Lessor shall, at lessor's option, obtain and keep in force, during the term of is Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any 11 proceeds therefrom. The policies required by this Paragraph 8.3 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in Paragraph 9.1(e) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirety of any increase in the property insurance premium for the Office building Project over what it was immediately prior the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.4 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of all insurance policies required to be maintained by Lessee under this section 8 or certificates evidencing the existence and amounts of such insurance within fifteen (15) days after the Commencement Date of this Lease. All such policies shall name Lessor as an additional insured and no such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the exploration of such policies, furnish Lessor with renewals thereof. 8.5 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of lessor or Lessee or their agents, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.6 INDEMNITY. Except to the extent and proportion caused solely by Lessor's negligence or willful misconduct, Lessee shall indemnify and hold harmless Lessor and its agents, partners and lenders, from and against any and all liability, cost, expense, loss or claim for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all liability, cost, expense, loss or claim arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees or invitees and from and against all costs, attorneys' fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding be brought against lessor by reason of any such matter, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such liability cost, expense, loss or claim in order to be so 12 indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or from loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from thefts, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible. In addition, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease. 8.8 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of insurance specified in this section 8 are adequate to cover Lessee's property or obligations under this Lease. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Partial Damage" shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is less than thirty-three and one-third percent (33-1/3%) of the then Replacement Cost of the Building. (c) "Premises Total Destruction" shall mean if the Building is damaged or destroyed to the extent that the cost of repair is thirty-three and one-third percent (33-1/3%) or more of the then Replacement Cost of the Building. (d) "Building Total Destruction" shall mean if the Building is damaged or destroyed to the extent that the cost of repair is thirty-three and one-third percent (33-1/3%) or more of the then Replacement Cost of the Building. 13 (e) "Insured Loss" shall mean damage or destruction which was caused by an event actually covered by the insurance described in section 8. The fact that an insured Loss has a deductible amount shall not make the loss an uninsured loss. (f) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged are to the condition that existed immediately prior to the damage occurring, excluding all improvements made by Lessee, other than those installed by Lessor or Lessee at Lessee's expense. 9.2 PREMISES DAMAGE; PREMISES PARTIAL DAMAGE. (a) INSURED LOSS: Subject to the provisions of Paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Damage or Premises Partial Damage, then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (b) UNINSURED LOSS: Subject to the provisions of Paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 PREMISES TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL DESTRUCTION. Subject to the provisions of Paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classification of either (i) Premises Total Destruction, or (ii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such 14 damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 DAMAGE NEAR END OF TERM. If at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. 9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event Lessor repairs or restores the Building or Premises pursuant to the provisions of this Section 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expenses) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall be in proportion to the part of the Premises which is unusable by Lessee for the conduct of its business. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this Section 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (c) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications as and when required. 9.6 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Section 9, an equitable adjustment shall be made concerning advance rent, if any, and any advance payments made by Lessee to Lessor. Lessor shall, in addition return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor or which Lessor has a right to apply pursuant to the terms of this Lease. 9.7 WAIVER. Lessor and lessee waive the provisions of any statutes which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this lease. 15 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined in Paragraph 10.3, applicable to the Office Building Project subject to the payment by Lessee of Lessee's Share of Operating Expenses in accordance with the provisions of Paragraph 4.2, except as otherwise provided in Paragraph 10.2. 10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other Lessees or by Lessor for the exclusive enjoyment of any other lessee. Notwithstanding the provisions set forth in Paragraph 4.2 hereof, Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under Paragraph 4.2(d) the entirety of any increase in real property taxes if assessed solely by reason of additional improvements placed upon the Premises by Lessee at Lessee's request. 10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, he term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvements bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Office Building Project or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. 10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for which are to be paid separately by Lessee under Paragraph 10.2 or 10.5, are not separately assessed, Lessee's portion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 16 11. UTILITIES AND SERVICES. 11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. 11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, heating, ventilation, air conditioning, light, power, telephone, data and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.3 HOURS OF SERVICE. Said services and utilities shall be provided during generally accepted business days, Monday through Friday, hours 7:00 a.m. through 6:00 p.m. or such other days or hours as may hereafter be set forth. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof. 11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the premises that uses excess water, lighting, or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Property. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. Lessee may elect to terminate this lease if an interruption of utility or service results for thirty (30) consecutive calendar days and is caused by the negligent acts of Lessor or its agents. 12. OPTION TO EXTEND. Provided that Lessee is not in default under any of the terms of this Lease at the date on which the option granted herein is exercised or at the expiration of the Term, Lessee (but not a subtenant or assignee of Lessee except as provided in Paragraph 13.2 hereof) shall have the option to extend the Term for one (1) additional five (5) year period commencing on the day following the termination date of the original Term (the "Option Term") by giving Lessor written notice of Lessee's 17 irrevocable exercise of the Option Term not less than one hundred eighty (180) days prior to the expiration of the original Term ("Lessee's Notice"), in which event the Term shall be deemed to include the period of the Option Term. All terms and conditions of this Lease shall apply to the Option Term except that the monthly rent payable pursuant to section 4 hereof shall be one hundred percent (100%) of the Prevailing Market Rate be less than the rental rate paid during the last month of the Base Lease Term. The Monthly Rent shall be increased five cents ($0.05) per rentable square foot per month at the beginning of each year thereafter (years 2 through 5). "Prevailing Market Rate" ("PMR") is to be determined in accordance with this section 12. PMR shall be the actual effective rental being obtained at the time Lessor receives Lessee's Notice under leases on comparable space in comparable buildings. To the extent feasible, the aforementioned comparable buildings shall be in the surrounding area. The PMR shall be determined by agreement of Lessor and Lessee within thirty (30) days of receipt by Lessor of Lessee's Notice, or in the absence of such agreement, by one real estate appraiser with at least five (5) years' full time commercial appraisal experience in the area where the Premises are located who shall be selected jointly by Lessor and Lessee within forty-five (45) days after receipt by Lessor of Lessee's Notice. Said appraiser shall make a determination, which shall be binding on each party, within thirty (30) days of h is or her appointment. 13. ASSIGNMENT AND SUBLETTING. 13.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void and shall constitute a material default and breach of this Lease without the need for notice to Lessee under Paragraph 14.1. "Transfer" within the meaning of this Section 13 shall include the transfer or transfers aggregating: (a) if Lessee is a corporation, more than fifty percent (50%) of the voting stock of such corporation, or (b) if Lessee is a partnership, more than fifty percent (50%) of the profit and loss participation in such partnership. 13.2 LESSEE AFFILIATE. Notwithstanding the provisions of Paragraph 13.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control whit Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee under the Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment 18 shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment of subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 13.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder of alter the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expenses, and to perform all other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting nor the acceptance of rent, shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this Section 14 or this Lease. (d) If Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such assignment or sublease and the terms thereof. (e) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment of subletting by the sublessee. However, Lessor may consent to subsequent subletting and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease; provided, however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or anyone else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgment that no default then exists under this lease of the obligations to be performed by Lessee nor shall 19 such consent be deemed a waiver of any then existing default, except as may be other wise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. (i) If Lessee receives rent or other consideration, either initially or over the term of any assignment or sublease in excess of the rent required under this Lease, Lessee shall pay to Lessor, an additional rent hereunder, 50% of the excess of each such payment of rent or additional consideration by Lessee after deducting Lessee's cost for marketing and real estate commissions. 13.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rental and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease, provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reasons of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to relay upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublease as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed of modified without Lessor's prior written consent. Any sublessee shall, by reason of entering into a sublease under this Lease, be deemed for the benefit of Lessor, to have assumed 20 and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorney to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of lessee within three (3) days after Service of said notice of default upon such sublessee, and the sublessee shall have the right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 13.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys', architects', engineers' and other consultants' fees. 13.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the Office Building Project and not in violation of any exclusives or rights then held by other tenants, and (b) the proposed assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 14. DEFAULT; REMEDIES. 14.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The abandonment of the Premises by Lessee. Abandonment of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid. 21 (b) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) business days after written notice thereof from lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (c) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30 days. In the event that any provision of this Paragraph 14.1(c) is contrary to any applicable law, such provision shall be of no force or effect. (d) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. (e) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee, other than those specifically referenced in other subparagraphs of this Paragraph 14.1, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to lessee under applicable Unlawful Detainer statutes. In the event a specific time period for performance is set forth in any covenant, condition or provision of this Lease, such specific time period shall govern such performance rather than the thirty (30) day period set forth in this section and such specific time period shall not be subject to extension as provided in this section. 14.2 REMEDIES. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default. (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate 22 and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to Section 16 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession, in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent, and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. (d) Lessor and Lessee agree that if at attorney is consulted by Lessor in connection with a Lessee Default, $500 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of default and that Lessor may include the greater of $500 or the actual cost of such services and costs in said notice as rent due and payable to cure said Default. 14.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently pursues the same to completion. 14.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the term of any mortgage or trust deed covering the Office Building Project. 23 Accordingly, if any installment of Base Rent, Operating Expenses, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, lessee shall pay to Lessor a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. Lessor will grant to Lessee a one-time exemption from this requirement provided the late payment is received by Lessor within twenty (20) days after written notice by Lessor. 15. CONDEMNATION. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lesson shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in the full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expenses shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improved that have been paid for by Lessee. For that purpose, the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has 24 been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 16. BROKER'S FEE. (a) The only brokers involved in this transaction are CPS Realty Group and Cornish & Carey Commercial. Lessor shall pay to said brokers, fees set forth in the Listing Agreement with CPS Realty Group. (b) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm, broker or finder (other than the person(s), if any, whose names are set forth in Paragraph 16(a), above) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and no other broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses, attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions or the indemnifying party. 17. ESTOPPEL CERTIFICATE. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrance of the Office Building Project or of the business of Lessee. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, and shall give rise to all rights of a non-defaulting party against a defaulting party without necessity of further notice or cure period. In addition, at the requesting party's option, such failure shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. 25 (c) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 18. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project, and except as expressly provided in Section 16, in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 19. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall i no way affect the validity of any other provision hereof. 20. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 21. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 22. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense and any other expenses payable by Lessee hereunder, shall be deemed to be rent. 23. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate brokers listed in Section 16 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or 26 representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 24. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight (48) house following deposit in the mail, postage prepaid, whichever first occurs. Either party may be noticed to the other specifying a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate to notice to Lessee. 25. WAIVER. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval to any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 26. RECORDING. Lessee shall, upon request of Lessor, execute, acknowledge and deliver to Lessor a "short form" memorandum of this Lease for recording purposes. 27. NO RIGHT TO HOLD OVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease unless agreed to by the parties. 28. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 29. COVENANTS AND CONDITIONS. Each provision of this Lease preferable by Lessee shall be deemed both a covenant and a condition. 30. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of Section 19, this Lease shall bind the parties, their personal representatives, successors and 27 assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 31. SUBORDINATION. (a) This Lease, any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof without requirement that Lessee execute any acknowledgment of such subordination. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee 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 and the Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof and whether or not Lessee has executed any acknowledgment of such. (b) Lessee agrees to execute any documents requested to evidence or effectuate an attornment, a subordination, or to make this Lease or any option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be so long as such document is consistent with the provisions set forth herein and contains Lessee's right to not be disturbed as described herein. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or any additional cure period and shall give rise to all remedies of Lessor arising from a default by Lessee hereunder. 32. ATTORNEYS' FEES. 32.1 ATTORNEYS' FEES. If either party or the broker(s) named herein brings an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 28 32.2 REIMBURSEMENT. The attorneys' fee aware shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys fees reasonable incurred in good faith. 32.3 DEFAULT. Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notices of default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such default. 33. LESSOR'S ACCESS. 33.1 ENTRY ONTO PREMISES. Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 180 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. Lessor shall endeavor to minimize any interference with Lessee's use of the Premises. 33.2 ABATEMENT OF RENT. All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for same. 33.3 EMERGENCY. In case of emergency, at any time of night or day, Lessee shall provide Lessor immediate access to the Premises by means of Lessee's personnel, security guard, by key or by any reasonably appropriate means. Moreover, Lesser shall have the right to enter the Premises in case of emergency by any reasonable means, and any such entry shall not be deemed a forceable or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 34. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holder of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 29 35. SIGNS. Lessee shall not place any sign on the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. All such signs are subject to all covenants, conditions and restrictions and zoning and other ordinances applicable to the Premises and the prior written consent of Lessor as to the size, color and other details of any such sign. 36. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 37. CONSENTS. Except for Sections 35 (Auctions) and 36 (Signs) hereof, wherever in this Lease the consent of one party is required to an action of the other party, such consent shall not be unreasonably withheld or delayed. 38. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 39. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed thereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 40. SECURITY MEASURES - LESSOR'S RESERVATIONS. 40.1 SECURITY MEASURES. Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in Paragraph 4.2(b). 40.2 LESSOR'S RESERVATIONS. Lessor shall have the following rights: (a) To change the name or title of the Office Building Project or building Project or building in which the Premises are located upon not less than ninety (90) days prior written notice; 30 (b) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (c) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on pole signs in the Common Areas. 41. EASEMENTS. 41.1 LESSOR'S RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default to this Lease by Lessee without the need for further notice to Lessee. 41.2 OBSTRUCTION. The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. AUTHORITY. If Lessee is a corporation, trust, or general or limited partnership, Lessee, and each individual executing this Lease on behalf of such entity, represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. The Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 45. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in 31 connection with the obtaining of normal financing or refinancing of the Office Building Project. 46. MULTIPLE PARTIES. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor Lessee, respectively. 47. TENANT IMPROVEMENTS. Lessee shall be responsible for managing and constructing the "Tenant Improvements" described and depicted on Exhibit "C" to this Lease. Lessee shall use its best efforts to substantially complete the Tenant Improvements prior to the Commencement Date. Lessee's architect and final plans are subject to Lessor's approval. 48. RIGHT OF FIRST AND SECOND REFUSAL. If there is not an event of default under this Lease, then Lessee shall have the First Right of Refusal on any vacant space in approximately the westerly half of the second floor and the Second Right of Refusal on any adjacent vacant available space on the first floor (the "Expansion Space") on substantially the same terms and conditions as contained in this Lease. The following procedures shall be followed with respect the Lessee's Right of Refusal under this Lease. 48.1 Lessee shall have five (5) business days to elect, by written notice to Lessor, to exercise its Right of First or Second Refusal (as the case may be) to lease the Expansion Space. If Lessee so elects, the parties shall immediately execute an amendment to this Lease identifying the addition of such Expansion Space to the Premises and the increased rental. 48.2 Lessee's failure to exercise its Right of First or Second Refusal shall not be deemed a waiver of such future right(s) with respect to any other transaction. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. 32 "LESSOR" "LESSEE" William H. and Leila A. Cilker BEA Systems, Inc. By: /s/ William H. Cilker By: /s/ Steve Wong --------------------------- ---------------------------- William H. Cilker Title: VP Finance and Administration ------------------------------ Steve Wong Lessor's address for notices: Lessee's address for notices: William H. Cilker Cilker Orchards 1631 Willow Street, Suite 225 San Jose, CA 95125 33 FIRST AMENDMENT TO LEASE This First Amendment to Lease (the "First Amendment") is made and entered into as of this 19th day of January 1996 by and between William H. and Leila A. Cilker ("Lessor") and BEA Systems, Inc., a Delaware corporation ("Lessee"). RECITALS A. On or about November 15, 1995 Lessor and Lessee entered into a Lease (the "Lease") of those certain premises commonly known as Suite 105, 385 Moffett Park Drive, Sunnyvale, California, consisting of approximately twelve thousand one hundred sixty-four (12,164) usable square feet (USF), thirteen thousand six hundred twenty-four (13,624) rentable square feet (RSF) (the "Original premises") as more particularly described therein. B. Lessor and Lessee now wish to expand the premises demised under the Lease to include the remaining vacant space on the second floor of the Building which consists of approximately twenty one thousand five hundred (21,500) USF, twenty four thousand eighty (24,800) RSF and is identified as Suite 200 (the "Expansion Space") for a total of thirty three thousand six hundred sixty-four (33,664) USF and thirty seven thousand seven hundred four (37,704) RSF. C. Lessor and Lessee also wish to amend the Lease in order to provide for the construction of certain tenant improvements in the Expansion Space. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, the parties hereto agree to amend the Lease as follows: 1. PREMISES. 1.2 Premises in the Lease remains unchanged. The following is added as a second paragraph. Suite number 200, consisting of approximately twenty-one thousand five hundred (21,500) usable square feet (USF) as measured from the center line of the shared wall to the outside of the outside walls; twenty-four thousand eighty (24,080) rentable square feet (RSF), more or less, (the expansion space) for a total of thirty- three thousand six hundred (33,600) USF and thirty-seven thousand seven hundred four (37,704) RSF including a 12% load factor (the "Premises"). 2. BASE RENT. Paragraph 1.6 of the Lease is hereby amended as follows: 1.6 BASE MONTHLY RENT. For Suite 105, Eighteen Thousand Three Hundred Ninety-Two Dollars ($18,392.00) per month payable on the 1 first day of each month, per Paragraph 4.1, commencing on the Commencement Date but no later than February 1, 1996. For Suite 200, Thirty Thousand Seven Hundred Eighty Dollars ($30,70.00) per month payable on the first day of each month commencing on March 25, 1996 (prorated). 3. RENT PAID UPON EXECUTION. Paragraph 1.8 of the Lease is hereby amended to read as follows: 1.8 RENT PAID UPON EXECUTION. Eighteen Thousand Three Hundred Ninety-Two Dollars ($13,392.00), as to Suite 105, for the month of February 1996, and Thirty Thousand Seven Hundred Eighty Dollars ($30,780.00), as to Suite 200, for April 1996. 4. SECURITY DEPOSIT. Paragraph 1.9 of the Lease is hereby amended to read as follows: 1.9 SECURITY DEPOSIT. Twenty One Thousand One Hundred Seventeen Dollars ($21,117.00) as to Suite 105 paid upon execution of the Lease and Forty Thousand Nine Hundred Thirty-Six Dollars ($40,936.00) as to Suite 200 payable upon execution of this First Amendment. 5. LESSEE'S SHARE OF OPERATING EXPENSE INCREASE is hereby amended to read as follows: 1.10 LESSEE'S SHARE OF OPERATING EXPENSE INCREASE is Forty-seven and five-tenths percent (47.5%) as defined in Paragraph 4.2. 6. VEHICLE PARKING. The first two sentences of Paragraph 2.2 are hereby amended to read as follows: 2.2 VEHICLE PARKING. So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to use one hundred thirty-five (135) parking spaces in the Common Area of the Office Building Project. Twenty-eight (28) of these spaces shall be designated for "Visitors." The remainder of Paragraph 2.2 is unchanged. 2 7. BASE MONTHLY RENT. Paragraph 4.1 of the Lease is hereby amended as follows: 4.1 BASE MONTHLY RENT. Lessee shall pay the Base Monthly Rent on the amount and for the months set forth below, and otherwise as provided in this Paragraph 4.1. Month 1 2/1/96 thru 2/28/96 $ 18,392.00* Month 2 3/1/96 thru 3/31/96 $ 25,342.00 Month 3 - 12 4/1/96 thru 1/31/96 $ 49,172.00** Month 13 - 24 2/1/97 thru 1/31/98 $ 56,398.00 Month 25 - 36 2/1/98 thru 1/31/99 $ 58,283.00 Month 37 - 48 2/1/99 thru 1/31/00 $ 60,168.00 Month 49 - 60 2/1/00 thru 1/31/01 $ 62,053.00 *Suite 105, $18,392.00 paid upon execution of the Lease Agreement. **Suite 200, $30,780.00 paid upon execution of the Lease Agreement. 8. BASE YEAR is hereby amended to read as follows: 4.2(c) "Base Year is defined, for purposes of this Lease, to be the year ending December 31, 1996, which shall be based on annualizing the months at a minimum of 95% occupancy. 9. OPTION TO EXTEND. The last two sentences of the first paragraph of Section 12 of the Lease is hereby amended to read as follows: 12. OPTION TO EXTEND. All terms and conditions of this Lease shall apply to the Option Term except that the monthly rent payable pursuant to Section 4 hereof shall be one hundred percent (100%) of the Prevailing Market Rent, as hereinafter defined, but not less than the rental rate paid during the last month of the Base Lease Term. 10. TENANT IMPROVEMENTS. Section 47 of the Lease is hereby amended by addition of the following as a second paragraph: 47. Lessee shall at Lessee's expense construct the "Tenant Improvements" described and depicted on Exhibit C-2 to be attached to this First Amendment. Lessor shall provide included in the rent, the "Tenant Improvement Allowance" of Five Dollars ($5.00) per usable square foot (60,820) (the "Additional Tenant Improvement Allowance") to be repaid by an increase in Base Monthly Rent equal to Twenty-One and 25/100th Dollars ($32.25) for each One Thousand Dollars ($1,000). In accordance with the provisions of Paragraph 9 of 3 the Work Letter Agreement, within thirty (30) days of substantial completion of the Tenant Improvements and following receipt of a statement from Lessee setting forth in reasonable detail the application of the Tenant Improvement Allowance and the Additional Tenant Improvement Allowance, reimburse Lessee for these funds expended, but not to exceed $10.00 per USF (121,640). Lessee shall use Lessee's best efforts to substantially complete the Tenant Improvements prior to April 1, 1996. 11. RIGHT OF FIRST AND SECOND REFUSAL. The first paragraph of section 48 is hereby amended to read as follows: If there is not an event of default under this Lease, then Lessee shall have the First Right of Refusal on any vacant space in approximately the westerly half of the second floor and the Second Right of Refusal on any adjacent vacant available space on the first floor (the "Expansion space") on substantially the same terms and conditions contained in the Lease, except for the Rent which shall be at the current lease rate or at the rate of the offer, whichever is higher. The following procedures shall be followed with respect to Lessee's Rights of Refusal under this Lease. 12. OCCUPANCY OF EXPANSION SPACE. Section 49 shall be added to the Lease to read as follows: 49. OCCUPANCY OF EXPANSION SPACE. Lessee shall have occupancy of the Expansion Space, Suite 200, on February 1, 1996. Except as amended hereby, the Lease shall remain in full force and effect. 4 IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the day and year first above written. :LESSOR" "LESSEE" WILLIAM H. AND LEILA A. CILKER BEA SYSTEMS, INC., a Delaware corporation By: /s/ William H. Cilker By: /s/ Steve Wong --------------------------- ---------------------------- William H. Cilker By: /s/ Leila H. Cilker Its: VP of Finance and Administration -------------------------- ---------------------------------- Leila H. Cilker Lessor's address for notices and Lessee's address for notices: payment of rent: William H. Cilker Steve Wong Cilker Orchards BEA Systems, Inc. 1631 Willow Street, Suite 225 2465 E. Bayshore Road, #301 San Jose, CA 95125 Palo Alto, CA 94303 5 EX-10.10 11 STOCK PURCHASE AGREEMENT EXHIBIT 10.10 BEA ENTERPRISES, INC. STOCK PURCHASE AGREEMENT This Agreement is made as of September 28, 1995 among BEA Enterprises, Inc., a Delaware corporation (the "Company") located at 2465 E. Bayshore Road, Suite 301, Palo Alto, CA 94303, and Warburg, Pincus Ventures, L.P., a Delaware limited partnership (the "Purchaser"). RECITALS -------- A. Purchaser has also entered into that certain Option Agreement dated July 27, 1995 for the purchase of all of the outstanding stock of Information Management Company, a Delaware corporation ("IMC"). Purchaser desires to assign its right to acquire the outstanding stock of IMC to the Company, and the Company desires to accept such assignment and to consummate the purchase of all of the outstanding stock of IMC (the "IMC Transaction") in accordance with a stock purchase agreement to be entered into among the Company and the stockholders of IMC concurrently with the execution and delivery of this Agreement by Purchaser and the Company. B. Purchaser also has entered into that certain Option Agreement dated August 14, 1995 for the purchase of TWL Holding's ("TWL") stock in Independent Technologies, Inc. a Delaware corporation ("ITI"). Purchaser desires to assign its right to acquire the outstanding stock of ITI from TWL to the Company, and the Company desires to accept such assignment and to consummate the purchase of the outstanding stock of ITI (the "ITI Transaction") in accordance with a stock purchase agreement or merger agreement to be entered into among the Company, TWL and ITI. C. The Company has entered an agreement to purchase certain assets of VI Systems, Inc. (the "VI Transaction"). D. Purchaser desires to purchase certain shares of the Company's Series A Preferred Stock, the Company's Series B Preferred Stock and the Company's Common Stock and the Company desires to issue and sell such shares to Purchaser to enable the Company to consummate the IMC Transaction, the ITI Transaction, the VI Transaction and future acquisitions by the Company as mutually agreed to by Purchaser and the Company. NOW, THEREFORE, the parties hereto agree as follows: 1 AGREEMENT --------- SECTION I AUTHORIZATION AND SALE OF PREFERRED STOCK 1.1 AUTHORIZATION. The Company will authorize the sale and issuance of (i) up to 20,000,000 shares of its Series A Preferred Stock (the "Series A Preferred"), having the rights, preferences, privileges and restrictions as set forth in the Certificate of Amendment of the Certificate of Incorporation (the "Certificate") in the form attached to this Agreement as EXHIBIT A, and (ii) up to 20,000,000 shares of Series B Preferred Stock (the "Series B Preferred") having the rights, preferences, privileges and restrictions as set forth in the Certificate. 1.2 SALE OF PREFERRED AND COMMON. (a) Subject to the terms and conditions hereof, the Company will issue and sell to Purchaser at the first Closing (as defined below), and Purchaser will buy from the Company at the first Closing, (i) 7,900,000 shares of Series A Preferred for a purchase price of $1.70 per share for an aggregate purchase price of $13,430,000; (ii) 1,000,000 shares of the Company's Common Stock ("Common Stock") for a purchase price of $.57 per share for an aggregate purchase price of $570,000. Purchaser also intends to purchase shares of Series B Preferred in the future as described in paragraph (b) of this Section 1.2. For purposes of this Agreement, shares of Series A Preferred and/or Series B Preferred shall be referred to as the "Preferred Shares," shares of Series A Preferred, Series B Preferred and Common Stock shall be referred to as the "Shares." The aggregate purchase price to be paid for the Series A Preferred and Common Stock at the First Closing shall be referred to as the "Purchase Price." (b) Subject to the terms and conditions hereof, the Company will issue and sell to Purchaser, and the Purchaser will buy from the Company, such additional shares of Preferred Shares and Common Stock at such time and at the purchase price as mutually agreed to by the Company and Purchaser which additional investments will be reflected on the Schedule of Investments attached hereto as EXHIBIT B, which exhibit will be modified to reflect additional capital investments upon the mutual consent of the Company and Purchaser. The Company's agreement with respect to closing each purchase are separate agreements, and each sale of the Stock to the Purchaser are separate sales. SECTION II CLOSING DATES; DELIVERY 2.2 CLOSING DATES. The first closing of the purchase and sale of the hereunder shall be held at the offices of Morrison & Foerster, 1290 Avenue of the Americas, New York, New York, 10104-0185, concurrently with the closing of the IMC Transaction (the "first 2 Closing") or at such other time and place upon which the Company and Purchaser shall agree (the date of the first Closing is hereinafter referred to as the "Closing Date"). 2.3 SUBSEQUENT CLOSINGS. The Company may, at its option, schedule additional closings (the "Additional Closings") after the first Closing has been completed on such date or dates as the Company may determine, but not later than September 30, 1998. The date of each Additional Closing is hereinafter referred to as an "Additional Closing Date." The first Closing and each Additional Closing are sometimes referred to herein individually as a "Closing" and the first Closing Date and each Additional Closing Date are sometimes referred to herein individually as a "Closing Date." 2.4 DELIVERY. (a) At the first Closing, the Company shall deliver to Purchaser certificates, registered in such Purchaser's name, representing the Series A Preferred and Common Stock against payment of the Purchase Price therefor, which shall be paid (i) as to $10,880,000 wire transfer per the Company's instructions; (ii) as to $860,000 in the form of a credit for amounts paid by Purchaser to the Company pursuant to that certain Agreement, dated as of September 18, 1995, between the Company and Purchaser regarding the VI Transaction; (iii) as to $1,000,000 in the form of a credit for amounts previously paid to the stockholders of IMC as an option payment in connection with the IMC Transaction; (iv) as to $500,000 in the form of a credit for amounts previously paid to TWL Holdings as an option payment in connection with the ITI Transaction; (v) as to $200,000 in the form of a credit for amounts paid by Purchaser to the Company pursuant to that certain Agreement, dated as of September 27, 1995, between the Company and the Purchaser; and (vi) as to $560,000 in the form of previous advances to the Company. (b) At each Additional Closing, the Company shall deliver to each Purchaser a certificate or certificates, registered in such Purchaser's name set forth on the Schedule of Purchasers, representing the number of Shares designated on the Schedule of Purchasers to be purchased by such Purchaser, against payment of the purchase price therefor, by check payable to the Company or wire transfer per the Company's instructions. SECTION III REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth on EXHIBIT C attached hereto ("Schedule of Exceptions"), the Company represents and warrants to Purchaser as follows: 3.1 ORGANIZATION AND STANDING; CERTIFICATE AND BY-LAWS. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as 3 currently conducted and as proposed to be conducted. The Company is not currently qualified to do business as a foreign corporation in any jurisdiction, except for California, and the failure to be so qualified will not have a material adverse affect on the Company's business as now conducted. The Company has furnished Purchaser with copies of its Certificate of Incorporation and By-Laws, as amended. Said copies are true, correct and complete and contain all amendments through the Closing Date. 3.2 CORPORATE POWER. The Company has all requisite legal and corporate power and authority to execute and deliver this Agreement, the Investor Rights Agreement in the form attached hereto as EXHIBIT D (the "Rights Agreement"), and the Shareholders Agreement in the form attached hereto as EXHIBIT E (the "Shareholders Agreement") to sell and issue the Shares hereunder, to issue the Common Stock issuable upon conversion of the Series A Preferred, and to carry out and perform all of its obligations under the terms of this Agreement and such other agreements and instruments. 3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies and does not otherwise control, directly or indirectly, or have any ownership interest in any corporation, partnership, business trust, association or business entity. 3.4 CAPITALIZATION. The authorized capital stock of the Company consists, or will, upon the filing of the Certificate and immediately prior to the First Closing, consist, of 40,000,000 shares of Common Stock, $0.001 par value, of which 1,525,000 shares will be issued and outstanding immediately prior to the First Closing, and 36,784,000 shares of Preferred Stock, $0.001 par value, of which (i) 18,066,000 shares have been designated "Series A Preferred," of which no shares will be issued and outstanding immediately prior to the First Closing; and (ii) 18,718,000 shares have been designated "Series B Preferred," of which no shares will be issued and outstanding immediately prior to the First Closing. All outstanding shares have been duly authorized and validly issued, are fully paid and nonassessable, were issued in compliance with all federal and state securities laws, and were not issued in violation of any preemptive rights. The Company has reserved 18,066,000 shares of Series A Preferred for issuance hereunder and 18,718,000 shares of Series B Preferred for issuance hereunder 1,000,000 shares of Common for issuance hereunder, 36,784,000 shares of Common Stock for issuance upon conversion of the authorized Series A and Series B Preferred Stock and 3,300,000 shares of its Common Stock for issuance to employees, consultants, or directors under stock plans or arrangements approved by the Board of Directors. The Series A Preferred and Series B Preferred shall have the rights, preferences, privileges and restrictions set forth in the Certificate. Except as set forth above, there are no other authorized or outstanding subscription, warrant, option or other rights or commitments (including, without limitation, preemptive rights or rights of first refusal) to purchase or acquire from the Company any shares of any class of capital stock of the Company or securities convertible into or exchangeable for such capital stock. The Company is under no duty to redeem or to repurchase any shares of any class or series of stock. 4 3.5 AUTHORIZATION. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement and the Rights Agreement by the Company, the authorization, sale, issuance and delivery of the Shares and the Common Stock issuable upon conversion of the Series A Preferred and the performance of all of the Company's obligations hereunder and thereunder has been taken or will be taken prior to the Closing. Each of this Agreement, the Shareholders Agreement and the Rights Agreement, when each is executed and delivered by the Company, shall constitute a valid and binding obligation of the Company, enforceable in accordance with its terms, except as the indemnification provisions of Section 5.7 of the Rights Agreement may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, and will have the rights, preferences, privileges and restrictions described in the Certificate. The Common Stock issuable upon conversion of the Series A Preferred has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement and the Certificate will be validly issued, fully paid and nonassessable. The issuance and delivery of the Shares, in accordance with this Agreement, and the Common Stock issuable upon conversion of the Series A Preferred Shares, as applicable, is not subject to any preemptive or other similar rights or any liens or encumbrances; provided, however, that the Shares and the Common Stock issuable upon conversion of the Series A Preferred, as applicable, may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or in the Rights Agreement. 3.6 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The Company is not in breach or violation of any term of its Certificate of Incorporation or By-Laws, of any term or provision of any mortgage, deed of trust, indebtedness, indenture, contract, agreement, instrument, judgment or decree, or any order, statute, rule or regulation, in each case where such breach or violation would have a material adverse effect on the Company. No event or failure of performance has occurred that, with the passage of time or the giving of notice, would constitute such a breach or violation by the Company. The execution, delivery and performance of and compliance with this Agreement, the Shareholders Agreement and the Rights Agreement and the issuance, sale and delivery of the Shares, in accordance with this Agreement, and the Common Stock issuable upon conversion of the Series A Preferred do not conflict with, and will not result in a breach or violation of the terms, conditions or provisions of, or constitute a default (or an event that, with the giving of notice or passage of time, or both, could result in a default) under, or result in the creation or imposition of any lien pursuant to the terms of the Company's Certificate of Incorporation or Bylaws, or any statute, law, rule or regulation, any state or federal order, judgment or decree, or any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company, or any of its properties, is subject, in each case where such conflict, breach, violation, default or lien would have a material adverse effect on the Company. 5 3.7 LITIGATION, ETC. There is no action, proceeding or investigation pending or threatened (nor to the Company's knowledge is there a reasonable basis therefor) against the Company or any of its properties or assets or that questions the validity of this Agreement, the Shareholders Agreement or the Rights Agreement, or any action taken or to be taken in connection herewith. The foregoing includes, without limitation, actions pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. No action, suit or proceeding has been instituted or is threatened by the Company. 3.8 REGISTRATION RIGHTS. Except as set forth in the Rights Agreement, the Company is not under any contractual obligation to register (as defined in Section 1 of the Rights Agreement) any of its currently outstanding securities or any of its securities which hereafter may be issued. 3.9 CERTAIN TRANSACTIONS. Neither the Company nor, to the Company's knowledge, any of its officers has any interest (other than as holders of less than 1% of the voting securities of a publicly-traded company), either directly or indirectly, in any entity that currently (i) provides any services or designs, produces or sells any products or product lines that are the same, similar to or competitive with any activity or business in which the Company is engaged or proposes to engage; (ii) is a supplier, customer, or creditor of the Company; or (iii) has any direct or indirect interest in any asset or property, real or personal, tangible or intangible, of the Company or any property, real or personal, tangible or intangible, that is necessary for the Company's business as currently conducted or proposed to be conducted. No employee, stockholder, officer or director of the Company, or their spouses or children, is indebted to the Company, nor is the Company indebted to any of them. 3.10 SECURITIES LAWS; GOVERNMENTAL CONSENT. Based in part on the accuracy of the Purchaser's representations and warranties set forth in Section 4, the offer, sale and issuance of the Shares and the Common Stock issuable upon conversion of the Series A Preferred as provided in this Agreement are exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 (the "Securities Act"), and have been qualified (or are exempt from qualification) under all applicable state securities qualification requirements. Except for the filing of (a) the Certificate with the Secretary of State of the State of Delaware, and (b) notices required or permitted to be filed after the Closing Date with certain United States federal and state securities commissions, which notices the Company will file on a timely basis, no consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution, delivery and performance of this Agreement or the Rights Agreement, the offer, sale or issuance of the Shares (and the issuance of the Common Stock issuable upon conversion of the 6 Series A Preferred) or the consummation of any other transaction contemplated hereby or by the Shareholders Agreement or the Rights Agreement. 3.11 DISCLOSURE. The Company has fully provided Purchaser with all the information that the Purchasers have requested for the purpose of deciding whether to purchase the Shares pursuant to the terms of this Agreement. This Agreement with the Exhibits hereto, when taken as a whole, do not contain any untrue statement of a material fact on the part of the Company or omit to state a material fact necessary in order to make the statements contained herein on the part of the Company not misleading. SECTION IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Purchaser hereby severally represents and warrants to the Company with respect to the purchase of the Shares pursuant to the terms of this Agreement and the Common Stock issuable upon conversion of the Series A Preferred (collectively, the "Securities") as follows: 4.1 INVESTMENT EXPERIENCE. Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. 4.2 INVESTMENT INTENT. Purchaser is acquiring the Securities for investment only for its own account, and not with the view to, or for resale in connection with, any distribution thereof. Purchaser understands that the Securities have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent of such Purchaser as expressed herein. 4.3 RULE 144. Purchaser acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than two years after the security was last held by the Company or an affiliate of the Company, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" and the number of shares being sold during any three-month period not exceeding specified limitations. 4.4 NO PUBLIC MARKET. Purchaser understands that no public market now exists for any of the securities issued by the Company, and that the Company has made no assurances that a public market will ever exist for the Company's securities. 7 4.5 ACCESS TO DATA. Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management and the opportunity to review the Company's facilities and business plan. Purchaser has also had an opportunity to ask questions of officers of the Company, which questions were answered to its satisfaction. Purchaser understands that such discussions, as well as any written information issued by the Company, were intended to describe certain aspects of the Company's business and prospects which the Company believes to be material, but were not a thorough or exhaustive description, except as set forth in Section 3 hereof. 4.6 AUTHORIZATION. Each of this Agreement and the Rights Agreement when executed and delivered by such Purchaser will constitute a valid and legally binding obligation of the Purchaser, enforceable in accordance with its terms, except as the indemnification provisions of Section 5.7 of the Rights Agreement may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. SECTION V CONDITIONS TO CLOSING 5.1 CONDITIONS TO BOTH THE PURCHASER'S AND THE COMPANY'S OBLIGATIONS. The obligations of the Purchaser to purchase and of the Company to issue and sell the Shares are subject to the fulfillment, on or prior to each Closing Date, of all of the following conditions, any of which may be waived in whole or in part by mutual agreement of the Purchasers and the Company: (a) The Company shall have obtained all consents, permits and waivers necessary or appropriate on the part of the Company for consummation of the transactions contemplated by this Agreement and the Rights Agreement. Except for the notices required to be filed after each Closing Date with certain federal and state securities commissions, which notices the Company will file on a timely basis, the Company shall have obtained all approvals of any federal or state governmental authority or regulatory body that are required on the part of the Company in connection with the lawful sale and issuance of the Shares and the Common Stock issuable upon conversion of the Series A Preferred. (b) At each Closing, the purchase of the Shares by Purchaser hereunder shall be legally permitted by all laws and regulations to which Purchaser or the Company is subject. (c) Prior to the first Closing, the Certificate shall have been filed with the Secretary of State of the State of Delaware. (d) Prior to the first Closing, the Company and Purchaser shall have entered into the Rights Agreement. 8 (e) The Company, Purchaser and each of the stockholders of the Company signatories thereto shall have entered into the Shareholders Agreement at the first Closing, which will be amended at Additional Closings if additional stockholders have purchased stock; (f) The IMC Transaction shall be closing concurrently with the occurrence of the first Closing pursuant to this Agreement, and the terms and conditions of the IMC Transaction and the closing thereof shall have approved in writing by each of the Company and Purchaser; and (g) Each subsequent Transaction's closing shall occur concurrently with each Closing pursuant to this Agreement, and the terms of each Transaction and the closing thereof shall have been approved in writing by each of the Company and the Purchaser. 5.2 ADDITIONAL CONDITIONS TO THE PURCHASER'S OBLIGATIONS. In addition to the conditions set forth in Section 5.1 hereof, Purchaser's obligation to purchase the Shares is subject to the fulfillment, on or prior to each Closing Date, of all of the following conditions (except as otherwise provided below), any of which may be waived in whole or in part by such Purchaser: (a) The representations and warranties made by the Company in Section 3 hereof shall be true and correct when made, and shall be true and correct on each Closing Date with the same force and effect as if they had been made on and as of the same date, provided that the Company shall be entitled to update EXHIBIT C in connection with any Additional Closing. (b) The Company shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to each Closing Date. (c) With respect to the first Closing only, the Purchaser shall have received from Morrison & Foerster, an opinion letter addressed to them, dated the first Closing Date and in substantially the form attached hereto as EXHIBIT F. (d) The Company shall have delivered to Purchaser a certificate, executed by the chief executive officer of the Company and dated the Closing Date, and each Additional Closing Date certifying to the fulfillment of the conditions specified in Sections 5.1(a), 5.2(a) and 5.2(b). 5.3 ADDITIONAL CONDITION TO OBLIGATIONS OF THE COMPANY. In addition to the conditions set forth in Section 5.1 hereof, the Company's obligation to issue and sell the Shares to the Purchaser is subject to the fulfillment to the Company's satisfaction, on or prior to each Closing Date, of the following conditions, any of which may be waived in whole or in part by the Company: 9 (a) The representations and warranties made by Purchaser in Section 4 hereof shall be true and correct when made, and shall be true and correct on each Closing Date with the same force and effect as if they had been made on and as of the same date. (b) Purchaser shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to each Closing Date, including payment of the Purchase Price. SECTION VI MISCELLANEOUS 6.1 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 6.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Purchaser and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto or in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder as of the date of such certificate or instrument. 6.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 6.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof. Neither this Agreement nor any provision hereof may be amended, changed, waived, discharged or terminated other than by a written instrument signed by the party against who enforcement of any such amendment, change, waiver, discharge or termination is sought. 6.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be effective upon receipt and shall be in writing and may be delivered in person, by telecopy, electronic mail, express delivery service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage prepaid, addressed: (a) if to Company: BEA Enterprises, Inc. 2465 E. Bayshore Road, Ste. 301 Palo Alto, CA 94303 Attn: President and Chief Executive Officer 10 (b) if to Purchaser: Warburg, Pincus Ventures, L.P. 466 Lexington Avenue New York, NY 10017-3147 Attn: Stewart K.P. Gross with a copy to: Michael C. Phillips, Esq. Morrison & Foerster 755 Page Mill Road Palo Alto, CA 94304-1018 or at such other address as the party shall so indicate in accordance with this Section 6.5. 6.6 SEVERABILITY. If any provision of this Agreement shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 6.7 FINDER'S FEES. (a) The Company (i) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement and (ii) hereby agrees to indemnify and to hold the Purchasers harmless of and from any liability for any commission or compensation in the nature of a finder's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which the Company, or any of its employees or representatives, is responsible. (b) The Purchaser (i) represents and warrants that, except for Nancy Albertini, it has retained no finder or broker in connection with the transactions contemplated by this Agreement and (ii) hereby agrees to indemnify and to hold the Company harmless of and from any liability for any commission or compensation in the nature of a finder's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which Purchaser, or any of its employees or representatives, is responsible, including, without limitation, Nancy Albertini. 6.8 TITLES AND SUBTITLES. The titles of the Articles and Sections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 6.10 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party upon any breach or default of any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed to 11 be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character of any breach or default under this Agreement, or any waiver of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in writing, and that all remedies, either under this Agreement, by law or otherwise, shall be cumulative and not alternative. 12 6.11 PAYMENT OF FEES AND EXPENSES. Each party shall be responsible for paying its own fees, costs and expenses in connection with this Agreement and the transactions herein contemplated. 6.12 EXHIBITS. Each of the exhibits and schedules to this Agreement are incorporated in the Agreement by this reference. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above. COMPANY: BEA ENTERPRISES, INC. By: /s/ William T. Coleman III -------------------------------- Title: President ----------------------------- PURCHASER: WARBURG, PINCUS VENTURES, L.P. By: /s/ Stuart K. P. Gross -------------------------------- Title: Partner, Warburg, Pincus & Co. General Partner ------------------------------- 13 EXHIBITS -------- EXHIBIT NAME ------- ---- A Certificate of Amendment to Certificate of Incorporation B Schedule of Investments C Schedule of Exceptions D Investor Rights Agreement E Shareholder Agreement F Opinion of Morrison & Foerster i EXHIBIT B SCHEDULE OF INVESTMENTS Date Purchase Price Shares September 28, 1995 $570,000 1,000,000 common stock September 28, 1995 $13,430,000 7,900,000 Series A Preferred Stock ii FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT This First Amendment is made and dated as of October 31, 1995 by and between BEA Systems, a Delaware corporation (formerly known as, BEA Enterprises, Inc.) (the "Company") and Warburg, Pincus Ventures, L.P., a Delaware limited partnership (the "Purchaser") with respect to that certain Stock Purchase Agreement dated September 28, 1995 between the Company and Purchaser (the "Agreement") regarding the following facts: RECITALS A. WHEREAS, pursuant to the terms of the Agreement, Purchase invested Fourteen Million Dollars ($14,000,000) in the Company in exchange for 7,900,000 of the Company's Series A Preferred Stock and 1,000,000 shares of the Company's Common Stock. B. WHEREAS, the Agreement contemplates additional investments by Purchaser in the Company and the Purchaser desires to purchase additional shares of the Company's Series A Preferred Stock and the Company's Series B Preferred Stock and the Company desires to issue and sell such shares to Purchaser to enable the Company to consummate the ITI transaction (as that term is defined in the Agreement). AGREEMENT NOW THEREFORE, the parties hereto agree as follows: 1. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions hereof and of the Agreement, the Company will issue and the Purchaser will buy from the Company (a) Three Million Two Hundred Thousand (3,200,000) shares of Series A Preferred for a purchase price of $1.70 per share for an aggregate purchase price of Five Million Four Hundred Forty Thousand Dollars ($5,440,000), and (b) Two Million Sixty Thousand (2,060,000) shares of Series B Preferred for a purchase price of $1.00 per share for an aggregate purchase price of Two Million Sixty Thousand Dollars ($2,060,000). 2. AMENDED EXHIBIT B. EXHIBIT B to the Agreement is hereby amended to reflect the purchase of the shares referenced in paragraph 1 above, which amended EXHIBIT B is attached hereto and incorporated herein. 3. CLOSING. The closing of the purchase and sale of shares hereunder shall be held on October 31, 1995 and shall constitute an "Additional Closing" pursuant to the terms of the Agreement. 4. AGREEMENT CONTINUES. Except as specifically modified herein, the terms and conditions of the Agreement shall remain in full force and effect and the Company and Purchaser 1 each reaffrim their respective representations and warranties as set forth in the Agreement to the extent they apply to each Additional Closing. 5. DEFINITIONS. Capitalized terms used herein shall have the meanings set forth in the Agreement, unless otherwise specifically defined herein. 2 6. COUNTERPARTS. This First Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to the Stock Purchase Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above. COMPANY: BEA SYSTEMS, INC. By: /s/ William T. Coleman III ---------------------------------- Title: President & CEO ------------------------------- PURCHASER: WARBURG, PINCUS VENTURES, L.P. By: /s/ Stuart K. P. Gross ---------------------------------- Title: Partner, Warburg, Pincus & Co. General Partner ------------------------------- 3 EXHIBIT B SCHEDULE OF INVESTMENTS DATE PURCHASE PRICE SHARES September 28, 1995 $570,000 1,000,000 Common Stock September 28, 1995 $13,430,000 7,900,000 Series A Preferred Stock October 31, 1995 $5,440,000 3,200,000 Series A Preferred Stock October 31, 1995 $2,060,000 2,060,000 Series B Preferred Stock SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT This Second Amendment is made and dated as of January 10, 1996 by and between BEA Systems, a Delaware corporation (formerly known as, BEA Enterprises, Inc.) (the "Company") and Warburg, Pincus Ventures, L.P., a Delaware limited partnership (the "Purchaser") with respect to that certain Stock Purchase Agreement dated September 28, 1995, as amended, between the Company and Purchaser (the "Agreement") regarding the following facts: RECITALS WHEREAS, the Agreement contemplates additional investments by Purchaser in the Company and the Purchaser desires to invest an additional $4,000,000 in the Company and to purchase 4,000,000 additional shares of the Company's Series B Preferred Stock and the Company desires to issue and sell such shares to Purchaser. AGREEMENT NOW THEREFORE, the parties hereto agree as follows: 1. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions hereof and of the Agreement, the Company will issue and the Purchaser will buy from the Company Four (4,000,000) shares of Series B Preferred for a purchase price of $1.00 per share for an aggregate purchase price of Four Million Dollars ($4,000,000). 2. AMENDED EXHIBIT B. EXHIBIT B to the Agreement is hereby amended to reflect the purchase of the shares referenced in paragraph 1 above, which amended EXHIBIT B is attached hereto and incorporated herein. 3. CLOSING. The closing of the purchase and sale of shares hereunder shall be held on January 8, 1996 and shall constitute an "Additional Closing" pursuant to the terms of the Agreement. 4. AGREEMENT CONTINUES. Except as specifically modified herein, the terms and conditions of the Agreement shall remain in full force and effect and the Company and Purchaser each reaffirm their respective representations and warranties as set forth in the Agreement to the extent they apply to each Additional Closing. 5. DEFINITIONS. Capitalized terms used herein shall have the meanings set forth in the Agreement, unless otherwise specifically defined herein. 1 6. COUNTERPARTS. This Second Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to the Stock Purchase Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above. COMPANY: BEA SYSTEMS, INC. By: /s/ William T. Coleman III ---------------------------------- Title: President ------------------------------- PURCHASER: WARBURG, PINCUS VENTURES, L.P. By: /s/ Stuart K. P. Gross ---------------------------------- Title: Partner, Warburg, Pincus & Co. General Partner ------------------------------- 2 EXHIBIT B SCHEDULE OF INVESTMENTS DATE PURCHASE PRICE SHARES September 28, 1995 $570,000 1,000,000 Common Stock September 28, 1995 $13,430,000 7,900,000 Series A Preferred Stock October 31, 1995 $5,440,000 3,200,000 Series A Preferred Stock October 31, 1995 $2,060,000 2,060,000 Series B Preferred Stock November 30, 1995 NC -split shares 1,000,000 Common Stock January 10, 1996 $4,000,000 4,000,000 Series B Preferred Stock THIRD AMENDMENT TO STOCK PURCHASE AGREEMENT This Third Amendment is made and dated as of April 16, 1996 by and between BEA Systems, Inc. a Delaware corporation (formerly known as, BEA Enterprises, Inc.) (the "Company") and Warburg, Pincus Ventures, L.P., a Delaware limited partnership (the "Purchaser") with respect to that certain Stock Purchase Agreement dated September 28, 1995, as amended, between the Company and Purchaser (the "Agreement") regarding the following facts: RECITALS WHEREAS, the Agreement contemplates additional investments by Purchaser in the Company and the Purchaser desires to invest an additional $5,000,000 in the Company and to purchase an additional 174,150 additional shares of the Company's Series A Preferred Stock and an additional 4,703,945 shares of the Company's Series B Preferred Stock and the Company desires to issue and sell such shares to Purchaser. AGREEMENT NOW THEREFORE, the parties hereto agree as follows: 1. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions hereof and of the Agreement, the Company will issue and the Purchaser will buy from the Company (i) One Hundred Seventy Four Thousand One Hundred and Fifty (174,150) shares of Series A Preferred for a purchase price of $1.70 per share for an aggregate purchase price of Two Hundred Ninety Six Thousand Fifty Five Dollars ($296,055), and (ii) Four Million Seven Hundred and Three Thousand Nine Hundred and Forty Five (4,703,945) shares of Series B Preferred for a purchase price of $1.00 per share for an aggregate purchase price of Four Million Seven Hundred and Three Thousand Nine Hundred and Forty Five dollars ($4,703,945). 2. AMENDED EXHIBIT B. EXHIBIT B to the Agreement is hereby amended to reflect the purchase of the shares referenced in paragraph 1 above, which amended EXHIBIT B is attached hereto and incorporated herein. 3. CLOSING. The closing of the purchase and sale of shares hereunder shall be held on April 16, 1996 and shall constitute an "Additional Closing" pursuant to the terms of the Agreement. 4. AGREEMENT CONTINUES. Except as specifically modified herein, the terms and conditions of the Agreement shall remain in full force and effect and the Company and Purchaser each reaffirm their respective representations and warranties as set forth in the Agreement to the extent they apply to each Additional Closing. 1 5. DEFINITIONS. Capitalized terms used herein shall have the meanings set forth in the Agreement, unless otherwise specifically defined herein. 6. COUNTERPARTS. This Third Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to the Stock Purchase Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above. COMPANY: BEA SYSTEMS, INC. By: /s/ William T. Coleman III ---------------------------------- Title: President & CEO ------------------------------- PURCHASER: WARBURG, PINCUS VENTURES, L.P. By: /s/ Stuart K. P. Gross ---------------------------------- Title: Partner, Warburg, Pincus & Co. General Partner ------------------------------- 2 EXHIBIT B SCHEDULE OF INVESTMENTS DATE PURCHASE PRICE COMMON SERIES A SERIES B SHARES SHARES SHARES September 28, 1995 $570,000 1,000,000 September 28, 1995 $13,430,000 7,900,000 October 31, 1995 $5,440,000 3,200,000 October 31, 1995 $2,060,000 2,060,000 November 30, 1995 NC -split shares 1,000,000 January 10, 1996 $4,000,000 4,000,000 April 16, 1996 $5,000,000 174,150 4,703,945 ------------------ ---------- ---------- ---------- Total to Date $30,500,000 2,000,000 11,274,150 10,763,945 FOURTH AMENDMENT TO STOCK PURCHASE AGREEMENT This Fourth Amendment is made and dated as of July 1, 1996 by and between BEA Systems, Inc. a Delaware corporation (formerly known as, BEA Enterprises, Inc.) (the "Company") and Warburg, Pincus Ventures, L.P., a Delaware limited partnership (the "Purchaser") with respect to that certain Stock Purchase Agreement dated September 28, 1995, as amended, between the Company and Purchaser (the "Agreement") regarding the following facts: RECITALS WHEREAS, the Agreement contemplates additional investments by Purchaser in the Company and the Purchaser desires to invest an additional $4,000,000 in the Company and to purchase an additional 2,000,000 shares of the Company's Common Stock, 1,664,000 additional shares of the Company's Series A Preferred Stock and an additional 601,200 shares of the Company's Series B Preferred Stock and the Company desires to issue and sell such shares to Purchaser. AGREEMENT NOW THEREFORE, the parties hereto agree as follows: 1. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions hereof and of the Agreement, the Company will issue and the Purchaser will buy from the Company (i) Two Million (2,000,000) shares of Common Stock for a purchase price of $.285 per share for an aggregate purchase of Five Hundred Seventy Thousand Dollars ($570,000), (ii) One Million Six Hundred Sixty Four Thousand (1,664,000) shares of Series A Preferred for a purchase price of $1.70 per share for an aggregate purchase price of Two Million Eight Hundred Twenty Eight Thousand Eight Hundred Dollars ($2,828,800), and (iii) Six Hundred and One Thousand Two Hundred (601,200) shares of Series B Preferred for a purchase price of $1.00 per share for an aggregate purchase price of Six Hundred and One Thousand Two Hundred Dollars ($601,200). 2. AMENDED EXHIBIT B. EXHIBIT B to the Agreement is hereby amended to reflect the purchase of the shares referenced in paragraph 1 above, which amended EXHIBIT B is attached hereto and incorporated herein. 3. CLOSING. The closing of the purchase and sale of shares hereunder shall be held on July 1, 1996 and shall constitute an "Additional Closing" pursuant to the terms of the Agreement. 4. AGREEMENT CONTINUES. Except as specifically modified herein, the terms and conditions of the Agreement shall remain in full force and effect and the Company and Purchaser 1 each reaffirm their respective representations and warranties as set forth in the Agreement to the extent they apply to each Additional Closing. 5. DEFINITIONS. Capitalized terms used herein shall have the meanings set forth in the Agreement, unless otherwise specifically defined herein. 6. COUNTERPARTS. This Fourth Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to the Stock Purchase Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above. COMPANY: BEA SYSTEMS, INC. By: /s/ William T. Coleman III ---------------------------------- Title: President & CEO ------------------------------- PURCHASER: WARBURG, PINCUS VENTURES, L.P. By: /s/ Stuart K. P. Gross ---------------------------------- Title: Partner, Warburg, Pincus & Co. General Partner ------------------------------- 2 EXHIBIT B SCHEDULE OF INVESTMENTS DATE PURCHASE PRICE COMMON SERIES A SERIES B SHARES SHARES SHARES September 28, 1995 $570,000 1,000,000 September 28, 1995 $13,430,000 7,900,000 October 31, 1995 $5,440,000 3,200,000 October 31, 1995 $2,060,000 2,060,000 November 30, 1995 NC -split shares 1,000,000 January 10, 1996 $4,000,000 4,000,000 April 16, 1996 $5,000,000 174,150 4,703,945 July 1, 1996 $4,000,000 2,000,000 1,664,000 601,200 ------------------ ---------- ----------- ---------- Total to Date $34,500,000 4,000,000 12,938,150 11,365,145 FIFTH AMENDMENT TO STOCK PURCHASE AGREEMENT This Fifth Amendment is made and dated as of September 3, 1996 by and between BEA Systems, Inc. a Delaware corporation (formerly known as, BEA Enterprises, Inc.) (the "Company") and Warburg, Pincus Ventures, L.P., a Delaware limited partnership (the "Purchaser") with respect to that certain Stock Purchase Agreement dated September 28, 1995, as amended, between the Company and Purchaser (the "Agreement") regarding the following facts: RECITALS WHEREAS, the Agreement contemplates additional investments by Purchaser in the Company and the Purchaser desires to invest an additional $12,000,000 in the Company and to purchase an additional 4,127,850 additional shares of the Company's Series A Preferred Stock and an additional 4,982,655 shares of the Company's Series B Preferred Stock and the Company desires to issue and sell such shares to Purchaser. AGREEMENT NOW THEREFORE, the parties hereto agree as follows: 1. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions hereof and of the Agreement, the Company will issue and the Purchaser will buy from the Company (i) Four Million One Hundred Twenty Seven Thousand Eight Hundred and Fifty (4,127,850) shares of Series A Preferred for a purchase price of $1.70 per share for an aggregate purchase price of Seven Million Seventeen Thousand Three Hundred Forty Five Dollars ($7,017,345), and (ii) Four Million Nine Hundred Eighty Two Thousand Six Hundred and Fifty Five (4,982,655) shares of Series B Preferred for a purchase price of $1.00 per share for an aggregate purchase price of Four Million Nine Hundred Eighty Two Thousand Six Hundred and Fifty Five dollars ($4,982,655). 2. AMENDED EXHIBIT B. EXHIBIT B to the Agreement is hereby amended to reflect the purchase of the shares referenced in paragraph 1 above, which amended EXHIBIT B is attached hereto and incorporated herein. 3. CLOSING. The closing of the purchase and sale of shares hereunder shall be held on September 3, 1996 and shall constitute an "Additional Closing" pursuant to the terms of the Agreement. 4. AGREEMENT CONTINUES. Except as specifically modified herein, the terms and conditions of the Agreement shall remain in full force and effect and the Company and Purchaser 1 each reaffirm their respective representations and warranties as set forth in the Agreement to the extent they apply to each Additional Closing. 5. DEFINITIONS. Capitalized terms used herein shall have the meanings set forth in the Agreement, unless otherwise specifically defined herein. 6. COUNTERPARTS. This Fifth Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to the Stock Purchase Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first written above. COMPANY: BEA SYSTEMS, INC. By: /s/ William T. Coleman III ---------------------------------- Title: President & CEO ------------------------------- PURCHASER: WARBURG, PINCUS VENTURES, L.P. By: /s/ Stuart K. P. Gross ---------------------------------- Title: Partner, Warburg, Pincus & Co. General Partner ------------------------------- 2 EXHIBIT B SCHEDULE OF INVESTMENTS
DATE PURCHASE PRICE COMMON SERIES A SERIES B SHARES SHARES SHARES September 28, 1995 $570,000 1,000,000 September 28, 1995 $13,430,000 7,900,000 October 31, 1995 $5,440,000 3,200,000 October 31, 1995 $2,060,000 2,060,000 November 30, 1995 NC-split shares 1,000,000 January 10, 1996 $4,000,000 4,000,000 April 16, 1996 $5,000,000 174,150 4,703,945 July 1, 1996 $4,000,000 2,000,000 1,664,000 601,200 September 3, 1996 $12,000,000 0 4,127,850 4,982,655 --------------- --------- ---------- ---------- Total to Date $46,500,000 4,000,000 17,066,000 16,347,800
EX-10.11 12 FLEXIBLE STOCK INCENTIVE PLAN EXHIBIT 10.11 BEA SYSTEMS, INC. 1995 FLEXIBLE STOCK INCENTIVE PLAN 1. ESTABLISHMENT, PURPOSE, AND DEFINITIONS. (a) There is hereby adopted the 1995 Flexible Stock Incentive Plan (the "Plan") of BEA Systems, Inc. (the "Company"). (b) The purpose of the Plan is to provide a means whereby eligible individuals (as defined in paragraph 4, below) can acquire Common Stock of the Company (the "Stock"). The Plan provides employees (including officers and directors who are employees) of the Company and of its Affiliates an opportunity to purchase shares of Stock pursuant to options which may qualify as incentive stock options (referred to as "incentive stock options") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and employees, officers, directors, independent contractors, and consultants of the Company and of its Affiliates an opportunity to purchase shares of Stock pursuant to options which are not described in Sections 422 or 423 of the Code (referred to as "nonqualified stock options"). The Plan also provides for the sale or bonus of Stock to eligible individuals in connection with the performance of services for the Company or its Affiliates. (c) The term "Affiliates" as used in the Plan means parent or subsidiary corporations, as defined in Sections 424(e) and (f) of the Code (but substituting "the Company" for "employer corporation"), including parents or subsidiaries which become such after adoption of the Plan. 2. ADMINISTRATION OF THE PLAN. (a) The Plan shall be administered by the Board of Directors of the Company (the "Board"). The Board may delegate the responsibility for administering the Plan to a committee, under such terms and conditions as the Board shall determine (the "Committee"). If the Board delegates its responsibilities hereunder to a Committee, then the Committee shall select one of its members as chairman, and shall hold meetings at such times and places as it may determine. A majority of the Committee shall constitute a quorum and acts of the Committee at which a quorum is present, or acts reduced to or approved in writing by all the members of the Committee, shall be the valid acts of the Committee. For purposes of this Plan, where references are made to the Board, such reference shall also include the Committee to the extent the Board chooses to delegate its responsibility for administering the Plan to a Committee. (b) The Board shall determine which eligible individuals (as defined in paragraph 4, below) shall be granted options under the Plan, the timing of 1 such grants, the terms thereof (including any restrictions on the Stock), and the number of shares subject to such options. (c) The Board may amend the terms of any outstanding option granted under this Plan, but any amendment which would adversely affect the optionee's rights under an outstanding option shall not be made without the optionee's written consent. The Board may, with the optionee's written consent, cancel any outstanding stock option or accept any outstanding stock option in exchange for a new option. (d) The Board shall also determine which eligible individuals (as defined in paragraph 4, below) shall be issued Stock under the Plan, the timing of such grants, the terms thereof (including any restrictions), and the number of shares to be granted. The Stock shall be issued for such consideration (if any) as the Board deems appropriate. Stock issued subject to restrictions shall be evidenced by a written agreement (the "Restricted Stock Purchase Agreement" or the "Restricted Stock Bonus Agreement"). The Board may amend any Restricted Stock Purchase Agreement or Restricted Stock Bonus Agreement, but any amendment which would adversely affect the shareholder's rights to the Stock shall not be made without his or her written consent. (e) The Board shall have the sole authority, in its absolute discretion to adopt, amend, and rescind such rules and regulations as, in its opinion, may be advisable for the administration of the Plan, to construe and interpret the Plan, the rules and the regulations, and the instruments evidencing options or Stock granted under the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations, and interpretations of the Board shall be binding on all participants. (f) Without limitation of the foregoing, the Board shall have the right, with the optionee's consent, to accelerate the exercise date of any options issued pursuant to the Plan or terminate the restrictions applicable to any stock issued pursuant to the Plan. 3. STOCK SUBJECT TO THE PLAN. (a) An aggregate of not more than 9,600,000 shares of Stock shall be available for the grant of stock options or the issuance of Stock under the Plan. If an option is surrendered (except surrender for shares of Stock) or for any other reason ceases to be exercisable in whole or in part, the shares which were subject to such option but as to which the option had not been exercised shall continue to be available under the Plan. Any Stock which is retained by the Company upon exercise of an option in order to satisfy the exercise price for such option or any withholding taxes due with respect to such option exercise shall be treated as issued to the optionee and will thereafter not be available under the Plan. 2 (b) If there is any change in the Stock subject to the Plan, an Option Agreement, a Restricted Stock Purchase Agreement, or a Restricted Stock Bonus Agreement, through merger, consolidation, reorganization, recapitalization, reincorporation, stock split, stock dividend, or other change in the capital structure of the Company, appropriate adjustments shall be made by the Board in order to preserve but not to increase the benefits to the individual, including adjustments to the aggregate number, kind and price per share of shares subject to the Plan, an Option Agreement, a Restricted Stock Purchase Agreement, or a Restricted Stock Bonus Agreement. 4. ELIGIBLE INDIVIDUALS. Individuals who shall be eligible to have granted to them the options or Stock provided for by the Plan shall be such employees, officers, directors, independent contractors and consultants of the Company or an Affiliate as the Board, in its discretion, shall designate from time to time. Notwithstanding the foregoing, only employees of the Company or an Affiliate (including officers and directors who are bona fide employees) shall be eligible to receive incentive stock options. 5. THE OPTION PRICE. The exercise price of the Stock covered by each incentive stock option shall be not less than the per share fair market value of such Stock on the date the option is granted. The exercise price of the Stock covered by each nonqualified stock option shall be as determined by the Board, but shall not be less than eighty-five percent of the per share fair market value of such stock on the date the option is granted. Notwithstanding the foregoing, in the case of an incentive stock option granted to a person possessing more than ten percent of the combined voting power of the Company or an Affiliate, the exercise price shall be not less than 110 percent of the fair market value of the Stock on the date the option is granted. The exercise price of an option shall be subject to adjustment to the extent provided in paragraph 3(b), above. 6. TERMS AND CONDITIONS OF OPTIONS. (a) Each option granted pursuant to the Plan will be evidenced by a written Stock Option Agreement executed by the Company and the person to whom such option is granted. (b) The Board shall determine the term of each option granted under the Plan; PROVIDED, HOWEVER, that the term of an incentive stock option shall not be for more than 10 years and that, in the case of an incentive stock option granted to a person possessing more than ten percent of the combined voting power of the Company or an Affiliate, the term shall be for no more than five years. (c) In the case of incentive stock options, the aggregate fair market value (determined as of the time such option is granted) of the Stock with respect to which incentive stock options are exercisable for the first time by an eligible employee in any calendar year (under this Plan and any other plans of the Company or its Affiliates) shall not exceed $100,000. 3 (d) The Stock Option Agreement may contain such other terms, provisions and conditions consistent with this Plan as may be determined by the Board. If an option, or any part thereof is intended to qualify as an incentive stock option, the Stock Option Agreement shall contain those terms and conditions which are necessary to so qualify it. Notwithstanding the foregoing, no stock option granted under the Plan shall vest at a rate of less than 20% per year over five (5) years from the date the option is granted. 7. TERMS AND CONDITIONS OF STOCK PURCHASES AND BONUSES. (a) Each sale or grant of stock pursuant to the Plan will be evidenced by a written Restricted Stock Purchase Agreement or a Restricted Stock Bonus Agreement executed by the Company and the person to whom such stock is sold or granted. (b) The Restricted Stock Purchase Agreement or Restricted Stock Bonus Agreement may contain such other terms, provisions and conditions consistent with this Plan as may be determined by the Board, including not by way of limitation, restrictions on transfer, forfeiture provisions, repurchase provisions and vesting provisions; provided, however, that the purchase price of any stock sold or granted pursuant to any Restricted Stock Purchase Agreement or Restricted Stock Bonus Agreement shall not be less than eighty-five percent of the per share fair market value of such stock at the time the right to purchase the stock is granted or, the time the purchase is consummated. Notwithstanding the foregoing, in the case of a sale or grant of stock to a person possessing more than ten percent of the combined voting power of the Company or an Affiliate, the purchase price shall be not less than 100 percent of the fair market value of the stock at the time the right to purchase the stock is granted or, the time the purchase is consummated. The purchase price of stock shall be subject to adjustment to the extent provided in paragraph 3(b), above. 8. USE OF PROCEEDS. Cash proceeds realized from the sale of Stock under the Plan shall constitute general funds of the Company. 9. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN. (a) The Board may at any time amend, suspend or terminate the Plan as it deems advisable; provided that such amendment, suspension or termination complies with all applicable requirements of state and federal law, including any applicable requirement that the Plan or an amendment to the Plan be approved by the Company's shareholders, and provided further that, except as provided in paragraph 3(b) above, the Board shall in no event amend the Plan in the following respects without the consent of shareholders then sufficient to approve the Plan in the first instance: 4 (i) To increase the maximum number of shares subject to incentive stock options issued under the Plan; or (ii) To change the designation or class of persons eligible to receive incentive stock options under the Plan. (b) No option may be granted nor any Stock issued under the Plan during any suspension or after the termination of the Plan, and no amendment, suspension or termination of the Plan shall, without the affected individual's consent, alter or impair any rights or obligations under any option previously granted under the Plan. The Plan shall terminate with respect to the grant of incentive stock options on September 15, 2005, unless previously terminated by the Board pursuant to this paragraph 9. 10. ASSIGNABILITY. Each option granted pursuant to this Plan shall, during optionee's lifetime, be exercisable only by him, and neither the option nor any right hereunder shall be transferable by optionee by operation of law or otherwise other than by will or the laws of descent and distribution. Stock subject to a Restricted Stock Purchase Agreement or a Restricted Stock Bonus Agreement shall be transferable only as provided in such Agreement. 11. RIGHT TO REPURCHASE SHARES. (a) RESTRICTION ON TRANSFER OF STOCK. Except as expressly permitted in this Plan, an optionee may not transfer, encumber, or dispose of any Stock or any interest in the Stock. (b) RIGHT OF FIRST REFUSAL. Before an optionee may transfer any Stock (whether voluntarily or involuntarily), optionee must deliver to the Company at its principal office a written notice describing the proposed transfer and stating the name of the proposed transferee, the number of shares of Stock to be transferred, and the consideration for which the shares of Stock are to be transferred ("Disposition Notice"), and a written offer signed by the proposed transferee (if the proposed transfer is voluntary) to acquire the shares of Stock on the terms specified in the Disposition Notice. Thereafter, for thirty (30) days, the Company may purchase the shares of Stock by giving optionee written notice ("Repurchase Notice"). The purchase price for the shares of Stock shall be the price specified in the Disposition Notice. If the Company repurchases any shares pursuant to this right of first refusal, it must purchase all of the shares of Stock proposed to be transferred. (c) EXCHANGES OR OTHER TRANSFERS. If the consideration specified in a Disposition Notice is property other than cash but with a readily ascertainable fair market value, the purchase price of the Stock shall be an amount equal to the fair market value of the consideration specified in the Disposition Notice. If the consideration for the shares of stock set forth in the Disposition Notice consists of property other than cash and does not have a readily ascertainable fair market value, 5 the purchase price for the Stock shall be the Current Market Value (as defined in paragraph (f) of this paragraph 11) of the Stock determined as of the date the Company receives the Disposition Notice. (d) EFFECT OF NOTICE. Except as otherwise provided herein, Stock shall be deemed repurchased when optionee or any other holder of the Stock receives a Repurchase Notice. All rights accorded a holder of such Stock, other than the right to payment therefor, shall cease at that time. The Company shall pay the purchase price of any Stock so purchased within five (5) business days after tender of the certificates representing such Stock to the Company's transfer agent. (e) FAILURE TO REPURCHASE STOCK; SURVIVAL OF RESTRICTIONS ON TRANSFER. If the Company or its assignee does not exercise the right of first refusal set forth in paragraph 11(b), the shares of stock subject to repurchase may be transferred only in the manner and to the persons specified in the Disposition Notice within six (6) months after delivery of the Disposition Notice. Shares of stock transferred pursuant to paragraph 11(b) shall continue to be subject to the restrictions imposed by this Plan. (f) CURRENT MARKET PRICE. For purposes of this Plan, the "Current Market Price" means the fair market value of the Company's common stock for the purpose of any employee benefit plan of the Company, including the Plan, as most recently determined by the Board. (g) ASSIGNMENT. The Company may assign its rights to repurchase Stock under this paragraph. (h) TERMINATION OF RESTRICTIONS. The restrictions on Stock imposed by this paragraph 11 shall terminate when a public market exists for the Common Stock of the Company. A public market shall be deemed to exist if any of the Company's shares of common stock have been registered pursuant to Section 5 of the Securities Act of 1933 or Section 12 of the Securities Exchange Act of 1934, and (a) said stock has ever been listed on a national securities exchange, or (b) offers by two or more persons to buy or sell said stock have ever been published at least daily for ninety (90) days in a publication of the National Quotation Bureau, Inc. (i) REPURCHASE RIGHTS LEGENDS. Unless a public market exists for the Stock, each certificate representing the Stock shall bear a legend in form and substance satisfactory to the Company to the effect that the shares of Stock are subject to restrictions on transfer and to repurchase under the circumstances set forth in this Plan. 6 12. PAYMENT UPON EXERCISE OF OPTIONS. (a) Payment of the purchase price upon exercise of any option granted under this Plan shall be made in cash; provided, however, that the Board, in its sole discretion, may permit an optionee to pay the option price in whole or in part (i) with shares of Stock owned by the optionee; (ii) by delivery on a form prescribed by the Board of an irrevocable direction to a securities broker approved by the Board to sell shares and deliver all or a portion of the proceeds to the Company in payment for the Stock; (iii) by delivery of the optionee's promissory note with such recourse, interest, security, and redemption provisions as the Board in its discretion determines appropriate; or (iv) in any combination of the foregoing. Any Stock used to exercise options shall be valued at its fair market value on the date of the exercise of the option. In addition, the Board, in its sole discretion, may authorize the surrender by an optionee of all or part of an unexercised option and authorize a payment in consideration thereof of an amount equal to the difference between the aggregate fair market value of the Stock subject to such option and the aggregate option price of such Stock. In the Board's discretion, such payment may be made in cash, shares of Stock with a fair market value on the date of surrender equal to the payment amount, or some combination thereof. (b) In the event that the exercise price is satisfied by the Board retaining from the shares of Stock otherwise to be issued to optionee shares of Stock having a value equal to the exercise price, the Board may issue optionee an additional option, with terms identical to this option agreement, entitling optionee to purchase additional Stock in an amount equal to the number of shares so retained. 13. WITHHOLDING TAXES. (a) No Stock shall be granted or sold under the Plan to any participant, until the participant has made arrangements acceptable to the Board for the satisfaction of federal, state, and local income and social security tax withholding obligations, including without limitation obligations incident to the receipt of Stock under the Plan, the lapsing of restrictions applicable to such Stock, the failure to satisfy the conditions for treatment as incentive stock options under applicable tax law, or the receipt of cash payments. Upon ercise of a stock option or lapsing or restriction on stock issued under the Plan, the Company may satisfy its withholding obligations by withholding from the optionee or requiring the Shareholder to surrender shares of the Company's Stock sufficient to satisfy federal, state, and local income and social security tax withholding obligations. (b) In the event that such withholding is satisfied by the Company or the optionee's employer retaining from the shares of Stock otherwise to be issued to optionee shares of Stock having a value equal to such withholding tax, the Board may issue optionee an additional option, with terms identical to the option agreement 7 under which the option was received, entitling optionee to purchase additional Stock in an amount equal to the number of shares so retained. 14. RESTRICTIONS ON TRANSFER OF SHARES. The Stock acquired pursuant to the Plan shall be subject to such restrictions and agreements regarding sale, assignment, encumbrances or other transfer as are in effect among the shareholders of the Company at the time such Stock is acquired, as well as to such other restrictions as the Board shall deem advisable. 15. CORPORATE TRANSACTION. (a) For purposes of this Paragraph 15, a "Corporate Transaction" shall include any of the following shareholder-approved transactions to which the Company is a party: (i) a merger or consolidation in which the Company is not the surviving entity, except for (1) a transaction the principal purpose of which is to change the state of the Company's incorporation, or (2) a transaction in which the Company's shareholders immediately prior to such merger or consolidation hold (by virtue of securities received in exchange for their shares in the Company) securities of the surviving entity representing more than fifty percent (50%) of the total voting power of such entity immediately after such transaction; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company unless the Company's shareholders immediately prior to such sale, transfer or other disposition hold (by virtue of securities received in exchange for their shares in the Company) securities of the purchaser or other transferee representing more than fifty percent (50%) of the total voting power of such entity immediately after such transaction; or (iii) any reverse merger in which the Company is the surviving entity but in which the Company's shareholders immediately prior to such merger do not hold (by virtue of their shares in the Company held immediately prior to such transaction) securities of the Company representing more than fifty percent (50%) of the total voting power of the Company immediately after such transaction. (b) In the event of any Corporate Transaction, any option shall terminate and any restricted stock shall be reconveyed to or repurchased by the Company immediately prior to the specified effective date of the Corporate Transaction unless assumed by the successor corporation or its parent company, pursuant to options or restricted stock agreements providing substantially equal value and having substantially equivalent provisions as the options or restricted stock granted pursuant to this Plan. 8 16. SHAREHOLDER APPROVAL. This Plan shall only become effective with regard to incentive stock options upon its approval by a majority of the shareholders voting (in person or by proxy) at a shareholders' meeting held within 12 months of the Board's adoption of the Plan. The Board may grant incentive stock options under the Plan prior to the shareholders' meeting, but until shareholder approval of the Plan is obtained, no incentive stock option shall be exercisable. 17. MISCELLANEOUS PROVISIONS. The Company shall provide to each participant, on a periodic basis (but not less than annually), financial statements of the Company. The Company may provide other information regarding the Company as determined by the Board in its discretion." 9 BEA SYSTEMS, INC. INCENTIVE STOCK OPTION AGREEMENT This Agreement is made as of _______________________________ (the "Grant Date"), between BEA Systems, Inc. (the "Company") and ____________________________________ "Optionee"). WITNESSETH: WHEREAS, the Company has adopted the 1995 Flexible Stock Incentive Plan (the "Plan"), which Plan is incorporated in this Agreement by reference and made a part of it; and WHEREAS, the Company regards Optionee as a valuable employee of the Company, and has determined that it would be to the advantage and in the interests of the Company and its shareholders to grant the options provided for in this Agreement to Optionee as an inducement to remain in the service of the Company (as defined in the Plan) and as an incentive for increased efforts during such service; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties to this Agreement hereby agree as follows: 1. OPTION GRANT. The Company hereby grants to Optionee the right and option to purchase from the Company on the terms and conditions hereinafter set forth, all or any part of an aggregate of ____________ shares of the Common Stock of the Company (the "Stock"). This option is intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and qualify as an incentive stock option. 2. OPTION PRICE. The purchase price of the Stock subject to this option shall be $__________ per share, which price is not less than the per share fair market value of such Stock as of the Grant Date as determined by the Board of Directors of the Company or a Committee designated by it (the "Committee"), or, if Optionee possesses more than ten percent of the combined voting power of the Company or any of its Affiliates, not less than 110 percent of the per share fair market value of the Stock as of the Grant Date as determined by the Committee. The term "Option Price" as used in this agreement refers to the purchase price of the Stock subject to this option. 3. OPTION PERIOD. This option shall be exercisable only during the Option Period, and during such Option Period, the exercisability of the option shall be subject to the limitations of paragraph 4 and the vesting provisions of paragraph 5. The Option Period shall commence on the Grant Date and except as provided in paragraph 4, shall terminate (the 1 "Termination Date") ten years from the Grant Date; provided, however, that the Option Period for a person possessing more than ten percent of the combined voting power of the Company or an Affiliate shall terminate five years from the Grant Date. 4. LIMITS ON OPTION PERIOD. The Option Period may end before the Termination Date, as follows: (a) If Optionee ceases to be a bona fide employee of the Company or an Affiliate for any reason other than disability (within the meaning of subparagraph (c)) or death during the Option Period, the Option Period shall terminate three months after the date of such cessation of employment or on the Termination Date, whichever shall first occur, and the option shall be exercisable only to the extent exercisable under paragraph 5 on the date of Optionee's cessation of employment. (b) If Optionee dies while in the employ of the Company or any of its Affiliates, the Option Period shall end one year after the date of death or on the Termination Date, whichever shall first occur, and Optionee's executor or administrator or the person or persons to whom Optionee's rights under this option shall pass by will or by the applicable laws of descent and distribution may exercise this option only to the extent exercisable under paragraph 5 on the date of Optionee's death. (c) If Optionee's employment is terminated by reason of disability, the Option Period shall end one year after the date of Optionee's cessation of employment or on the Termination Date, whichever shall first occur; provided, however, that in the event that the Termination Date shall occur sooner than six (6) months after the date of Optionee's cessation of employment, then the Option Period shall end on the first business day after six (6) calendar months following the date of Optionee's cessation of employment. The option shall be exercisable only to the extent exercisable under paragraph 5 on the date of Optionee's cessation of employment; provided, however, that if such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, this incentive stock option shall automatically convert to a nonstatutory stock option on the day three (3) months and one (1) day following such cessation of employment. To the extent Optionee was not entitled to exercise the option at the date of cessation of employment, or if Optionee does not exercise such option to the extent so entitled within the time specified herein, the option shall terminate, and the Stock covered by such option shall revert to the Plan. (d) If Optionee is on a leave of absence from the Company or an Affiliate because of his disability, or for the purpose of serving the government of the country in which the principal place of employment of Optionee is located, either in a military or civilian capacity, or for such other purpose or reason as the Committee may approve, Optionee shall not be deemed during the period of such absence, by virtue of such absence alone, to have terminated employment with the Company or an Affiliate except as the Committee may otherwise expressly provide. 2 5. VESTING OF RIGHT TO EXERCISE OPTIONS. Subject to other limitations contained in this Agreement, the Optionee shall have the right to exercise the option in accordance with the following schedule: (a) As to ___% of the number of shares covered by the option, at any time after one year from the Grant Date; (b) As to an additional ___% of the number of shares covered by the option, at any time after the end of each month thereafter until the option shall be fully exercisable. (c) Any portion of the option that is not exercised shall accumulate and may be exercised at any time during the Option Period prior to the Termination Date. No partial exercise of this option may be for less than 5 percent of the total number of shares then available under this option. In no event shall the Company be required to issue fractional shares. (d) Notwithstanding the foregoing, the aggregate fair market value (determined as of the time such option is granted) of the Stock with respect to which incentive stock options are exercisable for the first time in any calendar year (under the Plan and any other incentive stock option plans of the Company or its Affiliates) shall not exceed $100,000. 6. METHOD OF EXERCISE. Optionee may exercise the option with respect to all or any part of the shares of Stock then subject to such exercise as follows: (a) By giving the Company written notice of such exercise, specifying the number of such shares as to which this option is exercised. Such notice shall be accompanied by an amount equal to the Option Price of such shares, in the form of any one or combination of the following: (i) cash; (ii) a certified check, bank draft, postal or express money order payable to the order of the Company in lawful money of the United States; (iii) shares of Stock valued at fair market value; or (iv) if authorized for Optionee by the Committee, notes. The shares of Stock shall be valued in accordance with procedures established by the Committee. Any note used to exercise this option shall be a full recourse, interest-bearing obligation containing such terms as the Committee shall determine. If a note is used, the Optionee agrees to execute such further documents as the Committee may deem necessary or appropriate in connection with issuing the note, perfecting a security interest in the Stock purchased with the note, and any related terms or conditions that the Committee may propose. Such further documents may include, not by way of limitation, a security agreement, an escrow agreement, a voting trust agreement and an assignment separate from certificate. (b) Optionee (and Optionee's spouse, if any) shall be required, as a condition precedent to acquiring Stock through exercise of the option, to execute one or more agreements relating to obligations in connection with ownership of the Stock or restrictions on transfer of the Stock no less restrictive than the obligations and restrictions to which the other shareholders of the Company are subject at the time of such exercise. 3 (c) If required by the Committee, Optionee shall give the Company satisfactory assurance in writing, signed by Optionee or his legal representative, as the case may be, that such shares are being purchased for investment and not with a view to the distribution thereof, provided that such assurance shall be deemed inapplicable to (1) any sale of such shares by such Optionee made in accordance with the terms of a registration statement covering such sale, which may hereafter be filed and become effective under the Securities Act of 1933, as amended (the "Securities Act"), and with respect to which no stop order suspending the effectiveness thereof has been issued, and (2) any other sale of such shares with respect to which in the opinion of counsel for the Company, such assurance is not required to be given in order to comply with the provisions of the Securities Act. As soon as practicable after receipt of the notice required in paragraph 6(a) and satisfaction of the conditions set forth in paragraphs 6(b) and 6(c), the Company shall, without transfer or issue tax and without other incidental expense to Optionee, deliver to Optionee at the office of the Company, at 385 Moffett Park Drive Suite 105, Sunnyvale, California 94089-1208, attention of the Secretary, or such other place as may be mutually acceptable to the Company and Optionee, a certificate or certificates of such shares of Stock; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with applicable registration requirements under the Securities Act, the Securities Exchange Act of 1934, as amended, any applicable listing requirements of any national securities exchange, and requirements under any other law or regulation applicable to the issuance or transfer of such shares. 7. CORPORATE TRANSACTIONS. (a) If there should be any change in a class of Stock subject to this option, through merger, consolidation, reorganization, recapitalization, reincorporation, stock split, stock dividend or other change in the capital structure of the Company, the Company shall make appropriate adjustments in order to preserve, but not to increase, the benefits to Optionee, including adjustments in the number of shares of such Stock subject to this option and in the price per share. Any adjustment made pursuant to this paragraph 7 as a consequence of a change in the capital structure of the Company shall not entitle Optionee to acquire a number of shares of such Stock of the Company or shares of stock of any successor company greater than the number of shares Optionee would receive if, prior to such change, Optionee had actually held a number of shares of such Stock equal to the number of shares then subject to this option. (b) For purposes of this paragraph 7, a "Corporate Transaction" shall include any of the following stockholder-approved transactions to which the Company is a party: (i) a merger or consolidation in which the Company is not the surviving entity, except for (1) a transaction the principal purpose of which is to change the state of the Company's incorporation, or (2) a transaction in which the Company's shareholders immediately prior to such merger or consolidation hold (by virtue of securities received in exchange for their shares in the Company) securities of the 4 surviving entity representing more than fifty percent (50%) of the total voting power of such entity immediately after such transaction; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company unless the Company's shareholders immediately prior to such sale, transfer or other disposition hold (by virtue of securities received in exchange for their shares in the Company) securities of the purchaser or other transferee representing more than fifty percent (50%) of the total voting power of such entity immediately after such transaction; or (iii) any reverse merger in which the Company is the surviving entity but in which the Company's shareholders immediately prior to such merger do not hold (by virtue of their shares in the Company held immediately prior to such transaction) securities of the Company representing more than fifty percent (50%) of the total voting power of the Company immediately after such transaction. (c) In the event of any Corporate Transaction, any non-vested option shall terminate immediately prior to the specified effective date of the Corporate Transaction unless assumed by the successor corporation or its parent company, pursuant to options providing substantially equal value and having substantially equivalent provisions as the options granted pursuant to this Agreement. 8. LIMITATIONS ON TRANSFER. This option shall, during Optionee's lifetime, be exercisable only by Optionee, and neither this option nor any right hereunder shall be transferable by Optionee by operation of law or otherwise other than by will or the laws of descent and distribution. In the event of any attempt by Optionee to alienate, assign, pledge, hypothecate, or otherwise dispose of this option or of any right hereunder, except as provided for in this Agreement, or in the event of the levy of any attachment, execution, or similar process upon the rights or interest hereby conferred, the Company at its election may terminate this option by notice to Optionee and this option shall thereupon become null and void. 9. NO SHAREHOLDER RIGHTS. Neither Optionee nor any person entitled to exercise Optionee's rights in the event of his death shall have any of the rights of a shareholder with respect to the shares of Stock subject to this option except to the extent the certificates for such shares shall have been issued upon the exercise of this option. 10. LOCK-UP AGREEMENT. Optionee, if requested by the Company and an underwriter of the Stock or other securities of the Company, shall not sell or otherwise transfer or dispose of any Stock of the Company held by Optionee (except Stock included in such registration) during the 180-day period following the effective date of the first registration statement of the Company filed under the Securities Act for a public offering, or such shorter period of time as the Company and the underwriter shall require. The Company may impose stop-transfer instructions with respect to such Stock subject to the foregoing restriction until the end of said period. 5 11. NO EFFECT ON TERMS OF EMPLOYMENT. SUBJECT TO THE TERMS OF ANY WRITTEN EMPLOYMENT CONTRACT TO THE CONTRARY, THE COMPANY (OR ITS AFFILIATE WHICH EMPLOYS OPTIONEE) SHALL HAVE THE RIGHT TO TERMINATE OR CHANGE THE TERMS OF EMPLOYMENT OF OPTIONEE AT ANY TIME AND FOR ANY REASON WHATSOEVER, WITH OR WITHOUT CAUSE. 12. NOTICE. Any notice required to be given under the terms of this Agreement shall be addressed to the Company in care of its Secretary at the Office of the Company at 2465 East Bayshore Road, Suite 301, Palo Alto, California 94303, and any notice to be given to Optionee shall be addressed to him at the address given by him beneath his signature to this Agreement, or such other address as either party to this Agreement may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified and deposited (postage or registration or certification fee prepaid) in a post office or branch post office regularly maintained by the United States. 13. COMMITTEE DECISIONS CONCLUSIVE. All decisions of the Committee upon any question arising under the Plan or under this Agreement shall be conclusive. 14. SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company. Where the context permits, "Optionee" as used in this Agreement shall include Optionee's executor, administrator or other legal representative or the person or persons to whom Optionee's rights pass by will or the applicable laws of descent and distribution. 15. EARLY DISPOSITIONS. Optionee agrees, as partial consideration for the designation of this option as an incentive stock option under Section 422 of the Code, to notify the Company in writing within thirty days of any disposition of any shares acquired by exercise of this option if such disposition occurs within two years from the Grant Date or within one year from the date Optionee purchased such shares by exercise of this option. If the Company is required to withhold an amount for the purpose of income and employment taxes as a result of an early disposition, Optionee acknowledges that it will be required to satisfy the amount of such withholding in a manner that the company prescribes. 16. RESTRICTIVE LEGENDS. All certificates for shares of the Stock shall bear the following legends, in addition to any other legends required by applicable state securities law and securities commissioners: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT 6 AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF, AND ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE COMPANY, AS PROVIDED IN THE COMPANY'S 1995 FLEXIBLE STOCK INCENTIVE PLAN, A COPY OF WHICH IS AVAILABLE FROM THE COMPANY." "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." 17. CALIFORNIA LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. 7 IN WITNESS WHEREOF, the Company and Optionee have executed this agreement as of the day and year first above written. BEA SYSTEMS, INC. By____________________________________________ Its___________________________________________ _____________________________________________ Optionee Address:_____________________________________ _____________________________________________ _____________________________________________ 8 ATTACHMENT A CONSENT OF SPOUSE I, _________________________, spouse of ___________________________, have read and approved the foregoing Agreement. In consideration of granting of the right of my spouse to purchase shares of BEA Systems, Inc. as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact with respect to the exercise of any rights of the Agreement insofar as I may have any rights under such community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: _______________ By: _______________________________ BEA SYSTEMS, INC. NONQUALIFIED STOCK OPTION AGREEMENT This Agreement is made as of __________________________________ (the "Grant Date"), between BEA Systems, Inc. (the "Company") and ______________________________________________("Optionee"). WITNESSETH: WHEREAS, the Company has adopted the 1995 Flexible Stock Incentive Plan (the "Plan"), which Plan is incorporated in this Agreement by reference and made a part of it; and WHEREAS, the Company regards Optionee as a valuable employee or service provider of the Company, and has determined that it would be to the advantage and in the interests of the Company and its shareholders to grant the options provided for in this Agreement to Optionee as an inducement to remain in the employ or service of the Company and its Affiliates (as defined in the Plan) and as an incentive for increased efforts during such employ or service; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties to this Agreement hereby agree as follows: 1. OPTION GRANT. The Company hereby grants to Optionee the right and option to purchase from the Company on the terms and conditions hereinafter set forth, all or any part of an aggregate of ____________ shares of the Common Stock of the Company (the "Stock"). This option is not intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") for incentive stock options. 2. OPTION PRICE. The purchase price of the Stock subject to this option shall be $__________ per share, which price is not less than 85% of the per share fair market value of such Stock as of the Grant Date as determined by the Board of Directors of the Company or a Committee designated by it (the "Committee"). The term "Option Price" as used in this agreement refers to the purchase price of the Stock subject to this option. 3. OPTION PERIOD. This option shall be exercisable only during the Option Period, and during such Option Period, the exercisability of the option shall be 1 subject to the vesting provisions of paragraph 5. The Option Period shall commence on the Grant Date and shall terminate ten years from the Grant Date (the "Termination Date"). 4. LIMITS ON OPTION PERIOD. The Option Period may end before the Termination Date, as follows: (a) If Optionee ceases to be an employee or service provider of the Company or an Affiliate for any reason other than disability (within the meaning of subparagraph (c)) or death during the Option Period, the Option Period shall terminate three months after the date of such cessation of employment or on the Termination Date, whichever shall first occur, and the option shall be exercisable only to the extent exercisable under paragraph 5 on the date of Optionee's cessation of employment and shall thereafter cease to be exercisable. (b) If Optionee dies while an employee or service provider of the Company or any of its Affiliates, the Option Period shall end one year after the date of death or on the Termination Date, whichever shall first occur, and Optionee's executor or administrator or the person or persons to whom Optionee's rights under this option shall pass by will or by the applicable laws of descent and distribution may exercise this option only to the extent exercisable under paragraph 5 on the date of Optionee's death. (c) If Optionee ceases to be an employee or service provider by reason of disability (within the meaning of Section 22(e)(3) of the Code), the Option Period shall end one year after the date of Optionee's cessation of employment or on the Termination Date, whichever shall first occur, and the option shall be exercisable only to the extent exercisable under paragraph 5 on the date of Optionee's cessation of employment. (d) If Optionee is on a leave of absence from the Company or an Affiliate because of his disability, or for the purpose of serving the government of the country in which the principal place of employment of Optionee is located, either in a military or civilian capacity, or for such other purpose or reason as the Committee may approve, Optionee shall not be deemed during the period of such absence, by virtue of such absence alone, to have terminated employment with the Company or an Affiliate except as the Committee may otherwise expressly provide. 5. VESTING OF RIGHT TO EXERCISE OPTIONS. Subject to other limitations contained in this Agreement, the Optionee shall have the right to exercise the options in accordance with the following schedule: 2 (a) As to ____% of the number of shares covered by the option, at any time after one year from date of the Grant Date; (b) As to an additional ___% of the remaining number of shares covered by the option, at any time after the end of each month thereafter until the option shall be fully exercisable. (c) Any portion of the option that is not exercised shall accumulate and may be exercised at any time during the Option Period prior to the Termination Date. No partial exercise of this option may be for less than 5 percent of the total number of shares then available under this option. In no event shall the Company be required to issue fractional shares. 6. METHOD OF EXERCISE. Optionee may exercise the option with respect to all or any part of the shares of Stock then subject to such exercise as follows: (a) By giving the Company written notice of such exercise, specifying the number of such shares as to which this option is exercised. Such notice shall be accompanied by an amount equal to the Option Price of such shares, in the form of any one or combination of the following: (i) cash; (ii) a certified check, bank draft, postal or express money order payable to the order of the Company in lawful money of the United States; (iii) shares of Stock valued at fair market value; or (iv) if authorized for Optionee by the Committee, notes. The shares of Stock shall be valued in accordance with procedures established by the Committee. Any note used to exercise this option shall be a full recourse, interest-bearing obligation containing such terms as the Committee shall determine. If a note is used, the Optionee agrees to execute such further documents as the Committee may deem necessary or appropriate in connection with issuing the note, perfecting a security interest in the Stock purchased with the note, and any related terms or conditions that the Committee may propose. Such further documents may include, not by way of limitation, a security agreement, an escrow agreement, a voting trust agreement and an assignment separate from certificate. (b) Optionee (and Optionee's spouse, if any) shall be required, as a condition precedent to acquiring Stock through exercise of the option, to execute one or more agreements relating to obligations in connection with ownership of the Stock or restrictions on transfer of the Stock no less restrictive than the obligations and restrictions to which the other shareholders of the Company are subject at the time of such exercise. 3 (c) If required by the Committee, Optionee shall give the Company satisfactory assurance in writing, signed by Optionee or his legal representative, as the case may be, that such shares are being purchased for investment and not with a view to the distribution thereof, provided that such assurance shall be deemed inapplicable to (1) any sale of such shares by such Optionee made in accordance with the terms of a registration statement covering such sale, which may hereafter be filed and become effective under the Securities Act of 1933, as amended (the "Securities Act"), and with respect to which no stop order suspending the effectiveness thereof has been issued, and (2) any other sale of such shares with respect to which in the opinion of counsel for the Company, such assurance is not required to be given in order to comply with the provisions of the Securities Act. As soon as practicable after receipt of the notice required in paragraph 6(a) and satisfaction of the conditions set forth in paragraphs 6(b) and 6(c), the Company shall, without transfer or issue tax and without other incidental expense to Optionee, deliver to Optionee at the office of the Company, at 2465 East Bayshore Road, Suite 301, Palo Alto, CA 94303, attention of the Secretary, or such other place as may be mutually acceptable to the Company and Optionee, a certificate or certificates of such shares of Stock; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with applicable registration requirements under the Securities Act, the Securities Exchange Act of 1934, as amended, any applicable listing requirements of any national securities exchange, and requirements under any other law or regulation applicable to the issuance or transfer of such shares. 7. CORPORATE TRANSACTIONS. (a) If there should be any change in a class of Stock subject to this option, through merger, consolidation, reorganization, recapitalization, reincorporation, stock split, stock dividend or other change in the capital structure of the Company, the Company shall make appropriate adjustments in order to preserve, but not to increase, the benefits to Optionee, including adjustments in the number of shares of such Stock subject to this option and in the price per share. Any adjustment made pursuant to this paragraph 7 as a consequence of a change in the capital structure of the Company shall not entitle Optionee to acquire a number of shares of such Stock of the Company or shares of stock of any successor company greater than the number of shares Optionee would receive if, prior to such change, Optionee had actually held a number of shares of such Stock equal to the number of shares then subject to this option. (b) For purposes of this paragraph 7, a "Corporate Transaction" shall include any of the following stockholder-approved transactions to which the Company is a party: 4 (i) a merger or consolidation in which the Company is not the surviving entity, except for (1) a transaction the principal purpose of which is to change the state of the Company's incorporation, or (2) a transaction in which the Company's shareholders immediately prior to such merger or consolidation hold (by virtue of securities received in exchange for their shares in the Company) securities of the surviving entity representing more than fifty percent (50%) of the total voting power of such entity immediately after such transaction; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company unless the Company's shareholders immediately prior to such sale, transfer or other disposition hold (by virtue of securities received in exchange for their shares in the Company) securities of the purchaser or other transferee representing more than fifty percent (50%) of the total voting power of such entity immediately after such transaction; or (iii) any reverse merger in which the Company is the surviving entity but in which the Company's shareholders immediately prior to such merger do not hold (by virtue of their shares in the Company held immediately prior to such transaction) securities of the Company representing more than fifty percent (50%) of the total voting power of the Company immediately after such transaction. (c) In the event of any Corporate Transaction, any non-vested option shall terminate immediately prior to the specified effective date of the Corporate Transaction unless assumed by the successor corporation or its parent company, pursuant to options providing substantially equal value and having substantially equivalent provisions as the options granted pursuant to this Agreement. 8. LIMITATIONS ON TRANSFER. This option shall, during Optionee's lifetime, be exercisable only by Optionee, and neither this option nor any right hereunder shall be transferable by Optionee by operation of law or otherwise other than by will or the laws of descent and distribution. In the event of any attempt by Optionee to alienate, assign, pledge, hypothecate, or otherwise dispose of this option or of any right hereunder, except as provided for in this Agreement, or in the event of the levy of any attachment, execution, or similar process upon the rights or interest hereby conferred, the Company at its election may terminate this option by notice to Optionee and this option shall thereupon become null and void. 9. NO SHAREHOLDER RIGHTS. Neither Optionee nor any person entitled to exercise Optionee's rights in the event of his death shall have any of the 5 rights of a shareholder with respect to the shares of Stock subject to this option except to the extent the certificates for such shares shall have been issued upon the exercise of this option. 10. LOCK-UP AGREEMENT. Optionee, if requested by the Company and an underwriter of the Stock or other securities of the Company, shall not sell or otherwise transfer or dispose of any Stock of the Company held by Optionee (except Stock included in such registration) during the 180-day period following the effective date of the first registration statement of the Company filed under the Securities Act for a public offering, or such shorter period of time as the Company and the underwriter shall require. The Company may impose stop-transfer instructions with respect to such Stock subject to the foregoing restriction until the end of said period. 11. NO EFFECT ON TERMS OF EMPLOYMENT. SUBJECT TO THE TERMS OF ANY WRITTEN EMPLOYMENT CONTRACT TO THE CONTRARY, THE COMPANY (OR ITS AFFILIATE WHICH EMPLOYS OPTIONEE) SHALL HAVE THE RIGHT TO TERMINATE OR CHANGE THE TERMS OF EMPLOYMENT OF OPTIONEE AT ANY TIME AND FOR ANY REASON WHATSOEVER, WITH OR WITHOUT CAUSE. 12. NOTICE. Any notice required to be given under the terms of this Agreement shall be addressed to the Company in care of its Secretary at the Office of the Company at 2465 East Bayshore Road, Suite 301, Palo Alto, California 94303, and any notice to be given to Optionee shall be addressed to him at the address given by him beneath his signature to this Agreement, or such other address as either party to this Agreement may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified and deposited (postage or registration or certification fee prepaid) in a post office or branch post office regularly maintained by the United States. 13. COMMITTEE DECISIONS CONCLUSIVE. All decisions of the Committee upon any question arising under the Plan or under this Agreement shall be conclusive. 14. SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company. Where the context permits, "Optionee" as used in this Agreement shall include Optionee's executor, administrator or other legal representative or the person or persons to whom Optionee's rights pass by will or the applicable laws of descent and distribution. 15. WITHHOLDING. Optionee agrees to withholding of shares from exercise for satisfaction of any applicable federal, state or local income tax or employment tax withholding requirements. The Committee may issue Optionee an 6 additional option, with terms identical to this option Agreement, entitling Optionee to purchase additional Stock in an amount equal to the number of shares so retained. 16. CALIFORNIA LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement as of the day and year first above written. BEA SYSTEMS, INC. By____________________________________________ Its___________________________________________ _____________________________________________ Optionee Address:_____________________________________ _____________________________________________ _____________________________________________ 7 ATTACHMENT A CONSENT OF SPOUSE I, _______________________, spouse of _____________________________, have read and approved the foregoing Agreement. In consideration of granting of the right of my spouse to purchase shares of BEA Systems, Inc., as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact with respect to the exercise of any rights of the Agreement insofar as I may have any rights under such community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: _______________ By: ______________________________________ BEA SYTEMS, INC. 1995 FLEXIBLE STOCK INCENTIVE PLAN IMMEDIATELY EXERCISABLE NONQUALIFIED STOCK OPTION AGREEMENT This Agreement is made as of _________, 1995, between BEA Systems, Inc., a Delaware corporation (the "Company"), and ____________________ ("Optionee"). W I T N E S S E T H: WHEREAS, the Company has adopted the Company's 1995 Flexible Stock Incentive Plan (the "Plan"), which Plan is incorporated in this Agreement by reference and made a part hereof; and WHEREAS, the Company regards Optionee as a valuable employee or service provider of the Company, and has determined that it would be to the advantage and interest of the Company and its shareholders to grant the options provided for in this Agreement to Optionee as an inducement to remain in the employ or service of the Company and its affiliates (as defined in the Plan) and as an incentive for increased efforts during such employ of service; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties to this Agreement hereby agree as follows: I. A. OPTION GRANT. The Company hereby grants to Optionee the right and option to purchase from the Company on the terms and conditions hereinafter set forth, all or any part of an aggregate of ______ shares of the Common Stock of the Company (the "Stock"). This Option to purchase the Stock (the "Option") is not intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). (b) OPTION PRICE. The purchase price of the Stock subject to this Option shall be _____________ ($___) per share, which price is at least 85% of the fair market value (as defined in the Plan) of the Stock. The term "Option Price" as used in this Agreement refers to the purchase price of the Stock subject to this Option. 2. OPTION PERIOD. This option shall be exercisable only during the Option Period, and during such Option Period, the exercisability of the Option shall be subject to the limitations of paragraph 3 and the right of repurchase provisions set forth in paragraph 4. The Option Period shall commence on __________, 199_ (the "Grant Date) and shall terminate 120 months from the Grant Date (the "Termination Date"). 1 3. LIMITS ON OPTION PERIOD. The Option Period may end before the Termination Date, as follows: (a) If Optionee ceases to be an employee or service provider of the Company or any of its affiliates for any reason other than removal for cause, disability (within the meaning of subparagraph (c)) or death during the Option Period, the Option Period shall terminate thirty (30) days after the date of such cessation of employment or service or on the Termination Date, whichever shall first occur, and the Option shall be exercisable only to the extent exercisable under paragraph 4 on the date of Optionee's cessation of employment or service. (b) If Optionee dies while an employee or service provider of the Company or any of its affiliates, the Option Period shall end one year after the date of death or on the Termination Date, whichever shall first occur, and Optionee's executor or administrator or the person or persons to whom Optionee's rights under this Option shall pass by will or by the applicable laws of descent and distribution may exercise this Option only to the extent exercisable under paragraph 4 on the date of Optionee's death. (c) If Optionee ceases to be an employee or service provider of the Company or any of its affiliates by reason of disability (within the meaning of Section 22(e)(3) of the Code), the Option Period shall end one year after the date of Optionee's cessation of employment or service or on the Termination Date, whichever shall first occur, and the Option shall be exercisable only to the extent exercisable under paragraph 4 on the date of Optionee's cessation of employment or service. (d) If Optionee is on a leave of absence from the Company or any of its affiliates because of Optionee's disability, or for the purpose of serving the government of the country in which the principal place of employment of Optionee is located, either in a military or civilian capacity, or for such other purpose or reason as the Board of Directors of the Company (the "Board") or the Committee of the Board charged with the administering of the Plan (the "Committee") may approve, Optionee shall not be deemed during the period of such absence, by virtue of such absence alone, to have terminated employment with the Company or an affiliate except as the Board or Committee may otherwise expressly provide. (e) If Optionee's employment or service with the Company or any of its affiliates terminates for cause during the Option Period, the Option Period shall terminate on the date of such Optionee's termination of employment or service and shall not thereafter be exercisable to any extent. 2 4. RIGHT TO EXERCISE OPTIONS; REPURCHASE RIGHT. Subject to other limitations contained in this Agreement, the Option shall be immediately exercisable until termination of the Option pursuant to this Agreement. All shares of Stock purchased upon exercise of the Option shall be subject to repurchase by the Company upon termination of Optionee's employment or service to the Company or its affiliates for any reason as set forth below (the "Repurchase Right"). The Repurchase Right shall lapse and cease to have effect in accordance with the following schedule: as to one forty eighth (1/48th) of the number of shares of Stock covered by the Option, at the end of each month commencing after the Grant Date so that the Company's Repurchase Right shall fully lapse as to all shares of Stock subject to this Option four (4) years from the Grant Date; provided, however, that in the event Optionee dies or becomes disabled (as defined in Section 22(e)(3), the Company's Repurchase Right shall be accelerated by one year. In such an event, the Board or Committee shall inform Optionee of the adjusted rate at which the Company's Repurchase Right shall lapse. The Repurchase Right shall be exercisable by the Company by written notice to the Optionee within thirty (30) days after the date Optionee ceases to be an employee or service provider of the Company or its affiliates for any reason other than Optionee's death or disability, and one year in the event of Optionee's death or disability. In the event the Company exercises its Repurchase Right, the Company shall pay the Optionee the Option Price for each share repurchased (the "Repurchase Price"). The Company, at its option, shall pay the Repurchase Price by cash, check or the cancellation of indebtedness of the Optionee to the Company (even if not yet due and payable) or any combination of the foregoing. 5. RIGHT OF FIRST REFUSAL. 5.1 GRANT. The Company is hereby granted the right of first refusal (the "First Refusal Right"), exercisable in connection with any proposed sale or other transfer of the Stock acquired by Optionee upon exercise of the Option. For purposes of this paragraph 5, the term "transfer" shall include any assignment, pledge, encumbrance or other disposition for value of the Stock intended to be made by the Owner (defined below), but shall not include any of the permitted transfers under paragraph 8. For purposes of this paragraph 5, the term "Owner" shall include the Optionee or any subsequent holder of the Stock who derives his chain of ownership through a transfer permitted by Paragraph 8. 5.2 LAPSE. The Company's First Refusal Right under this paragraph 5 shall lapse and cease to have effect upon the closing of the first underwritten public offering of Common Stock of the Company that is pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), covering the offer and sale of any Common Stock to the public for the Company's account. 3 5.3 NOTICE OF INTENDED DISPOSITION. In the event the Owner desires to accept a bona fide third-party offer for any or all of the Stock (the shares subject to such offer to be hereinafter called, solely for the purposes of this paragraph 5, the "Target Shares"), Owner shall promptly deliver to the Secretary of the Company written notice (the "Disposition Notice") of the offer and the basic terms and conditions thereof, including the proposed purchase price. 5.4 EXERCISE OF RIGHT. The Company (or its assignee) shall, for a period of twenty (20) days following receipt of the Disposition Notice, have the right to repurchase any or all of the Target Shares specified in the Disposition Notice upon substantially the same terms and conditions specified therein. Such right shall be exercisable by written notice (the "Exercise Notice") delivered to Owner prior to the expiration of the twenty (20) day exercise period. If the Exercise Notice pertains to all the Target Shares specified in the Disposition Notice, then the Company (or its assignees) shall effect the repurchase of such Target Shares, including payment of the purchase price, not more than five (5) business days after delivery of the Exercise Notice; and at such time Owner shall deliver to the Company the certificates representing the Target Shares to be repurchased, each certificate to be properly endorsed for transfer. The Target Shares so purchased shall thereupon be cancelled and cease to be issued and outstanding shares of the Company's common stock. However, should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the Company (or its assignees) shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property. If the Owner and the Company (or its assignees) cannot agree on such cash value within ten (10) days after the Company's receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by the Owner and the Company (or its assignees) or, if they cannot agree on an appraiser within twenty (20) days after the Company's receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The closing shall then be held on the LATER of (i) the fifth business day following delivery of the Exercise Notice or (ii) the 15th day after such cash valuation shall have been made. 5.5 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is not given to Owner within twenty (20) days following the date of the Company's receipt of the Disposition Notice, Owner shall have a period of ninety (90) days thereafter in which to sell or otherwise dispose of the Target Shares upon terms and conditions (including the purchase price) no more favorable to the third party purchaser than those specified in the Disposition Notice. The third-party purchaser shall acquire the Target Shares free and clear of all the terms and provisions of this Agreement (including the Company's First Refusal Right hereunder). In the event Owner does not sell or otherwise dispose of the Target Shares within the specified ninety (90) day period, the Company's First Refusal Right shall continue to be 4 applicable to any subsequent disposition of the Target Shares by Owner until such right lapses in accordance with paragraph 5.2 5.6 PARTIAL EXERCISE OF RIGHT. In the event the Company (or its assignees) makes a timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written notice to the Company delivered within ninety (90) days after the date of the Disposition Notice, to effect the sale of the Target Shares pursuant to one of the following alternatives: (i) sale or other distribution of all the Target Shares to a third-party purchaser in compliance with the requirements of paragraph 5.5, as if the Company did not exercise the First Refusal Right hereunder; or (ii) sale to the Company (or its assignees) of the portion of the Target Shares which the Company (or its assignees) has elected to purchase, such sale to be effected in substantial conformity with the provisions of paragraph 5.4. Failure of Owner to deliver timely notification to the Company under this paragraph 5.6 shall be deemed to be an election by Owner to sell the Target Shares pursuant to alternative (ii) above. 5.7 RECAPITALIZATION. (a) In the event of any stock dividend, stock split, recapitalization or other transaction affecting the Company's outstanding securities without receipt of consideration, then any new, substituted or additional securities or other property (including money paid other than as a cash dividend) which is by reason of such transaction distributed with respect to the Stock shall be immediately subject to the provisions of paragraphs 4 and 5 hereunder, but only to the extent the Stock is at such time covered by such provisions. (b) In the event of a Corporate Transaction (as defined in paragraph 9), the Company's rights under this paragraph shall remain in full force and effect and shall apply to any capital stock or other securities received in exchange for the Stock in consummation of the Corporate Transaction and delivered to the Company (or its successors) or the Optionee, but only to the extent the Stock is at such time covered by such provisions. 6. PARTIAL EXERCISE. No partial exercise of this Option may be for less than five percent (5%) of the total number of shares of Stock available under the Option. In no event shall the Company be required to issue fractional shares. 5 7. METHOD OF EXERCISE. Optionee may exercise the Option with respect to all or any part of the shares of Stock then subject to such exercise as follows: (a) By giving the Company written notice of such exercise, specifying the number of such shares as to which this Option is exercised. Such notice shall be accompanied by Optionee's payment of an amount equal to the Option Price of such shares. Such payment may be made in whole or in part (a) in cash, or in the discretion of the Board or Committee, (i) by check, (ii) by delivery to the Company of the Optionee's promissory note, or (iii) by delivery of shares of Stock owned by Optionee for at least six (6) months or such other period as may be required to avoid a charge to the Company's earnings; (b) with such other consideration as the Board or the Committee, in its absolute discretion, determines is consistent with the Plan's purpose and applicable law; or (c) in any combination of the foregoing. Any Stock used to exercise all or part of the Option shall be valued in accordance with the Plan. Such consideration may also be paid through a broker-dealer sale and remittance procedure pursuant to which the optionee shall (a) provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Company in connection with such purchase and (b) provide written directives to the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. Any note used to exercise this Option shall (i) be full recourse, (ii) bear interest at the lowest rate required to avoid imputed interest under federal and state income tax laws, (iii) be due five (5) years or upon sale of the Stock (proportionately in the event of a sale of less than all the Stock), (iv) provide for payment of interest at maturity, (v) be secured by Shares in the Company, and (vi) contain such terms as the Board or Committee shall determine. If a note is used, the Optionee agrees to execute such further documents as the Company may deem necessary or appropriate in connection with issuing the note, perfecting a security interest in the Stock purchased with the note, and any related terms or conditions that the Company may propose. Such further documents may include, not by way of limitation, a security agreement, an escrow agreement, a voting trust agreement and an assignment separate from certificate. (b) If required by the Company, Optionee (and Optionee's spouse, if any) shall, as a condition precedent to acquiring Stock through exercise of the option, execute one or more agreements relating to obligations in connection with ownership of the Stock or restrictions on transfer of the Stock no less restrictive than the obligations and restrictions to which the other shareholders of the Company are subject at the time of such exercise. (c) If required by the Company, Optionee shall give the Company satisfactory assurance in writing, signed by Optionee or his legal representative, as the case may be, that such shares are being purchased for investment and not with a view to the 6 distribution thereof, provided that such assurance shall be deemed inapplicable to (i) any sale of such shares by such Optionee made in accordance with the terms of a registration statement covering such sale, which may hereafter be filed and become effective under the Securities Act, and with respect to which no stop order suspending the effectiveness thereof has been issued, and (ii) any other sale of such shares with respect to which in the opinion of counsel for the Company, such assurance is not required to be given in order to comply with the provisions of the Securities Act. As soon as practicable after receipt of the notice required in paragraph 7(a) and satisfaction of the conditions set forth in paragraphs 7(b) and 7(c), the Company shall, without transfer or issue tax and without other incidental expense to Optionee, deliver to Optionee at the principal office of the Company, attention of the Secretary, or such other place as may be mutually acceptable to the Company and Optionee, a certificate or certificates of such shares of Stock; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with applicable registration requirements under the Securities Act, the Securities Exchange Act of 1934, as amended, any applicable listing requirements of any national securities exchange, and requirements under any other law or regulation applicable to the issuance or transfer of such shares. 8. CORPORATE TRANSACTIONS. (a) For purposes of this paragraph 8, a "Corporate Transaction" shall include any of the following shareholder-approved transactions to which the Company is a party: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state of the Company's incorporation; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company; or (iii) any reverse merger in which the Company is the surviving entity but in which securities assessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to holders different from those who held such securities immediately prior to such merger. (b) Upon consummation of any Corporate Transaction, any unexercised portions of this Option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or its parent company, pursuant to options 7 providing Optionee substantially equal value and having substantially equivalent provisions as this Option and, to the extent this Option is exercised, the Repurchase Right shall terminate unless the Optionee receives as a result of such Corporate Transaction securities of the successor corporation or its parent company having substantially similar attributes as the Stock and having substantially equal value to that received by shareholders of the same class of stock of the Company; and (c) In the event that this Option is assumed in connection with the Corporate Transaction or is otherwise to continue in effect, or in the event of any other change in a class of stock subject to this Option through a stock dividend, stock split, recapitalization or other change in the Company's capital structure, this Option shall be appropriately adjusted, immediately after such Corporate Transaction or other event, to apply and pertain to the number and class of securities which would have been issued to Optionee in connection with the consummation of such Corporate Transaction or other event had Optionee exercised the Option immediately prior to such Corporate Transaction or other event. Appropriate adjustments shall also be made to the Option Price, provided the aggregate option price payable for such securities shall remain the same. Such adjustments shall be made so as to preserve, but not to increase, the benefits to Optionee under this Option. 9. LIMITATIONS ON TRANSFER. This Option shall, during Optionee's lifetime, be exercisable only by Optionee or by Optionee's representative or legal guardian, and this Option shall not be transferable by Optionee by operation of law or otherwise, other than by will or the laws of descent and distribution, in contravention of the Company's Repurchase Right in Paragraph 3 of this Agreement or its First Refusal Right in Paragraph 4 of this Agreement. In the event of any attempt by Optionee to alienate, assign, pledge, hypothecate, or otherwise dispose of this Option, or in the event of the levy of any attachment, execution, or similar process upon the rights or interest hereby conferred, the Company at its election may terminate this Option by notice to Optionee and this Option and/or the attempted disposition of the Stock shall thereupon become null and void. 10. NO SHAREHOLDER RIGHTS. Neither Optionee nor any person entitled to exercise Optionee's rights in the event of Optionee's death shall have any of the rights of a shareholder with respect to the shares of Stock subject to this Option except to the extent the certificates for such shares shall have been issued upon the exercise of this Option. 11. LOCK-UP AGREEMENT. Optionee, if requested by the Company and an underwriter of the Stock or other securities of the Company, shall not sell or otherwise transfer or dispose of any Stock of the Company held by Optionee (except Stock included in such registration) during the 180-day period following the effective date of the first registration statement of the Company filed under the Securities Act for a public offering, or such shorter period of time as the Company and the underwriter shall require. The Company may impose 8 stop-transfer instructions with respect to such Stock subject to the foregoing restriction until the end of said period. 12. NO EFFECT ON TERMS OF EMPLOYMENT OR SERVICE. Subject to the terms of any written employment or service contract to the contrary, the Company (or its affiliate which employs Optionee) shall have the right to terminate or change the terms of employment or service of Optionee at any time and for any reason whatsoever, with or without cause. 13. LEGENDS. The Company may at any time place legends referencing any applicable federal or state securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement and the Plan. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the option in the possession of the Optionee in order to effectuate the provisions of this paragraph. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: (a) "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE "ACT"), AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 OF THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FORM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT." (b) Any legend required to be placed thereon by the Commissioner of Corporations of the State of California. 14. NOTICE. Any notice required to be given under the terms of this Agreement shall be addressed to the Company in care of its Secretary at the principal executive office of the Company, and any notice to be given to Optionee shall be addressed to him at the address given by him beneath his signature to this Agreement, or such other address as either party to this Agreement may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified and deposited (postage or registration or certification fee prepaid) in a post office or branch post office regularly maintained by the United States. 9 15. BOARD/COMMITTEE DECISIONS CONCLUSIVE. All decisions of the Board or the Committee upon any question arising under the Plan or under this Agreement shall be conclusive and binding upon the Optionee. 16. SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company. Where the context permits, "Optionee" as used in this Agreement shall include Optionee's executor, administrator or other legal representative or the person or persons to whom Optionee's rights pass by will or the applicable laws of descent and distribution. 17. WITHHOLDING. Optionee agrees to make appropriate arrangements with the Company and his employer for satisfaction in cash of any applicable federal, state or local income tax or employment tax withholding requirements. 18. CALIFORNIA LAW. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of California. 19. DELIVERY OF THE PLAN. By executing below, the Optionee hereby acknowledges receipt of a copy of the Plan. IN WITNESS WHEREOF, the Company has caused these presents to be executed on its behalf, and Optionee has hereunto set Optionee's hand as of the day and year first above written. BEA SYSTEMS, INC., a California corporation By:_________________________________________ Title:______________________________________ OPTIONEE ___________________________________________ Address: __________________________________ __________________________________________ 10 CONSENT OF SPOUSE I, ______________________________, the spouse of ________________, have read and approved the foregoing Nonqualified Stock Option Agreement. In consideration of granting of the right of my spouse to purchase shares of BEA Systems, Inc., as set forth in the Nonqualified Stock Option Agreement, I hereby appoint my spouse as my attorney-in-fact with respect to the exercise of any rights of the Nonqualified Stock Option Agreement insofar as I may have any rights under such community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Nonqualified Stock Option Agreement. Dated: _______________, 199_. By:______________________________ 11 BEA SYSTEMS, INC. STOCK OPTION EXERCISE FORM ________________ (date) _____ Incentive Stock Option Exercise _____ Nonqualified Stock Option Exercise I hereby notify BEA Systems, Inc. (the "Company") that I elect to exercise the following stock options to purchase the number of shares (the "Stock") indicated pursuant to the Company's 1995 Flexible Stock Incentive Plan (the "Plan"): GRANT # OF PRICE/ TOTAL OPTION PRICE DATE SHARES SHARE (EXCLUDING TAXES) ____________ ____________ ____________ __________________________ ____________ ____________ ____________ __________________________ ____________ ____________ ____________ __________________________ ____________ ____________ ____________ __________________________ ____________ ____________ ____________ __________________________ Concurrently with the delivery of this Exercise Form to the Company, I shall hereby pay to the Company the Total Option Price for the stock purchased in accordance with the provisions of my agreement with the Company evidencing the option(s) specified above. Furthermore, I understand that any taxes which may be due at the time of this exercise will be calculated and added to the Total Option Price listed above. The payment of the Total Option Price will be made via: a) _____ Cash, Certified Check, Bank Draft, Postal or Money Order. b) _____ Shares of the Company's stock valued at fair market value. c) _____ Execution of a secured promissory note and stock pledge agreement for $___________ (if approved by the Board of Directors). Please note the following: a) _____ Yes I wish to have taxes withheld at the following rate (above any minimum required): Federal _______% State ________% b) _____ No I do not wish to have taxes withheld above the minimum required (if any). INVESTMENT REPRESENTATIONS a) I understand that this sale of the Stock is made in reliance upon the following representation to the Company that the Stock to be received by me will be acquired for investment for my own account and not with a view to the sale or distribution of any part thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). b) I hereby represent that I am a resident of the state of ________________________. c)I hereby represent that I have received a copy of the Plan and understand the restrictions imposed on the Stock I am purchasing, including but not limited to, the Company's right to repurchase the Stock. d)I understand that the Stock may not be sold, transferred, or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Stock or an available exemption from registration under the Securities Act, the Stock must be held indefinitely. In particular, I am aware that the Stock may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 is the availability of current information to the public about the Company. Such information is not now available, and the Company has no present plans to make such information available. I represent that, in the absence of an effective registration statement covering the Stock, I will sell, transfer, or otherwise dispose of the Stock only in a manner consistent with the representations set forth herein. e)I agree that in no event will I make a transfer or disposition of any of the Stock (other than pursuant to an effective registration statement under the Securities Act), unless and until (i) I have notified the Company of the proposed disposition and have furnished the Company with a statement of the circumstances surrounding the disposition, (ii) such transfer is made in accordance with the provisions of the Plan and (iii) if requested by the Company, at my expense or the expense of the transferee, I shall have furnished to the Company either (A) an opinion of counsel, reasonably satisfactory to the Company, to the effect that such transfer may be made without registration under the Securities Act or (B) a "no action" letter from the Securities and Exchange Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Securities and Exchange Commission that action be taken with respect thereto. The Company will not require such a legal opinion or "no action" letter in any transaction in compliance with Rule 144. Signature of Optionee ________________________________________ Please print Optionee's Name: ________________________________________ Address: ________________________________________ ________________________________________ ________________________________________ Social Security Number: ________________________________________ BEA SYSTEMS, INC. RESTRICTED STOCK PURCHASE AGREEMENT ----------------------------------- THIS AGREEMENT is entered into as of the ____ day of ______________, 199__, between BEA Systems, Inc., a Delaware corporation (the "Company"), and __________________________________________ (the "Recipient"). W I T N E S S E T H: WHEREAS, the Company has adopted the 1995 Flexible Stock Incentive Plan (the "Plan"), which Plan is hereby incorporated in this Agreement by reference and made a part of it; and WHEREAS, the Company regards Recipient as a valuable contributor to the Company, and has determined that it would be in the interest of the Company and its stockholders to sell the Stock (as defined below) to the Recipient as a reward for past efforts and an incentive for continued service with the Company or its Affiliates (as defined in the Plan) and increased achievements in the future by Recipient; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties to this Agreement hereby agree as follows: 1. RESTRICTED STOCK PURCHASE. (a) PURCHASE AND SALE. Contemporaneously with the execution of this Agreement, the Company will issue to Recipient ____________ shares of Common Stock of the Company (the "Stock") for a consideration of $_______ per share ("Purchase Price"). Payment for the Stock in the amount of the Purchase Price multiplied by the number of shares issued hereunder shall be made to the Company upon execution of this Agreement. Such payments shall be made in cash, certified check or wire transfer acceptable to a committee that may be appointed by the Board of Directors of the Company (the "Board") to administer the Plan (the "Committee"). (If the Board has not appointed a Committee, then each reference to the "Committee" shall be construed to refer to the Board.) If approved by the Commitee, payment may also be made by a promissory note, in the form attached hereto as EXHIBIT A. In the event of a purchase by promissory note, recipient shall pledge the Stock as security for the promissory note pursuant to a security agreement in the form attached hereto as EXHIBIT B. (b) RIGHTS OF STOCKHOLDER; ADDITIONAL SECURITIES. All shares of Stock issued hereunder shall be deemed issued to Recipient as fully paid and nonassessable shares, and Recipient shall have all rights of a stockholder with respect thereto, including the right to vote, receive dividends (including stock dividends), 1 participate in stock splits or other recapitalizations, and exchange such shares in a merger, consolidation or other reorganization. The Company shall pay any applicable stock transfer taxes. The term "Stock" also refers to the purchased Stock and all securities received in replacement of the Stock, as a stock dividend or as a result of any stock split, recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Recipient is entitled by reason of Recipient's ownership of the Stock. 2. REPURCHASE OPTION. (a) TRANSFER RESTRICTIONS. No Stock issued to the Recipient hereunder shall be sold, transferred by gift, pledged, hypothecated, or otherwise transferred or disposed of by the Recipient prior to the date when the Recipient shall become vested in such Stock pursuant to Section 4 hereof ("Vested Stock"), and such Stock shall constitute "Non-Vested Stock" until such date. Any attempt to transfer Stock in violation of this Section 2 shall be null and void and shall be disregarded by the Company. (b) REPURCHASE OPTION. In addition, Non-Vested Stock shall be subject to a repurchase option in favor of the Company (the "Repurchase Option"). The Repurchase Option shall be subject to the following terms and conditions. In the event of the voluntary or involuntary termination of employment of Recipient with the Company for any reason, with or without cause (including death or disability), the Company shall, upon the date of such termination, have an irrevocable, exclusive option for a period of three months from such date to repurchase the Non-Vested Stock from Recipient or any person receiving the Non-Vested Stock by operation of law or other involuntary transfer, at the original Purchase Price for the Non-Vested Stock. The Repurchase Option shall be exercised by written notice by the Company to Recipient or his executor and, at the Company's option, (i) by delivery to the Recipient or his executor, with such notice, of a check in the amount of the Purchase Price for the Non-Vested Stock being repurchased, or (ii) in the event the Recipient is indebted to the Company for all or a portion of the Purchase Price for the Stock, by cancellation by the Company of an amount of such purchase money indebtedness equal to the Purchase Price for the Non-Vested Stock being repurchased, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such Purchase Price. Upon delivery by the Company of such notice and payment of the Purchase Price in any of the ways described above, the Company shall become the legal and beneficial owner of the Non-Vested Stock being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of shares of Non-Vested Stock being repurchased by the Company, without further action by Recipient. 2 The Repurchase Option may be assigned by the Company to any third party, provided that in the event the aggregate Purchase Price of the Stock being assigned is less than the fair market value of such Stock at the time of assignment, the assignee shall pay to the Company upon assignment cash equal to the difference between the aggregate Purchase Price and such fair market value. (c) ESCROW OF STOCK. For purposes of facilitating the enforcement of the provisions of this Section 2, Recipient agrees, immediately upon receipt of the certificate(s) for his Shares, to deliver such certificate(s), together with a stock power in the form attached hereto as EXHIBIT C executed in blank by Recipient and Recipient's spouse (if required for transfer) with respect to each such stock certificate, to the Secretary or Assistant Secretary of the Company, or their designee, to hold in escrow for so long as such stock remains as Non-Vested Stock, with the authority to take all such actions and to effectuate all such transfers and/or releases as may be necessary or appropriate to accomplish the objectives of this Agreement in accordance with the terms hereof. Recipient hereby acknowledges that the appointment of the Secretary or Assistant Secretary of the Company (or their designee) as the escrow holder pursuant to this Section 2 with the stated authorities herein and therein is a material inducement to the Company to make this Agreement and that such appointment is coupled with an interest and is accordingly irrevocable. Recipient agrees that such escrow holder shall not be liable to any party hereto (or to any other party) for any actions or omissions unless such escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. 3. RIGHT OF FIRST REFUSAL. (a) GRANT. Before Recipient may transfer any Stock (whether voluntarily or involuntarily), Recipient must deliver to the Company at its principal office a written notice describing the proposed transfer and stating the name of the proposed transferee, the number of shares of Stock to be transferred, and the consideration for which the shares of Stock are to be transferred ("Disposition Notice"), and a written offer signed by the proposed transferee (if the proposed transfer is voluntary) to acquire the shares of Stock on the terms specified in the Disposition Notice. Thereafter, for thirty (30) days, the Company may purchase the shares of Stock by giving Recipient written notice ("Repurchase Notice"). The purchase price for the shares of Stock shall be the price specified in the Disposition Notice. If the Company repurchases any shares pursuant to this right of first refusal, it must purchase all of the shares of Stock proposed to be transferred. (b) EXCHANGES OR OTHER TRANSFERS. If the consideration specified in a Disposition Notice is property other than cash but with a readily ascertainable fair 3 market value, the purchase price of the Stock shall be an amount equal to the fair market value of the consideration specified in the Disposition Notice. If the consideration for the shares of stock set forth in the Disposition Notice consists of property other than cash and does not have a readily ascertainable fair market value, the purchase price for the Stock shall be the Current Market Value (as defined in section (e) of this Section 3) of the Stock determined as of the date the Company receives the Disposition Notice. (c) EFFECT OF NOTICE. Except as otherwise provided herein, Stock shall be deemed repurchased when Recipient or any other holder of the Stock receives a Repurchase Notice. All rights accorded a holder of such Stock, other than the right to payment therefor, shall cease at that time. The Company shall pay the purchase price of any Stock so purchased within five (5) business days after tender of the certificates representing such Stock to the Company's transfer agent. (d) FAILURE TO REPURCHASE STOCK; SURVIVAL OF RESTRICTIONS ON TRANSFER. If the Company or its assignee does not exercise the right of first refusal set forth in Section 3(b), the shares of stock subject to repurchase may be transferred only in the manner and to the persons specified in the Disposition Notice within six (6) months after delivery of the Disposition Notice. Shares of stock transferred pursuant to Section 3(b) shall continue to be subject to the restrictions imposed by this Agreement. (e) CURRENT MARKET PRICE. For purposes of this Agreement, the "Current Market Price" means the fair market value of the Company's common stock for the purpose of any employee benefit plan of the Company, including the Plan, as most recently determined by the Board. (f) ASSIGNMENT. The Company may assign its rights of first refusal under this section. (g) TERMINATION OF RESTRICTIONS. The restrictions on Stock imposed by this Section 3 shall terminate when a public market exists for the Common Stock of the Company. A public market shall be deemed to exist if any of the Company's shares of common stock have been registered pursuant to Section 5 of the Securities Act of 1933 or Section 12 of the Securities Exchange Act of 1934, and (a) said stock has ever been listed on a national securities exchange, or (b) offers by two or more persons to buy or sell said stock have ever been published at least daily for ninety (90) days in a publication of the National Quotation Bureau, Inc. 4. VESTING. For purposes of this Agreement, the term "vest" shall mean with respect to any share of the Stock that such share is no longer subject to the restrictions on transfer set forth in Section 2 and that such share is released from the Repurchase Option. If Recipient would become vested in any fraction of a share of Stock on any date, such fractional share shall not vest and shall remain Non-Vested until the 4 Recipient becomes vested in the entire share. The Stock subject to this Agreement shall vest at a minimum of ___% per year over _____ years from the date hereof as follows: (a) As to ___% of the number of shares covered by this Agreement, one year from date of this Agreement; (b) As to each additional __% of the number of shares covered by this Agreement, on each anniversary of the date of this Agreement thereafter until all shares covered by this Agreement have become vested. 5. CORPORATE TRANSACTIONS. (a) DEFINITION. For purposes of this Section 5, a "Corporate Transaction" shall include any of the following stockholder-approved transactions to which the Company is a party: (i) a merger or consolidation in which the Company is not the surviving entity, except for (1) a transaction the principal purpose of which is to change the state of the Company's incorporation, or (2) a transaction in which the Company's stockholders immediately prior to such merger or consolidation hold (by virtue of securities received in exchange for their shares in the Company) securities of the surviving entity representing more than fifty percent (50%) of the total voting power of such entity immediately after such transaction; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company unless the Company's stockholders immediately prior to such sale, transfer or other disposition hold (by virtue of securities received in exchange for their shares in the Company) securities of the purchaser or other transferee representing more than fifty percent (50%) of the total voting power of such entity immediately after such transaction; or (iii) any reverse merger in which the Company is the surviving entity but in which the Company's stockholders immediately prior to such merger do not hold (by virtue of their shares in the Company held immediately prior to such transaction) securities of the Company representing more than fifty percent (50%) of the total voting power of the Company immediately after such transaction. (b) RELEASE OF REPURCHASE OPTION. In the event of any Corporate Transaction, any Non-Vested Stock shall be reconveyed to or repurchased by the Company immediately prior to the specified effective date of the Corporate Transaction unless assumed by the successor corporation or its parent company, pursuant to restricted stock providing substantially equal value and having substantially equivalent provisions as such Non-Vested Stock. 5 (c) CONTINUATION OF FIRST REFUSAL RIGHTS. In the event of any Corporate Transaction, the Company's rights under Section 3 shall remain in full force and effect and shall apply to any capital stock or other securities, received in exchange for the Stock in consummation of the Corporate Transaction and delivered to the Company (or its successors) or the Owner, but only to the extent that the Right of First Refusal has not lapsed pursuant to Section 3(b). 6. ADDITIONAL SECURITIES. Any securities received as the result of ownership of Stock (hereinafter called "Additional Securities"), including, but not by way of limitation, warrants, options and securities received as a stock dividend or stock split, or as a result of a recapitalization or reorganization, shall be retained by the Company in the same manner and subject to the same conditions as the Stock with respect to which they were issued. Recipient shall be entitled to direct the Company to exercise any warrant or option received as Additional Securities upon supplying the funds necessary to do so, in which event the securities so purchased shall constitute Additional Securities, but the Recipient may not direct Company to sell any such warrant or option. If Additional Securities consist of a convertible security, Recipient may exercise any conversion right, and any securities so acquired shall be deemed Additional Securities. Additional Securities shall be subject to the provisions of Sections 2 and 3 above in the same manner as the Stock. 7. INVESTMENT REPRESENTATIONS. (a) INVESTMENT REPRESENTATIONS. This Agreement is made in reliance upon the Recipient's representation to the Company, which by its acceptance hereof the Recipient hereby confirms, that the shares of Stock to be received by the Recipient will be acquired for investment for his or her own account and not with a view to the sale or distribution of any part thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). (b) AVAILABILITY OF EXEMPTION. The Recipient understands that the Stock is not registered under the Securities Act on the basis that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof, and that the Company's reliance on such exemption is predicated on the Recipient's representations set forth herein. (c) RESTRICTIONS ON TRANSFER. The Recipient understands that the Stock may not be sold, transferred, or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Stock or an available exemption from registration under the Securities Act, the Stock must be held indefinitely. In particular, the Recipient is aware that the Stock (and any Common Stock issued on conversion thereof) may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the 6 conditions of that Rule are met. Among the conditions for use of Rule 144 is the availability of current information to the public about the Company. Such information is not now available, and the Company has no present plans to make such information available. The Recipient represents that, in the absence of an effective registration statement covering the Stock, it will sell, transfer, or otherwise dispose of the Stock only in a manner consistent with its representations set forth herein and then only in accordance with the provisions of Section 6(d) hereof. (d) PROCEDURE FOR TRANSFER. The Recipient agrees that in no event will it make a transfer or disposition of any of the Stock (other than pursuant to an effective registration statement under the Securities Act), unless and until (i) the Recipient shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the disposition, (ii) such transfer if made in accordance with the provisions of Section 2 and Section 3 above and (iii) if requested by the Company, at the expense of the Recipient or transferee, the Recipient shall have furnished to the Company either (A) an opinion of counsel, reasonably satisfactory to the Company, to the effect that such transfer may be made without registration under the Securities Act or (B) a "no action" letter from the Securities and Exchange Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Securities and Exchange Commission that action be taken with respect thereto. The Company will not require such a legal opinion or "no action" letter in any transaction in compliance with Rule 144. (e) NO ADVERTISEMENT. At no time was Recipient presented with or solicited by any leaflet, public promotional meeting, circular, newspaper or magazine article, radio or television advertisement, or any other form of general advertising. (f) KNOWLEDGE OF ISSUER. Recipient is a sophisticated investor having such knowledge and experience in financial and business matters that Recipient is capable of evaluating the merits of acquiring the Stock. Recipient is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Stock. Recipient warrants that the nature and amount of the Stock are consistent with Recipient's investment objectives, abilities and resources. 8. LEGENDS; STOP TRANSFER. (a) All certificates for shares of the Stock shall bear the following legends: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A 7 VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF, AND ARE SUBJECT TO RESTRICTIONS ON TRANSFER AS PROVIDED IN, THE RESTRICTED STOCK PURCHASE AGREEMENT, A COPY OF WHICH IS AVAILABLE FROM THE COMPANY." (b) The certificates for shares of the Stock shall also bear any legend required by any applicable state securities law. 9. LOCK-UP AGREEMENT. Recipient, if requested by an underwriter of Common Stock or other securities of the Company, agrees not to sell or otherwise transfer or dispose of any Common Stock of the Company held by the Recipient (except Common Stock included in such registration) during the 180-day period following the effective date of a registration statement of the Company filed under the Securities Act, or such shorter period of time as the underwriter shall require. The Company may impose stop-transfer instructions with respect to such Common Stock subject to the foregoing restriction until the end of said period. 10. NO EMPLOYMENT RIGHTS. THIS AGREEMENT SHALL NOT CONFER UPON RECIPIENT ANY RIGHT WITH RESPECT TO CONTINUATION OF HIS OR HER EMPLOYMENT WITH THE COMPANY OR ITS AFFILIATES, NOR SHALL IT INTERFERE IN ANY WAY WITH THE RIGHT OF RECIPIENT OR THE COMPANY, OR ANY OF ITS AFFILIATES, TO TERMINATE RECIPIENT'S EMPLOYMENT WITH THE COMPANY AT ANY TIME FOR ANY REASON WITH OR WITHOUT CAUSE OR CHANGE THE TERMS OF EMPLOYMENT OF RECIPIENT. 11. SECTION 83(b) ELECTION. Recipient hereby represents that he or she understands (a) the contents and requirements of a timely election made pursuant to Section 83(b) of the Internal Revenue Code or similar provision of state law (collectively, an "83(b) Election"), (b) the application of Section 83(b) to the purchase of Stock by Recipient pursuant to this Agreement, (c) the nature of the election to be made by Recipient under Section 83(b) and (d) the effect and requirements of the 83(b) Election under relevant state and local tax laws. Recipient further represents that he or she intends 8 to file an election pursuant to Section 83(b), the form of which Election is attached hereto as EXHIBIT D, with the Internal Revenue Service within thirty (30) days following purchase of the Stock hereunder, and a copy of such election with his or her federal tax return for the calendar year in which the date of this Agreement falls. Recipient covenants to inform the Company of any change in Recipient's state of residency. Recipient shall provide the Company with a copy of any timely 83(b) Election. If Recipient makes a timely 83(b) Election, Recipient shall immediately pay Company (or the Affiliate that employs Recipient) the amount necessary to satisfy any applicable federal, state, and local income and employment tax withholding requirements. If Recipient does not make a timely 83(b) Election, Recipient shall, either at the time that the restrictions lapse under this Agreement and the Plan or at the time withholding is otherwise required by any applicable law, pay the Company (or the Affiliate that employs Recipient) the amount necessary to satisfy any applicable federal, state, and local income and employment tax withholding requirements. 12. DISTRIBUTIONS. The Company shall disburse to Recipient all dividends, interest and other distributions paid or made in cash or property (other than Additional Securities) with respect to Stock and Additional Securities, less any applicable federal or state withholding taxes. 13. SUCCESSORS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. NOTICE. Any notice or other paper required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: 9 Company: BEA Systems, Inc. 385 Moffett Park Drive, Suite 105 Sunnyvale, California 94089-1208 Recipient: At Recipient's address as it appears under Recipient's signature to this Agreement, or to such other address as Recipient may specify in writing to the Company Any party may designate another address for receipt of notices so long as notice is given in accordance with this Section. 15. COMMITTEE DECISIONS CONCLUSIVE. All decisions of the Committee arising under the Plan or under this Agreement shall be conclusive. 16. SPOUSAL CONSENT. Recipient shall cause his or her spouse to execute the Consent of Spouse attached hereto as EXHIBIT E concurrently with the execution of this Agreement or, if later, at the time Recipient becomes married. 17. CALIFORNIA LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. 10 IN WITNESS WHEREOF, the parties hereto have duly executed this Restricted Stock Purchase Agreement as of the date first above written. BEA SYSTEMS, INC. By ------------------------------------------- Its: ----------------------------------------- Recipient: --------------------------------------------- [Name] Address: --------------------------------------------- --------------------------------------------- 11 EXHIBIT A --------- PROMISSORY NOTE $ [DATE] --------- ------------ FOR VALUE RECEIVED, the undersigned [NAME] , an individual residing at [ADDRESS] ("Maker"), hereby promises to pay to BEA Systems, Inc., a Delaware corporation ("Payee"), on the earlier of (i) ______________ or (ii) the date Maker ceases to be an employee of Payee, for any reason, the principal sum of ________________ Dollars ($______), in lawful money of the United States of America and in immediately available funds, plus simple interest from the date hereof at the rate of _____ percent (__%) per annum, payable in arrears on [each of] __________ [,__________, __________ and __________] provided however, that the last said installment shall be in an amount necessary to repay in full the unpaid principal and interest hereof. Interest shall be computed on the basis of a year of 365 days for the actual number of days elapsed. Should interest not be paid when due hereunder, it shall be added to the principal and thereafter bear like interest as the principal, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. This is the Promissory Note referred to in the Security Agreement of even date herewith between Maker and Payee, and Payee is entitled to all the benefits provided therein. (i) PREPAYMENTS. Maker reserves the right to prepay the outstanding principal amount of this Note in full or in part at any time during the term of this Note without notice and without premium or penalty. (ii) EVENTS OF DEFAULT AND REMEDIES. Any one of the following occurrences shall constitute an "Event of Default" under this Note: (a) Maker fails to make payment of full principal amount of this Note as and when the same becomes due and payable in accordance with the terms hereof. (b) Maker becomes insolvent or bankrupt, commits any act of bankruptcy, generally fails to pay its debts as they become due, becomes the subject of any proceedings or action of any regulatory agency or any court relating to insolvency, or makes an 1 assignment for the benefit of its creditors, or enters into any agreement for the composition, extension, or readjustment of all or substantially all of his obligations. (c) Maker ceases to be an employee of Payee for any reason. Upon the occurrence of any Event of Default hereunder, the entire unpaid principal balance of this Note (including accrued interest) shall, at the option of the Payee and without notice or demand of any kind to Maker or any other person, immediately become due and payable, and Payee shall have and may exercise any and all rights and remedies available to it at law or in equity. (iii) ATTORNEYS' FEES AND COSTS. Maker promises to pay on demand all reasonable out-of-pocket costs of and expenses of Payee in connection with the collection of amounts due hereunder, including, without limitation, attorneys' fees incurred in connection therewith, whether or not any lawsuit is ever filed with respect thereto. (iv) MISCELLANEOUS. (a) WAIVER. Maker waives diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Note. No extension of time for the payment of this Note shall affect the original liability under this Note of Maker. The pleading of any statute of limitations as a defense to any demand against Maker is expressly waived by Maker to the full extent permitted by law. (b) SETOFF. The obligation to pay Payee shall be absolute and unconditional and the rights of Payee shall not be subject to any defense, setoff, counterclaim or recoupment or by reason of any indebtedness or liability at any time owing by Payee to Maker. IN WITNESS WHEREOF, the undersigned has executed and delivered this Note as of the date first above written. MAKER --------------------------------------------- [Signature] --------------------------------------------- [Name] 2 EXHIBIT B --------- SECURITY AGREEMENT THIS SECURITY AGREEMENT is made and entered into as of this ____ day of (MONTH) , (YEAR) , by and between BEA Systems, Inc., a Delaware corporation ("Secured Party"), and [NAME] , an individual residing at [ADDRESS] ("Debtor"). In consideration of the mutual covenants contained herein and for other good and valuable consideration, the adequacy and receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. DEFINITIONS. The following terms have the following meanings: (a) The term "Collateral" shall mean (i) the tangible assets owned by Debtor as of the date hereof and described in EXHIBIT A attached hereto and (ii) all Proceeds of the foregoing Collateral. For purposes of this Security Agreement, the term "Proceeds" includes whatever is receivable or received when Collateral or proceeds thereof is sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including return premiums, with respect to any insurance relating thereto. (b) The term "Obligations" shall mean all of the unpaid principal sum of that certain Promissory Note in the original principal amount of $______ of even date herewith (the "Note") evidencing the indebtedness of Debtor to Secured Party. (c) The term "UCC" shall mean the Uniform Commercial Code as the same may, from time to time, be in effect in the State of California. (d) Capitalized terms used herein shall have the meaning set forth in the UCC unless otherwise set forth herein. (e) The term "Event of Default" shall have the meaning set forth in the Note. 2. GRANT OF SECURITY INTEREST. As collateral security for prompt and complete payment and performance under the Obligations, Debtor hereby assigns, conveys, grants, pledges and transfers to and creates in favor of Secured Party a security interest in the Collateral, including all Proceeds of the foregoing and all accessions to, substitutions and replacements for the foregoing. Debtor shall, upon execution of this Security Agreement, and of the Note as Payee (as such term is defined in the Note), deliver all certificates representing the Collateral 1 together with a stock power executed in blank by Debtor and Debtor's spouse with respect to such stock certificates to the Secretary of Secured Party to be held in escrow until full satisfaction of Debtor's obligations hereunder and under the Note with the authority to take all such actions and to effectuate all such transfers and/or releases as may be necessary or appropriate to accomplish the objectives of this Security Agreement and the Note. In the event that the Proceeds from the disposition of the Collateral are insufficient to fully satisfy the amounts due and owing under the Note, Debtor shall, subject to the limitations set forth in the UCC, be liable for any deficiency. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS. Debtor represents, warrants and covenants that: (a) TITLE. Apart from the security interest in the Collateral granted to Secured Party hereunder, Debtor has good and valid title to the Collateral, free and clear of any and all liens, charges, claims, security interests or encumbrances of any kind whatsoever. (b) TRANSFER OF COLLATERAL. Debtor shall not sell, assign, transfer, encumber or otherwise dispose of any of the Collateral or any interest therein without the prior written consent of Secured Party. If any such encumbrance is imposed, Debtor shall give Secured Party immediate written notice. (c) PERFECTION. Debtor shall, upon demand, do all such acts as Secured Party may reasonably request to establish and maintain a perfected security interest in the Collateral, including, without limitation, executing a financing statement in the form prescribed by the appropriate Secretary of State. 4. REMEDIES. Upon the occurrence of any Event of Default hereunder, the entire unpaid principal balance of the Note shall, at the option of the Payee and without notice or demand of any kind to Debtor or any other person, immediately become due and payable, and Secured Party may proceed to exercise any and all of the rights and remedies of a secured party under the UCC and any other remedies available at law or in equity, with respect to the Collateral. 2 IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be executed as of the date first above written. SECURED PARTY By: ---------------------------------------- DEBTOR ------------------------------------------- [Name] 3 EXHIBIT A --------- DESCRIPTION OF COLLATERAL __________ shares of Common Stock of BEA Systems, Inc. EXHIBIT C --------- STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, ___________________ hereby sells, assigns and transfers unto BEA Systems, Inc., a Delaware corporation ("BEA"), _______________________ (__________) shares of the Common Stock of BEA, standing in his name on the books of BEA, represented by Certificate No. __ herewith, and does hereby irrevocably constitute and appoint the ___________________ attorney to transfer the said stock in the books of BEA with full power of substitution. DATED: ________________, 199__ ------------------------ (Signature) ------------------------ (Printed Name) EXHIBIT D --------- ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to the Internal Revenue Code, to include in gross income for 19__ the amount of any compensation taxable in connection with the taxpayer's receipt of the property described below; 1. The name, address, taxpayer identification number and taxable year of the undersigned are: TAXPAYER'S NAME: SPOUSE'S NAME: TAXPAYER'S SOCIAL SECURITY NO.: SPOUSE'S SOCIAL SECURITY NO.: TAXABLE YEAR: Calendar Year 19__ ADDRESS: 2. The property which is the subject of this election is: __________ shares of common stock of BEA Systems, Inc. 3. The property was transferred to the undersigned on ______________, 19___. 4. The property is subject to the following restriction: ____________________________________________. 5. The fair market value of the property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is: $_______ per share x ________ shares = $____________. 6. The undersigned paid $________ per share x _______ shares for the property transferred or a total of $__________. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The undersigned taxpayer is the person performing the services in connection with the transfer of said property. The undersigned will file this election with the Internal Revenue Service office in which he files his annual income tax return not later than 30 days after the date of transfer of the property. A copy of the election also will be furnished to the person for whom the services were performed. Additionally, the undersigned will include a copy of the election with his income tax return for the taxable year in which property is transferred. The undersigned understands that this election will also be effective as an election under ________________ law. Dated: ------------------------------ ------------------------------ Taxpayer The undersigned spouse of taxpayer joins in this election. Dated: ------------------------------ ------------------------------ Spouse of Taxpayer EXHIBIT E --------- CONSENT OF SPOUSE I, _____________________, spouse of __________________, have read and approved the foregoing Agreement. In consideration of the right of my spouse to purchase shares of BEA Systems, Inc., as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights of the Agreement insofar as I may have any rights under such community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: By: ------------------------------ ------------------------------ [Signature] ------------------------------ [Printed Name] EX-10.14 13 EXHIBIT 10.14 EXHIBIT 10.14 THIS AGREEMENT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED UNDER ANY SECURITIES LAW. THIS AGREEMENT MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND REGISTRATION OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS UNLESS THE PROPOSED TRANSACTION DOES NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND, IF REQUESTED BY MAKER, MAKER SHALL HAVE RECEIVED AN OPINION OF COUNSEL (IN FORM AND CONTENT REASONABLY SATISFACTORY TO MAKER) TO SUCH EFFECT. January 22, 1997 BEA Systems, Inc. 385 Moffett Park Drive, #105 Sunnyvale, California 94089 Attn: Chief Financial Officer Re: $10,000,000 SUBORDINATED BRIDGE LINE OF CREDIT Ladies and Gentlemen: This letter agreement (the "Agreement") sets forth the terms and conditions of the subordinated bridge line of credit (the "Line") which Warburg, Pincus Ventures, L.P. ("Lender") has agreed to establish for BEA Systems, Inc., a Delaware corporation ("Borrower"), and to which Borrower has agreed as evidenced by Borrower's signing and returning to Lender the enclosed copy of this Agreement: 1. Subject to the terms and conditions of this Agreement, Lender agrees from time to time to make advances (collectively and severally, the "Advances" and, severally, an "Advance") under the Line to Borrower; provided, however, that the aggregate amount of Advances outstanding to Borrower under the Line shall not exceed $10,000,000 at any time. 2. All Advances made to Borrower hereunder shall be payable in full in accordance with paragraph 3 hereof on the date that is the earlier of (the "Maturity Date") (i) five (5) business days after the occurrence of an initial public offering of the common stock of Borrower, and (ii) July 22, 1998. 3. (a) PAYMENT OPTIONS. If the Advances are to be repaid on the Maturity Date described in clause (i) of paragraph 2, Borrower shall repay the Advances and interest accrued thereon (the "Credit Line Liability"), at Lender's option, (i) in immediately available funds by wire transfer to an account designated in writing by Lender to Borrower, or (ii) by converting the Credit Line Liability into shares of common stock of Borrower in accordance with clauses (b) - (d) of this paragraph 3. 1 (b) CONDITIONS PRECEDENT TO CONVERSION. The Credit Line Liability is convertible (in whole but not in part) into common stock of Borrower (the "Common Stock") at the option of Lender upon written notice for a five (5) day period following the date on which Borrower has completed an initial public offering of Common Stock in a firm commitment underwritten offering consummated pursuant to a Registration Statement filed with the Securities and Exchange Commission on or prior to February 28, 1997 (the "Initial Public Offering") filed under the Securities Act of 1933, as amended (the "Securities Act") and effective under the Securities Act. (c) CONVERSION RATE. Upon any conversion of the Credit Line Liability pursuant to Paragraph 3(b), the Lender shall be entitled to receive that number of shares of Common Stock equal to the Credit Line Liability DIVIDED BY the Conversion Value (as hereinafter defined). The "Conversion Value" shall be an amount equal to the gross proceeds per share of Common Stock paid to Borrower (as reduced for underwriting commissions and discounts as calculated on a per share basis) pursuant to the Initial Public Offering described in Paragraph 3(b). Fractional shares shall not be issued, and Borrower shall make a cash payment to Lender on the conversion date for an amount equal to any fractional shares. (d) CONVERSION PROCEDURES. In order to convert the Credit Line Liability into Common Stock as permitted hereunder, Lender shall deliver to Borrower at any time prior to expiration of the five (5) day period provided in Paragraph 3(b) above (i) this Agreement, and (ii) a written notice stating that this Agreement is being surrendered for conversion into Common Stock to the extent of the amount of the Credit Line Liability. Borrower shall, within ten (10) business days following the closing of the Initial Public Offering issue and deliver to Lender a certificate or certificates representing the aggregate number of fully paid and nonassessable shares of Common Stock of Borrower issuable upon such conversion pursuant to the terms of Paragraph 3(c) (the "Shares"). Such certificate or certificates shall be deemed to have been issued and the Lender shall be deemed to have become a holder of record of such Shares on the later of the closing of the Initial Public Offering or the date the Lender delivers this Agreement and its notice of conversion to Borrower. Borrower shall cancel this Agreement upon the issuance and delivery of the certificate or certificates for such conversion shares. (e) WIRE TRANSFER PAYMENT IF MATURITY DATE IS AS DESCRIBED IN PARAGRAPH 2(ii). If the Advances are to be repaid on the Maturity Date described in clause (ii) of paragraph 2, then Borrower shall repay the Credit Line Liability on the Maturity Date by wire transfer of immediately available funds to such account as designated in writing by Lender to Borrower. 4. Advances under the Line will be evidenced by an account maintained by Lender on its books. 5. Borrower shall give Lender at least five (5) day's prior written notice of its intention to request an Advance under the Line. 6. Borrower shall pay interest on Advances outstanding under the Line at a fixed rate of eleven percent (11%) per annum. Interest shall accrue from the date of each 2 Advance and shall be payable on the Maturity Date. Interest payable hereunder shall be computed for the actual number of days elapsed on the basis of a year consisting of 365 or, where appropriate, 366 days. 7. Each Advance shall be made to Borrower by wire transfer of immediately available funds to such account as designated by Borrower in the notice described in paragraph 5 of this Agreement. 8. The Credit Line Liability shall be subordinate and junior in right of payment to the prior payment in full of any indebtedness of Borrower identified as senior debt in the event of any liquidation, dissolution or winding up of Borrower or any receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization or similar proceeding relative to Borrower or its properties. 9. Borrower hereby represents and warrants as follows: (a) Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is authorized to do business in the jurisdictions in which its ownership of property or conduct of business requires such authorization. (b) Borrower has the corporate power and authority to execute and deliver, and to perform and observe the provisions of, this Agreement. (c) The execution, delivery and performance by the Borrower of this Agreement has been duly authorized by all necessary corporate action. (d) This Agreement is a legal, valid and binding agreement of Borrower, enforceable against Borrower in accordance with its terms. 10. The occurrence of any of the following ("Events of Default") shall terminate any obligation on the part of Lender to extend credit under this Agreement and, at the option of Lender, shall make all obligations of Borrower to Lender under or in respect of this Agreement and any instrument or agreement required under this Agreement immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character: (a) Borrower fails to pay, within fifteen (15) days after it becomes due and payable, any interest or principal or any other sum due under this Agreement in accordance with the terms hereof; or (b) Any representation or warranty herein, or in any other agreement, instrument or certificate executed pursuant hereto or in connection with any transaction contemplated hereby proves to have been false or misleading in any material respect when made; or 3 (c) Borrower admits in writing its inability to pay its debts as they become due or shall become insolvent, or files any petition, proceeding, case, or action for relief under any bankruptcy, reorganization, insolvency, or moratorium law, or any other law or laws for the relief of, or relating to, debtors; or (d) An involuntary petition is filed under any bankruptcy or similar statute against Borrower, or a receiver, trustee, liquidator, assignee, custodian, sequestrator, or other similar official is appointed to take possession of the properties of Borrower unless such petition or appointment is set aside or withdrawn or ceases to be in effect within 60 days from the date of said filing or appointment. 11. Lender hereby represents and warrants to Borrower with respect to the purchase of the Shares pursuant to paragraph 3 of this Agreement, as follows: (a) INVESTMENT EXPERIENCE/ACCESS. Lender is aware of Borrower's business affairs and financial condition and has acquired sufficient information about Borrower to reach an informed and knowledgeable decision to acquire the Shares. Lender has sufficient knowledge and experience in financial and business matters to enable it to evaluate the merits and risks of an investment in Borrower and its business. At no time was Lender presented with or solicited by any leaflet, public promotional meeting, circular, newspaper or magazine article, radio or television advertisement, or any other form of general advertising regarding the Shares. (b) INVESTMENT INTENT. Lender is acquiring the Shares for investment only for its own account, and not with the view to, or for resale in connection with, any distribution thereof. Lender understands that the Shares have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent of such Lender as expressed herein. (c) RULE 144. Lender understands that no public market now exists for any of the securities issued by Borrower, and that Borrower has made no assurances that a public market will ever exist for Borrower's shares. Lender acknowledges that the Shares must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available. Lender is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions. The certificates for Shares shall bear legends as required by applicable state and federal securities laws. 12. The rights, powers and remedies of Lender hereunder are cumulative and in addition to all rights, powers and remedies provided under any and all agreements between Borrower and Lender relating hereto, at law, in equity or otherwise. Any delay or failure by Lender to exercise any right, power or remedy shall not constitute a waiver thereof by Lender, and no single or partial exercise by Lender of any right, power or remedy shall preclude other or further exercise thereof or any exercise of any other rights, powers or remedies. No consent or 4 waiver under this Agreement shall be effective unless in writing. No waiver of any breach or default shall be deemed a waiver of any breach or default thereafter occurring. 13. This Agreement embodies the entire agreement and understanding between Borrower and Lender and supersede all prior agreements and understandings relating to the subject matter hereof. 14. Borrower shall pay all costs and expenses of Lender (including, without limitation, reasonable fees and expenses of Lender's counsel) incurred by Lender in connection with the enforcement of Lender's rights, powers and remedies hereunder and any instruments or agreements executed in connection with this Agreement. 15. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 16. This Agreement may be executed in one or more counterparts each of which shall be an original and all of which together shall be but one agreement. If the above provisions accurately and completely reflect Borrower's understanding of the arrangements described, please so indicate by executing and returning to Lender the enclosed copy of this Agreement. Very truly yours, WARBURG, PINCUS VENTURES, L.P. By: ------------------------------------- Title: ---------------------------------- Address: 466 Lexington Avenue New York, New York 10017 The foregoing is agreed to and accepted this 22nd day of January, 1997. BEA SYSTEMS, INC. By: ------------------------------------- Title ----------------------------------- Address: 385 Moffett Park Drive, #105 Sunnyvale, California 94089 Attn: Chief Financial Officer Facsimile: (408) 734-9234 EX-11.1 14 EXHIBIT 11.1 EXHIBIT 11.1 COMPUTATION OF NET INCOME (LOSS) PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, --------------------- 1996 1995 1996 ------------ --------- ---------- HISTORICAL NET INCOME (LOSS) PER SHARE Weighted average common shares outstanding for the period................... 4,604 3,400 9,093 Common equivalent shares pursuant to Staff Accounting Bulletin Nos. 64 and 83......................................................................... 18,814 18,814 18,814 ------------ --------- ---------- Shares used in per share computation........................................ 23,418 22,214 27,907 ------------ --------- ---------- ------------ --------- ---------- Net income (loss)........................................................... $ (17,740) $ (8,109) $ (86,157) Cumulative dividends on Series B redeemable convertible preferred stock..... 52 -- 565 ------------ --------- ---------- Net income (loss) applicable to common stock................................ $ (17,792) $ (8,109) (86,722) ------------ --------- ---------- ------------ --------- ---------- Net income (loss) per share................................................. $ (0.76) $ (0.37) (3.11) ------------ --------- ---------- ------------ --------- ----------
YEAR ENDED JANUARY 31, NINE MONTHS ENDED 1996 OCTOBER 31, 1996 ------------ ----------------- PRO FORMA NET INCOME (LOSS) PER SHARE Weighted average common shares outstanding for the period........................ 4,604 9,093 Common equivalent shares pursuant to Staff Accounting Bulletin Nos. 64 and 83.... 18,814 18,814 Common equivalent shares assuming conversion of preferred stock.................. 6,967 22,200 Shares used in per share computation............................................. 30,385 50,107 ------------ -------- ------------ -------- Net income (loss)................................................................ $ (17,740) (86,157) ------------ -------- ------------ -------- Net income (loss) per share...................................................... $ (0.58) (1.72) ------------ -------- ------------ --------
EX-21.1 15 SIGNIFICANT SUBSIDIARIES Exhibit 21.1 SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT 1. Information Management Company, a company incorporated under the laws of Delaware 2. Independence Technologies Inc., a company incorporated under the laws of Delaware 3. USL Finance S.A., a company incorporated under the laws of France. EX-27.1 16 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BEA SYSTEMS, INC. AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 9-MOS JAN-31-1996 JAN-31-1997 FEB-01-1995 FEB-01-1996 JAN-31-1996 OCT-31-1996 4,549 1,628 0 0 4,125 20,874 400 1,036 0 0 9,026 22,834 495 6,240 39 1,265 18,953 48,463 6,516 52,852 4,287 52,361 11 17 6,112 16,965 8 10 20,355 32,223 18,953 48,463 3,569 26,855 5,133 36,349 1,929 7,655 2,704 12,498 20,068 104,862 0 0 89 4,941 (17,680) (85,857) 60 300 (17,740) (86,157) 0 0 0 0 0 0 (17,740) (86,157) (0.58) (1.72) 0 0
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