-----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, CKQlsATKnHMI0ookYk7TOwLxTwt9FgyahoyAKcL0E3UTovRcrazTmYrdHoqsDJu+ cYVM5u6GbpU1rctvliJP3Q== 0001012870-01-500561.txt : 20010502 0001012870-01-500561.hdr.sgml : 20010502 ACCESSION NUMBER: 0001012870-01-500561 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010131 FILED AS OF DATE: 20010501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEA SYSTEMS INC CENTRAL INDEX KEY: 0001031798 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 770394711 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22369 FILM NUMBER: 1618402 BUSINESS ADDRESS: STREET 1: 2315 NORTH FIRST ST STREET 2: SUITE 105 CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4087434000 MAIL ADDRESS: STREET 1: 2315 NORTH FIRST ST STREET 2: SUITE 105 CITY: SAN JOSE STATE: CA ZIP: 95131 10-K 1 d10k.txt FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2001 OR [_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-22369 ---------------- BEA SYSTEMS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 77-0394711 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)
2315 North First Street San Jose, California 95131 (Address of Principal Executive Offices, Zip Code) (408) 570-8000 (Registrant's telephone number, including area code) ---------------- Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock ---------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the closing price at which the common equity was sold on March 30, 2001, as reported on the Nasdaq National Market, was approximately $10,245,747,000. Shares of common equity held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status does not reflect a determination that such persons are affiliates for any other purposes. As of March 30, 2001, there were approximately 392,420,640 shares of the Registrant's common stock outstanding. ---------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of Stockholders to be held July 11, 2001 are incorporated by reference in Part III of this Form 10-K Report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- BEA SYSTEMS, INC. FORM 10-K For the Fiscal Year Ended January 31, 2001 INDEX
Page ---- PART I Item 1. Business...................................................... 1 Item 2. Properties.................................................... 8 Item 3. Legal Proceedings............................................. 8 Item 4. Submission of Matters to a Vote of Security Holders........... 8 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters...................................................... 8 Item 6. Selected Financial Data....................................... 9 Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations.................................... 10 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 27 Item 8. Consolidated Financial Statements and Supplementary Data...... 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 61 PART IV Item 10. Directors and Executive Officers of the Registrant............ 61 Item 11. Executive Compensation........................................ 61 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... 61 Item 13. Certain Relationships and Related Transactions................ 61 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................................... 61 Signatures.............................................................. 64
PART I FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E (this "Annual Report") of the Securities and Exchange Act of 1934 (the "Exchange Act"). All statements in this Annual Report other than statements of historical fact are "forward-looking statements" for purposes of these provisions, including any statements of the plans and objectives for future operations and any statement of assumptions underlying any of the foregoing. Statements that include the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology are forward-looking statements. Forward-looking statements include (i) in Item 1, all text under the heading "Business-- Strategy," statements regarding continued hiring in direct sales, support and services, indirect distribution channels, devoting substantial resources to product development, continuing to license and acquire software technologies and businesses, and continuing to recruit and hire experienced software developers, (ii) in Item 2, the statement regarding the adequacy of the Company's existing facilities to meet anticipated needs, (iii) in Item 3, the statement regarding the non-materiality of the liability of claims arising in the ordinary course of business, (iv) in Item 5, the statement regarding payment of cash dividends in the future, (v) in Item 7, statements regarding seasonal impacts, additional acquisitions, return on investment, investing in services offerings, improvement of total gross margins, expected timing and amount of amortization expenses, investment in sales channel expansion and marketing programs, commitment of substantial resources to product development and engineering, increase in general and administrative expenses, expansion of operations, sufficiency of cash to meet cash requirements, continuation of certain products accounting for the majority of revenues, distribution arrangements, and future hiring. These forward-looking statements involve risks and uncertainties, and it is important to note that BEA's actual results could differ materially from those projected or assumed in such forward- looking statements. Among the factors that could cause actual results to differ materially are the factors detailed under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Factors That May Impact Future Operating Results." All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to BEA as of the date hereof, and BEA assumes no obligation to update any forward-looking statement or risk factor. You should consult the risk factors listed from time to time in the Company's Reports on Forms 10-Q and 8-K. ITEM 1. BUSINESS. Overview BEA Systems, Inc. ("BEA" or the "Company") is a leading e-business infrastructure software company. BEA's customers use BEA products as a deployment platform for Internet-based applications, including custom-built and packaged applications, and as a means for robust enterprise application integration among mainframe, client/server and Internet-based applications. In addition, BEA provides Enterprise Java Bean ("EJB")-based components which perform functions such as personalization, shopping cart, order tracking, inventory and pricing that are used in developing custom applications. The Company's products have been adopted in a wide variety of industries, including commercial and investment banking, securities trading, insurance, telecommunications, services, airlines, package delivery, software, retail, manufacturing, government, healthcare, communications and utilities. The BEA WebLogic E-Business Platform(TM) provides infrastructure for building an integrated e-business, allowing customers to integrate private client/server networks, the Internet, intranets, extranets, and mainframe and legacy systems as system components. BEA's products serve as a platform or integration tool for applications such as billing, provisioning, customer service, electronic funds transfers, ATM networks, securities trading, Web-based banking, Internet sales, supply chain management, scheduling and logistics, and hotel, airline and rental car reservations. Licenses for BEA products are typically priced on a per-central processing unit basis, but BEA also offers licenses priced on a per-user basis. 1 BEA's products are marketed and sold worldwide through a network of BEA sales offices, the Company's Web site at www.bea.com, as well as distributors and alliances with hardware vendors, independent software vendors ("ISVs"), application service providers ("ASPs") and systems integrators ("SIs"). Industry Background Over the past decade, the information systems of many large organizations have evolved from traditional mainframe-based systems to distributed computing environments. This evolution has been driven by the benefits offered by distributed computing, including lower incremental technology costs, faster application development and deployment, increased flexibility, and improved access to business information. Despite these benefits, large-scale mission- critical applications that enable and support fundamental business processes, such as airline reservations, credit card processing, and customer billing and support systems, have largely remained in mainframe environments. For several decades, the high levels of reliability, scalability, security, manageability and control required for these complex, transaction-intensive systems have been provided by application server functionality included in the mainframe operating system. Mainframe environments, however, suffer from several shortcomings, including inflexibility, lengthy development and maintenance cycles, and limited, character-based user interfaces. Increasingly, these shortcomings are forcing many organizations to seek solutions, such as those offered by BEA, that will enable them to overcome the limitations of distributed computing for mission-critical applications while providing the robust computing infrastructure previously unavailable outside the mainframe environment. In addition, many businesses are using the World Wide Web as a node of these infrastructures. Businesses use the Internet as a means of selling products to consumers and distributors, buying components or whole products from suppliers, opening new customer accounts, scheduling service installation, providing account information and customer care, enabling reservations, funds transfers, bill payments and securities trading, and gathering information about customers and their buying habits. Many businesses also use intranets for functions such as inventory control, decision support, logistics, reservations, customer care and provisioning, and sometimes use extranets to make similar information and applications available to their suppliers or distributors. Achieving the full benefits of the Internet and e- commerce requires fully integrating business-to-consumer or business-to- business Web-based applications with existing enterprise applications, such as shipping, inventory control, billing, payroll, and general ledger. In order to fully integrate these internal applications with Web-based systems, the internal applications must be electronically linked to each other and must be built on a flexible, reliable, scalable, secure infrastructure that can connect to the Web and support the demanding loads that result from heavy Internet traffic. An e-commerce transaction involves much more than simply the purchase of an item over the Web. In order to perform a single e-business transaction, a robust e-commerce system must process several distinct computer transactions. A typical e-commerce request, whether a consumer purchase, a corporate procurement of supplies, or an information search, generates a series of interconnected computer transactions. These computer transactions may include determining whether the ordered item is in stock, determining where the item is located, scheduling the item for shipping, processing payment and recording the transaction in the Company's financial records. In addition, many Web sites now gather information about users as they navigate the site. This information is stored, identified with the particular user, and compared with past behavior of the same and other users in order to personalize online interaction by recommending specific merchandise, offering personalized pricing, and displaying targeted advertising, all based on the user's profile. As e-commerce grows, an increasing number of e-business transactions generates increasing numbers of computer transactions, driving the demand for more scalable and reliable systems for managing them. Products BEA provides a broad family of cross-platform software and services. BEA E-Commerce Server Products. BEA's application servers are software programs that function as the platform for applications that run in Internet or client/server environments, much like the operating system is the 2 platform for applications that run on personal computers. In its role as an application platform, BEA's application server products perform a wide variety of services for applications, such as balancing loads among the hardware in the system, detecting and accommodating hardware unavailability (either through crashes or planned maintenance), brokering transactions within e- business systems between the Web-based user, the application and the database. By delegating a substantial portion of processing logic from the application to the application server, application servers create a standardized transaction processing environment which leads to extremely high levels of scalability, enhanced performance, increased availability and improved reliability. BEA E-Commerce Application Component Products. BEA's commerce servers help enable adaptable e-commerce applications that personalize customer interactions. With out-of-the-box commerce and personalization functionality, BEA customers can quickly build e-commerce sites that capture their customers' preferences and enhance their customer experience. BEA E-Commerce Integration Products. BEA delivers a comprehensive integration solution that enables businesses to manage interactions among their customers, suppliers and trading partners as well as among internal computer systems and legacy applications. BEA E-Commerce Services. Customers also rely on BEA's services offerings to develop system architectures, application designs, components or custom applications, to customize packaged applications and to integrate applications. Using BEA platforms, application components and services, BEA customers have been able to create robust e-commerce sites in a matter of weeks. Strategy BEA's strategy is to extend its current leadership position in Java-based Web application servers and distributed transaction processing by penetrating new customer accounts, particularly e-commerce sites, through its products or services, and then to proliferate within those customers, servicing higher usage volumes and selling additional products. Key elements of BEA's strategy include: . Increasing direct sales capacity by hiring more direct sales representatives and by enabling the Web as an effective sales and communication channel. At the end of fiscal 2001, BEA had over 600 quota-bearing sales representatives, a 60 percent increase over the end of fiscal 2000. In addition, system and application developers are able to download free trial versions through the Company's Web site at www.bea.com. . Increasing indirect sales capacity by aggressively allying with ISVs, ASPs, SIs, hardware vendors and value added resellers. At the end of fiscal 2001, BEA had signed more than 1,500 customer and channel partnerships and alliances to promote, sell and service BEA products. . Generating repeat business from existing customers through servicing increasing usage volumes and selling additional products or services. BEA often generates repeat business as customers increase their system capacity, expand into new territories or lines of business, or increase the number of applications installed on BEA platforms. . Enhancing technology leadership through research and development efforts and through acquisition of complementary companies, products and technologies. Through BEA's research and development efforts or acquisitions, BEA has embraced new standards, such as Wireless Application Protocol ("WAP"), Simple Object Access Protocol ("SOAP") and Electronic Business XML ("ebXML"), and has added important features and functionality to its product line. BEA products have won several key industry awards and have received strong recommendations from key industry analysts. . Driving the continuing adoption of Enterprise Java, object-based solutions and e-business through development of products and participation in standards-setting bodies. BEA believes that EJB, object-based computing at the enterprise level, and electronic business will be important drivers for boosting demand for BEA solutions. BEA is participating in EJB standards setting groups and is also providing the most complete implementation of EJB available today. 3 Customers The total number of licensees of BEA products and solutions is greater than 9,400 worldwide. BEA's target end-user customers are organizations with sophisticated, high-end information systems with numerous, often geographically-dispersed users and diverse, heterogeneous computing environments. Typical customers are mainframe-reliant, have large-scale client/server implementations that handle very high volumes of business transactions, or have Web-based applications with large and unpredictable usage volumes. No customer accounted for more than 10 percent of total revenues in any of the fiscal years 2001, 2000 or 1999. Sales and Marketing BEA's sales strategy is to pursue opportunities worldwide within large organizations and organizations that are establishing e-businesses, through its direct sales, services and technical support organizations, complemented by indirect sales channels such as hardware original equipment manufacturers ("OEMs"), ISVs, ASPs and SIs. The Company currently intends to continue to add to its direct sales and support organizations in major worldwide markets, as well as investing in building its indirect distribution channel through relationships with SIs, packaged application developers and others. Direct Sales Organization. BEA markets its software and services primarily through its direct sales organization. As of January 31, 2001, BEA had over 1,970 employees in consulting, training, sales, support and marketing, including over 600 sales representatives, located in 90 offices in 30 countries. BEA is currently investing in building its direct sales capacity by aggressively hiring sales and technical sales support personnel. The Company typically uses a consultative, solution-oriented sales model that entails the collaboration of technical and sales personnel to formulate proposals to address specific customer requirements, often in conjunction with hardware, software and services providers. Because the Company's solutions are typically used as a platform or integration tool for e-commerce initiatives or other applications that are critical to a customer's business, the Company focuses its initial sales efforts on senior executives and information technology department personnel who are responsible for such initiatives and applications. Targeting Developers. BEA also markets its software directly to system and application developers. BEA makes available trial developer copies of many of its products available for free download over its Web site. There were over 900,000 downloads of BEA software in fiscal 2001. In addition, BEA periodically provides developer training and trial licenses through technical seminars in various locations worldwide. BEA also maintains a developers' Web site, with over 180,000 registered developers as of the end of fiscal 2001. The developers' Web site is designed to create a community among developers who use BEA products, providing a forum to exchange technical information and sample code, as well as feedback to BEA on BEA products and industry directions that BEA should pursue. Strategic Relations. An important element of the Company's sales and marketing strategy is to expand its relationships with third parties and strategic allies to increase the market awareness, demand and acceptance of BEA and its solutions. Allies have often generated and qualified sales leads, made initial customer contacts, assessed needs, recommended use of BEA solutions prior to BEA's introduction to the customer, and introduced BEA at high levels within the customer organization. A strategic ally can provide customers with additional resources and expertise, especially in vertical or geographic markets in which the partner has expertise, to help meet customers' system definition and application development requirements. Types of strategic alliances include: System platform companies. BEA's allies often act as resellers of BEA solutions, either under the BEA product name or integrated with the platform vendor's own software products, or recommend BEA products to their customers and prospects. Packaged application software developers. BEA licenses its software to packaged application software vendors. These vendors build on BEA software as an infrastructure for the applications they supply, giving these applications increased distribution, scalability and portability across all platforms on 4 which the BEA platform runs. Customers can also easily integrate other applications built using BEA solutions with these packaged applications. Application service providers. ASPs buy and maintain the hardware, infrastructure software and application software necessary for Web sites and e-businesses, and rent access to these systems to their customers, primarily small and medium sized businesses, who do not have the resources or the desire to buy and maintain these systems themselves. BEA licenses its software to ASPs who use it as an exclusive or optional feature in their systems. Systems integrators and independent consultants. SIs often refer their customers to BEA, utilize BEA as a subcontractor in some situations, and build custom solutions on BEA products. BEA also works cooperatively with independent consulting organizations, often being referred to prospective customers by services organizations with expertise in high-end transactional applications. Distributors. To supplement the efforts of its direct sales force, BEA uses software distributors to sell its products in Europe, Asia, Latin America and, to a lesser degree, North America. As of January 31, 2001, the Company was represented by 36 distributors. Services. The Company believes that its services organization plays an important role in facilitating initial license sales and enabling customers to successfully architect, design, develop, deploy and manage systems and applications. Fees for services are generally charged on a time and materials basis and vary depending upon the nature and extent of services to be performed. BEA's services organization works directly with end user customers and also with SIs. In addition, the Company offers introductory and advanced classes and training programs at the Company's offices, customer sites and training centers worldwide. These classes and training programs cover the use of BEA products and are designed for end user customers, SIs and packaged application developers. Marketing. The Company's marketing efforts are directed at broadening the demand for BEA products and solutions by increasing awareness of the benefits of using the Company's products to build mission-critical distributed and Web- based applications. Marketing efforts are also aimed at supporting the Company's worldwide direct and indirect sales channels. Marketing personnel engage in a variety of activities including conducting public relations and product seminars, issuing newsletters, sending direct mailings, preparing sales collateral and other marketing materials, coordinating the Company's participation in industry trade shows, programs and forums, and establishing and maintaining relationships with recognized industry analysts and press. The Company's senior executives are frequent speakers at industry forums in many of the major markets the Company serves. Customer and Distributor Support The Company believes that a high level of customer support is integral to the successful marketing and sale of BEA solutions. Mission-critical applications require rapid support response and problem resolution. The Company's world-wide support and sales presence enhances its ability to rapidly respond, and to handle support in local languages, which the Company believes gives it an advantage over many of its competitors. The Company offers a variety of support offerings. Broad support offerings such as 7x24 support contracts are also available, typically on an annual fee basis. Telephone hot line support is offered worldwide at either a standard or around-the-clock level, depending on customer requirements. The Company maintains product and technology experts on call at all times worldwide and has support call centers located in San Jose, California; Paris, France; Yokohama, Japan; Seoul, Korea and Brisbane, Australia. Competition The market for application server and integration software, and related software components and services, is highly competitive. BEA's competitors are diverse and offer a variety of solutions directed at various segments 5 of this marketplace. These competitors include operating system vendors such as IBM, Sun Microsystems and Hewlett-Packard and database vendors such as Oracle. Microsoft has released products that include certain application server functionality and has announced that it intends to include application server and integration functionality in future versions of its operating systems, including its .NET Web services initiative. In addition, there are other companies offering and developing application server and integration software products and related services that directly compete with products the Company offers. Further, software development tool vendors typically emphasize the broad versatility of their tool sets and, in some cases, offer complementary software that supports these tools and performs basic application server and integration functions. Last, internal development groups within prospective customers' organizations may develop software and hardware systems that may substitute for those the Company offers. A number of BEA'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. BEA's principal competitors currently include hardware vendors who bundle their own application server and integration software products, or similar products, with their computer systems and database vendors that advocate client/server networks driven by the database server. IBM, Sun Microsystems and Hewlett-Packard are the primary hardware vendors who offer a line of application server and integration solutions for their customers. IBM's sale of application server and integration functionality along with its IBM proprietary hardware systems requires BEA to compete with IBM in its installed base, where IBM has certain inherent advantages due to its significantly greater financial, technical, marketing and other resources, greater name recognition and the integration of its enterprise application server and integration functionality with its proprietary hardware and database systems. These inherent advantages allow IBM to bundle, at a discounted price, application functionality with computer hardware and software sales. Due to these factors, if the Company does not differentiate its products based on functionality, interoperability with non-IBM systems, performance and reliability, and establish its products as more effective solutions to customers' needs, its revenues and operating results will suffer. Microsoft has announced that it intends to include certain application server and integration functionality in its .NET Web services initiative. The bundling of competing functionality in versions of .NET servers requires BEA to compete with Microsoft in the Web services marketplace, where Microsoft has certain inherent advantages due to its significantly greater financial, technical, marketing and other resources, its greater name recognition, its substantial installed base and the integration of its broad product line and features into a Web services environment. The Company needs to differentiate its products from Microsoft's based on scalability, functionality, interoperability with non-Microsoft platforms, performance and reliability, and needs to establish its products as more effective solutions to customers' needs. The Company may not be able to successfully differentiate its products from those offered by Microsoft, and Microsoft's entry into the application server and integration market could 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 its 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 software licenses and maintenance, consulting and support services on terms favorable to us. Further, competitive pressures could require BEA to reduce the price of its products and related services, which could materially adversely affect its business, operating results and financial condition. The Company may not be able to compete successfully against current and future competitors and any failure to do so would have a material adverse effect upon its business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors That May Impact Future Operating Results--If we do not effectively compete with new and existing competitors, our revenues and operating margins will decline." 6 Product Development BEA's total research and development expenses were approximately $89.2 million, $61.0 million and $42.6 million in fiscal 2001, 2000 and 1999, respectively. The Company believes that its success will depend largely upon its ability to enhance existing products and develop or acquire new products that meet the needs of the rapidly evolving application server and application component marketplaces, and of increasingly sophisticated and demanding customers. The Company intends to continue to devote substantial resources to expanding its product offerings, introducing new products and services, and offering higher levels of integration among its products. BEA continues to invest in product development, particularly BEA WebLogic Collaborate(TM), BEA WebLogic Commerce Server(TM), BEA WebLogic Personalization Server(TM) and new releases of BEA WebLogic Server(TM). BEA WebLogic Collaborate(TM) is business-to-business integration software that provides an open, scalable and dynamic way to rapidly create and manage multi- party trading exchanges. BEA WebLogic Commerce Server(TM) and BEA WebLogic Personalization Server(TM) help enable companies to quickly deliver highly personalized e-commerce applications. BEA WebLogic Server(TM) accounts for the majority of BEA's license revenues and is a platform for Java and EJB applications. BEA recently announced a major release of BEA WebLogic Server(TM), which adds new transaction, multicasting, Java messaging services and XML support, as well as other features. BEA's planned investment in these efforts may affect BEA's anticipated overall financial results, particularly cost of revenues as a percentage of total revenues and research and development expense as a percentage of total revenues, and may create product transition concerns in BEA's customer base. In addition, investment in these projects results in an immediate increase in expenses, especially in research and development, although the return on such investment, if any, is not anticipated to occur until future periods. These expenses adversely affect BEA's operating results in the short-term, and also in the long-term if the anticipated benefits of such investments do not materialize. The Company intends to continue to consider the licensing and acquisition of complementary software technologies and businesses where appropriate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Factors That May Impact Future Operating Results--If we cannot successfully integrate our past and future acquisitions, our revenues may decline and expenses may increase." The Company's software development activities are conducted in various sites throughout the United States including San Jose and San Francisco, California; Plano, Texas; Maynard, Massachussetts; Liberty Corner, New Jersey; Nashua, New Hampshire; Boulder, Colorado; and Toronto, Canada. As of January 31, 2001, the Company had a research and software development staff of over 500 professionals. The Company intends to continue to recruit and hire experienced software developers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors That May Impact Future Operating Results--If we lose key personnel or cannot hire enough qualified personnel, it will adversely affect our ability to manage our business, develop new products and increase revenue. Intellectual Property and Licenses BEA's success depends upon its proprietary technology. The Company relies on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect its proprietary rights. It is possible that other companies could successfully challenge the validity or scope of BEA's patents and that BEA's patents may not provide a competitive advantage to BEA. As part of its confidentiality procedures, the Company generally enters into non-disclosure agreements with its employees, distributors and corporate partners and into license agreements with respect to its software, documentation and other proprietary information. Despite these precautions, third parties could copy or otherwise obtain and use its products or technology without authorization, or 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 its business, operating results and financial condition. It is difficult for BEA to police unauthorized use of its products, and 7 although the Company is unable to determine the extent to which piracy of its software products exists, software piracy is a persistent problem. Effective protection of intellectual property rights is unavailable or limited in certain foreign countries. The protection of its proprietary rights may not be adequate and its competitors could independently develop similar technology, duplicate its products, or design around patents and other intellectual property rights the Company holds. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors That May Impact Future Operating Results--If we fail to adequately protect our intellectual property rights, competitors may use our technology and trademarks, which could weaken our competitive position, reduce our revenues and increase our costs." Employees As of January 31, 2001, BEA had approximately 3,000 full-time employees, including 500 in research and development, 1,970 in consulting, training, sales, support and marketing and 530 in administration. None of BEA's employees are represented by a collective bargaining agreement, and BEA has never experienced any work stoppage. BEA considers its relations with its employees to be good. ITEM 2. PROPERTIES. BEA's executive offices and those related to product development, corporate marketing and administrative functions, totaling approximately 224,000 square feet, are located in San Jose, California under leases expiring in 2007. The Company has subleased approximately 36,000 square feet of such offices. The Company also leases office space in various locations throughout the United States for sales, support and development personnel, and BEA's foreign subsidiaries lease space for their operations. The Company owns substantially all of the equipment used in its facilities, except equipment held under capitalized lease arrangements. The Company believes its existing facilities will be adequate to meet its anticipated needs for the foreseeable future. See Note 15 of Notes to Consolidated Financial Statements for information regarding the Company's lease obligations. In the first quarter of fiscal 2002, the Company entered into a lease agreement for the lease of approximately 40 acres of land adjacent to its San Jose, California offices to construct additional corporate offices and research and development facilities. See Note 17 of Notes to Consolidated Financial Statements for information regarding the Company's lease agreement in fiscal 2002. ITEM 3. LEGAL PROCEEDINGS. The Company is not currently party to any material legal proceedings. The Company is subject to legal proceedings and claims that arise in the ordinary course of its business. While management currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect the financial position, results of operations, or liquidity of the Company, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur, the impact could be material to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2001. PART II On each of December 19, 1999 and April 24, 2000, the Company effected two- for-one common stock splits in the form of stock dividends. All common stock share information and per share amounts in this Annual Report on Form 10-K have been retroactively adjusted to reflect the effects of the stock splits. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. Since its initial public offering on April 11, 1997, the Company's common stock has traded on the Nasdaq National Market under the symbol "BEAS." According to the Company's transfer agent, the Company had 8 approximately 717 stockholders of record as of March 30, 2001. Because many of such shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders. The following table sets forth the high and low sales prices, as adjusted to reflect the two-for-one stock splits on each of December 19, 1999 and April 24, 2000, reported on the Nasdaq National Market for BEA common stock for the periods indicated:
Low High ------ ------ Fiscal year ended January 31, 2001: Fourth Quarter.............................................. $41.75 $84.13 Third Quarter............................................... 41.00 89.50 Second Quarter.............................................. 29.38 62.50 First Quarter............................................... 25.50 78.88 Fiscal year ended January 31, 2000: Fourth Quarter.............................................. $11.45 $47.50 Third Quarter............................................... 5.25 11.59 Second Quarter.............................................. 3.67 8.03 First Quarter............................................... 3.33 4.63
The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to invest cash generated from operations, if any, to support the development of its business and does not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results and current and anticipated cash needs. During the fourth quarter of fiscal 2001, the Company had no issuances of equity securities that were not either registered under the Securities Act of 1933, as amended, (the "Securities Act") or exempt from registration under Regulation S of the Securities Act. ITEM 6. SELECTED FINANCIAL DATA: The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K.
As of or for the fiscal year ended January 31, ----------------------------------------------------- 2001(2) 2000(2) 1999(1)(2) 1998(1)(2) 1997(1)(2) --------- --------- ---------- ---------- ---------- (in thousands, except per share data) Total revenues.......... $ 819,760 $ 464,410 $289,042 $166,447 $64,566 Net income (loss)....... 17,082 (19,574) (51,582) (22,912) (87,834) Net income (loss) per share: Basic................... 0.05 (0.06) (0.18) (0.11) (2.21) Diluted................. 0.04 (0.06) (0.18) (0.11) (2.21) Total assets............ 1,592,336 1,258,841 403,011 174,203 59,276 Long-term obligations (3).................... 564,082 578,489 250,112 766 49,540 Redeemable convertible preferred stock........ - - - - 83,120
- -------- (1) Restated to include the results of Leader Group, Inc. and WebLogic, Inc., which were acquired in pooling of interests transactions. In addition, all share and per-share amounts have been restated to reflect the two-for-one common stock splits on each of December 19, 1999 and April 24, 2000. (2) No cash dividends have been declared or paid in any period presented. (3) Excludes any long-term deferred tax liabilities. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of e- business infrastructure software that helps companies of all sizes build e- business systems that extend investments in existing computer systems and provide the foundation for running a successful integrated e-business. BEA's products are marketed and sold worldwide primarily through BEA's direct sales force, and also through hardware vendors, independent software vendors ("ISVs") and systems integrators ("SIs") that are BEA partners and distributors. BEA's products have been adopted in a wide variety of industries, including commercial and investment banking, securities trading, telecommunications, airlines, services, retail, manufacturing, package delivery, insurance and government. The BEA WebLogic E-Business Platform(TM) provides infrastructure for building an integrated e-business, allowing customers to integrate private client/server networks, the Internet, intranets, extranets, and mainframe and legacy systems as system components. BEA's products serve as a platform or integration tool for applications such as billing, provisioning, customer service, electronic funds transfers, ATM networks, securities trading, Web-based banking, Internet sales, supply chain management, scheduling and logistics, and hotel, airline and rental car reservations. Licenses for BEA products are typically priced on a per-central processing unit basis, but BEA also offers licenses priced on a per-user basis. The Company's core business has been providing infrastructure for e- business systems and high-volume transaction systems, such as Web-based retail sites, inventory systems, telecommunications billing applications, commercial bank ATM networks and account management systems, credit card billing systems and securities trading account management systems. These Web-based and distributed systems must be highly available, scale to process high transaction volumes and accommodate large numbers of users. As the Internet and e-commerce continue to develop and become more richly integrated, systems that historically had been strictly internal are now being extended to the Internet, such as telecommunications, bank and credit card account information. BEA provides an e-business platform that is designed to address this demand and help companies quickly develop and integrate e-business initiatives and reliably deliver a wider range of dynamic, personalized services. In addition, BEA provides a personalization engine and components used to build common e- commerce functionality, such as online catalog, dynamic pricing, shopping cart and order processing. Seasonality. As is common in the software industry, we believe that our fourth quarter orders are favorably impacted by a variety of factors including year-end capital purchases by larger corporate customers and the commission structure for our sales force. This increase typically results in first quarter customer orders being lower than orders received in the immediately preceding fourth quarter. BEA anticipates that this seasonal impact is likely to continue. Investment in Distribution Channels. BEA is currently expanding its direct sales capacity by aggressively hiring sales and technical sales support personnel. In addition, in August 2000, BEA announced a major planned investment in expansion of its indirect distribution network through stronger relationships with system platform companies, packaged application software developers, SIs and independent consultants, ISVs, and distributors. These investments result in an immediate increase in expenses, especially in sales and marketing. Service Revenues as a Percentage of Total Revenues. For the year ended January 31, 2001, service revenues increased as a percentage of total revenues. BEA believes that its customer base has been in the process of transitioning to mission-critical applications based on Java, Enterprise Java Beans ("EJB"), and, in some cases, CORBA programming models, but that customers typically have not had sufficient numbers of system architects and application developers experienced in building large, reliable systems on these programming models. BEA believes that by providing its customers with additional services, especially in architecting, building and deploying Java, EJB and CORBA systems, and training system architects and customers' application developers to develop these systems, BEA can help facilitate customers' deployment of systems 10 based on our platform products. An important element of our strategy of investing in an indirect distribution channel is to supplement BEA's service offerings through relationships with SIs and other strategic partners, allowing BEA to focus on architecture services and increase the number of projects available for licensing BEA's products through SIs' application development efforts. Investment in these efforts results in an immediate increase in expenses, although the return on such investment, if any, is not anticipated to occur until future periods. These expenses adversely affect BEA's operating results in the short-term, and also in the long-term if the anticipated benefits of such investments do not materialize. Over the four quarters of fiscal 2001, as we have increased our focus on using strategic partners to provide services related to the deployment and use of our software solutions, we have experienced a slowdown in the growth rate of our services revenue, particularly revenue derived from our lower-margin consulting services. As a result, services revenue as a percentage of total revenue has dropped from 44.5 percent in the first quarter of fiscal 2001 to 37.9 percent in the fourth quarter of fiscal 2001. This trend may continue or even worsen, particularly if the recent industry-wide oversupply in software infrastructure consultants further increases the willingness and ability of our strategic partners to provide such services or if the current economic slowdown continues or worsens. Product Development. In fiscal 2001, BEA continued to invest in product development, particularly BEA WebLogic Collaborate(TM), BEA WebLogic Commerce Server(TM), BEA WebLogic Personalization Server(TM) and new releases of BEA WebLogic Server(TM). BEA WebLogic Collaborate(TM) is business-to-business integration software that provides an open, scalable and dynamic way to rapidly create and manage multi-party trading exchanges. BEA WebLogic Commerce Server(TM) and BEA WebLogic Personalization Server(TM) help enable companies to quickly deliver highly personalized e-commerce applications. BEA WebLogic Server(TM) accounts for the majority of BEA's license revenues and is a platform for Java and EJB applications. BEA recently announced a major release of BEA WebLogic Server(TM), which adds new transaction, multicasting, Java messaging services and XML support, as well as other features. This release became generally available in the fourth quarter of fiscal 2001. BEA's planned investment in these efforts may affect BEA's anticipated overall financial results, particularly cost of revenues as a percentage of total revenues and research and development expense as a percentage of total revenues, and may create product transition concerns in BEA's customer base. In addition, investment in these projects results in an immediate increase in expenses, especially in research and development, although the return on such investment, if any, is not anticipated to occur until future periods. These expenses adversely affect BEA's operating results in the short-term, and also in the long-term if the anticipated benefits of such investments do not materialize. Acquisitions. Since its inception, BEA has acquired several companies and product lines, as well as distribution rights to product lines. Through these acquisitions, BEA has added additional product lines, additional functionality to its existing products, additional direct distribution capacity and additional service capacity. These acquisitions have resulted in significant charges to BEA's operating results in the periods in which the acquisitions were completed and have added intangible assets to BEA's balance sheet, the values of which are being amortized and charged to BEA's operating results over periods ranging from two to five years after completion of the acquisitions. BEA's management views the markets for its products as growing, and that companies serving those markets are consolidating. This consolidation presents an opportunity for BEA to further expand its product lines and functionality, distribution capacity and service offerings and to add new, related lines of business. BEA anticipates that it may make additional, perhaps material, acquisitions in the future. The timing of any such acquisition is impossible to predict and the charges associated with any such acquisition could materially adversely affect BEA's results of operations, beginning in the periods in which any such acquisition is completed. Employer Payroll Taxes. The Company is subject to employer payroll taxes when employees exercise stock options. These payroll taxes are assessed on the stock option gain, which is the difference between the common stock price on the date of exercise and the exercise price. The tax rate varies depending upon the employees' taxing jurisdiction. During fiscal 2001, the Company incurred $13.3 million of employer payroll tax expense resulting from employee exercises of stock options. Because we are unable to predict how many stock 11 options will be exercised, at what price and in which country, we are unable to predict what, if any, expense will be recorded in a future period. Results of Operations The following table sets forth certain line items in BEA's consolidated statements of operations as a percentage of total revenues for the fiscal years ended January 31, 2001, 2000, and 1999.
Fiscal year ended January 31, -------------------- 2001 2000 1999 ----- ----- ----- Revenues: License fees...................................... 58.1% 63.1% 66.9% Services.......................................... 41.9 36.9 33.1 ----- ----- ----- Total revenues.................................. 100.0 100.0 100.0 Cost of revenues: Cost of license fees(1)........................... 4.1 2.2 1.7 Cost of services(1)............................... 57.6 57.1 59.8 Amortization of certain acquired intangible assets........................................... 4.7 6.5 8.1 ----- ----- ----- Total cost of revenues.......................... 31.2 29.0 29.0 ----- ----- ----- Gross margin........................................ 68.8 71.0 71.0 Operating expenses: Sales and marketing............................... 40.9 45.5 48.1 Research and development.......................... 10.9 13.1 14.7 General and administrative........................ 7.0 8.2 8.6 Amortization of goodwill.......................... 7.2 3.4 1.0 Acquisition-related charges....................... 0.3 0.6 14.6 ----- ----- ----- Income (loss) from operations....................... 2.5 0.1 (16.0) Interest income (expense) and other, net............ 3.3 (1.3) (0.2) ----- ----- ----- Income (loss) before provision for income taxes..... 5.8 (1.2) (16.2) Provision for income taxes.......................... 3.7 3.0 1.7 ----- ----- ----- Net income (loss)................................... 2.1% (4.2)% (17.8)% ===== ===== =====
- -------- (1) Cost of license fees and cost of services are stated as a percentage of license fees and services, respectively. Revenues BEA's revenues are derived from fees for software licenses, customer support, education and consulting services. Total revenues increased 76.5 percent to $819.8 million in fiscal 2001 from $464.4 million in fiscal 2000, when it increased 60.7 percent from $289.0 million in fiscal 1999. These increases reflect the continued adoption of our software solutions. License Revenues. License revenues increased 62.7 percent to $476.6 million in fiscal 2001 from $292.9 million in fiscal 2000, when it increased 51.3 percent from $193.5 million in fiscal 1999. These increases were mainly due to the rapid adoption of BEA WebLogic Server(TM) as well as the adoption of other products in our WebLogic E-Business Platform(TM), expansion of our direct sales force, introduction of new products and new versions of existing products. License revenues as a percentage of total revenues decreased from 63.1 percent in fiscal 2000 to 58.1 percent in fiscal 2001 and from 66.9 percent in fiscal 1999 to 63.1 percent in fiscal 2000. These percentage decreases were attributable to the significant increase in service revenues. Service Revenues. Service revenues increased 100.0 percent to $343.2 million in fiscal 2001 from $171.6 million in fiscal 2000, when it increased 79.6 percent from $95.5 million in fiscal 1999. Service revenues 12 as a percentage of total revenues increased from 36.9 percent in fiscal 2000 to 41.9 percent in fiscal 2001 and increased from 33.1 percent in fiscal 1999 to 36.9 percent in fiscal 2000. The Company's service business experienced very strong growth in support, education and consulting, particularly outside the U.S. Over the four quarters of fiscal 2001, as we have increased our focus on using strategic partners to provide services related to the deployment and use of our software solutions, we have experienced a slowdown in the growth rate of our services revenue, particularly revenue derived from our lower- margin consulting services. International Revenues. International revenues increased 81.8 percent to $341.1 million in fiscal 2001 from $187.7 million in fiscal 2000 and increased 62.1 percent from $115.7 in fiscal 1999. International revenues as a percent of total revenues were 41.6 percent, 40.4 percent and 40.0 percent in fiscal 2001, 2000 and 1999, respectively. Revenues from the Europe, Middle East and Africa region ("EMEA") increased by 70.2 percent and 50.4 percent during fiscal 2001 and 2000, respectively. Revenues from the Asia/Pacific region ("APAC") increased by 104.7 percent and 125.9 percent during fiscal 2001 and 2000, respectively. Revenues from other international regions were insignificant. The increases were the result of expansion of the Company's international sales force. Cost of Revenues Total cost of revenues increased 89.7 percent to $255.8 million in fiscal 2001 from $134.8 million in fiscal 2000, when it increased by 61.1 percent from $83.7 million in fiscal 1999. Total cost of revenues as a percentage of total revenues represented 31.2 percent in fiscal 2001 and 29.0 percent in fiscal 2000 and 1999, respectively. The increase in fiscal 2001 was primarily due to the increase in cost of services, which carry a substantially higher cost of revenues than software licenses. Amortization charges included in cost of revenues also contributed to the increase. Cost of Licenses. Cost of licenses increased 206.0 percent to $19.7 million in fiscal 2001 from $6.4 million in fiscal 2000, when it increased 99.8 percent from $3.2 million in fiscal 1999. Cost of licenses includes expenses related to the purchase of compact discs, costs associated with transferring the Company's software to electronic media, the printing of user manuals, packaging and distribution costs as well as royalties paid to third parties. Cost of licenses represented 4.1 percent, 2.2 percent and 1.7 percent of license revenues in fiscal 2001, 2000 and 1999, respectively. The increases were primarily due to increases in royalties paid to third parties primarily resulting from license agreements signed in the third quarter of fiscal 2000 which were in place for all of fiscal 2001. Cost of Services. Cost of services increased 101.6 percent to $197.6 million in fiscal 2001 from $98.0 million in fiscal 2000, when it increased by 71.4 percent from $57.2 million in fiscal 1999. Cost of services consists primarily of salaries and benefits for consulting, education and product support personnel. Cost of services represented 57.6 percent, 57.1 percent and 59.8 percent of service revenues in fiscal 2001, 2000 and 1999, respectively. Cost of services as a percentage of service revenues increased slightly in fiscal 2001 compared to fiscal 2000 due to an increase in consulting costs offset by a higher mix of support revenues. In contrast, cost of services as a percentage of service revenues decreased in fiscal 2000 as compared to fiscal 1999 due to spreading costs over a higher mix of support revenues versus consulting revenues. Amortization of Certain Acquired Intangible Assets, included in Cost of Revenues. The amortization of certain acquired intangible assets, consisting primarily of developed technology, non-compete agreements, distribution rights, trademarks and tradenames, totaled $38.5 million, $30.4 million and $23.3 million in fiscal 2001, 2000 and 1999, respectively. These increases were primarily due to additional intangible assets acquired as a result of a number of strategic acquisitions completed in fiscal 2000 and 2001, particularly the acquisition of The Theory Center, Inc. ("TTC"), which was completed in the fourth quarter of fiscal 2000. In the future, amortization expense associated with intangible assets recorded prior to January 31, 2001 is expected to total approximately $26.1 million, $17.1 million, $9.0 million and $129,000 for the fiscal years ending January 31, 2002, 2003, 2004 and thereafter, respectively. 13 Operating Expenses Sales and Marketing. Sales and marketing expenses include salaries, benefits, sales commissions, travel and facility costs for the Company's sales and marketing personnel. These expenses also include programs aimed at increasing revenues, such as advertising, public relations, trade shows and user conferences. Sales and marketing expenses increased 58.7 percent to $335.5 million in fiscal 2001 from $211.4 million in fiscal 2000 and increased 52.2 percent in fiscal 2000 from $138.9 million in fiscal 1999. These increases were due to the expansion of the Company's direct sales force, increased commissions on the Company's increased revenue base, an increase in marketing personnel, logo re-branding and advertising campaigns to build brand awareness. Sales and marketing expenses decreased as a percentage of total revenues to 40.9 percent in fiscal 2001 from 45.5 percent in fiscal 2000 and from 48.1 percent in fiscal 1999. These decreases were due to spreading the increased sales and marketing expenses over a larger revenue base. The Company expects to continue to invest in the expansion of the direct and indirect sales channels, as well as marketing programs to promote the Company's products and brand. Accordingly, the Company expects sales and marketing expenses to increase in absolute dollars. Research and Development. Research and development expenses consist primarily of salaries and benefits for software engineers, contract development fees, costs of computer equipment used in software development and facilities expenses. Total expenditures for research and development increased 46.4 percent to $89.2 million in fiscal 2001 from $61.0 million in fiscal 2000 and increased 43.2 percent in fiscal 2000 from $42.6 million in fiscal 1999. These increases were attributed to an increase in product development personnel and expenses associated with the release of several new products and product versions. Research and development expenses represented 10.9 percent of total revenues in fiscal 2001 and 13.1 percent and 14.7 percent in fiscal 2000 and 1999, respectively. These decreases were primarily due to spreading the increased research and development expenses over a larger revenue base. The Company believes that a significant level of research and development is required to remain competitive and expects to continue to commit substantial resources to product development and engineering in future periods. As a result, the Company expects research and development expenses to continue to increase in absolute dollars in future periods. Additionally, management intends to continue recruiting and hiring experienced software development personnel and to consider the licensing and acquisition of technologies complementary to the Company's business. General and Administrative. General and administrative expenses include costs for the Company's human resources, finance, legal, information technology, facilities and general management functions. General and administrative expenses increased 51.3 percent to $57.6 million in fiscal 2001 from $38.1 million in fiscal 2000 and increased 52.9 percent in fiscal 2000 from $24.9 million in fiscal 1999. These increases were attributed to the expansion of the Company's support infrastructure, including information systems and associated expenses necessary to manage the Company's growth. We expect general and administrative expenses to increase in absolute dollars, as we expand our operations. Amortization of Goodwill. Amortization of goodwill increased in fiscal 2001 compared to fiscal 2000, due to goodwill resulting from various acquisitions completed in fiscal 2001 and 2000. Amortization of goodwill totaled $59.2 million, $15.8 million and $3.0 million in fiscal 2001, 2000 and 1999, respectively. In the future, amortization of goodwill recorded prior to January 31, 2001 is expected to total approximately $53.9 million, $47.4 million, $36.1 million, and $1.0 million for the fiscal years ending January 31, 2002, 2003, 2004 and thereafter, respectively. Acquisition related charges. In connection with certain acquisitions, the Company acquired and expensed the cost of a number of research projects and products that were in process on the acquisition dates. In fiscal 2001, acquisition related charges were related to the write-off of the acquired in- process research and development of approximately $2.2 million relating to The Workflow Automation Corporation ("Workflow") acquisition, which occurred in the first quarter of fiscal 2001. In fiscal 2000, acquisition related charges of $3.0 million were related to the write-off of acquired in-process research and development relating to the acquisition of The Theory Center ("TTC"), while in fiscal 1999, acquisition related charges of $42.2 million were primarily related to the acquisition of the TOP END enterprise middleware technology and product family of the NCR Corporation. 14 In October 2000, the Company completed its purchase of Bauhaus Technologies Inc. ("Bauhaus"), an IT and e-commerce consulting company. The purchase price was approximately $19.8 million in cash, and the acquisition was accounted for using the purchase method of accounting. Substantially all of the purchase price was allocated to intangible assets, including assembled workforce, non- compete agreements, customer base and goodwill. The intangibles are being amortized on a straight-line basis over two to three years. In April 2000, the Company completed its purchase of the services business of The Object People, Inc. ("TOP"), headquartered in Ottawa, Canada. The purchase price was approximately $20.5 million in cash. The acquisition was accounted for using the purchase method of accounting with substantially all of the purchase price allocated to intangible assets, including assembled workforce and goodwill. The intangibles are being amortized on a straight-line basis over three years. In March 2000, the Company acquired Workflow, a software development company based in Toronto, Canada. Workflow was purchased with a combination of $4.9 million of cash and the issuance of 470,718 shares of BEA common stock, valued at $49.41 per share, resulting in a total purchase price of approximately $28.6 million. The acquisition was accounted for using the purchase method with substantially all of the purchase price allocated to intangible assets, including purchased technology, non-compete agreements, assembled workforce and goodwill. The intangibles are being amortized on a straight-line basis over lives ranging from two to four years. An independent valuation of the purchased assets was performed to assist in determining the fair value of each identifiable tangible and intangible asset and in allocating the purchase price among the acquired assets. The Company recorded a charge to income of $2.2 million or $0.01 per diluted share, resulting from the write-off of acquired research and development. Standard valuation procedures and techniques were utilized in determining the fair value of the acquired core/developed, in-process technology, non-compete agreements and assembled workforce. Core technology and in-process technology were identified and valued through analysis of Workflow's and BEA's current development projects, their respective stage of development, the time and resources needed to complete them, their expected income-generating ability, their target markets and the associated risks. The cost approach, which includes an analysis of the cost of reproducing or replacing the asset, was the methodology utilized in valuing assembled workforce. The income approach, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows, was the methodology utilized in valuing core technology, completed technology, in- process technology, and non-compete agreements. Each developmental project was evaluated to determine if there were any alternative future uses. This evaluation consisted of a specific review of each project, including the overall objectives of the project, progress toward such objectives, and uniqueness of the project. The net after-tax cash flows representing the cash flows generated by the respective core and in-process technologies were then discounted to present value. The discount was based upon an analysis of the weighted average cost of capital for the industry. In November 1999, BEA completed its merger with TTC. TTC was purchased with the issuance of approximately 10.9 million shares of BEA common stock and stock options valued at approximately $154.9 million. An independent valuation of the purchased assets was performed to assist the Company in determining the fair value of each identifiable and intangible asset and in the allocation of the purchase price. The transaction was accounted for using the purchase method with $3.0 million allocated to in-process technology, $122.4 million to goodwill and the remaining $29.5 million representing other intangible assets and liabilities assumed. The intangibles, including purchased technology, trademarks and tradenames, non-compete agreements, assembled workforce and goodwill, are being amortized on a straight-line basis over lives ranging from two to four years. Interest Expense. Interest expense was $22.9 million in fiscal 2001, compared to $20.4 million and $10.4 million in fiscal 2000 and 1999, respectively. The increases in fiscal 2001 and 2000 as compared to fiscal 1999 were due to a higher average amount of outstanding borrowings, primarily due to the issuance of $550 million 4% Convertible Subordinated Notes due December 15, 2006 ("2006 Notes") in fiscal 2000 and 15 premiums paid in connection with the conversion of a majority of the $250 million 4% Convertible Subordinated Notes due June 12, 2005 ("2005 Notes") which were issued during fiscal 1999 and outstanding for substantially all of fiscal 2000. Interest Income and Other, Net. Interest income and other, net increased 247.2 percent to $50.1 million in fiscal 2001 from $14.4 million in fiscal 2000 and increased 44.7 percent from $10.0 million in fiscal 1999. These amounts include interest income of $47.9 million, $15.7 million and $9.1 million in fiscal 2001, 2000 and 1999, respectively. The increases in interest income were due to the investment of higher average cash, cash equivalents and short-term investment balances, generated primarily from the Company's debt and equity offerings. The Company recognized other income and expense of approximately $2.2 million during fiscal 2001. Other income related primarily to a net gain of $18.6 million as a result of the sale of a portion of the Company's investment in WebGain, Inc. ("WebGain") Series A Preferred Stock and an $18.0 million convertible note receivable from WebGain to Warburg, Pincus Equity Partners, LP ("WP Equity Partners"). In exchange for these Series A Preferred Shares and the convertible note, the Company received a note receivable from WP Equity Partners for approximately $50.0 million. The net gain in the aforementioned transaction was offset by the write-down of approximately $16.2 million of certain investments in equity securities which were determined to be other than temporarily impaired. The Company has a hedging program to reduce the effect of foreign exchange transaction gains and losses from recorded foreign currency-denominated assets and liabilities. This program involves the use of forward foreign exchange contracts in certain European and Asian currencies. The Company does not currently hedge anticipated foreign currency-denominated revenues and expenses not yet incurred. Net gains and losses on foreign currency transactions, which are included in interest income and other, net, were $(787,000), $287,000, and $340,000 in fiscal 2001, 2000 and 1999, respectively. The Company's international operations generally consist of sales, distribution and support organizations that generate revenues and incur product and service costs, marketing and general and administrative expenses in local currencies. Research and development, corporate marketing and administrative expenses are primarily incurred in U.S. dollars. Thus, a strengthening of local currencies against the U.S. dollar has a positive influence on international revenues translated into dollars and a negative effect on translated local costs and expenses. A weakening of local currencies has a negative effect on translated international revenues and a positive effect on translated local costs and expenses. BEA's hedging program is intended to moderate the impact of exchange rate changes on operating results and cash flow. Provision for Income Taxes. The Company has provided for income taxes of $30.4 million, $13.9 million and $4.9 million for fiscal 2001, 2000, and 1999, respectively. The income tax expense provided in each year consists primarily of domestic minimum taxes, foreign withholding taxes and foreign income tax expense incurred as a result of local country profits. The increases in income taxes for fiscal 2001 relative to fiscal 2000 and fiscal 2000 relative to fiscal 1999 are primarily due to an overall increase in foreign corporate income taxes and service revenues and an increase in domestic state current taxes due to book/tax differences in the amortization of acquired intangibles and the timing of revenue recognition. Under Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes ("FAS 109"), deferred tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FAS 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the available evidence, which includes BEA's historical operating performance and the reported cumulative net losses from prior years, the Company has provided a valuation allowance against its net deferred tax assets to the extent that they are dependent upon future taxable income for realization. The Company intends to evaluate the realizability of the deferred tax assets on a quarterly basis. See Note 9 of Notes to Consolidated Financial Statements. 16 Liquidity and Capital Resources As of January 31, 2001, cash, cash equivalents and short-term investments totaled $940.9 million, up from $801.4 million at January 31, 2000. The increase in cash, cash equivalents and short-term investments was primarily due to cash generated from increased operating profitability and the sale of common stock. Cash generated from operating activities rose to $225.3 million in fiscal 2001, compared with $95.2 million in fiscal 2000 and $27.4 million in fiscal 1999. The increases were primarily due to increased operating profitability, increases in deferred revenues and accrued liabilities, offset partially by an increase in accounts receivable. Investing activities consumed $156.7 million of cash during fiscal 2001, compared with $119.9 million and $107.8 million in fiscal 2000 and 1999, respectively. Cash used for investing activities in fiscal 2001 was primarily for a number of strategic acquisitions and investments in equity and debt securities amounting to approximately $122.8 million, capital expenditures of $35.3 million, an increase in restricted cash of $3.4 million and purchases of short-term investments of $186.9 million, offset by maturities of short-term investments of $191.7 million. Cash used for investing activities in fiscal 2000 was primarily for a number of strategic acquisitions amounting to $66.0 million, capital expenditures of $17.8 million and purchases of short-term investments of $70.9 million, offset by maturities of short-term investments of $32.9 million. Cash used for investing activities in fiscal 1999 was primarily for a number of strategic acquisitions amounting to $99.4 million, capital expenditures of $13.2 million and purchases of short-term investments of $1.4 million offset by maturities of short-term investments of $6.2 million. The Company generated $81.7 million of cash from financing activities in fiscal 2001, compared with $554.2 million and $221.1 million in fiscal 2000 and 1999, respectively. The primary source of cash from financing activities in fiscal 2001 was the proceeds received from employee stock purchases and the issuance of common stock by BEA pursuant to stock option exercises of $85.7 million, partially offset by payments on the Company's outstanding obligations of $11.8 million. The primary source of cash from financing activities in fiscal 2000 was the issuance of the $550 million 4% Convertible Subordinated Notes due December 15, 2006 ("2006 Notes"), net of $14.6 million of debt issuance costs. The primary source of cash from financing activities in fiscal 1999 was the issuance of the $250 million 4% Convertible Subordinated Notes due June 15, 2005 ("2005 Notes") offset by $5.3 million of net debt issuance costs. The main use of cash for financing activities in fiscal 1999 was for the payment in full of the $38.7 million outstanding note payable to Novell, Inc. related to the acquisition of distribution rights for Tuxedo(TM). As of January 31, 2001, the Company's outstanding short and long-term obligations were $577.4 million, up from $582.9 million at January 31, 2000. At January 31, 2001, the Company's outstanding obligations consisted of $561.4 million of convertible notes and $16.0 million of other short-term and long- term obligations. At January 31, 2000, the Company's outstanding obligations consisted of $572.5 million of convertible notes and $10.4 million of other short-term and long-term obligations. During the first quarter of fiscal 2002, the Company entered into a lease agreement for the lease of approximately 40 acres of land adjacent to the Company's San Jose, California headquarters to construct additional corporate offices and research and development facilities. The lease has an initial term of five years with renewal options. Rent obligations commence at the beginning of the third year. The total approximate minimum lease payments for the next five years are currently estimated to be approximately $0 in fiscal 2002 and 2003 and $17.5 million in fiscal 2004, 2005 and 2006, respectively. The minimum lease payments will fluctuate from time to time depending on short- term interest rates. The Company has an option to purchase the land at the end of the term of the lease for the lesser of $331 million or the outstanding lease balance or, prior to the end of the lease, to arrange for the sale of the property to a third party with the Company retaining an obligation to the owner for the difference between the sales price and the guaranteed residual value up to $328.7 million if the sales price is less than this amount, subject to certain provisions of the lease. As part of the 17 lease transaction, the Company has restricted approximately $330 million of its investment securities as collateral for specified obligations to the lessor under the lease. The investment securities are restricted as to withdrawal and are managed by a third party subject to certain limitations. The Company must maintain certain covenants, as defined in the lease. In addition to normal operating expenses, cash requirements are anticipated for financing anticipated growth, payment of outstanding debt obligations and the acquisition or licensing of products and technologies complementary to the Company's business. The Company believes that its existing cash, cash equivalents, short-term investments and cash generated from operations, if any, will be sufficient to satisfy its currently anticipated cash requirements through January 31, 2002. However, the Company may make additional acquisitions and may need to raise additional capital through future debt or equity financings to the extent necessary to fund any such acquisitions. There can be no assurance that additional financing will be available, at all, or on terms favorable to the Company. Effect of New Accounting Pronouncements In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB Opinion No. 25, ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and, among other issues, clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of the previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 was effective July 1, 2000. The application of FIN 44 has not had a material impact on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101") and amended it in March 2000. The application of SAB 101 has not had a material impact on the Company's financial position or results of operations. In June 1998, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 establishes the accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. In July 1999, FAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Data of FASB Statement 133 ("FAS 137") was issued. FAS 137 deferred the effective date of FAS 133 until the first fiscal quarter of fiscal years beginning after June 15, 2000. The Company will adopt FAS 133 effective February 1, 2001. The Company does not currently expect that the adoption of FAS 133 will have a material impact to its financial position or results of operations. Factors That May Impact Future Operating Results BEA. operates in a rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of these risks and uncertainties which may have a material adverse effect on the Company's business, financial condition or results of operations. Significant unanticipated fluctuations in our actual or anticipated quarterly revenues and operating results may cause us not to meet securities analysts' or investors' expectations and may result in a decline in our stock price Although we have had significant revenue growth in recent quarters, our growth rates may not be sustainable. If our revenues, operating results, earnings or future projections are below the levels expected by investors or securities analysts, our stock price is likely to decline. Our stock price is also subject to the volatility 18 generally associated with Internet, software and technology stocks and may also be affected by broader market trends unrelated to our performance, such as the declines in the prices of many such stocks since March 2000 to March 2001. We expect to experience significant fluctuations in our future quarterly revenues and operating results as a result of many factors, including: . recent adverse economic conditions, which may increase the likelihood that customers will unexpectedly delay or cancel orders and result in revenue shortfalls . difficulty predicting the size and timing of customer orders . the mix of our products and services sold . mix of distribution channels . whether our strategy to further establish and expand our relationships with distributors is successful . introduction or enhancement of our products or our competitors' products . changes in our competitors' product offerings and pricing policies, and customer order deferrals in anticipation of new products and product enhancements from BEA or competitors . whether we are able to develop, introduce and market new products on a timely basis and whether any new products are accepted in the market . any slowdown in use of the Internet for commerce . recent hiring may prove excessive if growth rates are not maintained . the structure, timing and integration of acquisitions of businesses, products and technologies . the terms and timing of financing activities . potential fluctuations in demand or prices of our products and services . the lengthy sales cycle for our products . technological changes in computer systems and environments . whether we are able to successfully expand our sales and marketing programs . whether we are able to meet our customers' service requirements . costs associated with acquisitions . loss of key personnel . fluctuations in foreign currency exchange rates As a result of all of these factors, we believe that quarterly revenues and operating results are difficult to forecast and period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of trends or future performance. A material portion of our revenues has been derived from large orders, as customers deployed our products. Increases in the dollar size of some individual license transactions would also increase the risk of fluctuation in future quarterly results. The majority of our revenue originates with a large number of small development orders with the potential to turn into large deployments. If we cannot generate large customer orders, turn development orders into large deployments or customers delay or cancel such orders in a particular quarter, it may have a material adverse effect on our revenues and, more significantly on a percentage basis, our net income or loss in that quarter. Moreover, we typically receive and fulfill most of our orders within the quarter, with the substantial majority of our orders typically received in the last month of each fiscal quarter. As a result, we may not learn of 19 revenue shortfalls until late in a fiscal quarter, after it is too late to adjust expenses for that quarter. Moreover, recent adverse economic conditions in the United States, particularly those related to the technology industry, may increase the likelihood that customers will unexpectedly delay or cancel orders and result in revenue shortfalls. This risk is particularly relevant with respect to large customer orders which are more likely to be cancelled or delayed and also have a greater financial impact on our operating results. A number of technology companies, particularly software companies that, like BEA, sell enterprise-wide software solutions, have recently announced that these conditions have adversely affected their financial results. Additionally, our operating expenses are based in part on our expectations for future revenues and are difficult to adjust in the short term. Any revenue shortfall below our expectations could have an immediate and significant adverse effect on our results of operations. We are subject to employer payroll taxes when our employees exercise their stock options. The employer payroll taxes are assessed on each employee's gain, which is the difference between the price of our common stock on the date of exercise and the exercise price. During a particular period, these payroll taxes could be material. These employer payroll taxes are recorded as an expense and are assessed at tax rates that vary depending upon the employee's taxing jurisdiction in the period such options are exercised based on actual gains realized by employees. However, because we are unable to predict how many stock options will be exercised, at what price and in which country during any particular period, we cannot predict the amount, if any, of employer payroll expense that will be recorded in a future period or the impact on our future financial results. As is common in the software industry, we believe that our fourth quarter orders are favorably impacted by a variety of factors including year-end capital purchases by larger corporate customers and the commission structure for our sales force. This increase typically results in first quarter customer orders being lower than orders received in the immediately preceding fourth quarter. BEA anticipates that this seasonal impact is likely to continue. Although we use standardized license agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we must often negotiate and revise terms and conditions of these standardized agreements, particularly in larger license transactions. Negotiation of mutually acceptable terms and conditions can extend the sales cycle and, in certain situations, may require us to defer recognition of revenue on the license. While we believe that we are in compliance with Statement of Position 97-2, Software Revenue Recognition, ("SOP 97-2") as amended, the American Institute of Certified Public Accountants continues to issue implementation guidelines for these standards and the accounting profession continues to discuss a wide range of potential interpretations. In addition, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). BEA has adopted the provisions of SAB 101 in its fourth fiscal quarter of 2001. Additional implementation guidelines and changes in interpretations of such guidelines could lead to unanticipated changes in our current revenue accounting practices that could cause us to defer the recognition of revenue to future periods or to recognize lower revenue and profits. Our revenues are derived primarily from two main products and related services, and a decline in demand or prices for either products or services could substantially adversely affect our operating results We currently derive the majority of our license and service revenues from BEA WebLogic(TM), BEA TUXEDO(TM) and from related products and services. We expect these products and services to continue to account for the majority of our revenues in the immediate future. As a result, factors adversely affecting the pricing of or demand for BEA WebLogic(TM), BEA TUXEDO(TM) or related services, such as a general economic slowdown, competition, product performance or technological change, could have a material adverse effect on our business and consolidated results of operations and financial condition. As we have increased our focus on using strategic partners to provide services related to the deployment and use of our software solutions, we have recently experienced a slowdown in the growth rate of our services revenue, particularly revenue derived from our lower-margin consulting services. This trend may continue or even worsen, particularly if the recent industry-wide oversupply in software infrastructure consultants further increases the willingness and ability of our strategic partners to provide such services or if the current economic slowdown continues or worsens. 20 Any failure to maintain ongoing sales through distribution channels could result in lower revenues To date, we have sold our products principally through our direct sales force, as well as through indirect sales channels, such as computer hardware companies, packaged application software developers, ISVs, SIs and independent consultants, independent software tool vendors and distributors. Our ability to achieve revenue growth in the future will depend in large part on our success in expanding our direct sales force and in further establishing and expanding relationships with distributors, ISVs, original equipment manufacturers ("OEMs") and SIs. In particular, in August 2000, we announced a significant initiative to further establish and expand relationships with our distributors through these sales channels, especially ISVs and SIs. A significant part of this initiative is to recruit and train a large number of consultants employed by SIs and induce these SIs to more broadly use our products in their consulting practices, as well as to embed our technology in products our ISV customers offer. We intend to seek distribution arrangements with additional ISVs to embed our Web application servers in their products. It is possible that we will not be able to successfully expand our direct sales force or other distribution channels, secure agreements with additional SIs and ISVs on commercially reasonable terms or at all, and otherwise adequately develop our relationships with indirect sales channels. Moreover, even if we succeed in these endeavors, it still may not increase our revenues. In particular, we need to carefully monitor the development and scope of our indirect sales channels and create appropriate pricing, sales force compensation and other distribution parameters to help ensure these indirect channels complement our direct channels. If we invest resources in these types of expansion and our overall revenues do not correspondingly increase, our business, results of operations and financial condition will be materially and adversely affected. In addition, we already rely on informal relationships with a number of consulting and systems integration firms to enhance our sales, support, service and marketing efforts, particularly with respect to implementation and support of our products as well as lead generation and assistance in the sales process. We will need to expand our relationships with third parties in order to support license revenue growth. Many such firms have similar, and often more established, relationships with our principal competitors. It is possible that these and other third parties will not provide the level and quality of service required to meet the needs of our customers, that we will not be able to maintain an effective, long term relationship with these third parties, and that these third parties will not successfully meet the needs of our customers. It is difficult to predict our future results for a variety of reasons including our limited operating history and need to continue to integrate our acquisitions We were incorporated in January 1995 and therefore have a limited operating history. We have generated revenues to date primarily from sales of BEA WebLogic(TM), a software product which we acquired in September 1998, and from BEA TUXEDO(TM), a software product to which we acquired worldwide distribution rights in February 1996, and fees for software products and services related to WebLogic(TM) and TUXEDO(TM). We have also acquired a number of additional businesses, technologies and products. Our limited operating history and the need to integrate a number of separate and independent business operations subject our business to numerous risks. At January 31, 2001, we had an accumulated deficit of approximately $185.9 million. In addition, in connection with certain acquisitions completed prior to January 31, 2001, we recorded approximately $511.0 million as intangible assets and goodwill. Under current generally accepted accounting principles, intangible assets and goodwill are required to be amortized in future periods. Approximately $320.3 million of these assets have been amortized as of January 31, 2001, and we expect to amortize the remaining amount of approximately $190.7 million in future periods through our fiscal year ending January 31, 2005. If we acquire additional businesses, products and technologies in the future, we may report additional, potentially significant expenses. If future events cause the impairment of any intangible assets acquired in our past or future acquisitions, we may have to expense such assets sooner than we expect. We first reported an operating profit under generally accepted accounting principles in the second quarter of fiscal 2001. Because of our limited operating history and ongoing expenses associated with our prior acquisitions, there can be no assurance that we will continue to be profitable in any future period, and recent operating results should not be considered indicative of future financial performance. 21 If we do not develop and enhance new and existing products to keep pace with technological, market and industry changes, our revenues may decline The market for our products is highly fragmented, competitive with alternative computing architectures, and characterized by continuing technological developments, evolving industry standards and changing customer requirements. The introduction of products embodying new technologies, the emergence of new industry standards or changes in customer requirements could render our existing products obsolete and unmarketable. As a result, our success depends upon our ability to timely and effectively enhance existing products (such as our WebLogic Server product), respond to changing customer requirements and develop and introduce in a timely manner new products (such as our WebLogic Collaborate product) that keep pace with technological and market developments and emerging industry standards. We are also developing products designed to provide components for applications (such as our WebLogic Commerce Server(TM), WebLogic Personalization Server(TM) and Campaign Manager products) in an effort to further build out and increase the value of the e- business software infrastructure platform we provide. It is possible that our products will not adequately address the changing needs of the marketplace and that we will not be successful in developing and marketing enhancements to our existing products or products incorporating new technology on a timely basis. Failure to develop and introduce new products, or enhancements to existing products, in a timely manner in response to changing market conditions or customer requirements, will materially and adversely affect our business, results of operations and financial condition. The price of our common stock may fluctuate significantly The market price for our common stock may be affected by a number of factors, including developments in the Internet, software or technology industry, general market conditions and other factors, including factors unrelated to our operating performance or our competitors' operating performance. In addition, stock prices for BEA and many other companies in the Internet, technology and emerging growth sectors have experienced wide fluctuations including recent rapid rises and declines in their stock prices that often have not been directly related to the operating performance of such companies, such as the declines in the stock prices of BEA and many such companies since March 2000 to March 2001. Such factors and fluctuations, as well as general economic, political and market conditions, such as recessions, may materially adversely affect the market price of our common stock. If we cannot successfully integrate our past and future acquisitions, our revenues may decline and expenses may increase From our inception in January 1995, we have made a number of strategic acquisitions. Integration of acquired companies, divisions and products involves the assimilation of potentially conflicting operations and products, which divert the attention of our management team and may have a material adverse effect on our operating results in future quarters. It is possible we may not achieve any of the intended financial or strategic benefits of these transactions. While we intend to make additional acquisitions in the future, there may not be suitable companies, divisions or products available for acquisition. Our acquisitions entail numerous risks, including the risk we will not successfully assimilate the acquired operations and products, or retain key employees of the acquired operations. There are also risks relating to the diversion of our management's attention, and difficulties and uncertainties in our ability to maintain the key business relationships the acquired entities have established. In addition, if we undertake future acquisitions, we may issue dilutive securities, assume or incur additional debt obligations, incur large one-time expenses, and acquire intangible assets that would result in significant future amortization expense. Any of these events could have a material adverse effect on our business, operating results and financial condition. Recently, the Financial Accounting Standards Board ("FASB") proposed to eliminate pooling of interests accounting for acquisitions and the ability to write-off in-process research and development has been limited by recent pronouncements. The effect of these changes would be to increase the portion of the purchase price for any future acquisitions that must be charged to BEA's cost of revenues and operating expenses in the periods following any such acquisitions. As a consequence, our results of operations in periods following any such 22 acquisitions could be materially adversely affected. Although these changes would not directly affect the purchase price for any of these acquisitions, they would have the effect of increasing the reported expenses associated with any of these acquisitions. To that extent, these changes may make it more difficult for us to acquire other companies, product lines or technologies. Recently, FASB proposed that purchased goodwill should not be amortized, but rather, it should be periodically reviewed for impairment. FASB proposed that at the time goodwill is considered impaired an amount equal to the impairment loss should be charged as an operating expense in the income statement. The timing of such an impairment (if any) of goodwill acquired in past and future transactions is uncertain and difficult to predict. If this proposal is adopted, our results of operations in periods following any such impairment could be materially adversely affected. The lengthy sales cycle for our products makes our revenues susceptible to substantial fluctuations Our customers typically use our products to implement large, sophisticated applications that are critical to their business, and their purchases are often part of their implementation of a distributed or Web-based computing environment. Customers evaluating our software products face complex decisions regarding alternative approaches to the integration of enterprise applications, competitive product offerings, rapidly changing software technologies and limited internal resources due to other information systems requirements. For these and other reasons, the sales cycle for our products is lengthy and is subject to delays or cancellation over which we have little or no control. We have experienced an increase in the number of million and multi-million dollar license transactions. In some cases, this has resulted in more extended customer evaluation and procurement processes, which in turn have lengthened the overall sales cycle for our products. This delay or failure to complete large orders and sales in a particular quarter could significantly reduce revenue that quarter, as well as subsequent quarters over which revenue for the sale would likely be recognized. If we do not effectively compete with new and existing competitors, our revenues and operating margins will decline The market for application server and integration software, and related software components and services, is highly competitive. BEA's competitors are diverse and offer a variety of solutions directed at various segments of this marketplace. These competitors include operating system vendors such as IBM, Sun Microsystems and Hewlett-Packard and database vendors such as Oracle. Microsoft has released products that include certain application server functionality and has announced that it intends to include application server and integration functionality in future versions of its operating systems, including its .NET Web services initiative. In addition, there are other companies offering and developing application server and integration software products and related services that directly compete with products the Company offers. Further, software development tool vendors typically emphasize the broad versatility of their tool sets and, in some cases, offer complementary software that supports these tools and performs basic application server and integration functions. Last, internal development groups within prospective customers' organizations may develop software and hardware systems that may substitute for those the Company offers. A number of BEA'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 us. BEA's principal competitors currently include hardware vendors who bundle their own application server and integration software products, or similar products, with their computer systems and database vendors that advocate client/server networks driven by the database server. IBM, Sun Microsystems and Hewlett-Packard are the primary hardware vendors who offer a line of application server and integration solutions for their customers. IBM's sale of application server and integration functionality along with its IBM proprietary hardware systems requires BEA to compete with IBM in its installed base, where IBM has certain inherent advantages due to its significantly greater financial, technical, marketing and other resources, greater name recognition and the integration of its enterprise application server and integration functionality with its proprietary hardware and database systems. These inherent advantages allow IBM to bundle, at a discounted price, application 23 functionality with computer hardware and software sales. Due to these factors, if the Company does not differentiate its products based on functionality, interoperability with non-IBM systems, performance and reliability, and establish its products as more effective solutions to customers' needs, its revenues and operating results will suffer. Microsoft has announced that it intends to include certain application server and integration functionality in its .NET Web services initiative. The bundling of competing functionality in versions of .NET servers requires BEA to compete with Microsoft in the Web services marketplace, where Microsoft has certain inherent advantages due to its significantly greater financial, technical, marketing and other resources, its greater name recognition, its substantial installed base and the integration of its broad product line and features into a Web services environment. The Company needs to differentiate its products from Microsoft's based on scalability, functionality, interoperability with non-Microsoft platforms, performance and reliability, and needs to establish its products as more effective solutions to customers' needs. The Company may not be able to successfully differentiate its products from those offered by Microsoft, and Microsoft's entry into the application server and integration market could 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 its 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 software licenses and maintenance, consulting and support services on terms favorable to us. Further, competitive pressures could require BEA to reduce the price of its products and related services, which could materially adversely affect the Company's business, operating results and financial condition. The Company may not be able to compete successfully against current and future competitors and any failure to do so would have a material adverse effect upon its business, operating results and financial condition. If the market for application servers, application integration and application component software does not grow as quickly as we expect, our revenues will be harmed We sell our products and services in the application server, application integration and application component markets. These markets are emerging and are characterized by continuing technological developments, evolving industry standards and changing customer requirements. Our success is dependent in large part on acceptance of our products by large customers with substantial legacy mainframe systems, customers establishing a presence on the Web for commerce, and developers of web-based commerce applications. Our future financial performance will depend in large part on continued growth in the number of companies extending their mainframe-based, mission-critical applications to an enterprise-wide distributed computing environment and to the Internet through the use of application server and integration technology. There can be no assurance that the markets for application server and integration technology and related services will continue to grow. Even if they do grow they may grow more slowly than we anticipate, particularly in view of the recent economic downturn affecting the technology sector in the United States. If these markets fail to grow or grow more slowly than we currently anticipate, or if we experience increased competition in these markets, our business, results of operations and financial condition will be adversely affected. If we fail to adequately protect our intellectual property rights, competitors may use our technology and trademarks, which could weaken our competitive position, reduce our revenues and increase our costs Our success depends upon our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. It is possible that other companies could successfully challenge the validity or scope of our patents and that our patents may not provide a competitive advantage to us. 24 As part of our confidentiality procedures, we generally enter into non- disclosure agreements with our employees, distributors and corporate partners and into license agreements with respect to our software, documentation and other proprietary information. Despite these precautions, third parties could copy or otherwise obtain and use our products or technology without authorization, or develop similar technology independently. In particular, we have, in the past, provided certain hardware OEMs with access to our source code, and any unauthorized publication or proliferation of this source code could materially adversely affect our business, operating results and financial condition. It is difficult for us to police unauthorized use of our products, and although we are unable to determine the extent to which piracy of our software products exists, software piracy is a persistent problem. Effective protection of intellectual property rights is unavailable or limited in certain foreign countries. The protection of our proprietary rights may not be adequate and our competitors could independently develop similar technology, duplicate our products, or design around patents and other intellectual property rights we hold. Third parties could assert that our software products and services infringe their intellectual property rights, which could expose us to increased costs and litigation It is possible that third parties could claim our current or future products infringe their rights including their patent rights. Any such claims, with or without merit, could cause costly litigation that could absorb significant management time, which could materially adversely affect our business, operating results and financial condition. These types of claims could cause us to pay substantial damages on settlement amounts, cease offering any subject technology and require us to enter into royalty or license agreements. If required, we may not be able to obtain such royalty or license agreements, or obtain them on terms acceptable to us, which could have a material adverse effect upon our business, operating results and financial condition. Our international operations expose us to greater management, collections, currency, intellectual property, regulatory and other risks International revenues accounted for 41.6 percent, 40.4 percent and 40.0 percent of our consolidated revenues for the fiscal years ended January 31, 2001, 2000 and 1999, respectively. We sell our products and services through a network of branches and subsidiaries located in 30 countries worldwide. In addition, we also market through distributors. We believe that our success depends upon continued expansion of our international operations. Our international business is subject to a number of risks, including unexpected changes in regulatory practices and tariffs, greater difficulties in staffing and managing foreign operations, longer collection cycles, seasonality, potential changes in tax laws, greater difficulty in protecting intellectual property and the impact of fluctuating exchange rates between the US dollar and foreign currencies in markets where we do business. General economic and political conditions in these foreign markets may also impact our international revenues. There can be no assurances that these factors and other factors will not have a material adverse effect on our future international revenues and consequently on our business and consolidated financial condition and results of operations. If we are unable to manage our growth, our business will suffer We have continued to experience a period of rapid and substantial growth that has placed, and if such growth continues would continue to place, a strain on the Company's administrative and operational infrastructure. We have increased the number of our employees from 120 employees in three offices in the United States at January 31, 1996 to over 3,000 employees in 90 offices in 30 countries at January 31, 2001. Our ability to manage our staff and growth effectively requires us to continue to improve our operational, financial and management controls; reporting systems and procedures; and information technology infrastructure. In this regard, we are currently updating our management information systems to integrate financial and other reporting among our multiple domestic and foreign offices. In addition, we intend to continue to increase our staff worldwide and to continue to improve the financial reporting and controls for our global operations. We are also continuing to develop and roll out information technology initiatives. It is possible we will not be able to 25 successfully implement improvements to our management information, control systems and information technology infrastructure in an efficient or timely manner and that, during the course of this implementation, we could discover deficiencies in existing systems and controls. If we are unable to manage growth effectively, our business, results of operations and financial condition will be materially adversely affected. If we lose key personnel or cannot hire enough qualified personnel, it will adversely affect our ability to manage our business, develop new products and increase revenue We believe our future success will depend upon our ability to attract and retain highly skilled personnel including our founders, Messrs. William T. Coleman III and Alfred S. Chuang, and other key members of management. Competition for these types of employees is intense, and it is possible that we will not be able to retain our key employees and that we will not be successful in attracting, assimilating and retaining qualified candidates in the future. As we seek to expand our global organization, the hiring of qualified sales, technical and support personnel will be difficult due to the limited number of qualified professionals. Failure to attract, assimilate and retain key personnel would have a material adverse effect on our business, results of operations and financial condition. If our products contain software defects, it could harm our revenues and expose us to litigation The software products we offer are internally complex and, despite extensive testing and quality control, may contain errors or defects, especially when we first introduce them. We may need to issue corrective releases of our software products to fix any defects or errors. Any defects or errors could also cause damage to our reputation, loss of revenues, product returns or order cancellations, or lack of market acceptance of our products. Accordingly, any defects or errors could have a material and adverse effect on our business, results of operations and financial condition. Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Although we have not experienced any product liability claims to date, sale and support of our products entails the risk of such claims, which could be substantial in light of customers' use of such products in mission-critical applications. If a claimant brings a product liability claim against us, it could have a material adverse effect on our business, results of operations and financial condition. Our products interoperate with many parts of complicated computer systems, such as mainframes, servers, personal computers, application software, databases, operating systems and data transformation software. Failure of anyone of these parts could cause all or large parts of computer systems to fail. In such circumstances, it may be difficult to determine which part failed, and it is likely that customers will bring a lawsuit against several suppliers. Even if our software is not at fault, we could suffer material expense and material diversion of management time in defending any such lawsuits. Our strategy of investing in development-stage companies involves a number of risks and uncertainties We have invested, and expect to continue to invest, in development-stage companies. Each of these investments involves risks and uncertainties, including: . diversion of management attention from our core business; . failure to leverage our relationship with these companies to access new technologies and new markets; . inability to value investments appropriately or to predict changes to the future value of investments; . inability to manage investments effectively; and . loss of cash invested 26 We have a high debt balance and large interest obligations At January 31, 2001, we had approximately $561.4 million of long-term indebtedness, consisting of convertible notes. As a result of this indebtedness, we have substantial principal and interest payment obligations. The degree to which we are leveraged could significantly harm our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. In addition, our earnings are insufficient to cover our fixed charges. Also, in connection with a lease transaction for real estate in San Jose, California, we have restricted approximately $330 million out of $940.9 million of our otherwise unrestricted cash and cash equivalents and investment securities as collateral for specified obligations to the lessor under the lease. The investment securities are restricted as to withdrawal and are managed by a third party subject to a number of limitations. We will require substantial amounts of cash to fund scheduled payments of interest on the convertible notes, payment of the principal amount of the convertible notes, payment of principal and interest on our other indebtedness, future capital expenditures, payments on our lease and any increased working capital requirements. If we are unable to meet our cash requirements out of cash flow from operations, there can be no assurance that we will be able to obtain alternative financing. In the absence of such financing, our ability to respond to changing business and economic conditions, to make future acquisitions, to absorb adverse operating results or to fund capital expenditures or increased working capital requirements would be significantly reduced. If we do not generate sufficient cash flow from operations to repay the notes at maturity, we could attempt to refinance the notes; however, no assurance can be given that such a refinancing would be available on terms acceptable to us, if at all. Any failure by us to satisfy our obligations with respect to the notes at maturity (with respect to payments of principal) or prior thereto (with respect to payments of interest or required repurchases) would constitute a default under the indenture and could cause a default under agreements governing our other indebtedness. Power outages in California may adversely affect us. We have significant operations, including our headquarters, in the state of California and are dependent on a continuous power supply. California's current energy crisis could substantially disrupt our operations and increase our expenses. California has recently implemented, and may in the future continue to implement, rolling blackouts throughout the state. If blackouts interrupt our power supply, we may be temporarily unable to continue operations at our California facilities. Any such interruption in our ability to continue operations at our facilities could delay the development and delivery of our products and services and otherwise disrupt communications with our customers or other third parties on whom we rely, such as SIs. Future interruptions could damage our reputation and could result in lost revenue, either of which could substantially harm our business and results of operations. Furthermore, shortages in wholesale electricity supplies have caused power prices to increase. If energy prices continue to increase, our operating expenses will likely increase which could have a negative effect on our operating results. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Exchange BEA's revenues originating outside the United States were 41.6 percent, 40.4 percent and 40.0 percent of total revenues in fiscal 2001, 2000 and 1999, respectively. The only geographic sub-region with revenues greater than 10 percent of total revenues in fiscal 2001 was the United Kingdom with 10.3 percent. International revenues from each geographic sub-region were less than 10 percent of total revenues in each of fiscal 2000 and 1999. International sales were made mostly from the Company's foreign sales subsidiaries in the local countries and are typically denominated in the local currency of each country. These subsidiaries also incur most of their expenses in the local currency. Accordingly, foreign subsidiaries use the local currency as their functional currency. The Company's international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other 27 regulations and restrictions, and foreign exchange volatility. Accordingly, the Company's future results could be materially adversely impacted by changes in these or other factors. The Company's exposure to foreign exchange rate fluctuations arise in part from intercompany accounts in which certain costs of software development, support and product marketing incurred in the United States are charged to the Company's foreign subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk with the parent company in the United States. The Company is also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall financial results. The Company has a program to reduce the effect of foreign exchange transaction gains and losses from recorded foreign currency-denominated assets and liabilities. This program involves the use of forward foreign exchange contracts in certain European and Asian currencies, principally the U.K., Korea, Canada, Sweden, Japan and Australia. A forward foreign exchange contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. Under this program, increases or decreases in the Company's foreign currency transactions are partially offset by gains and losses on the forward contracts, so as to mitigate the possibility of significant foreign currency transaction gains and losses. The Company does not use foreign currency contracts for trading purposes. The Company does not currently hedge anticipated foreign currency-denominated revenues and expenses not yet incurred. All foreign currency transactions and all outstanding forward contracts are marked-to-market on a monthly basis with realized gains and losses included in interest income and other, net. Net losses resulting from foreign currency transactions were approximately $787,000 for fiscal 2001. The Company's outstanding forward contracts as of January 31, 2001 are presented in the table below. This table presents the notional amount in U.S. dollars using the spot exchange rate in January 2001 and the weighted average contractual foreign currency exchange rates. Notional weighted average exchange rates are quoted using market conventions where the currency is expressed in units per U.S. dollar. All of these forward contracts mature within 90 days or less as of January 31, 2001.
Notional Weighted Average Notional Exchange Amount Rate -------------- --------- (in thousands) Functional Currency--US Dollar Euros............................................... $46,800 1.070 British pounds...................................... 6,900 0.675 Japanese yen........................................ 14,000 118.161 Canadian dollars.................................... 4,900 1.512 Swiss francs........................................ 100 1.630 Korean won.......................................... 5,400 1,291.306 Australian dollars.................................. 2,700 1.840 ------- Total........................................... $80,800 ------- Functional Currency--EURO British pounds...................................... $ 6,600 0.680 Swiss francs........................................ 4,000 1.650 Swedish krona....................................... 1,300 9.591 ------- Total........................................... $11,900 ------- Grand Total..................................... $92,700 =======
28 Interest Rates The Company invests its cash in a variety of financial instruments, consisting principally of investments in commercial paper, interest-bearing demand deposit accounts with financial institutions, money market funds and highly liquid debt securities of corporations, municipalities and the U.S. Government. These investments are denominated in U.S. dollars. Cash balances in foreign currencies overseas are operating balances and are invested in short-term time deposits of the local operating bank. The Company accounts for its investment instruments in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, ("FAS 115"). All of the cash equivalents, short-term and long-term investments are treated as "available- for-sale" under FAS 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. However, the Company reduces its interest rate risk by investing its cash in instruments with short maturities. The Company's exposure, on its portfolio of marketable investments, to changes in short term interest rates is insignificant as of January 31, 2001 because the average holding period until maturity of the Company's cash equivalents and short-term investments was approximately 12 days. The table below presents the principal amount and related weighted average interest rates for the Company's investment portfolio. Short-term investments are all in fixed rate instruments. Table of investment securities (in thousands) at January 31, 2001:
Average Fair Interest Value Rate -------- -------- Cash and cash equivalents.................................. $907,635 6.17% Restricted cash............................................ 4,998 6.05% Short-term investments (0-1 year).......................... 33,294 6.42% Long-term investments (1 year)............................. 14,908 6.83% -------- Total cash and investment securities....................... $960,835 ========
The Company is exposed to changes in short term interest rates through a lease the company entered into on February 13, 2001, which includes a variable short-term interest rate based on LIBOR. The annual lease expense will fluctuate from time to time depending on changes in LIBOR. A 1.64% increase in LIBOR will generate an increase in annual lease expense of approximately $287,000 beginning in year 3 of the lease. Investments in equity securities The Company has made investments in several privately held companies totaling $67.1 million, several of which can still be considered in the start- up or development stages. These non-marketable investments are accounted for using the cost method as the Company does not have the ability to exercise significant influence. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. It is possible that the Company could lose its entire initial investment in these companies. As a part of management's process of regularly reviewing these investments for impairment, the Company recorded a write-down of $16.2 million of certain investments which were determined to be permanently impaired in the fourth quarter of fiscal 2001. 29 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. Supplementary Quarterly Financial Data (unaudited):
Quarter Ended --------------------------------------------------------------------------------------- January 31, October 31, July 31, April 30, January 31, October 31, July 31, April 30, ----------- ----------- -------- --------- ----------- ----------- -------- --------- 2001 2000 2000 2000 2000 1999 1999 1999 ----------- ----------- -------- --------- ----------- ----------- -------- --------- (in thousands, except per share data) Total revenues.......... $256,043 $224,014 $186,021 $153,682 $149,169 $126,454 $103,212 $85,575 Gross profit............ $188,069 $152,980 $123,443 $ 99,511 $104,546 $ 90,837 $ 73,257 $60,929 Net income (loss)....... $ 18,953 $ 8,243 $ 2,269 $(12,383) $(13,686) $ 145 $ (2,068) $(3,965) Net income (loss) per share: Basic.................. $ 0.05 $ 0.02 $ 0.01 $ (0.03) $ (0.04) $ 0.00 $ (0.01) $ (0.01) Diluted................ $ 0.04 $ 0.02 $ 0.01 $ (0.03) $ (0.04) $ 0.00 $ (0.01) (0.01)
30 BEA SYSTEMS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- AUDITED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors......................... 32 Consolidated Balance Sheets as of January 31, 2001 and 2000............... 33 Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended January 31, 2001, 2000 and 1999.......................... 34 Consolidated Statements of Stockholders' Equity for the years ended January 31, 2001, 2000 and 1999.......................................... 35 Consolidated Statements of Cash Flows for the years ended January 31, 2001, 2000 and 1999...................................................... 36 Notes to Consolidated Financial Statements................................ 37
31 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, 2001 and 2000 and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended January 31, 2001. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BEA Systems, Inc. at January 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Palo Alto, California February 21, 2001 32 BEA SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value)
January 31, ---------------------- 2001 2000 ---------- ---------- ASSETS Current assets: Cash and cash equivalents............................ $ 907,635 $ 763,294 Restricted cash...................................... 4,998 1,631 Short-term investments............................... 33,294 38,135 Accounts receivable, net of allowance for doubtful accounts of $9,399 and $5,512 at January 31, 2001 and 2000, respectively.............................. 214,706 133,069 Deferred tax assets.................................. 20,035 13,520 Other current assets................................. 26,223 21,728 ---------- ---------- Total current assets............................... 1,206,891 971,377 Property and equipment, net............................ 51,223 27,978 Goodwill, net of accumulated amortization of $78,392 and $19,200 at January 31, 2001 and 2000, respectively.......................................... 138,404 141,457 Acquired intangible assets, net........................ 52,288 61,600 Deferred tax assets.................................... 9,915 - Other long-term assets................................. 133,615 56,429 ---------- ---------- Total assets....................................... $1,592,336 $1,258,841 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................................... 15,233 14,848 Accrued liabilities.................................. 133,092 92,673 Accrued income taxes................................. 24,307 13,501 Deferred tax liabilities............................. - 13,520 Deferred revenues.................................... 203,947 96,537 Current portion of notes payable and other obligations......................................... 13,321 4,454 ---------- ---------- Total current liabilities.......................... 389,900 235,533 Deferred tax liabilities............................... 32,350 - Notes payable and other long-term obligations.......... 2,661 6,005 Convertible subordinated notes......................... 561,421 572,484 Commitments and contingencies Stockholders' equity: Common stock--$0.001 par value; 1,000,000 shares authorized; 390,196 and 290,568 shares issued and outstanding at January 31, 2001 and 2000, respectively........................................ 390 290 Class B common stock--$0.001 par value; 140,000 shares authorized; 0 and 71,296 shares issued and outstanding at January 31, 2001 and 2000, respectively........................................ - 71 Additional paid-in capital........................... 793,729 650,128 Accumulated deficit.................................. (185,873) (202,951) Notes receivable from stockholders................... (198) (296) Deferred compensation................................ (523) (1,144) Accumulated other comprehensive loss................. (1,521) (1,279) ---------- ---------- Total stockholders' equity......................... 606,004 444,819 ---------- ---------- Total liabilities and stockholders' equity......... $1,592,336 $1,258,841 ========== ==========
See accompanying notes 33 BEA SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share data)
Fiscal year ended January 31, ---------------------------- 2001 2000 1999 -------- -------- -------- Revenues: License fees................................... $476,573 $292,855 $193,511 Services....................................... 343,187 171,555 95,531 -------- -------- -------- Total revenues............................... 819,760 464,410 289,042 -------- -------- -------- Cost of revenues: Cost of license fees........................... 19,724 6,445 3,225 Cost of services............................... 197,567 98,005 57,167 Amortization of certain acquired intangible assets........................................ 38,466 30,391 23,290 -------- -------- -------- Total cost of revenues....................... 255,757 134,841 83,682 -------- -------- -------- Gross profit..................................... 564,003 329,569 205,360 Operating expenses: Sales and marketing............................ 335,501 211,445 138,926 Research and development....................... 89,247 60,972 42,584 General and administrative..................... 57,611 38,065 24,900 Amortization of goodwill....................... 59,192 15,764 2,981 Acquisition-related charges.................... 2,200 3,000 42,244 -------- -------- -------- Total operating expenses..................... 543,751 329,246 251,635 -------- -------- -------- Income (loss) from operations.................... 20,252 323 (46,275) Interest expense................................. (22,910) (20,417) (10,426) Interest income and other, net................... 50,120 14,437 9,975 -------- -------- -------- Income (loss) before provision for income taxes.. 47,462 (5,657) (46,726) Provision for income taxes....................... 30,380 13,917 4,856 -------- -------- -------- Net income (loss)................................ 17,082 (19,574) (51,582) Other comprehensive income (loss): Foreign currency translation adjustments....... (213) (395) 5 Unrealized loss on available-for-sale investments, net of income taxes.............. (29) (290) (8) -------- -------- -------- Comprehensive income (loss)...................... $ 16,840 $(20,259) $(51,585) ======== ======== ======== Net income (loss) per share: Basic.......................................... $ 0.05 $ (0.06) $ (0.18) ======== ======== ======== Diluted........................................ $ 0.04 $ (0.06) $ (0.18) ======== ======== ======== Shares used in computing net income (loss) per share: Basic.......................................... 377,070 310,817 280,988 ======== ======== ======== Diluted........................................ 412,700 310,817 280,988 ======== ======== ========
See accompanying notes 34 BEA SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Class Notes Accumulated B Additional receivable other Total Preferred Common common paid-in Accumulated from Deferred comprehensive stockholders' stock stock stock capital deficit stockholders compensation income (loss) equity --------- ------ ------ ---------- ----------- ------------ ------------ ------------- ------------- Balance at January 31, 1998.......... $ 1 $155 $121 $211,556 $(130,726) $(544) $ (601) $ (591) $ 79,371 Issuance of preferred stock... 3 - - 18,187 - - - - 18,190 Common shares issued under stock option and stock purchase plans.... - 14 - 13,354 (10) - (1,650) - 11,708 Conversion of preferred stock... (4) 16 - - (12) - - - - Conversion of Class B common stock............. - 50 (50) - - - - - - Amortization of deferred compensation...... - - - - - - 371 - 371 Cash distributions to Leader Group founders.......... - - - - (559) - - - (559) Losses from WebLogic for the month ended January 31, 1998.. - - - - (456) - - - (456) Net loss.......... - - - - (51,582) - - - (51,582) Foreign currency translation adjustment........ - - - - - - - 5 5 Unrealized losses on available-for- sale investments, net of tax........ - - - - - - - (8) (8) ---- ---- ---- -------- --------- ----- ------- ------- -------- Balance at January 31, 1999.......... - 235 71 243,097 (183,345) (544) (1,880) (594) 57,040 Issuance of common stock............. - 7 - 156,886 (4) - - - 156,889 Common shares issued under stock option and stock purchase plans.... - 14 - 27,820 (11) - - - 27,823 Conversion of debt obligations....... - 34 - 222,325 (17) - - - 222,342 Repayment of notes receivable from stockholders...... - - - - - 248 - - 248 Amortization of deferred compensation...... - - - - - - 736 - 736 Net loss.......... - - - - (19,574) - - - (19,574) Foreign currency translation adjustment........ - - - - - - - (395) (395) Unrealized losses on available-for- sale investments, net of tax........ - - - - - - - (290) (290) ---- ---- ---- -------- --------- ----- ------- ------- -------- Balance at January 31, 2000.......... - 290 71 650,128 (202,951) (296) (1,144) (1,279) 444,819 Issuance of common stock............. - 2 - 23,258 - - - - 23,260 Common shares issued under stock option and stock purchase plans.... - 25 - 85,725 (4) - - - 85,746 Conversion of Class B common stock............. - 71 (71) - - - - - - Conversion of debt obligations....... - 2 - 10,823 - - - - 10,825 Repayment of notes receivable from stockholders...... - - - - - 98 - - 98 Amortization of deferred compensation...... - - - - - - 621 - 621 Return of shares from escrow previously issued in connection with acquisitions...... - - - (2,060) - - - - (2,060) Tax benefit on stock options..... - - - 25,855 - - - - 25,855 Net income........ - - - - 17,082 - - - 17,082 Foreign currency translation adjustment........ - - - - - - - (213) (213) Unrealized losses on available-for- sale investments, net of tax........ - - - - - - - (29) (29) ---- ---- ---- -------- --------- ----- ------- ------- -------- Balance at January 31, 2001.......... $ - $390 $ - $793,729 $(185,873) $(198) $ (523) $(1,521) $606,004 ==== ==== ==== ======== ========= ===== ======= ======= ========
See accompanying notes 35 BEA SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal year ended January 31, ------------------------------- 2001 2000 1999 --------- --------- --------- Operating activities: Net income (loss)........................... $ 17,082 $ (19,574) $ (51,582) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation.............................. 12,782 7,309 4,377 Amortization of deferred compensation..... 621 736 371 Amortization of certain acquired intangible assets and goodwill and write- off of in-process research and development.............................. 99,858 49,155 66,643 Write-down of equity investments.......... 16,211 - - Amortization of debt issuance costs....... 2,195 1,189 661 Net gain on sale of WebGain preferred stock and note receivable................ (18,595) - - Debt conversion premium................... 236 8,054 - Other..................................... 4,170 (880) (1,275) Changes in operating assets and liabilities, net of business combinations: Accounts receivable..................... (78,121) (54,386) (28,856) Other current assets.................... (9,105) (9,365) (923) Other long-term assets.................. (12,617) (913) 311 Accounts payable........................ (130) 6,688 1,706 Accrued liabilities..................... 76,163 44,942 17,189 Deferred revenues....................... 107,631 62,231 18,821 Other long-term liabilities............. 6,909 - - --------- --------- --------- Net cash provided by operating activities..... 225,290 95,186 27,443 Investing activities: Property and equipment...................... (35,305) (17,807) (13,188) Payments for acquisitions, net of cash acquired, and other equity investments..... (107,897) (65,980) (99,432) Purchase of long-term investment security... (14,900) - - Decrease (increase) in restricted cash...... (3,367) 1,869 - Purchases of available-for-sale short-term investments................................ (186,889) (70,897) (1,374) Proceeds from maturities of available-for- sale short-term investments................ 191,701 32,867 6,187 --------- --------- --------- Net cash used in investing activities......... (156,657) (119,948) (107,807) Financing activities: Net payments under lines of credit.......... - (679) (1,200) Proceeds from convertible debt and other outstanding obligations.................... 7,878 535,352 244,698 Payments on outstanding obligations......... (11,825) (498) (45,717) Payments received on stockholder notes receivable................................. 98 248 - Distributions............................... - - (559) Debt conversion premiums.................... (236) (8,054) - Proceeds from issuance of common and preferred stock, net of issuance costs..... 85,746 27,823 23,902 --------- --------- --------- Net cash provided by financing activities..... 81,661 554,192 221,124 --------- --------- --------- Net increase in cash and cash equivalents..... 150,294 529,430 140,760 Effect of foreign exchange rate changes on cash......................................... (5,953) 1,308 812 Cash and cash equivalents at beginning of year......................................... 763,294 232,556 90,984 --------- --------- --------- Cash and cash equivalents at end of year...... $ 907,635 $ 763,294 $ 232,556 ========= ========= =========
See accompanying notes 36 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Significant Accounting Policies Description of business BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of e- business infrastructure software that helps companies of all sizes build e- business systems that extend investments in existing computer systems and provide the foundation for running a successful integrated e-business. BEA's customers use BEA products as a deployment platform for Internet-based applications, including custom-built and packaged applications, and as a means for robust enterprise application integration among mainframe, client/server and Internet-based applications. In addition, BEA provides Enterprise Java Bean ("EJB")-based components which perform functions such as personalization, shopping cart, order tracking, inventory and pricing that are used in developing custom applications. Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Operations of businesses acquired and accounted for as purchases are consolidated as of the date of acquisition. On April 30, 1998, the Company acquired Leader Group Inc. ("Leader Group") and on September 30, 1998 acquired WebLogic, Inc. ("WebLogic") in merger transactions accounted for as poolings of interests. All financial information for all dates and periods prior to these mergers has been restated to reflect the combined operations of the Company, Leader Group and WebLogic. Use of estimates The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ materially from those estimates. Foreign currencies The assets and liabilities of foreign subsidiaries are translated from their respective functional currencies at the rates in effect in the ending month of the period while revenues and expense accounts are translated at weighted average rates during the period. Foreign currency translation adjustments are reflected as a separate component of accumulated other comprehensive income (loss). The Company hedges a portion of its exposure on certain foreign currency denominated assets and liabilities, primarily intercompany amounts, using forward foreign exchange contracts, which are recorded at fair value based on spot exchange rates each month. Gains and losses resulting from exchange rate fluctuations on forward foreign exchange contracts are recorded currently in interest income and other, net and offset by the corresponding foreign exchange transaction gains and losses from the foreign currency denominated assets and liabilities being hedged. Net gains (losses) resulting from foreign currency transactions were approximately $(787,000), $287,000 and $340,000 in fiscal 2001, 2000 and 1999, respectively. Forward foreign currency are accounted for at fair value and recorded in cash and cash equivalents. Cash equivalents and short-term investments Cash equivalents consist of highly liquid investments including commercial paper, money market and taxable municipal bonds with maturities of 90 days or less from the date of purchase. The carrying amounts reported on the consolidated balance sheets for cash equivalents approximates their fair market value. Short-term investments consist principally of commercial paper and time deposits with remaining maturities of one year or less. The Company determines the appropriate classification of its investments at the time of 37 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) purchase and re-evaluates such designations as of each balance sheet date. All short-term investments and cash equivalents in the Company's portfolio are classified as "available-for-sale" and are stated at fair market value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income and other, net. Realized gains and losses and declines in value judged to be other-than- temporary on available-for-sale securities are included in the consolidated statements of operations and comprehensive income (loss). The cost of securities sold is based on the specific identification method. Interest and dividends on short-term investments classified as available-for-sale are included in interest income and other, net. Concentration of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of investments in debt securities and trade receivables. The Company invests its cash, cash equivalents and short-term investments in commercial paper rated A-1/P-1 or higher and money market instruments with financial institutions with high credit standing and, by policy, limits the amounts invested with any one institution, type of security and issuer. The Company sells its products to customers, typically large corporations, in a variety of industries in the Americas, Europe and the Asia/Pacific region. The Company performs ongoing credit evaluations of its customers' financial condition and limits the amount of credit extended as deemed appropriate, but generally requires no collateral. The Company maintains reserves for estimated credit losses and, to date, such losses have been within management's expectations. Future credit losses may differ from the Company's estimates and could have a material impact on the Company's future results of operations. No customer accounted for more than 10 percent of total revenues in any of the fiscal years 2001, 2000 or 1999. There were no customers that accounted for more than 10 percent of accounts receivable as of January 31, 2001, 2000 or 1999. The only geographic sub-region with revenues greater than 10 percent of total revenues in fiscal 2001 was the United Kingdom with 10.3 percent or $84.7 million. No one geographic sub-region outside of the United States accounted for more than 10% of total revenues in either fiscal 2000 or 1999. Property and equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives of the assets: Computer hardware and software 3 years Furniture and equipment 3 years Assets under capital leases are amortized over the lesser of three years or the life of the lease, while leasehold improvements are amortized over the shorter of five years or the lease term. 38 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Acquired intangible assets and goodwill Acquired intangible assets consist of purchased technology, purchased software, distribution rights, patents, licenses, trademarks, non-compete agreements, assembled workforce and customer base related to the Company's acquisitions accounted for using the purchase method. Amortization of these purchased intangibles and goodwill is calculated on the straight-line basis over the following estimated useful lives of the assets: Purchased technology 3-4 years Purchased software 3 years Patents, licenses and trademarks 4-5 years Non-compete agreements 2 years Assembled workforce 2-5 years Customer base 3 years Goodwill 2-5 years
Amortization of purchased technology, purchased software, distribution rights, patents, licenses, trademarks, non-compete agreements, assembled workforce and customer base is included as a component of cost of revenues, while amortization of goodwill is included in operating expenses. Acquired in- process research and development without alternative future use is charged to operations when acquired. Long-lived assets In accordance with Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed of ("FAS 121"), the Company identifies and records impairment losses, as circumstances dictate, on long-lived assets used in operations when events and circumstances indicate that the assets are impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business, a significant decrease in the benefits realized from the acquired business, or a significant change in the operations of the acquired business. If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. The Company's long-lived assets, consist primarily of acquired intangible assets, goodwill, equity investments and property and equipment. Changes in the economy, the business in which the Company operates and BEA's own relative performance could change the assumptions used to evaluate the recovery of goodwill and other intangible assets. BEA monitors the preceding factors to identify events or circumstances which would cause the Company to test for impairment and revise its assumptions on the estimated recovery of goodwill and intangible assets. Software development costs Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon the completion of a working model. Costs incurred by the Company between the completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly, the Company has charged all such costs to research and development expense in the period incurred. Equity investments The Company invests in equity and debt instruments of privately-held companies for business and strategic purposes. These investments are included in other long-term assets and are accounted for under the cost method when ownership is less than 20 percent and the Company does not have the ability to exercise significant 39 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) influence over operations. When BEA's ownership exceeds 20 percent but is less than 50 percent, the investment is accounted for under the equity method. Under the equity method, the investee's proportionate share of net income or loss and amortization of the investee's net excess investment over its equity in net assets is included in net income or loss. The Company regularly reviews the assumptions underlying the operating performance and cash flow forecasts in assessing the fair values. BEA monitors the preceding factors to identify events or circumstances which would cause the Company to test for other than temporary impairment and revise its assumptions for the estimated recovery of equity investments. Revenue recognition The Company recognizes revenues in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2, Software Revenue Recognition, as amended. Revenue from software license agreements is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectibility is probable. The Company uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date and evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements does not exist, revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established. When the Company enters into a license agreement requiring that the Company provide significant customization of the software products, the license and related consulting services revenue is recognized in accordance with AICPA Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. If the fee due from the customer is not fixed or determinable, revenue is recognized as cash is received from the customer, assuming all other revenue recognition criteria have been met. The Company considers all arrangements with payment terms longer than normal not to be fixed or determinable. Revenue arrangements with resellers are recognized on a sell-thru basis. Services revenue includes consulting services, post-contract customer support and training. Consulting revenue and the related cost of services are recognized on a time and materials basis; however, revenues from certain fixed-price contracts are recognized on the percentage of completion basis, which involves the use of estimates. Actual results could differ from those estimates and, as a result, future gross margin on such contracts may be more or less than anticipated. The amount of consulting contracts recognized on a percentage of completion basis has not been material to date. Software maintenance agreements provide technical support and the right to unspecified upgrades on an if-and-when available basis. Post-contract customer support revenue is recognized ratably over the term of the support period (generally one year) and training and other service revenues are recognized as the related services are provided. The unrecognized portion of amounts paid in advance for licenses and services is recorded as deferred revenues. Stock-based compensation The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair market value of the stock on the date of grant. As allowed under the Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation ("FAS 123"), the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for stock awards to employees. Accordingly, no compensation expense is recognized in the Company's financial statements in connection with employee stock awards where the exercise price of the award is equal to the fair market value of the stock at the date of the award. Net income (loss) per share The Company computes net income (loss) per share under the provisions of Statement of Financial Accounting Standard No. 128, Earnings per Share ("FAS 128"). Basic net income (loss) per share is computed 40 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) based on the weighted average number of shares of the Company's common stock less the weighted average number of shares subject to repurchase. Diluted net income (loss) per share is computed based on the weighted average number of shares of the Company's common stock and common equivalent shares (stock options and warrants, using the treasury stock method, and convertible notes and preferred stock, using the if-converted method), if dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations (in thousands, except per share data):
Fiscal year ended January 31, ---------------------------- 2001 2000 1999 -------- -------- -------- Numerator: Numerator for basic net income (loss) per share: Net income (loss)........................... $ 17,082 $(19,574) $(51,582) Numerator for diluted net income (loss) per share: Interest and amortization charges for 4% Convertible Subordinated Notes due June 15, 2005, net of taxes................... 509 - - -------- -------- -------- Net income (loss) available to common stockholders............................... $ 17,591 $(19,574) $(51,582) ======== ======== ======== Denominator: Denominator for basic net income (loss) per share: Weighted average shares outstanding....... 378,046 314,126 287,064 Weighted average shares subject to repurchase............................... (976) (3,309) (6,076) -------- -------- -------- Denominator for basic net income (loss) per share, weighted average shares outstanding.............................. 377,070 310,817 280,988 Weighted average dilutive potential common shares: Convertible shares on the 4% Convertible Subordinated Notes due June 15, 2005... 1,331 - - Options, warrants, shares subject to repurchase............................. 34,299 - - -------- -------- -------- Denominator for diluted net income (loss) per share.................................. 412,700 310,817 280,988 ======== ======== ======== Basic net income (loss) per share........... $ 0.05 $ (0.06) $ (0.18) ======== ======== ======== Diluted net income (loss) per share......... $ 0.04 $ (0.06) $ (0.18) ======== ======== ========
The computation of diluted net loss per share for the fiscal year ended January 31, 2001 excludes the impact of options to purchase 9.0 million shares of common stock and the conversion of the $550 million 4% Convertible Subordinated Notes due December 15, 2006 ("2006 Notes") which are convertible into 15.9 million shares of common stock at January 31, 2001, as such impact would be antidilutive for this period. The computation of diluted net loss per share for the fiscal year ended January 31, 2000 excludes the impact of options to purchase 52.3 million shares of common stock; the conversion of the $550 million 2006 Notes and the $250 million 4% Convertible Subordinated Notes due June 15, 2005 ("2005 Notes"), which were convertible into 15.9 million and 3.4 million shares of common stock, respectively, at January 31, 2000 as such impact would be antidilutive for this period. The computation of diluted net loss per share for the fiscal year ended January 31, 1999 excludes the impact of options to purchase 21.6 million shares of common stock; the conversion of the $250 million 2005 Notes, which were convertible into 37.9 million shares of common stock, at January 31, 1999, as such impact would be antidilutive for this period. 41 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Segment information The Company follows Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information ("FAS 131"). FAS 131 establishes standards for reporting financial information about operating segments in financial statements, as well as additional disclosures about products and services, geographic areas, and major customers. The Company operates in one operating segment, e-business infrastructure software. The Company's chief operating decision maker evaluates the performance of the Company based upon software product and service revenues by geographic segments disclosed in Note 13. Advertising costs The Company expenses advertising costs as incurred. Total advertising expenses were approximately $18.2 million, $9.9 million and $4.8 million in fiscal 2001, 2000 and 1999, respectively. Recent accounting pronouncements In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB Opinion No. 25, ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and, among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of the previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 was effective July 1, 2000. The application of FIN 44 has not had a material impact on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101") and amended it in March 2000. BEA was required to adopt the provisions of SAB 101 in its fourth quarter of fiscal 2001. The adoption of SAB 101 did not have a material impact on the Company's financial position or results of operations. In June 1998, the FASB released Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 establishes the accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. In July 1999, FAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Data of FASB Statement 133 ("FAS 137") was issued. FAS 137 deferred the effective date of FAS 133 until the first fiscal quarter of fiscal years beginning after June 15, 2000. The Company is required to adopt FAS 133 effective February 1, 2001. The Company does not expect the adoption of FAS 133 to have a material impact to its financial position or results of operations. Reclassification of accounts Certain prior year amounts have been reclassified to conform to the presentation adopted in the current year. Such reclassifications did not change the previously reported operating income (loss) or net income (loss) amounts. 42 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Financial Instruments Available-for-sale securities The following is a summary of available-for-sale securities at January 31, 2001 and 2000 (in thousands):
January 31, 2001 January 31, 2000 ----------------------------- ----------------------------- Gross Gross Amortized unrealized Fair Amortized unrealized Fair cost losses value cost losses value --------- ---------- -------- --------- ---------- -------- Commercial paper........ $367,069 $(494) $366,575 $311,782 $(151) $311,631 Money market............ 502,838 - 502,838 446,106 - 446,106 Time deposits........... - - - 602 - 602 -------- ----- -------- -------- ----- -------- $869,907 $(494) $869,413 $758,490 $(151) $758,339 ======== ===== ======== ======== ===== ========
Included in the above table are securities with fair values totaling $816.2 million and $718.5 million at January 31, 2001 and 2000, respectively, which are classified as cash and cash equivalents and $38.3 million and $39.8 million at January 31, 2001 and 2000, respectively, which are classified as restricted cash and short-term investments and $14.9 million at January 31, 2001 which is classified as a long-term asset in the accompanying consolidated balance sheets. All short-term investments mature within six months. At January 31, 2001 and 2000, restricted cash includes cash equivalents of $5.0 and $1.4 million, respectively, which is used as collateral on standby letters of credit and restricted time deposits of $0 and $250,000, respectively, which is used as collateral on borrowings (see Note 8). Foreign currency contracts The Company enters into forward foreign currency contracts to reduce the exposure to foreign currency transaction fluctuations as a result of certain foreign currency denominated assets and liabilities. The contracts are marked- to-market on a monthly basis and are not used for trading or speculative purposes. At January 31, 2001 and 2000, the Company had outstanding forward foreign currency contracts with notional amounts of approximately $92.7 million and $44.2 million, respectively. All of the Company's forward foreign currency contracts have maturities of 90 days or less. The Company's forward foreign currency contract notional amounts outstanding at January 31, 2001 and 2000 were as follows (in thousands):
January 31, --------------- 2001 2000 ------- ------- Contracts to sell foreign currency (purchase U.S. dollars) during the following year: Euros................................................... $35,300 $21,800 British pounds.......................................... - 10,300 Japanese yen............................................ 14,000 2,700 Canadian dollars........................................ 4,900 - Swiss francs............................................ - 2,800 Swedish krona........................................... - 3,200 Korean won.............................................. 5,400 - Australian dollars...................................... 2,700 600 ------- ------- $62,300 $41,400 ======= =======
43 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, -------------- 2001 2000 ------- ------ Contracts to purchase foreign currency (sell U.S. dollars) during the following year: Euros.................................................... $11,500 $2,000 British pounds........................................... 6,900 - Swiss francs............................................. 100 - Australian dollars....................................... - 800 ------- ------ $18,500 $2,800 ======= ====== Contracts to sell foreign currency (purchase Euros) during the following year: British pounds........................................... $ 6,600 $ - Swedish krona............................................ 1,300 - Swiss francs............................................. 4,000 - ------- ------ $11,900 $ - ======= ======
Fair value of financial instruments The carrying amounts and estimated fair values of the Company's financial instruments were as follows (in thousands):
January 31, --------------------------------------- 2001 2000 ------------------- ------------------ Carrying Fair Carrying Fair amount value amount value -------- --------- -------- -------- Financial assets: Cash and cash equivalents........ $907,635 $ 907,635 $763,294 $763,294 Restricted cash.................. 4,998 4,998 1,631 1,631 Short-term investments........... 33,294 33,294 38,135 38,135 Long-term investments (expected realization 1 year)............. 14,908 14,908 - - Financial liabilities: Notes payable, capital lease obligations and other long-term obligations (including current portion)........................ 15,982 15,982 10,459 10,459 Convertible subordinated 2006 Notes........................... 550,000 1,046,626 550,000 598,200 Convertible subordinated 2005 Notes........................... 11,421 114,075 22,484 128,400 Forward foreign currency contracts....................... (924) (924) (780) (780)
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented above are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The fair value of the 2005 Notes and 2006 Notes significantly exceeds the carrying amount at January 31, 2001, however, the Company's obligation to settle the notes will at no time be greater than their face or carrying value unless a discretionary debt conversion premium is negotiated with the holders of the notes. For certain of the Company's financial instruments, including cash and cash equivalents, restricted cash, short-term investments, and notes payable, the carrying amounts approximate fair value due to their short 44 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) maturities. The fair value of forward foreign currency contracts was based on the estimated amount at which they could be settled based on quoted exchange rates. The fair values of the convertible subordinated notes are estimated using quoted market prices. 3. Property and equipment Property and equipment consist of the following (in thousands):
January 31, ---------------- 2001 2000 ------- ------- Computer hardware and software............................. $34,384 $17,290 Furniture and equipment.................................... 17,916 11,722 Leasehold improvements..................................... 26,543 13,269 Furniture and equipment under capital leases............... 1,510 1,510 ------- ------- 80,353 43,791 Accumulated depreciation and amortization.................. (29,130) (15,813) ------- ------- $51,223 $27,978 ======= =======
Accumulated amortization for furniture and equipment under capital leases was approximately $1.2 million and $936,000 at January 31, 2001 and 2000, respectively. 4. Business Combinations Bauhaus Technologies On October 3, 2000, BEA purchased Bauhaus Technologies, Inc. ("Bauhaus"). The purchase price was approximately $19.8 million in cash. The acquisition includes contingent consideration of approximately $7.9 million, payable in cash, which will be earned based on achievement of performance goals. It is considered probable beyond a reasonable doubt that $5.6 million of this amount will be paid and, therefore, this amount has been included in the recorded purchase price of $19.8 million. The remaining $2.3 million of contingent consideration will be recorded when and if paid by BEA. As of January 31, 2001, $1.1 million of the purchase price is held in escrow for potential claims until October 2001. The acquisition was accounted for using the purchase method with a significant portion of the purchase price allocated to intangible assets. The following is a summary of the purchase price allocation (in thousands): Current assets and other tangible assets............................ $ 4,491 Liabilities assumed................................................. (3,611) Deferred taxes...................................................... (6,515) Goodwill............................................................ 8,445 Intangible assets................................................... 17,000 ------- $19,810 =======
The operating results of Bauhaus were immaterial and would not have materially altered the results of the Company if presented on a pro forma basis. 45 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Object People On April 19, 2000, the Company completed its acquisition of the services business of The Object People, Inc. ("TOP"). The purchase price was approximately $20.5 million in cash. As of January 31, 2001, $2.1 million of the purchase price was held in escrow for potential claims with expected payout in May 2001. The acquisition was accounted for using the purchase method with a significant portion of the purchase price allocated to intangible assets. The following is a summary of the purchase price allocation (in thousands): Current assets and other tangible assets............................ $ 3,611 Liabilities assumed................................................. (3,485) Goodwill............................................................ 12,274 Intangible assets................................................... 8,100 ------- $20,500 =======
The operating results of TOP were immaterial and would not have materially altered the results of the Company if presented on a pro forma basis. The Workflow Automation Corporation On March 21, 2000, BEA purchased The Workflow Automation Corporation ("Workflow") with a combination of $4.9 million in cash and the issuance of 470,718 shares of BEA common stock, valued at $49.41 per share. The acquisition was accounted for using the purchase method. As of January 31, 2001, approximately 86,920 shares were held in escrow for potential claims of which 55,320 shares were distributed in March 2001 with expected distribution of the remaining shares in September 2001. The total purchase price was approximately $28.6 million. The following is a summary of the purchase price allocation (in thousands): Current assets and other tangible assets............................ $ 817 Liabilities assumed................................................. (868) Deferred taxes...................................................... (2,400) Acquired in-process research and development........................ 2,200 Goodwill............................................................ 22,887 Intangible assets................................................... 6,000 ------- $28,636 =======
A valuation of the purchased assets was performed to assist in determining the fair value of each identifiable tangible and intangible asset and in allocating the purchase price among the acquired assets, including the portion of the purchase price attributed to acquired in-process research and development projects. Standard valuation procedures and techniques were utilized in determining the fair value of the acquired core/developed, in- process technology, non-compete agreements and assembled workforce. Core technology and in-process technology were identified and valued through analysis of Workflow's and BEA's current development projects, their respective stage of development, the time and resources needed to complete them, their expected income-generating ability, their target markets and the associated risks. The cost approach, which includes an analysis of the cost of reproducing or replacing the asset, was the methodology utilized in valuing component technology tools and assembled workforce. The income approach, 46 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows, was the methodology utilized in valuing in- process technology, completed technology, patents and non-compete agreements. Each developmental project was evaluated to determine if there were any alternative future uses. This evaluation consisted of a specific review of each project, including the overall objectives of the project, progress toward such objectives, and uniqueness of the project. The net after-tax cash flows representing the cash flows generated by the respective core and in-process technologies were then discounted to present value. The discount was based upon an analysis of the weighted average cost of capital for the industry. The operating results of Workflow were immaterial and would not have materially altered the results of the Company if presented on a pro forma basis. The Theory Center On November 19, 1999, BEA completed its acquisition of The Theory Center, Inc. ("TTC"). Under the terms of the acquisition agreement, each outstanding share of TTC common stock was converted into 0.7918276 shares of BEA common stock. This resulted in the issuance of 7,270,828 shares of BEA common stock, valued at $16.1875 per share. In addition, TTC options were exchanged for options to purchase 3,642,400 shares of BEA common stock and TTC warrants were exchanged for warrants to purchase 80,000 shares of BEA common stock. As of January 31, 2001, approximately 445,608 shares were held in escrow for potential claims, with distribution expected in May 2002. The transaction was accounted for as a purchase. The total cost of the acquisition was approximately $154.9 million. The following is a summary of the purchase price allocation (in thousands): Current assets and other tangible assets........................... $ 2,122 Liabilities assumed................................................ (6,495) Acquired in-process research and development....................... 3,000 Goodwill........................................................... 122,433 Intangible assets.................................................. 33,800 -------- $154,860 ========
A valuation of the purchased assets was performed to assist in determining the fair value of each identifiable tangible and intangible asset and in allocating the purchase price among the acquired assets, including the portion of the purchase price attributed to acquired in-process research and development projects. Standard valuation procedures and techniques were utilized in determining the fair value of the acquired core/developed and in- process technology. Core technology and in-process technology were identified and valued through analysis of TTC's and BEA's current development projects, their respective stage of development, the time and resources needed to complete them, their expected income-generating ability, their target markets and the associated risks. The cost approach, which includes an analysis of the cost of reproducing or replacing the asset, was the methodology utilized in valuing component technology tools and assembled workforce. The income approach, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows, was the methodology utilized in valuing in-process technology, completed technology, patents and non-compete agreements. Each developmental project was evaluated to determine if there were any alternative future uses. This evaluation consisted of a specific review of each project, including the overall objectives of the project, progress toward such objectives, and uniqueness of the project. The net after-tax cash flows representing the cash flows generated by the respective core and in-process technologies were then discounted to present value. The discount was based upon an analysis of the weighted average cost of capital for the industry. 47 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental pro forma information reflecting the acquisition of TTC as if it occurred at the beginning of each fiscal year (in thousands, unaudited):
Fiscal Year Ended January 31, ------------------- 2000 1999 -------- --------- Revenues................................................ $465,420 $ 289,042 Net loss................................................ $(59,029) $ (86,980) Net loss per share...................................... $ (0.19) $ (0.60)
This pro forma information assumes that the acquisition of TTC occurred as of the beginning of each fiscal period presented. Such information is not necessarily representative of the actual results that would have occurred for those periods. WebLogic, Inc. and Leader Group, Inc. On September 30, 1998 the Company issued 30,572,480 shares of its common stock to acquire WebLogic, Inc. ("WebLogic"), a San Francisco-based privately held software company, in a transaction accounted for as a pooling of interests. The Company's financial statements include WebLogic's results of operations and cash flows for all periods presented. On April 30, 1998, the Company issued 2,242,816 shares of its common stock to acquire Leader Group, Inc. ("Leader Group"), a Denver-based private company specializing in consulting solutions for the development, deployment and delivery of mission-critical distributed object applications, in a transaction accounted for as a pooling of interests. The Company's consolidated financial statements include the results of operations, financial position and cash flows of Leader Group for the periods presented. As required by generally accepted accounting principles, the effect of transactions between the Company, Leader Group and WebLogic prior to the combinations have been eliminated. There were no significant conforming accounting adjustments. TOP END On June 16, 1998, the Company completed an Asset Purchase Agreement with NCR Corporation ("NCR") under which the Company purchased the TOP END enterprise middleware technology and product family for approximately $92.4 million in cash. The Company has accounted for the acquisition as a purchase of assets. In connection with the purchase, the Company recorded a charge of $38.3 million relating to acquired in-process research and development. The following is a summary of the purchase price allocation (in thousands): Current assets and other intangible assets.......................... $ 7,907 Liabilities assumed................................................. (1,007) Acquired in-process research and development........................ 38,300 Goodwill............................................................ 7,700 Intangible assets................................................... 39,500 ------- $92,400 =======
48 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Acquired Intangible Assets Acquired intangible assets consist of the following (in thousands):
January 31, ------------------- 2001 2000 --------- -------- Purchased technology and software....................... $ 97,985 $ 95,603 Other intangibles....................................... 54,920 28,148 Trademarks and tradenames............................... 12,317 12,317 --------- -------- 165,222 136,068 Accumulated amortization ............................... (112,934) (74,468) --------- -------- $ 52,288 $ 61,600 ========= ========
6. Other Long-Term Assets Other assets consist of the following (in thousands):
January 31, ---------------- 2001 2000 -------- ------- Equity investment in WebGain, Inc.......................... $ 31,715 $37,000 Other equity investments in private companies.............. 19,209 1,060 Note receivable from WP Equity Partners, Inc. ............. 50,017 - Notes receivable from executive officers................... 700 1,787 Debt issuance costs........................................ 12,730 14,962 Other long-term assets..................................... 19,244 1,620 -------- ------- $133,615 $56,429 ======== =======
BEA has non-voting preferred stock (representing approximately 22.6 percent ownership interest) in WebGain, Inc. ("WebGain"), a private company. Other shareholders of WebGain include venture capital funds managed by E.M. Warburg, Pincus & Co., Inc., of which certain BEA directors are managing directors. To the extent that WebGain's aggregate losses exceed its common stockholders' equity, BEA would begin recognizing losses in a manner similar to the equity method of accounting, with such losses being limited to the extent of BEA's investment in WebGain. During fiscal 2001, the Company purchased investments in WebGain equity and debt securities of $23.0 million and sold investments in WebGain equity and debt securities of $28.3 million to WP Equity Partners, Inc. ("WP Equity Partners") in exchange for a note receivable due from WP Equity Partners in the amount of approximately $50.0 million with an annual interest rate of 7 percent. The terms of this sale also provide for additional payments upon the occurrence of certain events. The principal amount is due in full on January 31, 2003 and accrued interest is due on the last day of each March, June, September, and December, beginning March 31, 2001. The Company recorded a $18.6 million net gain in interest income and other, net. Aside from its investment in WebGain, during fiscal 2000 and 2001, the Company made a number of other strategic equity investments in privately-held companies amounting to a total investment of $34.3 million. The Company regularly reviews its portfolio of equity investments in private companies for impairment. In the fourth quarter of fiscal 2001, the Company concluded that a decline in value of the portfolio had occurred that was other than temporary. Accordingly, a write-down of these investments of approximately $16.2 million was recorded in interest income and other, net. At January 31, 2001, the Company's net investment in private equity investments, including the investment in WebGain, totaled $50.9 million. 49 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Notes receivable from executive officers of the Company are for the financing of real property. These notes, which are secured by deeds of trust on real property, bear interest at 7 percent per annum and are due and payable on the earlier of dates ranging from June 30, 2004 to December 23, 2004 or the termination of the executive's employment with the Company. The notes may be repaid at any time prior to the due date. During fiscal 2000, the Company incurred $14.6 million of debt issuance costs in connection with the issuance of the 2006 Notes (see Note 8). The costs are being amortized to interest expense over 84 months, the original life of the 2006 Notes. In fiscal 1999, the Company incurred $7.3 million of debt issuance costs in connection with the issuance of the 2005 Notes (see Note 8). During fiscal 2001 and 2000, approximately $11.1 million and $227.5 million, respectively, of the 2005 Notes were converted to common stock and related debt conversion premiums of approximately $236,000 and $8.1 million, respectively, were charged to interest expense. The debt issuance costs are being amortized to interest expense on a straight-line basis, which approximates the effective interest method over 84 months, the original life of the 2005 Notes. 7. Accrued Liabilities Accrued liabilities consist of the following (in thousands):
January 31, ---------------- 2001 2000 -------- ------- Accrued payroll and related liabilities.................... $ 60,282 $43,059 Accrued sales taxes........................................ 20,554 11,230 Other accrued liabilities.................................. 52,256 38,384 -------- ------- $133,092 $92,673 ======== =======
8. Line of Credit, Notes Payable and Other Long-Term Obligations Borrowings under lines of credit At January 31, 2001 and 2000, the Company had no line of credit agreements. Notes payable and other obligations Notes payable and other obligations consist of the following (in thousands):
January 31, ----------------- 2001 2000 -------- ------- Other notes payable and short-term obligations.......... $ 69 $ 36 Acquisition-related liabilities......................... 14,422 9,600 Other long-term obligations............................. 1,491 823 -------- ------- 15,982 10,459 Less amounts due within one year........................ (13,321) (4,454) -------- ------- Notes payable and other long-term obligations due after one year............................................... $ 2,661 $ 6,005 ======== =======
50 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Scheduled maturities of notes payable and other obligations are as follows (in thousands):
Principal Amount --------- Year ended January 31, 2002............................................................. $13,321 2003............................................................. 2,293 2004............................................................. 123 2005............................................................. 95 2006 and thereafter.............................................. 150 ------- $15,982 =======
Convertible subordinated debt offerings In December 1999, the Company completed the sale of the 2006 Notes in an offering to Qualified Institutional Buyers. The 2006 Notes are subordinated to all existing and future senior indebtedness of the Company. The principal amount of the 2006 Notes is convertible at the option of the holder at any time into common stock of the Company at a conversion rate of 28.86 shares per $1,000 principal amount of 2006 Notes (equivalent to an approximate conversion price of $34.65 per share). The 2006 Notes are redeemable at the option of the Company in whole or in part at any time on or after December 20, 2002, in cash plus accrued interest, if any, through the redemption date, subject to certain events. Interest is payable semi-annually. In June and July 1998, the Company completed the sale of the 2005 Notes in an offering to Qualified Institutional Buyers. The 2005 Notes are subordinated to all existing and future senior indebtedness of the Company. The principal amount of the 2005 Notes is convertible at the option of the holder at any time into common stock of the Company at a conversion rate of 151.48 shares per $1,000 principal amount of 2005 Notes (equivalent to an approximate conversion price of $6.60 per share). The 2005 Notes are redeemable at the option of the Company in whole or in part at any time on or after June 5, 2001, in cash plus accrued interest, if any, through the redemption date, subject to certain events. Interest is payable semi-annually. During fiscal 2001, approximately $11.1 million of the 2005 Notes were converted to common stock, leaving approximately $11.4 million as remaining principal. The Company incurred $236,000 million of debt conversion premium in fiscal 2001, which was charged to interest expense. During fiscal 2000, approximately $227.5 million of the 2005 Notes were converted to common stock. The Company incurred $8.1 million of debt conversion premium in fiscal 2000, which was charged to interest expense. 9. Income Taxes The components of the provisions for income taxes consist of the following (in thousands):
January 31, ------------------------- 2001 2000 1999 -------- ------- ------ Federal: Current......................................... $ 52,766 $ 5,731 $1,420 Deferred........................................ (52,622) (3,800) - State: Current......................................... 17,000 5,093 804 Deferred........................................ (10,888) - - Foreign: Current......................................... 24,124 6,893 2,632 -------- ------- ------ Provision for income taxes...................... $ 30,380 $13,917 $4,856 ======== ======= ======
51 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Pretax income (loss) from foreign operations was approximately $32.1 million, $(25.2) million, and $(25.7) million for fiscal 2001, 2000 and 1999, respectively. The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rate (35 percent) to income tax expense is as follows (in thousands):
January 31, ---------------------------- 2001 2000 1999 -------- -------- -------- Tax benefit at U.S. statutory rate........... $ 16,612 $ (1,980) $(16,355) State income taxes, net of federal benefit... 3,973 3,310 523 Nondeductible amortization of intangible assets...................................... 14,389 2,336 6,511 Purchase adjustment.......................... - 11,830 - Valuation allowance.......................... (18,156) (16,585) 8,316 Unbenefitted foreign losses.................. - 5,173 3,442 Foreign income and withholding taxes......... 14,493 6,893 1,056 Nondeductible transaction expenses........... - 2,819 1,036 Other........................................ (931) 121 327 -------- -------- -------- Provision for income taxes................. $ 30,380 $ 13,917 $ 4,856 ======== ======== ========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows (in thousands):
January 31, ------------------- 2001 2000 --------- -------- Deferred tax assets: Deferred revenue........ $ 32,248 $ 8,486 Accruals and reserves... 20,074 13,195 Net operating loss carryforwards.......... 84,469 525 Property, equipment and intangible assets...... 38,550 26,319 Other................... 657 - --------- -------- Subtotal.................. 175,998 48,525 Valuation allowance....... (168,483) (44,725) --------- -------- Total deferred tax assets................... $ 7,515 $ 3,800 --------- -------- Deferred tax liabilities: U.S. deferred taxes for unremitted foreign earnings............... (9,915) - --------- -------- Net deferred tax assets/(liabilities)... $ (2,400) $ 3,800 ========= ========
Realization of deferred tax assets is primarily dependent on future taxable income, if any, the timing and amount of which is uncertain in part due to the potential impact of future stock option deductions. Accordingly, a valuation allowance, in an amount equal to the net deferred tax assets dependent upon future taxable income at January 31, 2001 and 2000, has been established to reflect these uncertainties. The valuation allowance increased by approximately $123.8 million and $322,000 in fiscal years 2001 and 2000, respectively. Approximately $158.6 million and $25.5 million of the valuation allowance at January 31, 2001 and 2000, respectively, relates to tax benefits associated with exercises of stock options which will reduce income taxes payable and be credited to additional paid-in capital when realized. 52 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of January 31, 2001, the Company had federal net operating loss carryforwards of approximately $206.2 million, which will expire in 2009 through 2021. Utilization of net operating loss carryforwards may be subject to substantial limitations due to ownership change and other limitations provided by the Internal Revenue Code and similar state provisions. These limitations may result in the expiration of net operating loss carryforwards before full utilization. 10. Stockholders' Equity Share activity The following table represents changes in outstanding shares of preferred and common stock:
Class B Preferred Common common (in thousands) stock stock stock - -------------- --------- ------- ------- Balance at January 31, 1998....................... 2,408 155,008 120,896 Issuance of preferred and common stock............ 14,476 764 - Shares issued under stock option and stock purchase plans................................... - 14,292 - Repurchase of common shares....................... - (1,268) - Conversion of preferred stock..................... (16,884) 16,884 - Conversion of Class B common stock................ - 49,600 (49,600) ------- ------- ------- Balance at January 31, 1999....................... - 235,280 71,296 Issuance of common stock.......................... - 7,272 - Shares issued under stock option and stock purchase plans................................... - 13,552 - Conversion of debt obligations.................... - 34,464 - ------- ------- ------- Balance at January 31, 2000....................... - 290,568 71,296 Issuance of common stock.......................... - 1,969 - Conversion of Class B common stock................ - 71,296 (71,296) Shares issued under stock option and stock purchase plans................................... - 24,754 - Repurchase of common shares....................... - (48) - Return of shares from escrow previously issued in connection with acquisitions..................... - (127) - Shares issued from exercise of warrant............ - 109 - Conversion of debt obligations.................... - 1,675 - ------- ------- ------- Balance at January 31, 2001....................... - 390,196 - ======= ======= =======
Stock splits In each of December 1999 and April 2000, the Company completed two-for-one common stock splits in the form of a stock dividend. All common stock share information and per share amounts in the accompanying consolidated financial statements and notes have been retroactively adjusted to reflect the effect of these stock splits. Common stock In July 1999, the Company's stockholders approved an amendment to the Company's Certificate of Incorporation to increase the authorized shares of common stock and Class B common stock from 482,060,000 shares to 1,140,000,000 shares which is adjusted for the two-for-one stock splits on December 1999 and April 2000 per stockholder approval of an amendment in April 2000. 53 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company has issued shares of its common stock to certain employees of the Company, pursuant to which the Company has the right to repurchase shares of common stock sold to such employees at the original issuance price upon the employee's termination of employment. The repurchase option of these shares expires monthly over a four-year period, subject to acceleration upon the occurrence of certain events. As of January 31, 2001, approximately 226,000 shares were subject to the Company's right of repurchase. The Company has reserved shares of common stock for future issuance at January 31, 2001, as follows (in thousands): Shares reserved for Incentive Stock Option Plans.................... 102,693 Shares reserved for Employee Stock Purchase Plan.................... 6,132 Outstanding warrants................................................ 458 Shares reserved for conversion of convertible notes payable (2005 Notes and 2006 Notes).............................................. 17,603 ------- Total common stock reserved for future issuance................... 126,886 =======
Outstanding warrants, which are exercisable as of January 28, 1998 to September 24, 1999, have exercise prices ranging from $0.31 to $0.56 per share with expiration dates ranging from January 28, 2003 to September 24, 2004. Class B common stock In March 1997, BEA's Board of Directors authorized 140 million shares of an additional class of common stock (Class B common stock). The Class B common stock has the same rights, preferences, privileges and restrictions as the common stock, except that each share of Class B common stock is convertible into one share of common stock, has no voting rights except as required by Delaware law and has no right to vote for the election of directors. The shares of Class B common stock are convertible at the option of the holder into common stock, provided that such conversion does not result in the converting stockholder holding more than 49 percent of the Company's outstanding voting securities. The shares of Class B common stock could be automatically converted into a like number of shares of common stock upon the occurrence of certain events. During fiscal 2001, all remaining outstanding shares of Class B common stock were converted into common stock. Deferred compensation In fiscal 1999, the Company recorded deferred compensation of approximately $1.7 million, for certain common stock options granted at prices below the deemed fair market value of the Company's common stock on the date of grant. The deferred compensation is being amortized as compensation expense over the vesting period of the underlying stock options. For the fiscal years ended January 31, 2001, 2000 and 1999, compensation expense recognized totaled $621,000, $736,000 and $371,000, respectively. Stockholder notes receivable In September 1995, the Company issued 12,200,000 shares of common stock to certain officers in exchange for cash of $325,000 and notes receivable of $544,000. The notes receivable are issued on full recourse terms and bear interest at 7 percent compounded semi-annually. The notes receivable are due on or before January 31, 2002 or within a specified period of time following termination of employment with the Company. In fiscal 2001 and 2000, $98,000 and $248,000, respectively, of these notes were repaid to the Company. 54 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Employee Benefit Plans Stock option plans Under the Company's stock option plans, incentive and nonqualified stock options may be granted to eligible participants to purchase shares of the Company's common stock. Options generally vest over a four-year period and have terms of up to ten years. Annually, the number of shares available in the plan is automatically increased by an amount up to six percent of the outstanding shares of common stock on the last day of the immediately preceding fiscal year less the number of shares of common stock added to the stock purchase plan, not to exceed 24 million shares per fiscal year. The exercise price of the stock options is determined by the Company's Board of Directors on the date of grant and must be at least equal to the fair market value of the stock on the grant date. Upon the merger of BEA and WebLogic, all of the WebLogic outstanding stock options were converted into BEA stock options. All such options were immediately exercisable on the date of grant and are subject to vesting; however, certain options became fully vested upon the merger. The Company has the right to repurchase unvested shares, which right lapses ratably over the vesting period. Information with respect to option activity under the Company's stock option plans are summarized as follows:
Weighted average exercise Exercise price Options price per per (shares in thousands) outstanding share share --------------------- ----------- ------------- -------- Options outstanding at January 31, 1998................................... 40,072 $ 0.01-$ 6.04 $ 1.00 Granted............................... 19,132 $ 2.50-$ 7.04 $ 5.00 Exercised............................. (8,328) $ 0.03-$ 5.00 $ 0.38 Canceled.............................. (4,660) $ 0.07-$ 6.75 $ 3.60 ------- Options outstanding at January 31, 1999................................... 46,216 $ 0.03-$ 7.04 $ 2.56 Granted............................... 42,746 $ 0.07-$41.35 $ 8.56 Exercised............................. (10,235) $ 0.03-$ 6.75 $ 1.62 Canceled.............................. (11,041) $ 0.03-$34.97 $ 4.54 ------- Options outstanding at January 31, 2000................................... 67,686 $ 0.03-$41.35 $ 6.17 Granted............................... 14,820 $29.33-$85.56 $48.53 Exercised............................. (20,486) $ 0.01-$58.19 $ 3.10 Canceled.............................. (6,731) $ 0.07-$85.56 $ 4.54 ------- Options outstanding at January 31, 2001................................... 55,289 $ 0.07-$85.56 $16.97 ======= Options exercisable at January 31, 2001................................... 17,925 $ 0.07-$83.50 $ 5.06 ======= Options exercisable at January 31, 2000................................... 18,564 $ 0.03-$41.35 $ 1.71 ======= Options exercisable at January 31, 1999................................... 15,740 $ 0.03-$ 7.03 $ 0.84 ======= Options available for grant at January 31, 2001............................... 47,404 =======
The weighted average grant date fair value of stock options was $35.80, $8.79 and $3.55 in fiscal years 2001, 2000 and 1999, respectively. 55 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information about outstanding and exercisable stock options at January 31, 2001:
Outstanding Exercisable --------------------------- --------------- Weighted average remaining Weighted Weighted Number contractual average Number average of life (in exercise of exercise (shares in thousands) shares years) price shares price --------------------- ------ ----------- -------- ------ -------- Range of per share exercise prices $0.07-$1.50.................. 5,813 6.10 $ 0.70 5,440 $ 0.69 $1.58-$3.81.................. 6,093 7.78 $ 3.37 2,612 $ 3.41 $3.84-$4.33.................. 8,738 8.19 $ 4.17 3,227 $ 4.17 $4.33-$5.89.................. 6,759 7.70 $ 5.36 2,775 $ 5.26 $5.95-$6.72.................. 5,799 8.12 $ 6.45 1,750 $ 6.38 $6.75-$24.75................. 6,822 8.68 $13.29 1,443 $11.55 $28.17-$37.69................ 6,097 9.06 $34.43 669 $32.68 $37.88-$59.63................ 5,656 9.44 $46.18 8 $41.34 $61.00-$83.50................ 3,376 9.77 $68.14 1 $62.97 $85.56....................... 136 9.73 $85.56 - $ - ------ ------ 55,289 17,925 ====== ======
Employee stock purchase plan In March 1997, the Company's stockholders approved an Employee Stock Purchase Plan (the "ESPP Plan") for all employees meeting certain eligibility criteria. Under the ESPP Plan, employees may purchase shares of the Company's common stock, subject to certain limitations, at 85 percent of the lower of the closing sale price of BEA's Common Stock reported on the Nasdaq National Market ("Nasdaq") at the beginning or the end of each six-month offering period. Additionally, the price paid by the employee will not exceed 85% of the closing sale price as reported on Nasdaq at the beginning of a 24 month period that restarts in January and July of every second year determined by the employee's enrollment date in the plan. Eligible employees may purchase common stock through payroll deductions by electing to have between 1% and 15% of their compensation withheld. Annually, the number of shares available in the ESPP Plan automatically increase by an amount equal to six percent of the outstanding shares of common stock on the last day of the immediately preceding fiscal year less the number of shares of common stock added to the stock option plan, not to exceed 24 million shares per fiscal year. Approximately, 4.3 million, 3.3 million and 6.0 million shares for proceeds of $22.8 million, $11.0 million and $6.9 million were sold through the ESPP Plan in fiscal 2001, 2000 and 1999, respectively. At January 31, 2001, 16.1 million shares had been issued under the ESPP Plan and 6.1 million shares were reserved for issuance. 401(k) plan The Company has a 401(k) Profit Sharing Plan (the "401K Plan") that allows eligible employees to contribute up to 15 percent of their annual compensation to the 401K Plan, subject to certain limitations. The Company matches employee contributions at a rate of 3 percent of salary, up to a maximum of $3,000. Employee contributions vest immediately, whereas the Company's matching contributions vest at a rate of 25 percent per year of employment. The 401K Plan also allows the Company to make discretionary contributions; however, none have been made to date. The Company recognized matching contribution expense of $1.4 million, $838,000 and $0 in fiscal 2001, 2000 and 1999, respectively. 56 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Accounting for stock-based compensation The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the Company's financial statements. Pro forma information regarding net loss and net loss per share is required by FAS 123. This information is required to be determined as if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called "stock based awards") granted subsequent to January 31, 1995, under the fair value method of that statement. The fair value of the Company's stock based awards granted to employees in fiscal years 1998 and 1997, prior to the Company's initial public offering, was estimated using the minimum value method. Stock based awards granted in fiscal years 2001, 2000 and 1999, subsequent to the Company's initial public offering, have been valued using the Black-Scholes option pricing model. Among other things, the Black-Scholes model considers the expected volatility of the Company's stock price, determined in accordance with FAS 123, in arriving at an option valuation. The minimum value method does not consider stock price volatility. Further, certain other assumptions necessary to apply the Black-Scholes model may differ significantly from assumptions used in calculating the value of stock based awards granted in fiscal years 1998 and 1997 under the minimum value method. The fair value of the Company's stock based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
Employee stock Employee stock options purchase plan ---------------- ---------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- Expected life (in years)................ 4.30 4.30 4.71 .5 .5 .5 Risk-free interest rate................. 5.99% 5.93% 5.14% 5.68% 5.62% 5.10% Expected volatility..................... .98 .81 .66 .98 .81 .66 Dividends............................... - - - - - -
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because the Company's stock based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its stock based awards. For purposes of pro forma disclosures, the estimated fair value of the above stock-based awards is amortized to expense over the awards' vesting period. The Company's pro forma information follows (in thousands, except per share amount):
January 31, ----------------------------- 2001 2000 1999 --------- -------- -------- Pro forma net loss.......................... $(109,979) $(61,707) $(86,884) Pro forma basic and diluted net loss per share...................................... $ (0.29) $ (0.20) $ (0.31)
57 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows (in thousands):
January 31, ---------------- 2001 2000 ------- ------- Foreign currency translation adjustment................... $(1,175) $ (962) Unrealized loss on available-for-sale investments, net of tax of $12 and $124 in fiscal 2001 and 2000, respectively............................................. (346) (317) ------- ------- Total accumulated other comprehensive loss................ $(1,521) $(1,279) ======= =======
The related income tax effect allocated to each component of other comprehensive income (loss) are as follows (in thousands):
Amount Income Amount before tax net of tax benefit taxes ------ ------- ------ Fiscal 2001 Foreign currency translation adjustment........... $(213) $ - $(213) Unrealized loss on available-for-sale investments...................................... (41) 12 (29) ----- ---- ----- Total other comprehensive loss.................. $(254) $ 12 $(242) ===== ==== ===== Fiscal 2000 Foreign currency translation adjustment........... $(395) $ - $(395) Unrealized loss on available-for-sale investments...................................... (414) 124 (290) ----- ---- ----- Total other comprehensive loss.................. $(809) $124 $(685) ===== ==== ===== Fiscal 1999 Foreign currency translation adjustment........... $ 5 $ - $5 Unrealized loss on available-for-sale investments...................................... (12) 4 (8) ----- ---- ----- Total other comprehensive income (loss)......... $ (7) $ 4 $ (3) ===== ==== =====
13. Geographic Segment Information Information regarding the Company's operations by geographic areas at January 31, 2001, 2000 and 1999 and for the fiscal years then ended is as follows (in thousands):
January 31, -------------------------- 2001 2000 1999 -------- -------- -------- Total revenues: United States.................................. $478,634 $276,755 $173,305 Europe, Middle East and Africa................. 240,137 141,097 93,825 Asia/Pacific and other......................... 100,989 46,558 21,912 -------- -------- -------- $819,760 $464,410 $289,042 ======== ======== ======== Long-lived assets (at end of year): United States (1).............................. $352,787 $264,865 $340,481 Europe, Middle East and Africa................. 5,936 3,610 44,407 Asia/Pacific and other......................... 16,807 18,989 18,123 -------- -------- -------- $375,530 $287,464 $403,011 ======== ======== ========
- -------- (1) Long-lived assets include all long-term assets except those specifically excluded under SFAS No. 131, such as deferred income taxes. 58 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company assigns revenues to geographic areas based on the location from which the invoice is generated. The only geographic sub-region with revenues greater than 10 percent of total revenues in fiscal 2001 was the United Kingdom with 10.3 percent or $84.7 million. No one geographic sub-region outside the United States accounted for more than 10% of total revenues in both fiscal 2000 and 1999. No one geographic sub-region outside the United States accounted for more than 10% of total long-lived assets in any of fiscal 2001, 2000 and 1999. 14. Supplemental Cash Flow Disclosures Cash payments for interest were $22.4 million (exclusive of the debt conversion premium of $236,000), $11.0 million (exclusive of the debt conversion premium of $8.1 million), and $7.2 million in fiscal 2001, 2000 and 1999, respectively. Cash payments for income taxes were approximately $285,000, $6.3 million and $1.6 million for fiscal 2001, 2000 and 1999, respectively. In fiscal 2001 and 2000, the convertible holders converted approximately $11.1 million and $227.5 million of the 2005 Notes into common stock. The value of stock issued in connection with business acquisitions in fiscal 2001 and 2000 was $23.3 million and $117.7 million. During fiscal 2001, the Company sold of $10.3 million of the carrying value of its investment in WebGain and transferred a $18.0 million convertible note plus accrued interest to WP Equity Partners, LP in exchange for a note receivable due from WP Equity Partners in the amount of approximately $50.0 million. 15. Commitments and Contingencies Operating Leases The Company leases its facilities under operating lease arrangements with remaining terms ranging from less than 1 year up to 10.5 years. The Company entered into agreements to sublease portions of this space. Certain of the leases provide for specified annual rent increases as well as options to extend the lease beyond the initial term for additional terms ranging from 2 to 15 years. Approximate annual minimum operating lease commitments and sublease rental income are as follows (in thousands):
Sublease January 31, Commitments income ----------- ----------- -------- 2002.................................................. $ 26,182 $2,168 2003.................................................. 26,568 763 2004.................................................. 25,213 40 2005.................................................. 22,723 - 2006.................................................. 26,390 - Thereafter............................................ 55,254 - -------- ------ Total minimum lease payments........................ $182,330 $2,971 ======== ======
Total rent expense charged to operations for the fiscal years ended January 31, 2001, 2000 and 1999 was approximately $24.2 million, $16.9 million and $11.8 million, respectively. Rental income for the facilities under sublease was $4.2 million and $3.6 million for the fiscal years ended January 31, 2001 and 2000, respectively, and insignificant for the fiscal year ended January 31, 1999. Capital leases The company has equipment under capital lease for which the remaining payments of principal and interest are not significant. 59 BEA SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Litigation The Company is subject to legal proceedings and claims that arise in the ordinary course of its business. While management currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect the financial position, results of operations, or liquidity of the Company, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur, the impact could be material to the Company. Employer Payroll Taxes The Company is subject to employer payroll taxes when employees exercise stock options. The payroll taxes are assessed on the stock option gain, which is the difference between the common stock price on the date of exercise and the exercise price. The tax rate varies depending upon the employees' taxing jurisdiction. The timing and amount of employer payroll taxes is directly related to the timing and number of options exercised by employees, the gain thereon and the tax rate in the applicable jurisdiction. During fiscal 2001 and 2000, the Company recorded employer payroll taxes related to stock option exercises of approximately $13.3 million and $2.0 million, respectively. Because the Company is unable to predict these employer payroll taxes the Company is unable to predict what, if any, expense will be recorded in a future period. 16. Related Party Transactions During fiscal 2000, the Company extended two $5.0 million unsecured lines of credit to certain officers of the Company. As of January 31, 2001 and 2000, there were no outstanding borrowings under the lines of credit. As of January 31, 2001 and 2000, accrued interest on promissory notes to executive officers included in current assets totaled $136,000 and $371,000, respectively. 17. Subsequent Events (unaudited) During the first quarter of fiscal 2002, the Company entered into a lease agreement for the lease of approximately 40 acres of land adjacent to the Company's headquarters in San Jose, California to construct additional corporate offices and research and development facilities. The lease has an initial term of five years with renewal options. Rent obligations commence at the beginning of the third year. The total approximate minimum lease payments for the next five years are currently estimated to be approximately $0 in fiscal 2002 and 2003 and $17.5 million in fiscal 2004, 2005 and 2006, respectively. The minimum lease payments will fluctuate from time to time depending on short term interest rates. The Company has an option to purchase the land at the end of the term of the lease for the lesser of $331 million or the outstanding lease balance or, prior to the end of the lease, to arrange for the sale of the property to a third party with the Company retaining an obligation to the owner for the difference between the sales price and the guaranteed residual value up to $328.7 million if the sales price is less than this amount, subject to certain provisions of the lease. As part of the lease transaction, the Company has restricted approximately $330 million of its investment securities as collateral for specified obligations to the lessor under the lease. The investment securities are restricted as to withdrawal and are managed by a third party subject to certain limitations. The Company must maintain certain covenants, as defined in the lease. In February 2001, the Company sold additional shares of WebGain Series A Preferred Stock to WP Equity Partners, further reducing the Company's ownership interest to below 20 percent. In accordance with the agreement regarding the sale of the Company's investment in WebGain executed in January 2001, the Company recorded an additional gain of $18.0. See Note 6. 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors and executive officers of the Company is incorporated by reference to the sections entitled "Election of Directors," "Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement with respect to the Registrant's 2001 Annual Meeting to be filed with the SEC within 120 days of January 31, 2001 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information in the sections entitled "Executive Compensation and Related Information" and "Election of Directors" and related information in the Proxy Statement is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in the section entitled "Certain Relationships and Related Transactions" and the Proxy Statement is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as a part of this Report (1) Index to Financial Statements The index to the financial statements included in Part II, Item 8 of this document is filed as part of this Report. (2) Financial Statement Schedules The financial statement schedule included in Part II, Item 8 of this document is filed as part of this Report. All of the other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. (3) Exhibits
Exhibit Description ------- ----------- 2.1(5) Agreement and Plan of Reorganization among BEA Systems, Inc., WebLogic, Inc. and Charlotte acquisition Corp., dated as of September 24, 1998 2.1(8) Asset Purchase Agreement by and between NCR Corporation and BEA Systems, Inc. 3.1(3) Form of Registrant's Amended and Restated Certificate of Incorporation 3.2(1) Registrant's Bylaws, as currently in effect along with Certificate of Amendment of Bylaws
61
Exhibit Description ------- ----------- 3.3(10) Form of Registrant's Amended and Restated Certificate of Incorporation 4.1(1) Investor Rights Agreements by and among the Registrant and the investors and the founders named therein 4.3(4) Form of Indenture Agreement for the 4% Convertible Notes due June 15, 2005 4.4(4) Form of Promissory Note for the 4% Convertible Notes due June 15, 2005 4.5(4) Form of Purchase Agreement for the 4% Convertible Notes due June 15, 2005 4.6(4) Form of Registration Rights Agreement for the 4% Convertible Notes due June 15, 2005 4.7(9) Form of Indenture Agreement for the 4% Convertible Notes due December 15, 2006 4.8(9) Form of Promissory Note for the 4% Convertible Notes due December 15, 2006 4.9(9) Form of Purchase Agreement for the 4% Convertible Notes due December 15, 2006 4.10(9) Form of Registration Rights Agreement for the 4% Convertible Notes due December 15, 2006 10.1(1)* Form of Indemnification Agreement between the Registrant and each of its executive officers and directors 10.1(5) Agreement and Plan of Reorganization among BEA Systems, Inc. and WebLogic, Inc. and Charlotte Acquisition Corp., dated as of September 24, 1998. 10.1(7) Stock Purchase Agreement among BEA Systems, Inc. and Leader Group, Inc., Jeffrey D. Peotter, Jeffrey M. Ryan, Kenneth R. Allen and Shareholders. 10.1(1)* Employment Agreement between the Registrant and the three founders dated as of September 28, 1995 10.2(1) Form of Promissory Notes entered into between the Registrant, William T. Coleman III, Edward W. Scott, Jr. and Alfred S. Chuang each dated September 28, 1995 10.3(1) Promissory Note secured by deed of trust entered into between the Registrant and Edward W. Scott, Jr. and Cheryl S. Scott, dated December 12, 1995 10.4(1) Agreement between the Registrant and Novell, dated January 24, 1996, and Amendments thereto 10.5(1) Lease Agreement between the Registrant and William H. and Leila A. Cilker dated November 15, 1995 and First Amendment thereto 10.6(1) Stock Purchase Agreement between the Registrant and Warburg, Pincus Ventures, L.P. dated September 28, 1995, and Amendments thereto 10.7(1)* Registrant's 1995 Flexible Stock Incentive Plan, including forms of agreements thereunder 10.8(3)* Registrant's 1997 Stock Incentive Plan, including forms of agreements thereunder 10.9(3)* Registrant's 1997 Employee Stock Purchase Plan, including forms of agreements thereunder 10.10(1) Subordinated Bridge Line of Credit between the Registrant and Warburg, Pincus Ventures, L.P., dated January 22, 1997 10.11(2) License Agreement between the Registrant and Digital Equipment Corporation, dated January 31, 1997 and Amendments thereto 10.12(2)* 1997 Management Bonus Plan 10.13(6) Lease agreement between the Registrant and Sobrado Interest III for premise located at 2315 North First Street, San Jose, dated December 26, 1997 10.14(6) Lease agreement between the Registrant and Sobrado Interest III for premise located at 2345 North First Street, San Jose, dated December 26, 1997 10.15(10)* Employment Agreement between the Registrant and Alfred S. Chuang dated as of September 1, 1999 10.16(10)* Employment Agreement between the Registrant and William T. Coleman III dated as of September 1, 1999 10.17(10) Promissory Note secured by deed of trust entered into between the Registrant and Joe Menard and Laura Menard, dated December 15, 1999
62
Exhibit Description ------- ----------- 10.18(10) Lease agreement between the Registrant and Russ Building for premise located at 235 Montgomery Street, San Francisco, dated September 24, 1999 10.19(10) First amendment to lease between the Registrant and Russ Building for premise located at 235 Montgomery Street, San Francisco, dated March 15, 2000 10.20(10)* Registrant's 2000 Non-Qualified Stock Incentive Plan, including forms of agreements thereunder 10.21(10) Promissory Note secured by deed of trust entered into between the Registrant and Ivan Koon and Irene Li-Ping Chueng, dated December 7, 1999 10.22 Form of Lease agreement between the Registrant and ABN AMRO Leasing, Inc., dated February 13, 2001 10.23 2001 Executive Staff Bonus Plan 10.24 Registrant's Amended 1997 Employee Stock Purchase Plan 11.1 Statement re: computation of loss per share (included on page 41 of this Report) 12.1 Ratio of Earnings to Fixed Charges 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors
- -------- (1) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form SB-2, filed January 31, 1997 (2) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form SB-2/A, filed March 20, 1997 (3) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form SB-2/A, filed April 3, 1997 (4) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form S-3, filed September 9, 1998 (5) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form S-3, filed October 30, 1998 (6) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form 10-KSB, filed April 30, 1998 (7) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form S-3, filed August 10, 1998 (8) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form 8-K, filed June 30, 1998 (9) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form S-3, filed March 13, 2000 (10) Incorporated by reference to such exhibit as filed in the Registrant's Registration Statement on Form 10-K, filed May 1, 2000 * Denotes a management contract or compensatory plan or arrangement. (b) Reports on Form 8-K and 8-K/A [Reports on Form 8-K and 8-K/A were not filed by the Company during the last quarter of the fiscal year ended January 31, 2001.] 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BEA Systems, Inc. /s/ William T. Coleman III William T. Coleman III Chief Executive Officer and Chairman of the Board April 30, 2001 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ William T. Coleman III Chief Executive Officer April 30, 2001 ------------------------------------ and Chairman of the Board William T. Coleman III /s/ Alfred S. Chuang President, Chief April 30, 2001 ------------------------------------ Operating Officer Alfred S. Chuang and Director /s/ William M. Klein Chief Financial Officer April 30, 2001 ------------------------------------ and Executive Vice President-- Administration William M. Klein /s/ Carol A. Bartz Director April 30, 2001 ------------------------------------ Carol A. Bartz /s/ Cary J. Davis Director April 30, 2001 ------------------------------------ Cary J. Davis /s/ Stewart K. P. Gross Director April 30, 2001 ------------------------------------ Stewart K. P. Gross /s/ William H. Janeway Director April 30, 2001 ------------------------------------ William H. Janeway /s/ Robert L. Joss Director April 30, 2001 ------------------------------------ Robert L. Joss /s/ Dean O. Morton Director April 30, 2001 ------------------------------------ Dean O. Morton
64 BEA SYSTEMS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS Year Ended January 31, 2001, 2000 and 1999 (in thousands)
Balance at Balance at beginning end of of period Additions Deductions period ---------- --------- ---------- ---------- January 31, 2001 Allowance for doubtful accounts.... $5,512 $5,045 $1,158 $9,399 January 31, 2000 Allowance for doubtful accounts.... $3,661 $3,312 $1,461 $5,512 January 31, 1999 Allowance for doubtful accounts.... 2,033 2,806 1,178 3,661
65 EX-10.22 2 dex1022.txt FORM OF LEASE AGREEMENT, DATED FEB. 13, 2001 EXHIBIT 10.22
- ----------------------------------------------------------------------------------------------- Recording requested by, and when recorded, please return to: McGuireWoods LLP 77 West Wacker Drive Suite 4500 Chicago, Illinois 60601 ATTN: W. Kirk Grimm, Esq. - ----------------------------------------------------------------------------------------------- (Space Above This Line Reserved for Recorder's Use Only)
================================================================================ MASTER LEASE dated as of February 13, 2001 between ABN AMRO LEASING, INC., as the Lessor and BEA SYSTEMS, INC., as the Lessee San Jose, California Facility ================================================================================ This Lease is superior to a deed of trust in favor of ABN AMRO Bank, N.V., as Agent (the "Agent") under the Participation Agreement dated as of ----- February 13, 2001 among the Lessee, the Lessor, the Participants and the Agent for the benefit of the Participants. This Lease has been executed in counterparts. To the extent, if any, that this Lease constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no lien on this Lease may be created through the transfer or possession of any counterpart other than the original counterpart containing the receipt therefor executed by the Agent on the signature page hereof. TABLE OF CONTENTS -----------------
Page ---- ARTICLE I.................................................................. 1 1.1 Definitions; Interpretation........................................ 1 ARTICLE II................................................................. 1 2.1 Acceptance and Lease of Property................................... 1 2.2 Acceptance Procedure............................................... 2 2.3 Lease Term......................................................... 2 2.4 Title.............................................................. 2 2.5 Appointment........................................................ 2 2.6 Acceptance; Construction........................................... 2 ARTICLE III................................................................ 2 3.1 Rent............................................................... 2 3.2 Payment of Basic Rent.............................................. 3 3.3 Supplemental Rent.................................................. 3 3.4 Method of Payment.................................................. 3 ARTICLE IV................................................................. 3 4.1 Utility Charges.................................................... 3 ARTICLE V.................................................................. 4 5.1 Quiet Enjoyment.................................................... 4 ARTICLE VI................................................................. 4 6.1 Net Lease.......................................................... 4 6.2 No Termination or Abatement........................................ 5 ARTICLE VII................................................................ 5 7.1 Nature of Transaction; Intent of the Parties....................... 5 7.2 UCC Information.................................................... 8 ARTICLE VIII............................................................... 9 8.1 Condition of the Property.......................................... 9 8.2 Possession and Use of the Property................................. 9 ARTICLE IX................................................................. 10 9.1 Compliance with Requirements of Law and Insurance Requirements..... 10 ARTICLE X.................................................................. 10 10.1 Maintenance and Repair; Return..................................... 10 ARTICLE XI................................................................. 11 11.1 Improvements....................................................... 11
i ARTICLE XII................................................................ 11 12.1 Warranty of Title.................................................. 11 12.2 Grants and Releases of Easements................................... 11 ARTICLE XIII............................................................... 12 13.1 Permitted Contests Other Than in Respect of Indemnities............ 12 ARTICLE XIV................................................................ 13 14.1 General Liability and Workers' Compensation Insurance.............. 13 14.2 Reserved........................................................... 13 14.3 Coverage........................................................... 13 ARTICLE XV................................................................. 14 15.1 Casualty and Condemnation.......................................... 14 15.2 Environmental Matters.............................................. 16 15.3 Notice of Environmental Matters.................................... 16 ARTICLE XVI................................................................ 16 16.1 Termination upon Certain Events.................................... 16 16.2 Procedures......................................................... 17 16.3 Purchase of Property............................................... 18 ARTICLE XVII............................................................... 18 17.1 Lease Events of Default............................................ 18 17.2 Remedies........................................................... 21 17.3 Waiver of Certain Rights........................................... 25 17.4 Further Remedies................................................... 25 17.5 Remedies Cumulative................................................ 29 17.6 The Lessee's Right to Cure......................................... 30 ARTICLE XVIII.............................................................. 30 18.1 The Lessor's Right to Cure the Lessee's Lease Defaults............. 30 ARTICLE XIX................................................................ 30 19.1 Provisions Relating to the Lessee's Termination of this Lease or Exercise of Purchase Option or Obligation and Conveyance Upon Remarketing and Conveyance Upon Certain Other Events.......... 30 ARTICLE XX................................................................. 31 20.1 Purchase Option.................................................... 31 20.2 Expiration Date Purchase Obligation................................ 32 20.3 Acceleration of Purchase Obligation................................ 32 ARTICLE XXI................................................................ 33 21.1 Renewal............................................................ 33 ARTICLE XXII............................................................... 33 22.1 Option to Remarket................................................. 33
ii 22.2 Certain Obligations Continue....................................... 36 22.3 Support Obligations................................................ 37 ARTICLE XXIII.............................................................. 37 23.1 Holding Over....................................................... 37 ARTICLE XXIV............................................................... 38 24.1 Risk of Loss....................................................... 38 ARTICLE XXV................................................................ 39 25.1 Subletting and Assignment.......................................... 39 ARTICLE XXVI............................................................... 39 26.1 Estoppel Certificates.............................................. 39 ARTICLE XXVII.............................................................. 39 27.1 Right to Inspect................................................... 39 27.2 No Waiver.......................................................... 40 ARTICLE XXVIII............................................................. 40 28.1 Acceptance of Surrender............................................ 40 ARTICLE XXIX............................................................... 40 29.1 No Merger of Title................................................. 40 ARTICLE XXX................................................................ 40 30.1 Notices............................................................ 40 ARTICLE XXXI............................................................... 42 31.1 Miscellaneous...................................................... 42 31.2 Amendments and Modifications....................................... 42 31.3 Successors and Assigns............................................. 42 31.4 Headings and Table of Contents..................................... 42 31.5 Counterparts....................................................... 42 31.6 GOVERNING LAW...................................................... 42 31.7 Limitations on Recourse............................................ 42 31.8 Original Lease..................................................... 43
iii APPENDICES APPENDIX I Definitions and Interpretation EXHIBITS EXHIBIT A Form of Lease Supplement EXHIBIT B Legal Description of Land iv MASTER LEASE THIS MASTER LEASE (as amended, supplemented or otherwise modified from time to time, this "Lease"), dated as of February 13, 2001 is by and between ABN AMRO ----- LEASING, INC., an Illinois corporation, having its principal office at 135 S. LaSalle Street Chicago, Illinois 60603, as the lessor (together with its permitted successors and assigns, the "Lessor") and BEA SYSTEMS, INC., a ------ Delaware corporation, having its principal office at 2315 North First Street, San Jose, CA 95131, as the lessee (the "Lessee"). ------ W I T N E S S E T H: - - - - - - - - - - A. WHEREAS, the Lessor will purchase the Land Interest on the Land Interest Acquisition Date, and the Land Interest will be leased to the Lessee subject to the terms of this Lease; and B. WHEREAS, the Lessor desires to lease to the Lessee and the Lessee desires to lease from the Lessor, the Property pursuant to this Lease. C. WHEREAS, the leasing of the Land Interest is an initial step in what is intended to be a series of transactions between the Lessor and the Lessee and/or between the Lessee and a third party. After the Lessor acquires the Land Interest and leases it to Lessee, the Land Interest will be subdivided into three separate parcels, the Lessor (or another third party lessor) will construct an office building on each such parcel and, upon completion of construction, each element of the improved Property will be leased to the Lessee by the Lessor or another third party lessor pursuant to other documentation satisfactory to such parties. NOW, THEREFORE, in consideration of the foregoing, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I. 1.1 Definitions; Interpretation. Capitalized terms used but not --------------------------- otherwise defined in this Lease have the respective meanings specified in Appendix 1 to this Lease; and the rules of interpretation set forth in Appendix - ---------- -------- 1 to this Lease shall apply to this Lease. - - ARTICLE II. 2.1 Acceptance and Lease of Property. Effective as of the Closing Date, -------------------------------- the Lessor, subject to the satisfaction or waiver of the conditions set forth in Section 6 of the Participation Agreement, hereby agrees to accept delivery of the Land Interest to be delivered on the Land Interest Acquisition Date pursuant to the terms of the Participation Agreement, and to lease to the Lessee hereunder for the Term (as defined in Section 2.3), the Lessor's interest in ----------- such Land Interest and the Lessee hereby agrees, expressly for the direct benefit of the Lessor, to lease commencing on the Lease Commencement Date from the Lessor for the Term, the Lessor's interest in such Land Interest to be delivered on such Land Interest Acquisition Date. 2.2 Acceptance Procedure. The Lessor hereby authorizes one or more -------------------- employees of the Lessee, to be designated by the Lessee, as the authorized representative or representatives of the Lessor to accept delivery on behalf of the Lessor of the Property identified on the Acquisition Request. The Lessee hereby agrees that such acceptance of delivery by such authorized representative or representatives and the execution and delivery by the Lessee on the Land Interest Acquisition Date of a Lease Supplement in the form of Exhibit A hereto --------- (appropriately completed) shall, without further act, constitute the irrevocable acceptance by the Lessee of the Land Interest which is the subject thereof for all purposes of this Lease and the other Operative Documents on the terms set forth therein and herein. 2.3 Lease Term. The term of this Lease (the "Term") with respect to the ---------- ---- Land Interest shall consist of (i) an agency term (the "Agency Term") beginning ----------- on the Land Interest Acquisition Date and ending on the earlier of (A) the Completion of Construction, or (B) the second anniversary of the Closing Date, and (ii) a basic term (the "Basic Term") commencing on the day following the ---------- last day of the Agency Term, and ending on the fifth anniversary of the Closing Date, unless the Term is renewed or earlier terminated in accordance with the provisions of this Lease. 2.4 Title. The Property is leased to the Lessee without any ----- representation or warranty of title, condition of the Property or permitted uses, express or implied, by the Lessor and subject to the rights of parties in possession, the existing state of title (including, without limitation, the Permitted Exceptions) and all applicable Requirements of Law. The Lessee shall in no event have any recourse against the Lessor for any defect in or exception to title to the Property, other than for any such defect or exception constituting a Lessor Lien. 2.5 Appointment. Pursuant to and subject to the terms and conditions set ----------- forth herein, the Lessor hereby irrevocably designates and appoints the Lessee as its exclusive agent for the identification and acquisition of the Land Interest and to oversee the design and construction of those Improvements the Existing Owner is obligated to design and construct in accordance with the Property Purchase Agreement. The Lessor hereby authorizes the construction of the Improvements by the Existing Owner pursuant to the Property Purchase Agreement. 2.6 Acceptance; Construction. The Lessee hereby unconditionally agrees ------------------------ to act as agent of Lessor in accordance with Section 2.5 above. The Lessee will ----------- use commercially reasonable efforts to cause the Existing Owner to design and construct the Improvements to be designed and constructed on the Property in accordance with the Property Purchase Agreement and equipped in compliance with all Requirements of Law. ARTICLE III. 3.1 Rent. (a) During the Term, the Lessee shall pay Basic Rent on each ---- Payment Date, on the date required under Section 22.1(i) in connection with the --------------- Lessee's exercise of the Remarketing Option and on any date on which this Lease shall terminate. Prior to the Basic Term Commencement Date the Advances shall accrue interest and yield which shall be capitalized and paid as Advances pursuant to the Participation Agreement. From and after the Basic Term Commencement Date, Basic Rent shall be payable in cash. 2 (b) Neither the Lessee's inability or failure to take possession of all or any portion of the Property when delivered by the Lessor, nor the Lessor's inability or failure to deliver all or any portion of the Property to the Lessee on or before the Lease Commencement Date, whether or not attributable to any act or omission of the Lessee or any act or omission of the Lessor, or for any other reason whatsoever, shall delay or otherwise affect the Lessee's obligation to pay Rent for the Property. 3.2 Payment of Basic Rent. Basic Rent shall be paid absolutely net to --------------------- the Lessor, so that this Lease shall yield to the Lessor the full amount thereof, without setoff, deduction or reduction, whether or not the Lessee's quiet possession of the Property is disturbed. 3.3 Supplemental Rent. The Lessee shall pay to the Lessor or the Person ----------------- entitled thereto any and all Supplemental Rent promptly as the same shall become due and payable, and if the Lessee fails to pay any Supplemental Rent, the Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. The Lessee shall pay to the Lessor, as Supplemental Rent, among other things, on demand, to the extent permitted by Applicable Law, interest at the applicable Overdue Rate on any installment of Basic Rent not paid when due for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by the Lessor for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid. The expiration or other termination of the Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of the Lessee with respect to Supplemental Rent. Unless expressly provided otherwise in this Lease, in the event of any failure on the part of the Lessee to pay and discharge any Supplemental Rent as and when due, the Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added under any agreement with a third party for nonpayment or late payment of such Supplemental Rent, all of which shall also constitute Supplemental Rent. 3.4 Method of Payment. Each payment of Rent shall be made by the Lessee ----------------- to the Lessor by 12:00 noon, Chicago time at the place of payment designated by Agent in funds consisting of lawful currency of the United States of America which shall be immediately available on the scheduled date when such payment shall be due, unless such scheduled date shall not be a Business Day, in which case such payment shall be made on the next succeeding Business Day or as otherwise required by the definition of the term "Interest Period" set forth in Appendix 1 hereto. Payments initiated after 12:00 noon, Chicago time shall be deemed received on the next succeeding Business Day for purposes of the second sentence of Section 3.3 hereof, but shall be deemed received on the same day for ----------- purposes of Section 17.1 hereof. ------------ ARTICLE IV. 4.1 Utility Charges. Subject to the Lessee's rights under the terms of --------------- Article XIII relating to permitted contests, the Lessee shall pay or cause to be paid all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents and utilities used in or on the Property during the Term. The Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by the Lessee and the amount of any credit or refund received by the Lessor on account of any utility charges paid by the Lessee, net of the costs and expenses reasonably incurred by the Lessor in obtaining such credit or refund, shall be promptly 3 paid over to the Lessee. All charges for utilities imposed with respect to the Property for a billing period during which this Lease expires or terminates shall be adjusted and prorated on a daily basis between the Lessor and the Lessee, and each party shall pay or reimburse the other for each party's pro rata share thereof, except that to the extent the Lessee retains possession of the Property after termination or expiration of this Lease, no such adjustment and proration shall be made. Prior to the Lease Commencement Date, all amounts payable under this Section 4.1 shall be capitalized and paid as Advances pursuant to the Participation Agreement. After the Lease Commencement Date, such amounts shall be payable in cash. ARTICLE V. 5.1 Quiet Enjoyment. Subject to the rights of the Lessor contained in --------------- Section 17.2 and the other terms of this Lease and so long as no Lease Event of - ------------ Default shall have occurred and be continuing, the Lessee shall peaceably and quietly have, hold and enjoy the Property for the Term, free of any claim or other action by the Lessor or anyone rightfully claiming by, through or under the Lessor (other than the Lessee) with respect to any matters arising from and after the Lease Commencement Date. ARTICLE VI. 6.1 Net Lease. This Lease shall constitute a net lease. It is the --------- further express intent of the Lessor and the Lessee that the obligations of the Lessor and the Lessee hereunder shall be separate and independent covenants and agreements and that the Basic Rent and Supplemental Rent, and all other charges and sums payable by the Lessee hereunder, shall commence at the times provided herein and shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to an express provision in this Lease. Any present or future law to the contrary notwithstanding, this Lease shall not terminate, nor shall the Lessee be entitled to any abatement, suspension, deferment, reduction, setoff, counterclaim, or defense (other than the defense of payment) with respect to the Rent, nor shall the obligations of the Lessee hereunder be affected (except as expressly herein permitted and by performance of the obligations in connection therewith) by reason of: (i) any defect in the condition, merchantability, design, construction, quality or fitness for use of the Property or any part thereof, or the failure of the Property to comply with all Requirements of Law and Insurance Requirements, including any inability to occupy or use the Property by reason of such non-compliance; (ii) any damage to, removal, abandonment, salvage, loss, contamination of or Release from, scrapping or destruction of, or any requisition or taking of the Property or any part thereof; (iii) any restriction, prevention or curtailment of or interference with any use of the Property or any part thereof including eviction; (iv) any defect in title to or rights to the Property or any Lien on such title or rights or on the Property (other than Lessor Liens); (v) any change, waiver, extension, indulgence or other action or omission or breach in respect of any obligation or liability of or by the Lessor, the Agent or any Participant; (vi) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to the Lessee, the Lessor, the Agent, any Participant or any other Person, or any action taken with respect to this Lease by any trustee or receiver of the Lessee, the Lessor, the Agent, any Participant or any other Person, or by any court, in any such proceeding; (vii) any claim that the Lessee has or might have against any Person, including without limitation the Lessor, any vendor, manufacturer, contractor of or for the Property, the Agent or any Participant; (viii) any 4 failure on the part of the Lessor to perform or comply with any of the terms of this Lease, any other Operative Document or any other agreement; (ix) any invalidity or unenforceability or illegality or disaffirmance of this Lease, against or by the Lessee or any provision hereof or any of the other Operative Documents or any provision of any thereof; (x) the impossibility or illegality of performance by the Lessee, the Lessor or both; (xi) any action by any court, administrative agency or other Governmental Authority; (xii) any restriction, prevention or curtailment of or interference with the construction on or any use of the Property or any part thereof; or (xiii) any other cause or circumstances whether similar or dissimilar to the foregoing and whether or not the Lessee shall have notice or knowledge of any of the foregoing. The parties intend that the obligations of the Lessee hereunder shall be covenants and agreements that are separate and independent from any obligations of the Lessor hereunder or under any other Operative Document and the obligations of the Lessee shall continue unaffected unless such obligations shall have been modified or terminated in accordance with an express provision of this Lease. 6.2 No Termination or Abatement. The Lessee shall remain obligated --------------------------- under this Lease in accordance with its terms and shall not take any action to terminate (except as provided herein), rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other proceeding affecting the Lessor, the Agent, any Participant or the Lessee or any action with respect to this Lease or any Operative Document which may be taken by any trustee, receiver or liquidator of the Lessor, the Agent, any Participant or the Lessee or by any court with respect to the Lessor, the Agent or any Participant. The Lessee hereby waives, to the extent permitted by Applicable Law, all right (i) to terminate or surrender this Lease (except as provided herein) or (ii) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense (other than the defense of payment) with respect to any Rent. The Lessee shall remain obligated under this Lease in accordance with its terms and the Lessee hereby waives, to the extent permitted by Applicable Law, any and all rights now or hereafter conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, the Lessee shall be bound by all of the terms and conditions contained in this Lease. ARTICLE VII. 7.1 Nature of Transaction; Intent of the Parties. (a) It is the intent -------------------------------------------- of the parties hereto that: (i) this Lease constitutes an "operating lease" pursuant to Statement of Financial Accounting Standards No. 13, as amended and interpreted, for purposes of the Lessee's financial reporting, and (ii) for purposes of federal, state, local and foreign Taxes, including without limitation income or franchise taxes (and any other tax imposed on or measured by income, including any withholding taxes), and documentary, intangibles, and transfer taxes, the transaction contemplated hereby is a financing arrangement and preserves ownership in the Property in the Lessee. Each of the Parties agrees that it will not, nor will any Person controlled by it, or under common control with it, directly or indirectly, at any time take any action or fail to take any action with respect to the filing of any Tax return, report or other statement, including any income or franchise tax return or amended income or franchise tax return, inconsistent with the intention of the parties expressed in this Section 5.1(a) unless, in the case of Lessor or any Participant, required to do so by an appropriate taxing authority or after a clearly applicable change in law or as a protective response to a proposed adjustment by a Governmental Authority, 5 provided, however, that if an appropriate taxing authority shall require Lessor or any Participant to claim any tax attributes or benefits, such Person shall promptly notify Lessee thereof and shall permit Lessee to contest such requirement in a manner consistent with the contest provisions of Section 13.5(f) of the Participation Agreement. Nevertheless, the Lessee acknowledges and agrees that neither the Agent, the Lessor nor any Participant has made any representations or warranties to the Lessee concerning the tax, accounting or legal characteristics of the Operative Documents and that the Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. (b) Anything to the contrary in the Operative Documents notwithstanding, the Lessor and the Lessee intend and agree that with respect to the nature of the transactions evidenced by this Lease in the context of federal, state, local and foreign Taxes and in the context of the exercise of remedies under the Operative Documents, including, without limitation, in the case of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof or any foreign country affecting the Lessee, the Lessor, or any Participant or any enforcement or collection actions arising out of or relating to bankruptcy or insolvency laws, (i) the transactions evidenced by this Lease shall be deemed to be loans made by the Lessor and the Participants as unrelated third party lenders to the Lessee secured by the Property, (ii) the obligations of the Lessee under this Lease to pay Basic Rent, Supplemental Rent, Asset Termination Value, Purchase Option Price, Partial Purchase Option Price or the Residual Value Guarantee Amount in connection with a purchase of the Property pursuant to this Lease shall be treated as payments of interest on and principal of, respectively, loans from the Lessor and the Participants to the Lessee, and (iii) this Lease grants a security interest and mortgage or deed of trust or lien, as the case may be, in the Property to the Lessor and assigned by the Lessor to the Agent for the benefit of the Participants to secure the Lessee's performance under and payment of all amounts under this Lease and the other Operative Documents. (c) Specifically, without limiting the generality of subsections ----------- (a) and (b) of this Section 7.1 and Section 7.2, the parties hereto intend and - ----------- ----------- ----------- agree that, for purposes of filing federal, state and local returns, reports and other statements relating to income or franchise taxes, or any other taxes imposed upon or measured by income, (i) the Lessee shall be entitled to take any deduction, credit, allowance or other reporting position consistent with its status as owner of the Property; and (ii) neither the Lessor nor any Participant shall take an initial position on its federal, state and local returns, reports and other statements relating to income or franchise taxes that is inconsistent with the Lessee's status as owner of the Property. (d) [Reserved] (e) In the event that, after the date hereof, the UCC as enacted and in effect in any applicable jurisdiction shall be revised or amended or amendments thereto shall become effective, the Lessee, the Lessor, the Agent and the Participants shall negotiate in good faith to enter into such amendments to the Operative Documents as may be reasonably necessary or desirable to reflect or otherwise address such revisions or amendments. 6 (f) Specifically, without limiting the generality of subsection (b) of Section 7.1, in order to secure the Lessee's obligation to pay Basic ----------- Rent, Supplemental Rent, Asset Termination Value, the Residual Value Guarantee Amount, the Purchase Option Price, the Partial Purchase Option Price and all other obligations owing by the Lessee under the Operative Documents (the "Obligations"), the Lessee hereby grants, conveys, sells, transfers, assigns and ----------- sets over unto Chicago Title Insurance Company, as trustee (as "Trustee") for the benefit of Lessor, WITH POWER OF SALE and right of entry and possession, all of the Lessee's right, title and interest in and to the following (collectively, the "Collateral"): ---------- (i) all right, title and interest of the Lessee in and to the Property or any part thereof and the reversions, remainders, rents, issues and profits thereof; (ii) all right, title and interest of the Lessee in and to all substitutes and replacements of, and all additions and improvements to, any Improvements and the Fixtures, subsequently acquired by the Lessee or constructed, assembled or placed on the Land Interest, immediately upon such acquisition, release, construction, assembling or placement, including, without limitation, any and all building materials whether stored at the Property or offsite, and, in each such case, without any further mortgage, conveyance, assignment or other act by the Lessee; (iii) all right, title and interest of the Lessee in, to and under all books and records relating to or used in connection with the operation of the Property or any Fixtures or any part thereof; (iv) all right, title and interest of the Lessee in and to all insurance policies (including title insurance policies) required to be maintained by the Lessee pursuant to this Lease, including the right to collect and receive such proceeds; and all awards and other compensation, including the interest payable thereon and the right to collect and receive the same, made to the owner of the Property for the taking by eminent domain, condemnation or otherwise, of all or any part of the Property or any easement or other right therein; (v) all right, title and interest of the Lessee in and to (i) all consents, licenses, building permits, certificates of occupancy and other governmental approvals relating to construction, completion, occupancy, use or operation of the Property or any part thereof, provided that any such consent, license, permit, -------- certificate or approval that by its terms or by operation of law would become void, voidable, terminable or revocable or would result in a breach or default thereunder or under any applicable law if subjected to the lien granted pursuant to this clause (v) is ---------- expressly excepted and excluded from this clause (v) to the extent ---------- necessary to avoid such result, and (ii) all plans and specifications relating to the Property, in each case to the extent assignable; (vi) all Rent and all other rents, payments, purchase prices, receipts, revenues, issues and profits payable under this Lease or pursuant to any other lease with respect to the Property; 7 (vii) all proceeds, both cash and noncash, of the foregoing and any items acquired in substitution of, or replacement for, any of the foregoing; and (viii) all right, title and interest of the Lessee in and to all of the Operative Documents, including, without limitation, the Lease Supplement, regardless of whether the interest of the Lessee therein is that of lessee, sublessee, sublessor or borrower. 7.2 UCC Information. --------------- (a) Specifically, without limiting the generality of subsection (b) of Section 7.1, the Lessor and the Lessee further intend and agree that, for ----------- the purpose of securing the Lessee's obligations for the repayment of the above- described loans from the Lessor and the Participants to the Lessee, (i) this Lease shall also be deemed to be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code, a fixture filing and a real property mortgage or deed of trust of the Property; (ii) the conveyance provided for in Article II shall be deemed to be a grant by the Lessee to the Lessor, assigned by the Lessor to the Agent for the benefit of the Participants, of a mortgage lien and security interest in all of the Lessee's right, title and interest in and to the Property and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property (it being understood that the Lessee hereby mortgages and grants a security interest in the Property to Lessor to secure such loans); (iii) the possession by the Lessor or any of its agents of any notes and such other items of the Collateral as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the Uniform Commercial Code; and (iv) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of the Lessee shall be deemed to have been given for the purpose of perfecting such security interest under Applicable Law. The Lessor and the Lessee shall, to the extent consistent with this Lease, take such actions and execute, deliver, file and record such other documents, financing statements, mortgages and deeds of trust as may be necessary to ensure that, if this Lease were deemed to create a security interest in the Property in accordance with this Section, such security interest would be deemed to be a perfected security interest of first priority under Applicable Law and will be maintained as such throughout the Term. (b) For the purposes of the security agreement and financing statement provided herein the following information applies: (i) Name and Address of BEA Systems, Inc. Debtor: 2315 North First Street San Jose, CA 95131 (ii) Name and Address ABN AMRO Leasing, Inc. of Secured Party: 135 South LaSalle Street, Suite 740 Chicago, Illinois 60603 8 (iii) Description of the Those items described as types (or items) Improvements, Fixtures and by property covered Equipment and other personal by this Financing property in paragraph 7.1(f) Statement: hereof (iv) Description of real See Exhibit D hereto --------- estate to which collateral is attached or upon which it is located: (v) State of Incorporation Delaware of Debtor: ARTICLE VIII. 8.1 Condition of the Property. THE LESSEE ACKNOWLEDGES AND AGREES THAT ------------------------- ALTHOUGH THE LESSOR WILL HOLD FEE TITLE TO THE PROPERTY, THE LESSEE IS SOLELY RESPONSIBLE FOR THE PROPERTY. THE LESSEE FURTHER ACKNOWLEDGES AND AGREES THAT IT IS LEASING THE PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY THE LESSOR, THE AGENT OR ANY PARTICIPANT AND IN EACH CASE SUBJECT TO (A) THE EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW, AND (D) VIOLATIONS OF REQUIREMENTS OF LAW WHICH MAY EXIST ON THE DATE HEREOF. NEITHER THE LESSOR, THE AGENT NOR ANY PARTICIPANT HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE (INCLUDING BUT NOT LIMITED TO ANY IMPLIED LIABILITY RELATING TO A COVENANT OF QUIET ENJOYMENT, WHICH THE LESSEE HEREBY EXPRESSLY WAIVES), VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF, INCLUDING ANY IMPROVEMENTS EXISTING THEREON), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY (OR ANY PART THEREOF, INCLUDING ANY IMPROVEMENTS EXISTING THEREON) AND NEITHER THE LESSOR, THE AGENT NOR ANY PARTICIPANT SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR THE FAILURE OF THE PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY REQUIREMENT OF LAW. 8.2 Possession and Use of the Property. Subject to the next sentence ---------------------------------- hereof, the Property shall be used in a manner consistent with properties of a similar nature in the businesses in which the Lessee is engaged or as permitted in any sublease or assignment allowed by Section 25.1 hereof and in compliance ------------ in all respects with any covenants, conditions and restrictions of 9 record and any ordinance or law affecting the use and occupancy of the Property; and provided that such other uses do not increase the liability, directly or -------- indirectly, of the Lessor or adversely affect the value, utility or remaining useful life of the Property. The Lessee shall not without written consent of Lessor construct any Improvements on the Property. Notwithstanding the preceding sentence, the Lessor hereby consents to the construction by the Existing Owner of all Improvements which the Existing Owner is required to undertake and complete in accordance with the Property Purchase Agreement. The Lessor hereby authorizes the Lessee to, and the Lessee shall, exercise all rights and remedies of the buyer under the Property Purchase Agreement to enforce the obligations of the Existing Owner thereunder; provided, that such authority shall terminate upon the occurrence and during the continuance of an Event of Default. It is intended that the construction of Improvements (in addition to those the Existing Owner must complete under the Property Purchase Agreement) will be permitted under the terms of one or more subsequent leases either with the Lessor or a third party lessor and not under these Operative Documents. The Property shall not be abandoned by the Lessee or any permitted assignee or sublessee. The Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Property as contemplated by this Lease. The Lessee shall not commit or permit any waste of the property or any part thereof. ARTICLE IX. 9.1 Compliance with Requirements of Law and Insurance Requirements. -------------------------------------------------------------- Subject to the terms of Article XIII relating to permitted contests, the Lessee, ------------ at its sole cost and expense, shall (a) comply with all Requirements of Law and all Insurance Requirements relating to the Property, including the construction, use, operation, maintenance, repair and restoration thereof and the remarketing thereof pursuant to Article XXII, whether or not compliance therewith shall ------------ interfere with the use and enjoyment of the Property, and (b) procure, maintain and comply with all licenses, permits, orders, approvals, consents and other authorizations required for the use, maintenance-repair and operation of the Property. ARTICLE X. 10.1 Maintenance and Repair; Return. (a) The Lessee, at its sole cost and ------------------------------ expense, shall maintain the Property in good condition and repair and make all necessary repairs thereto, of every kind and nature whatsoever, in each case in compliance with all applicable Requirements of Law and in compliance with all Insurance Requirements and on a basis consistent with the operation and maintenance of commercial properties comparable in type and location to the Property and in compliance with standard industry practice. (b) The Lessor shall under no circumstances be required to build any improvements on the Property, make any repairs, replacements, alterations or renewals of any nature or description to the Property, make any expenditure whatsoever in connection with this Lease or maintain the Property in any way. The Lessor shall not be required to maintain, repair or rebuild all or any part of the Property, and the Lessee waives any right to (i) require the Lessor to maintain, repair, or rebuild all or any part of the Property, or (ii) make repairs at the expense of the Lessor pursuant to any Requirement of Law, Insurance Requirement, contract, agreement, or covenant, condition or restriction in effect at any time during the Term. 10 (c) The Lessee shall, upon the expiration or earlier termination of this Lease (unless the Property is conveyed to the Lessee as provided herein), vacate and surrender the Property to the Lessor in its then-current, "AS IS" condition, subject to the Lessee's obligations under Sections 9.1, 10.1(a), ------------ ------- 11.1, 12.1, 15.1(e), 15.2, 22.1 and 23.1. - ---- ---- ------- ---- ---- ---- (d) The Lessee warrants that it shall cause any Improvements to be constructed on the Property to be designed and constructed in a workmanlike manner and all Requirements of Law and in accordance with all Insurance Requirements, so that, such Improvements will be fit for their intended purpose. ARTICLE XI. 11.1 Improvements. The Lessee shall not at any time make any improvements ------------ to the Property or any part thereof except as permitted in Section 2.5, Section ----------- ------- 2.6 and Section 8.2. - --- ----------- ARTICLE XII. 12.1 Warranty of Title. (a) The Lessee agrees that except as otherwise ----------------- provided herein and subject to the terms of Article XIII relating to permitted ------------ contests, the Lessee shall not directly or indirectly create or allow to remain, and shall promptly discharge at its sole cost and expense, any Lien, defect, attachment, levy, title retention agreement or claim upon the Property (or the Lessor's interest therein) or any Lien, attachment, levy or claim with respect to the Rent or with respect to any amounts held by the Agent pursuant to the Participation Agreement or the other Operative Documents, other than Permitted Exceptions and Lessor Liens. (b) Nothing contained in this Lease shall be construed as constituting the consent or request of the Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to the Property or any part thereof. NOTICE IS HEREBY GIVEN THAT NEITHER THE LESSOR, ANY PARTICIPANT NOR THE AGENT IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO THE LESSEE OR TO ANYONE HOLDING THE PROPERTY OR ANY PART THEREOF THROUGH OR UNDER THE LESSEE AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF THE LESSOR IN AND TO THE PROPERTY. 12.2 Grants and Releases of Easements. Provided that no Lease Event of -------------------------------- Default shall have occurred and be continuing and subject to the provisions of Articles VIII, IX, X and XI, the Lessor hereby consents in each instance to the - ------------- -- - -- following actions by the Lessee, in the name and stead of the Lessor, but at the Lessee's sole cost and expense: (a) the making of dedications and the granting of easements, licenses, rights-of-way and other rights and privileges in the nature of easements reasonably necessary or desirable for the construction of Improvements planned to be placed upon the Property pursuant to the Property Purchase Agreement as in effect on the date hereof or as hereafter amended with Lessor's consent, use, repair, operation or maintenance of the Property as herein provided; (b) the release of easements, licenses, rights-of-way and other rights and privileges in the nature of easements which are for 11 the benefit of the Property; (c) the execution of petitions to have the Property annexed to any municipal corporation or utility district; and (d) the execution of amendments to any covenants, restrictions, easements, licenses, rights-of- way, and other rights and privileges in the nature of easements affecting the Property; provided, however, in each case the Lessee shall have delivered to the -------- ------- Lessor a Responsible Officer's Certificate stating that (i) such grant or release does not materially impair the value, utility and remaining useful life of the Property, (ii) such grant or release is desirable or reasonably necessary in connection with the construction of such Improvements, use, operation maintenance, alteration or improvement of the Property, (iii) the Lessee shall remain obligated under this Lease and under any instrument executed by the Lessee consenting to the assignment of the Lessor's interest in this Lease as security for indebtedness, in each such case in accordance with their terms, as though such grant or release or transfer, had not been effected, and (iv) the Lessee shall pay and perform any obligations of the Lessor under such grant or release, and (v) such easements, rights-of-way and other rights shall be prior and superior to the Lien of the Mortgage. Without limiting the effectiveness of the foregoing, provided that no Lease Event of Default shall have occurred and be continuing, the Lessor shall, upon the request of the Lessee, and at the Lessee's sole cost and expense, execute and deliver, any instruments necessary or appropriate to confirm any such grant or release to any Person permitted under this Section 12.2. ------------ ARTICLE XIII. 13.1 Permitted Contests Other Than in Respect of Indemnities. Except to ------------------------------------------------------- the extent otherwise provided for in Section 13 of the Participation Agreement, the Lessee, on its own or on the Lessor's behalf but at the Lessee's sole cost and expense, may contest, by appropriate administrative or judicial proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Requirement of Law, or utility charges payable pursuant to Section 4.1 or any Lien, attachment, levy, encumbrance or ----------- encroachment, and the Lessor agrees not to pay, settle or otherwise compromise any such item, provided that (a) the commencement and continuation of such -------- proceedings shall suspend the collection thereof from, and suspend the enforcement thereof against, the Property, the Lessor, the Agent and the Participants or the Lessee shall have bonded or otherwise secured such amount in a manner satisfactory to the Lessor and the Agent; (b) there shall be no risk of the imposition of a Lien as a result of such contest (other than Permitted Exceptions and, in the case of a contest of a Lien, such Lien being contested) on the Property and no part of the Property nor any Rent would be in any danger of being sold, forfeited, lost or deferred as a result of such contest; (c) at no time during the permitted contest shall there be a risk of the imposition of criminal liability or material civil liability on the Lessor, the Agent or any Participant for failure to comply therewith (unless, in the case of civil liability, the Lessee shall have bonded or otherwise secured such amount in a manner satisfactory to the Lessor and the Agent); and (d) in the event that, at any time, there shall be a material risk of extending the application of such item beyond the end of the Term, then the Lessee shall deliver to the Lessor a Responsible Officer's Certificate certifying as to the matters set forth in clauses (a), (b) and (c) of this Section 13.1. The Lessor, at the Lessee's sole - ----------- --- --- ------------ cost and expense, shall cooperate in good faith with the Lessee with respect to any permitted contests conducted by the Lessee pursuant to this Section 13.1 and ------------ shall, at the Lessee's sole cost and expense, execute and deliver to the Lessee such authorizations and other documents as may reasonably be required in connection with any such contest and, if reasonably requested by the Lessee, shall join as a party therein at the Lessee's sole cost and expense. 12 ARTICLE XIV. 14.1 General Liability and Workers' Compensation Insurance. The Lessee ----------------------------------------------------- shall procure and carry commercial general liability insurance, including contractual liability, for claims for injuries or death sustained by persons or damage to property while on the Property and such other general liability coverages as are ordinarily procured by Persons who own or operate similar properties and consistent with prudent business practice, which policies shall include contractual liability endorsements usually and customarily obtained by lessees of similar projects. Such insurance shall be on terms and in amounts (which shall be acceptable to the Lessor and in the event of liability insurance shall be maintained at a level set forth on Schedule 14.2) that are no less ------------- favorable than insurance maintained by the Lessee with respect to similar properties that it owns and that are in accordance with prudent business practice and may be provided under blanket policies maintained by or on behalf of the Lessee; provided, that during the Agency Term no such policies shall -------- carry any deductibles. The policy shall be endorsed to name the Lessor, the Agent and each Participant as additional insureds. The policy shall also specifically provide that the policy shall be considered primary insurance which shall apply to any loss or claim before any contribution by any insurance which the Lessor, the Agent or the Participants may have in force. The Lessee shall, in the construction of any improvements and the operation of the Property (including in connection with any Modifications thereof) comply with the applicable workers' compensation laws and protect the Lessor, the Agent and the Participants against any liability under such laws. 14.2 Reserved -------- 14.3 Coverage. (a) The Lessee shall furnish the Lessor and the Agent with -------- (i) certificates of insurance and copies of such policies on the Land Interest Acquisition Date and, within thirty (30) days after the Closing Date, certified copies of the insurance policies, showing the insurance required under Section ------- 14.1 to be in effect and naming the Lessor, the Agent and each Participant as - ---- additional insureds. Such policies and certificates in respect thereof shall include a provision for thirty (30) days' advance written notice by the insurer to the Lessor and the Agent in the event of cancellation of or any significant reduction in the coverage provided by such insurance. (b) The Lessee agrees that the insurance policy or policies required by Section 14.1 shall include (i) an appropriate clause pursuant to ------------ which such policy shall provide that it will not be invalidated should the Lessee waive, in writing, prior to a loss, any or all rights of recovery against any party for losses covered by such policy, and that the insurance in favor of the Lessor, the Agent and the Participants, and their respective rights under and interests in said policies shall not be invalidated or reduced by any act or omission or negligence of the Lessee or any other Person having any interest in the Property, and (ii) a so-called "Waiver of Subrogation Clause". The Lessee hereby waives any and all such rights against the Lessor, the Agent and the Participants to the extent of payments made under such policies. (c) All such insurance shall be written by reputable insurance companies that are financially sound and solvent and otherwise reasonably appropriate considering the amount and type of insurance being provided by such companies. Any insurance company selected by the Lessee which is rated in Best's Key Rating Guide or any successor thereto (or if there be 13 none, an organization having a similar national reputation) shall have a general policyholder rating of "A" and a financial rating of at least 13 in Best's Key Rating Guide or be otherwise acceptable to the Lessor and the Agent. (d) The Lessor shall not carry separate insurance concurrent in kind or form or contributing in the event of loss with any insurance required under this Article XIV except that the Lessor may carry separate liability insurance ----------- (at its sole cost) so long as (i) the Lessee's insurance is designated as primary and in no event excess or contributory to any insurance the Lessor may have in force which would apply to a loss covered under the Lessee's policy and (ii) each such insurance policy will not cause the Lessee's insurance required under this Article XIV to be subject to a coinsurance exception of any kind. ----------- (e) The Lessee shall pay as they become due all premiums for the insurance required by Section 14.1 and shall renew or replace each policy prior ------------ to the expiration date thereof; provided, that during the Agency Term such -------- premiums shall be funded by the Participants through the Lessor and capitalized as Advances. At the time each of the Lessee's insurance policies is renewed (but in no event less frequently than once each year), the Lessee shall deliver to the Lessor and the Agent certificates of insurance with respect to the insurance policies required by this Article XIV to be maintained by the Lessee with ----------- respect to the Property. (f) The Lessee hereby waives, releases and discharges the Lessor, the Agent and each Participant and their agents and employees from all claims whatsoever arising out of loss, claim, expense or damage to or destruction covered or coverable by insurance required under this Article XIV ----------- notwithstanding that such loss, claim, expense or damage may have been caused by the Lessor, the Agent or any Participant or any of their agents or employees, and the Lessee agrees to look to the insurance coverage only in the event of such loss. ARTICLE XV. 15.1 Casualty and Condemnation. (a) Subject to the provisions of Article ------------------------- ------- XIV, this Article XV and (in the event the Lessee delivers, or is obligated to - --- ---------- deliver, or the Lessor delivers, a Termination Notice) Article XVI, and prior to ----------- the occurrence and continuation of a Lease Event of Default, the Lessee shall be entitled to receive (and the Lessor shall pay over to the Lessee, if received by the Lessor, and hereby irrevocably assigns to the Lessee all of the Lessor's right, title and interest in) any award, compensation or insurance proceeds to which the Lessee or the Lessor may become entitled by reason of their respective interests in the Property (but not proceeds of any performance bond required to be obtained by the Existing Owner pursuant to the Property Purchase Agreement) occurring during the Basic Term (i) if all or a portion of the Property is damaged or destroyed in whole or in part by a Casualty or (ii) if the use, access, occupancy, easement rights or title to the Property or any part thereof, is the subject of a Condemnation; provided, however, if a Lease Event of Default -------- ------- shall have occurred and be continuing, or if such Casualty or Condemnation occurs during the Agency Term, such award, compensation or insurance proceeds shall be paid directly to the Agent or, if received by the Lessee, shall be held in trust for the Agent, and shall be paid over by the Lessee to the Agent (or, if the Participation Interests have been fully paid, to the Lessor) and held in accordance with the terms of this paragraph (a). If, contrary to such provision, ------------- any such award, compensation or insurance proceeds are paid to the Lessor or the Lessee rather than to the Agent, the Lessor and 14 the Lessee, as the case may be, hereby agree to transfer any such payment to the Agent. All amounts held by the Lessor or the Agent under the preceding sentences on account of any award or compensation proceeds either paid directly to the Lessor or the Agent or turned over to the Lessor or the Agent shall either be (i) paid to the Lessee for the repair of damage caused by such Casualty or Condemnation in accordance with paragraph (e) of this Section 15.1, or (ii) ------------- ------------ applied to the purchase price of the Property on a Termination Date resulting from a Casualty or Condemnation in accordance with paragraph (d) of this Section ------------- ------- 15.1 or paragraph (a) of Section 16.2 or the payment of the Residual Value - ---- ------------- ------------ Guarantee Amount pursuant to Section 16.2 or 24.1 and the remaining unpaid ------------ ---- portion of the Lease Balance, with any Excess Proceeds being payable to the Lessee. (b) [Reserved] (c) If the Lessor or the Lessee shall receive notice of a Casualty or of an actual, pending or threatened Condemnation of the Property or any interest therein, the Lessor or the Lessee, as the case may be, shall give notice thereof to the other and to the Agent promptly after the receipt of such notice. (d) In the event of a Casualty or receipt of notice by the Lessee or the Lessor of a Condemnation, the Lessee may deliver to the Lessor and the Agent a Termination Notice with respect to the Property pursuant to Section 16.1(a) or --------------- the Lessor may deliver a Termination Notice pursuant to Section 16.1(b). If the --------------- Lessee or the Lessor does not deliver a Termination Notice within thirty (30) days after such occurrence, then this Lease shall (subject to the terms and conditions thereof) remain in full force and effect, and the Lessee shall, at the Lessee's sole cost and expense (subject to Section 24.1), promptly and ------------ diligently restore the Property pursuant to paragraph (e) of this Section 15.1 ------------- ------------ and otherwise in accordance with this Lease. If the Lessee delivers a Termination Notice within thirty (30) days after such occurrence, a Significant Event shall irrevocably be deemed to have occurred with respect to the Property, and, in such event, this Lease shall terminate and the Lessee shall purchase the Property on the next Payment Date (but in no event to exceed thirty (30) days after such occurrence) (a "Termination Date") pursuant to Article XVI hereof. ---------------- ----------- (e) If pursuant to this Section 15.1 this Lease shall continue in ------------ full force and effect following a Casualty or Condemnation, the Lessee shall, at its sole cost and expense (subject to Section 24.1) promptly and diligently ------------ repair any damage to the Property caused by such Casualty or Condemnation so as to restore the Property to at least the same condition, operation, function and value as existed immediately prior to such Casualty or Condemnation. Upon completion of such restoration, the Lessee shall furnish the Lessor a Responsible Officer's Certificate confirming that such restoration has been completed pursuant to this Lease. In the event of a Condemnation, any award proceeds paid to the Lessor pursuant to Section 15.1 not applied to reimburse the Lessee for repairs or restoration expenses shall be applied to prepay the Lease Balance. (f) In no event shall a Casualty or Condemnation with respect to which this Lease remains in full force and effect under this Section 15.1 affect ------------ the Lessee's obligations to pay Rent pursuant to Section 3.1 or to perform its ----------- obligations and pay any amounts due on the Expiration Date or pursuant to Articles XIX and XX. - ------------ -- 15 (g) Any Excess Proceeds received by the Lessor or the Agent in respect of a Casualty or Condemnation shall be turned over to the Lessee. 15.2 Environmental Matters. Promptly upon the Lessee's actual knowledge --------------------- of the presence of Hazardous Substances in any portion of the Property in concentrations and conditions that constitute or could reasonably be expected to constitute an Environmental Violation, the Lessee shall notify the Lessor in writing of such condition. In the event of such Environmental Violation, the Lessee shall, not later than thirty (30) days after the Lessee has actual knowledge of such Environmental Violation, either, if such Environmental Violation is a Significant Event, deliver to the Lessor and the Agent a Responsible Officer's Certificate and a Termination Notice with respect to the Property pursuant to Section 16.1(a), or, if such Environmental Violation is not --------------- a Significant Event, at the Lessee's sole cost and expense, promptly and diligently commence any Response Actions necessary to investigate, remove, clean up or remediate the Environmental Violation in accordance with the terms of Section 9.1. If the Lessee does not deliver a Termination Notice with respect to - ----------- the Property pursuant to Section 16.1(a), the Lessee shall, upon completion of --------------- Response Actions by the Lessee, cause to be prepared by an environmental consultant reasonably acceptable to the Lessor a report describing the Environmental Violation and the Response Actions taken by the Lessee (or its agents) for such Environmental Violation, and a statement by the consultant that the Environmental Violation has been remedied in compliance in all material respects with applicable Environmental Law. Each such Environmental Violation shall be remedied prior to the Expiration Date. Nothing in this Article XV shall ---------- reduce or limit the Lessee's obligations under Sections 13.1, 13.2 or 13.3 of the Participation Agreement. 15.3 Notice of Environmental Matters. Promptly, but in any event within ------------------------------- thirty (30) Business Days from the date the Lessee has actual knowledge thereof, the Lessee shall provide to the Lessor written notice of any material pending or threatened claim, action or proceeding involving any Environmental Law or any Release on or in connection with the Property. All such notices shall describe in reasonable detail the nature of the claim, action or proceeding and the Lessee's proposed response thereto. In addition, the Lessee shall provide to the Lessor, within thirty (30) Business Days of receipt, copies of all material written communications with any Governmental Authority relating to any Environmental Law in connection with the Property. The Lessee shall also promptly provide such detailed reports of any such Material environmental claims as may reasonably be requested by the Lessor and the Agent. ARTICLE XVI. 16.1 Termination upon Certain Events ------------------------------- (a) If either: (i) during the Basic Term the Lessee or the Lessor shall have received notice of a Condemnation, and the Lessee shall have delivered to the Lessor a Responsible Officer's Certificate that such Condemnation is a Significant Condemnation; or (ii) during the Basic Term a Casualty occurs, and the Lessee shall have delivered to the Lessor a Responsible Officer's Certificate that such Casualty is a Significant Casualty; or (iii) during the Term an Environmental Violation occurs or is discovered and the Lessee shall have delivered to the Lessor a Responsible Officer's Certificate stating that, in the reasonable, good-faith judgment of the Lessee, the cost to remediate the same will cause the same to be a Significant Event, or 16 (iv) if during the Term the Lessee shall not have delivered a Termination Notice with respect to such Environmental Violation described in clause (iii) but the requirements of Section 16.3 are met with respect to such Environmental Violation; then, the (A) the Lessee shall, simultaneously with the delivery of the Responsible Officer's Certificate pursuant to the preceding clause (i), (ii) or (iii) deliver a written notice in the form described in Section 16.2(a) (a "Termination Notice"), or (B) if clause (iv) is applicable, the Lessor may ------------------ deliver a Termination Notice pursuant to Section 16.3. (b) If during the Agency Term any of the following shall occur: (i) a Casualty or Condemnation that Lessor determines is a Significant Casualty or a Significant Condemnation, (ii) the incurrence by any Lessor Party of any liabilities, losses, damages or expenses excluded from the Lessee's obligations under clause (5)(A)(2) of the proviso to Section 13.1 of the Participation Agreement or under Section 24.1 of this Lease by the proviso to such section, or ------------ (iii) a Lease Event of Default shall occur, the Lessor and the Participants may, but shall not be required to elect to: (A) deliver a Termination Notice to the Lessee which shall terminate their Commitments; and (B) require the Lessee to: (1) return the Property to the Lessor or remarket the Property for the Lessor as provided in clause (c) below; and ---------- (2) pay the maximum Residual Value Guarantee Amount or Asset Termination Value to the Lessor as provided in clause (c) ---------- below, together with the other amounts referred to therein. (c) The Lessee shall, at the request of the Lessor, (i)(A) return the Property to the Lessor or a Person designated by the Lessor on a date specified by the Lessor (which date shall constitute the Termination Date) and/or (B) remarket the Property for the Lessor as the Lessor's agent subject to the Lessor's direction and, in each case, comply with Section 19.1(b) and, to --------------- the extent applicable, Section 19.2, and (ii) pay to the Lessor (A) the maximum ------------ Residual Value Guarantee Amount on the date that is ten (10) days after the date the Lessor furnishes the Lessee with the Termination Notice that it will require the Lessee to return or remarket the Property, provided that the Lessor may -------- recover from the Lessee, and the Lessee shall be obligated to pay to the Lessor the Asset Termination Value as of such date (notwithstanding the limitation to maximum Residual Value Guarantee Amount contained in clause (A) above) if a ---------- Lease Event of Default under Section 17.1(f) or (g) shall have occurred or if --------------- --- the event described in clause (b)(i) or (ii) above arose out of a Fully ------------- ---- Indemnifiable Event or constituted an Environmental Obligation. If the Lessee has paid the Residual Value Guarantee Amount as required herein, proceeds from a sale of the Property pursuant to this Section 16.1(c) or, if not sold as --------------- provided in this Section 16.1(c), from a sale of the Property occurring --------------- thereafter, shall be distributed as provided in Section 3.14 of the Participation Agreement. 16.2 Procedures. (a) A Termination Notice delivered pursuant to Section ---------- ------- 16.1(a) shall contain: (i) notice of termination of this Lease with respect to - ------- the Property or the affected portion 17 thereof on a date that is no later than thirty (30) days after the occurrence of the applicable event described in clause (i), (ii) or (iii) of Section 16.1(a) ---------- ---- ----- --------------- (the "Termination Date"), such termination to be effective upon the Lessee's ---------------- payment of the Asset Termination Value (or portion thereof representing the Property Cost of the affected portion of the Property); and (ii) a binding and irrevocable agreement of the Lessee to pay the Asset Termination Value and purchase the Property (or such portion thereof) on the Termination Date. (b) On the Termination Date, the Lessee shall pay to the Lessor the Asset Termination Value (or such portion thereof, as applicable), plus all other amounts owing in respect of Rent for the Property (including Supplemental Rent) theretofore accruing, and the Lessor shall convey the Lessor's interest in the Property or such portion thereof to the Lessee (or the Lessee's designee) all in accordance with Section 19.1 and, to the extent applicable, Section 19.2, ------------ ------------ as well as any Net Proceeds with respect to the Casualty or Condemnation giving rise to the termination of this Lease with respect to the Property theretofore received by the Lessor. 16.3 Purchase of Property. Upon receipt of any notice pursuant to -------------------- Section 15.2 or 15.3, the Lessor or the Required Participants, at the Lessee's - -------------------- expense, shall have the right to select an independent environmental consultant acceptable to the Lessee, which acceptance shall not be unreasonably withheld or delayed, to determine the estimated cost of conducting any clean-up or remediation required as a result of the Environmental Violation disclosed in such notice. If such independent environmental consultant determines that the cost of any such clean-up or remediation would exceed fifteen percent (15%) of the original Property Cost, the Lessor shall, at the direction of the Required Participants, by written notice require the Lessee to purchase, or arrange for an Affiliate or other third party to purchase, the Property on the Expiration Date by delivering a Termination Notice following the requirements of Section ------- 16.2 hereof. - ---- ARTICLE XVII. 17.1 Lease Events of Default. The occurrence of any one or more of the ----------------------- following events (whether such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall constitute a "Lease Event of -------------- Default": - ------- (a) the Lessee shall fail to make payment of (i) any Basic Rent (other than a payment of Basic Rent due on the Expiration Date, any Termination Date or any date on which a payment is required to be made under clause (ii)) ----------- within five (5) Business Days after the same has become due and payable or (ii) Basic Rent, Purchase Option Price, Partial Purchase Option Price, Asset Termination Value, or Residual Value Guarantee Amount or other amounts due on the Expiration Date or the Termination Date, including, without limitation, amounts due pursuant to Sections 16.2, 16.3, 17.2(h), 20.2, 20.3 or 22.1, after ------------- ---- ------- ---- ---- ---- the same has become due and payable; (b) the Lessee shall fail to make payment of any Supplemental Rent (other than Supplemental Rent referred to in clause (a) of this Section) ---------- due and payable within five (5) Business Days after the same has become due and payable; 18 (c) the Lessee shall fail to maintain insurance as required by Article XIV of this Lease; - ----------- (d) the Lessee shall fail to observe or perform any term, covenant or condition of the Lessee under this Lease, the Participation Agreement or any other Operative Document to which it is a party other than those described in Section 17.1(a), (b), (c), (p), or (q) hereof, or any --------------- --- --- --- --- representation or warranty set forth in this Lease or in any other Operative Document or in any document entered into in connection herewith or therewith or in any document, certificate or financial or other statement delivered in connection herewith or therewith shall be false or inaccurate in any Material way, and, if such failure to perform or misrepresentation or breach of warranty is other than with respect to a covenant or agreement contained in Section ------- 10.1(b) or 10.2 of the Participation Agreement, such failure or - ------- misrepresentation or breach of warranty shall remain uncured for a period of 30 days after the earlier of (i) the date upon which an executive officer of the Lessee has actual knowledge thereof and (ii) the date upon which the Agent or the Lessor gives notice to the Lessee, or such longer period as is reasonably necessary to cure such default so long as such default cannot be cured merely by payment of money and so long as the Lessee shall be diligently prosecuting such cure and such default is cured within ninety (90) days after the earlier of (i) the date upon which an executive officer of the Lessee has actual knowledge thereof and (ii) the date upon which the Agent or the Lessor gives notice to the Lessee thereof; (e) the Lessee or any of its Subsidiaries shall fail to make any payment when due on account of any Indebtedness of such Person (other than Indebtedness referred to in clauses (a) and (b) of this Section 17.1) and such ----------- --- ------------ failure shall continue beyond any grace period provided with respect thereto, if the amount of such Indebtedness exceeds $10,000,000 or the effect of such failure is to cause, or permit the holder or holders thereof to cause, Indebtedness of Lessee and its Subsidiaries (other than Indebtedness referred to in clauses (a) and (b) of this Section 17.1) in an aggregate amount exceeding ----------- --- ------------ $10,000,000 to become due or (ii) Lessee or any of its Subsidiaries shall otherwise fail to observe or perform any agreement, term or condition contained in any agreement or instrument relating to any Indebtedness of such Person (other than Indebtedness referred to in clauses (a) and (b) of this Section ----------- --- ------- 17.1) and such failure shall continue beyond any grace period provided with - ---- respect thereto, or any other event shall occur or condition shall exist and any grace period provided with respect thereto shall have expired, if the effect of such failure, event or condition is to cause, or permit the holder or holders thereof to cause, after expiration of any such grace period, Indebtedness of Lessee and its Subsidiaries (other than Indebtedness referred to in clauses (a) ----------- and (b) of this Section 17.1) in an aggregate amount exceeding $10,000,000 to --- become due prior to its stated term (and/or to be secured by cash collateral); (f) (i) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Lessee or any of its Subsidiaries in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against the Lessee or any of its Subsidiaries under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, 19 trustee, custodian or other officer having similar powers over the Lessee or any of its Subsidiaries, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of the Lessee or any of its Subsidiaries for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of the Lessee or any of its Subsidiaries, and any such event described in this clause (ii) shall continue for sixty (60) days ----------- unless dismissed, bonded or discharged; (g) (i) the Lessee or any of its Subsidiaries shall (i) have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or the Lessee or any of its Subsidiaries shall make any assignment for the benefit of creditors; (ii) be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; (iii) be dissolved or liquidated in full or in part; (iv) become insolvent (as such term may be defined or interpreted under any applicable statute); or (v) the Board of Directors of the Lessee or any of its Subsidiaries (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to herein or in Section 17.1(f); --------------- (h) (i) one or more judgments, orders, decrees or arbitration awards requiring Lessee and/or its Subsidiaries to pay an aggregate amount of $5,000,000 or more (exclusive of amounts covered by insurance issued by an insurer which is a solvent and unaffiliated insurance company and otherwise satisfying the requirements set forth in Section 14.3(c)) shall be rendered against Lessee and/or any of its Subsidiaries in connection with any single or related series of transactions, incidents or circumstances and the same shall not be satisfied, vacated or stayed for a period of thirty (30) consecutive days after the issue of levy; (ii) any judgment, writ, assessment, warrant of attachment, tax lien or execution or similar process shall be issued or levied against a substantial part of the Property of Lessee or any of its Subsidiaries and the same shall not be released, stayed, vacated or otherwise dismissed within thirty (30) days after issue or levy; or (iii) any other judgments, orders, decrees, arbitration awards, writs, assessments, warrants of attachment, tax liens or executions or similar process which, alone or in the aggregate, are reasonable likely to have a Material Adverse Effect are rendered, issued or levied; (i) any Operative Document or any material term thereof shall cease to be, or be asserted by the Lessee or any of its Subsidiaries not to be, a legal, valid and binding obligation of the Lessee or any of its Subsidiaries enforceable in accordance with its terms; (j) any ERISA Event which constitutes grounds for the termination of any Employee Benefit Plan by the PBGC or for the appointment of a trustee by the PBGC to administer any Employee Benefit Plan shall occur, or any Employee Benefit Plan shall be terminated within the meaning of Title IV of ERISA or a trustee shall be appointed by the PBGC to administer any Employee Benefit Plant; (k) a Change of Control shall occur; 20 (l) [Reserved.]; (m) the Lessee shall have abandoned or constructively abandoned all or any material portion of the Property for a period of one hundred eighty (180) consecutive days which results in the Property not being properly maintained in accordance with the terms of this Lease; (n) the Lessee shall have elected to or be required to purchase the Property pursuant to Sections 16.2 or 16.3 hereof and such purchase shall --------------------- not have been consummated on the Termination Date pursuant to either such Section; (o) [Reserved]; (p) in the event the Lessee is not purchasing the Property upon the Expiration Date or earlier termination of this Lease, failure to comply with the return conditions set forth in Sections 19.1(b) and 22.3 hereof; or ---------------- ---- (q) any event(s) or condition(s) which has or have a Material Adverse Effect shall occur and be continuing or exist. 17.2 Remedies. Upon the occurrence of any Lease Event of Default and at -------- any time thereafter, the Lessor may, so long as such Lease Event of Default is continuing, do one or more of the following as the Lessor in its sole discretion shall determine, without limiting any other right or remedy the Lessor may have on account of such Lease Event of Default (including, without limitation, the obligation of the Lessee to purchase the Property as set forth in Section 20.3, ------------ but with respect to the Lessee's recourse liability, subject to the provisions of Section 16.1(b) and (c), if such Event of Default arises during the Agency --------------- --- Term): (a) The Lessor may, by notice to the Lessee, terminate the Commitments and rescind or terminate this Lease as to all or any portion of the Property as of the date specified in such notice; however, (i) no reletting, reentry or taking of possession of the Property (or any portion thereof) by the Lessor will be construed as an election on the Lessor's part to terminate this Lease unless a written notice of such intention is given to the Lessee, (ii) notwithstanding any reletting, reentry or taking of possession, the Lessor may at any time thereafter elect to terminate this Lease for a continuing Lease Event of Default, and (iii) no act or thing done by the Lessor or any of its agents, representatives or employees and no agreement accepting a surrender of the Property shall be valid unless the same be made in writing and executed by the Lessor; (b) The Lessor may (i) demand that the Lessee, and the Lessee shall upon the written demand of the Lessor, return the Property promptly to the Lessor in the manner and condition required by, and otherwise in accordance with all of the provisions of, Articles VIII, IX and X hereof as if the Property were ------------- -- - being returned at the end of the Term, and the Lessor shall not be liable for the reimbursement of the Lessee for any costs and expenses incurred by the Lessee in connection therewith and (ii) without prejudice to any other remedy which the Lessor may have for possession of the Property, and to the extent and in the manner permitted by Applicable Law, enter upon the Property and take immediate possession of (to the exclusion of the Lessee) the Property or any part thereof and expel or remove the Lessee and any other Person who may be occupying the Property, by summary proceedings or otherwise, all without liability 21 to the Lessee for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise and, in addition to the Lessor's other damages, the Lessee shall be responsible for all costs and expenses incurred by the Lessor and/or the Agent or the Participants in connection with any reletting, including, without limitation, brokers' fees and all costs of any alterations or repairs made by the Lessor; (c) The Lessor may (i) sell all or any part of the Property at public or private sale, as the Lessor may determine, pursuant to such notices and procedures as may be required by Applicable Law, free and clear of any rights of the Lessee and without any duty to account to the Lessee with respect to such action or inaction or any proceeds with respect thereto (except to the extent required by clause (ii) below if the Lessor shall elect to exercise its ----------- rights thereunder) in which event the Lessee's obligation to pay Basic Rent hereunder for periods commencing after the date of such sale shall be terminated or proportionately reduced, as the case may be; and (ii) if the Lessor shall so elect, demand that the Lessee pay to the Lessor, and the Lessee shall pay to the Lessor, on the date of such sale, as liquidated damages for loss of a bargain and not as a penalty (the parties agreeing that the Lessor's actual damages would be difficult to predict, but the aforementioned liquidated damages represent a reasonable approximation of such amount) (in lieu of Basic Rent due for periods commencing on or after the Payment Date coinciding with such date of sale (or, if the sale date is not a Payment Date, the Payment Date next preceding the date of such sale)), an amount equal to (A) the excess, if any, of (1) the Asset Termination Value calculated as of such Payment Date (including all Rent due and unpaid to and including such Payment Date) less the aggregate amount of the Cash Collateral, over (2) the net proceeds of such sale, if any (that is, after deducting all costs and expenses incurred by the Lessor, the Agent and the Participants incident to such conveyance, including, without limitation, repossession costs, brokerage commissions, prorations, transfer taxes, fees and expenses for counsel, title insurance fees, survey costs, recording fees, and any repair or alteration costs); plus (B) interest at the Overdue Rate on the foregoing amount from such Payment Date until the date of payment; provided, that the Lessor shall deliver all proceeds from the sale of -------- the Property and other amounts received hereunder to the Agent for application as provided in Sections 3.14 and 3.17 of the Participation Agreement. (d) [Reserved] (e) Unless the Property has been sold in its entirety, the Lessor may, subject to Section 17.2(i), whether or not the Lessor shall have exercised --------------- or shall thereafter at any time exercise any of its rights under paragraph (b), ------------- (c) or (d) of this Section 17.2 with respect to the Property or portions - --- --- ------------ thereof, demand, by written notice to the Lessee specifying a date (a "Termination Date") not earlier than 10 Business Days after the date of such ---------------- notice, that the Lessee purchase, on such Termination Date, the Property (or the remaining portion thereof) in accordance with the provisions of Article XIX and ----------- Section 20.3; - ------------ (f) The Lessor may exercise any other right or remedy that may be available to it under the Operative Documents or otherwise under Applicable Law, or proceed by appropriate court action (legal or equitable) to enforce the terms hereof or to recover damages for the breach hereof. Separate suits may be brought to collect any such damages for any period(s), and such suits shall not in any manner prejudice the Lessor's right to collect any such damages for any subsequent period(s), or the Lessor may defer any such suit until after the expiration of 22 the Term, in which event such suit shall be deemed not to have accrued until the expiration of the Term; (g) The Lessor may retain and apply against the Lessor's damages all sums which the Lessor would, absent such Lease Event of Default, be required to pay to, or turn over to, the Lessee pursuant to the terms of this Lease; (h) [Reserved.] (i) Notwithstanding anything contained in this Lease to the contrary, in the event that the Lease Event of Default resulting in the exercise of remedies by the Lessor hereunder is solely a Lease Event of Default described in Section 17.1(k) or (q), the Lessee shall have the option or, if the Lessor --------------- --- terminates this Lease, the Lessee shall be required to elect to (i) remarket the Property for 180 days after the occurrence of such Event of Default in accordance with Article XXII hereof (which period shall constitute the Marketing ------------ Period), with the purchase of the Property to be consummated no later than the date that is 180 days following the occurrence of such Lease Event of Default (which date shall constitute the Expiration Date if such option is exercised or required to be exercised), or (ii) exercise its Purchase Option under Section ------- 20.1 hereof, with the purchase of the Property by the Lessee to be consummated, - ---- and the other payments required thereunder to be made to the Lessor, on the next Payment Date following the occurrence of such Lease Event of Default (which date shall constitute the Expiration Date if such option is exercised). The Lessee shall notify the Lessor within ten (10) days after the occurrence of such Lease Event of Default which option it is exercising. If the Lessee elects to remarket the Property the Lessee shall pay to the Lessor (i) the maximum Residual Value Guarantee Amount on the date the Lessee furnishes such notice of exercise of the Remarketing Option (or, if the Lessor elects, on the date that is ten (10) Business Days after the Lessor furnishes the Lessee notice that it will require the Lessee to remarket or purchase the Property), (ii) all breakage costs incurred by the Participants for the duration of all then current Interest Periods under the Participation Agreement with respect to the amount so paid following notices thereof by the Agent, (iii) Basic Rent when due with respect to the unpaid portion of the Asset Termination Value for the duration of the 180 day Marketing Period and (iv) the other payments required under Section 22.1 ------------ when required thereunder and no later than the Expiration Date. (j) In addition to the other rights and remedies set forth herein, the Lessor shall have the right to continue this Lease in effect and, as permitted by Section 1951.4 of the California Civil Code, to enforce, by suit or otherwise, all covenants and conditions hereof to be performed or complied with by the Lessee and exercise all of the Lessor's rights and remedies under this Lease, including, without limitation, the right to recover Basic Rent and Supplemental Rent from the Lessee as it becomes due under this Lease, even though the Lessee shall have breached this Lease and abandoned the Property. Acts of maintenance or preservation, or efforts by the Lessor or on the Lessor's behalf to relet the Property, or the appointment of a receiver upon the initiative of the Lessor to protect the Lessor's interest under this Lease shall not constitute a termination of the Lessee's right to possession of the Property; provided, however, that the foregoing enumeration shall not be construed as in any way limiting the actions the Lessor may take without terminating the Lessee's right to possession. In furtherance of the rights hereby granted to the Lessor, and to the extent, permitted by law, the Lessee hereby appoints the 23 Lessor its agent and attorney-in-fact, which appointment shall be deemed to be coupled with an interest and is irrevocable, with power of substitution, to enter the Property upon a Lease Event of Default hereunder and remove therefrom all persons and property (with the right to store such property on the Property in a public warehouse or elsewhere at the cost and risk and for the account of the Lessee) and to alter the Property in such manner as the Lessor may deem necessary or advisable so as to put the Property in good order and to make the same rentable and from time to time and sublet the Property or any part thereof for such term or terms whether or not extending beyond the then current term of this Lease (but such sublease may provide for a new and successive lease to commence immediately upon the termination of this Lease), at such rentals and upon such other terms as the Lessor in its sole discretion may deem advisable, and with the right to make alterations and repairs to the Property; and the Lessee agrees to pay to the Lessor on demand all reasonable expenses incurred by the Lessor in such subletting, and in altering, repairing and putting the Property in good order and condition, and in reletting the same, including fees of attorneys and architects, and all other reasonable expenses or commissions. The Lessor shall be the Lessee's agent and representative on the Property in respect of all matters arising under or in connection with any such sublease made for the Lessee by the Lessor. Under each such sublease, the Lessee shall retain the right to enter upon and use the Property, subject to the terms and conditions of such sublease and the rights of the sublessee thereunder. The Lessee further agrees to pay to the Lessor, following the date of such subletting, to and including the date provided in this Lease for the expiration of the Term, the sums of money which would have been payable by the Lessee as Basic Rent and Supplemental Rent, deducting only the net amount of rent, if any, which the Lessor shall actually receive (after deducting from the gross receipts the expenses, costs and payments of the Lessor which in accordance with the terms of this Lease would have been borne by the Lessee) in the meantime from and by any such subletting of the Property, and the Lessee hereby agrees to remain liable for all sums otherwise payable by the Lessee under this Lease, including, but not limited to, the expenses of the Lessor aforesaid, as well as for any deficiency aforesaid. The Lessor shall have the right from time to time to begin and maintain successive actions or other legal proceedings against the Lessee for the recovery of such deficiency, expenses or damages or for a sum equal to any installments of Basic Rent or Supplemental Rent and other sums payable hereunder, and to recover the same upon the liability of the Lessee herein provided, which liability it is expressly covenanted shall survive the commencement or determination of any action to secure possession of the Property. Nothing herein contained shall be deemed to require the Lessor to wait to begin such action or other legal proceedings until the date when this Lease would have expired by limitation had there been no such Lease Event of Default. Notwithstanding any such subletting without termination, pursuant to the terms hereof, the Lessor shall retain the right to and may at any time thereafter elect to terminate this Lease or the Lessee's right to possession of the Property for any previous breach which remains uncured or for any subsequent breach by giving the Lessee written notice thereof as herein provided, and in such event the Lessee shall forfeit any rights or interest under any such sublease and thereafter the obligations of any such sublessee shall run directly to the Lessor for its own account. Upon application by the Lessor, a receiver may be appointed to take possession of the Property, exercise all rights granted to the Lessor as agent and attorney-in-fact for the Lessee set forth in this Section 17.2(j) and apply any rentals collected from the Property as hereinabove - --------------- provided. No taking of possession of the Property or other act by the Lessor as the agent and attorney-in-fact for the Lessee pursuant to the foregoing provisions, nor any subletting by the Lessor for the Lessee pursuant to the 24 foregoing provisions, nor any such appointment of a receiver shall constitute or be construed as an election by the Lessor to terminate this Lease or the Lessee's right to possession of the Property unless a written notice of such intention be given to the Lessee. 17.3 Waiver of Certain Rights. If this Lease shall be terminated ------------------------ pursuant to Section 17.2, the Lessee waives, to the fullest extent permitted by ------------ law, (a) any notice of re-entry or the institution of legal proceedings to obtain re-entry or possession; (b) any right of redemption, re-entry or repossession; (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt or limiting the Lessor with respect to the election of remedies; and (d) any other rights which might otherwise limit or modify any of the Lessor's rights or remedies under this Article XVII. ------------ 17.4 Further Remedies. If the transaction evidenced by this Agreement ---------------- and the other Operative Documents is treated as a loan, upon the occurrence or existence of any Event of Default and at any time thereafter unless such Event of Default is waived, the Lessor and the Trustee may with the consent of the Required Participants, or shall, upon instructions from the Required Participants, exercise any one or more of the following rights and remedies in addition to those rights and remedies set forth in Section 17.2 (subject, with ------------ respect to the Lessee's recourse liability, to the provisions of Section 16.1(b) --------------- and (c) if such Event of Default arises during the Agency Term). --- (a) Acceleration of Obligations. The Lessor may, by written --------------------------- notice to the Lessee, terminate this Lease and declare all unpaid Obligations due and payable. On such termination date (which shall then be the Expiration Date), the Lessee shall pay the Asset Termination Value (subject to Section ------- 17.2(i)), all unpaid Basic Rent accrued through such date, all Supplemental Rent - -------- due and payable on or prior to such date and all other amounts payable by the Lessee on the Expiration Date pursuant to this Lease and the other Operative Documents. (b) Uniform Commercial Code Remedies. The Lessor may exercise any -------------------------------- or all of the remedies granted to a secured party under any applicable Uniform Commercial Code. (c) Judicial Foreclosure. The Lessor may bring an action in any -------------------- court of competent jurisdiction to foreclose the security interest in the Property granted to the Lessor by this Lease or any of the other Operative Documents. Further, Lessor and/or the Trustee may bring an action or actions in a court of competent jurisdiction to foreclose this instrument as a mortgage and to obtain specific enforcement of the covenants of the Lessee hereunder, and the Lessee agrees that such covenants shall be specifically enforceable by injunction or any other appropriate equitable remedy and that for the purposes of any suit brought hereunder the Lessee waives the defense of laches and any applicable statute of limitations. (d) Power of Sale. The Lessor may cause some or all of the ------------- Property including any Collateral constituting personal property, including the Cash Collateral ("Personal Property Collateral"), to be sold or otherwise ----------------------------- disposed of in any combination and in any manner permitted by Applicable Law. (i) Sales of Personal Property. The Lessor may dispose of -------------------------- any Personal Property Collateral separately from the sale of the Collateral constituting 25 real property ("Real Property Collateral"), in any manner permitted by ------------------------ Division 9 of the California Uniform Commercial Code, including any public or private sale, or in any manner permitted by any other applicable Governmental Rule. Any proceeds of any such disposition shall not cure any Event of Default or reinstate any Obligation for purposes of Section 2924c of the California Civil Code. In connection with any such sale or other disposition, the Lessee agrees that the following procedures constitute a commercially reasonable sale: (A) The Lessor shall mail written notice of the sale to the Lessee not later than thirty (30) days prior to such sale. (B) Once per week during the three (3) weeks immediately preceding such sale, the Lessor will publish notice of the sale in a local daily newspaper of general circulation. (C) Upon receipt of any written request, the Lessor will make the Property available to any bona fide prospective purchaser for inspection during reasonable business hours. (D) Notwithstanding, the Lessor shall be under no obligation to consummate a sale if, in its judgment, none of the offers received by it equals the fair value of the Property offered for sale. (E) If the Lessor so requests, the Lessee shall assemble all of the Personal Property Collateral and make it available to the Lessor at the site of the Land Interest. Regardless of any provision of this Agreement or any other Operative Document, the Lessor shall not be considered to have accepted any property other than cash or immediately available funds in satisfaction of any Obligation, unless the Lessor has given express written notice of its election of that remedy in accordance with California Uniform Commercial Code Section 9505. The foregoing procedures do not constitute the only procedures that may be commercially reasonable. (ii) Lessor's Sales of Real Property or Mixed Collateral. The --------------------------------------------------- Lessor may choose to dispose of some or all of the Property which consists solely of Real Property Collateral in any manner then permitted by Applicable Law, including without limitation a nonjudicial trustee's sale pursuant to California Civil Code (S)(S)2924 et seq. In its discretion, the -- --- Lessor may also or alternatively choose to dispose of some or all of the Property, in any combination consisting of both Real Property Collateral and Personal Property Collateral, together in one sale to be held in accordance with the law and procedures applicable to real property, as permitted by Section 9501(4) of the California Uniform Commercial Code. The Lessee agrees that such a sale of Personal Property Collateral together with Real Property Collateral constitutes a commercially reasonable sale of the Personal Property Collateral. (For purposes of this Power of Sale, either a sale of Real 26 Property Collateral alone, or a sale of both Real Property Collateral and Personal Property Collateral together in accordance with California Uniform Commercial Code Section 9501(4), will sometimes be referred to as a "Lessor's -------- Sale" - ---- (A) Before any Lessor's Sale, the Lessor shall give such notice of default and election to sell as may then be required by Applicable Law. (B) When all time periods then legally mandated have expired, and after such notice of sale as may then be legally required has been given, the Lessor shall sell the property being sold at a public auction to be held at the time and place specified in the notice of sale. (C) Neither the Lessor nor the Agent shall have any obligation to make demand on the Lessee before any Lessor's Sale. (D) From time to time in accordance with then Applicable Law, the Lessor may postpone any Lessor's Sale by public announcement at the time and place noticed for that sale. (E) At any Lessor's Sale, the Lessor shall sell to the highest bidder at public auction for cash in lawful money of the United States. (F) The Lessor shall execute and deliver to the purchaser(s) a deed or deeds conveying the Property being sold without any covenant or warranty whatsoever, express or implied. The recitals in any such deed of any matters or facts, including any facts bearing upon the regularity or validity of any Lessor's Sale, shall be conclusive proof of their truthfulness. Any such deed shall be conclusive against all Persons as to the facts recited in it. (e) Foreclosure Sales. ----------------- (i) Single or Multiple. If the Property consists of more than one lot, ------------------ parcel or item of property, Lessor may: (A) Designate the order in which the lots, parcels and/or items shall be sold or disposed of or offered for sale or disposition; and (B) Elect to dispose of the lots, parcels and/or items through a single consolidated sale or disposition to be held or made under the power of sale granted in Section 17.4(d), or in connection with judicial --------------- proceedings, or by virtue of a judgment and decree of foreclosure and sale; or through two or more such sales or dispositions; or in any other manner the Lessor may deem to be in its best interests (any such sale or disposition, a "Foreclosure Sale," any two or more, "Foreclosure Sales"). ---------------- ----------------- If the Lessor chooses to have more than one Foreclosure Sale, the Lessor at its option may cause the Foreclosure Sales to be held simultaneously or successively, 27 on the same day, or on such different days and at such different times and in such order as it may deem to be in its best interests. No Foreclosure Sale shall terminate or affect the security interests granted to the Lessor in the Property by this Lease or any part of the Property which has not been sold, until all of the Obligations have been paid in full. (ii) Credit Bids. At any Foreclosure Sale, any Person, including the ----------- Lessor or any Participant, may bid for and acquire the Property or any part of it to the extent permitted by Applicable Law. Instead of paying cash for the Property, the Lessor may settle for the purchase price by crediting the sales price of the Property against the Obligations in any order and proportions as the Lessor in its sole discretion may choose. (f) Additional Rights and Remedies. ------------------------------ (i) In addition to and without limitation of the rights and remedies otherwise provided in this Section 17.4, Lessor or its employees, acting by ------------ themselves or through a court-appointed receiver, may enter upon, possess, manage, operate, dispose of and contract to dispose of the Property or any part thereof; negotiate with governmental authorities with respect to the Property's environmental compliance and remedial measures; contract for goods and services, hire agents, employees and counsel, make repairs, alterations and improvements to the Property necessary, in Lessor's judgment, to protect or enhance the security hereof; to incur the risks and obligations ordinarily incurred by owners of property (without any personal obligation on the part of the receiver); and/or to take any and all other actions which may be necessary or desirable to comply with Lessee's obligations hereunder and under the Operative Documents. All sums realized by the Lessor under this Section 17.4(f)(i), less all costs and expenses ------------------ incurred by it under this Section 17.4(f)(i), including attorneys' fees, ------------------ and less such sums as the Lessor deems appropriate as a reserve to meet future expenses under this Section 17.4(f)(i), shall be applied to any Obligations secured hereby in such order as the Lessor shall determine. Neither application of said sums to said indebtedness nor any other action taken by the Lessor under this Section 17.4(f)(i) shall cure or waive any ------------------ Event of Default or notice of default hereunder or nullify the effect of any such notice of default. The Lessor, or any employee or agent of the Lessor, or a receiver appointed by a court, may take any action or proceeding hereunder without regard to (i) the adequacy of the security for the indebtedness secured hereunder, (ii) the existence of a declaration that the indebtedness secured hereby has been declared immediately due and payable, or (iii) the filing of a notice of default; (ii) Lessor shall have the power and authority to execute a written notice of such Event of Default and, at its election, cause the Property to be sold to satisfy the Obligations secured hereby. The Lessor shall give and record such notice as the law then requires as a condition precedent to a nonjudicial foreclosure sale. When the minimum period of time required by law after such notice has elapsed, the Lessor, without notice to or demand upon Lessee except as 28 otherwise required by law, shall sell the Property at the time and place of sale fixed by it in the notice of sale and in such order as it or the Lessor may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale (the Obligations hereby secured being the equivalent of cash for purposes of said sale). If the Property consists of several lots, parcels, or items of property, the Lessor may: (i) designate the order in which such lots, parcels, or items of property shall be offered for sale or sold, or (ii) elect to sell such lots, parcels or items through a single sale, through two or more successive sales, or in any other manner the Lessor deems in its best interest. The Lessee shall have no right to direct the order in which the Property is sold. The Lessor may postpone sale of all or any portion of the Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at such time fixed by the preceding postponement. The Lessor shall deliver to the purchaser at such sale a deed or other appropriate transfer instrument conveying the Property or portion thereof so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters of facts shall be conclusive proof of the truthfulness thereof. Any person, including the Lessor or the Lessee may purchase at such sale. In connection with any sale or sales hereunder, the Lessor may elect to treat any of the Property which consists of a right in action or which is property that can be severed from the real property covered hereby or any improvements thereon without causing structural damage thereto as if the same were personal property or a fixture, as the case may be, and dispose of the same in accordance with applicable law, separate and apart from the sale of real property. Any sale of any personal property or fixtures hereunder shall be conducted in any matter permitted by the California Uniform Commercial Code. After deducting all costs, fees and expenses of the Lessor and of this trust, including all costs of evidence of title and attorneys' fees in connection with sale, the Lessor shall apply the proceeds of sale to payment of all sums so expended under the terms hereof not then repaid; the payment of all other sums then secured hereby; and the remainder, if any, to the person or persons legally entitled thereto; (iii) Lessor shall have the power and authority to resort to and realize upon the Property and any other security now or hereafter held by the Lessor in such order and manner as the Lessor and the Trustee may, in their sole discretion, determine; and resort to any or all such security may be taken concurrently or successively and in one or several consolidated or independent judicial actions or lawfully taken non-judicial proceedings, or both. 17.5 Remedies Cumulative. The remedies herein provided shall be ------------------- cumulative and in addition to (and not in limitation of) any other remedies available at law, equity or otherwise, including, without limitation, any mortgage foreclosure remedies. 29 17.6 The Lessee's Right to Cure. Notwithstanding any provision --------------------------- contained in the Lease or any other Operative Document, if a Lease Event of Default has occurred and is continuing, the Lessee shall have the right to cure such Lease Event of Default by exercising its Purchase Option and purchasing the Property in accordance with Section 20.1 at any time prior to such time as a ------------ foreclosure upon or sale of the Property has been completed. ARTICLE XVIII. 18.1 The Lessor's Right to Cure the Lessee's Lease Defaults. The ------------------------------------------------------ Lessor, without waiving or releasing any obligation or Lease Event of Default, may (but shall be under no obligation to) remedy any Lease Default or Lease Event of Default for the account and at the sole cost and expense of the Lessee, including the failure by the Lessee to maintain the insurance required by Article XIV (subject to the limitations set forth in Section 24.1), and may, - ----------- ------------ to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of the Lessee, enter upon the Property for such purpose and take all such action thereon as may be necessary or appropriate therefor. No such entry shall be deemed an eviction of the Lessee. All out-of-pocket costs and expenses so incurred (including reasonable fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by the Lessor, shall be paid by the Lessee to the Lessor on demand (subject to the limitations set forth in Section 24.1), as ------------ Supplemental Rent. ARTICLE XIX. 19.1 Provisions Relating to the Lessee's Termination of this Lease or ---------------------------------------------------------------- Exercise of Purchase Option or Obligation and Conveyance Upon Remarketing and - ----------------------------------------------------------------------------- Conveyance Upon Certain Other Events. (a) In connection with any termination of - ------------------------------------- this Lease pursuant to the terms of Section 16.1, 16.2 or 16.3 (if the Lessee is ------------ ---- ---- obligated to purchase the Property), or in connection with the Lessee's exercise of its Purchase Option, Partial Purchase Option or Expiration Date Purchase Obligation, upon the date on which this Lease is to terminate or upon the Expiration Date, and upon tender by the Lessee of the amounts set forth in Sections 16.2(b), 20.1, 20.2, 20.3 or 22.1(m) as applicable, the Lessor shall - ---------------- ---- ---- ---- ------- execute and deliver to the Lessee (or to the Lessee's designee) at the Lessee's cost and expense an assignment or transfer without recourse of the Lessor's right, title and interest in the Property (which shall include a release, quitclaim and assignment of all of the Lessor's right, title and interest in and to any Net Proceeds with respect to the Property or such portion thereof not previously received by the Lessor), subject to the Permitted Exceptions (other than Lessor Liens and, so long as all amounts required to be paid upon such termination or exercise have been paid and discharged in full, free of all Liens created by the Operative Documents) and any encumbrance caused by the fault, neglect or intention of the Lessee, in recordable form and otherwise in conformity with local custom and free and clear of any Lessor Liens. The Property shall be conveyed to the Lessee "AS IS" and in its then present condition of title and physical condition free of any Lessor Liens and, so long as all amounts required to be paid upon such termination or exercise have been paid and discharged in full, free of all Liens created by the Operative Documents. (b) If the Lessee properly exercises the Remarketing Option or is required to remarket the Property or return the Property to the Lessor pursuant to Section 17.2(i), then the Lessee shall, on the Expiration Date, and at its own cost, transfer possession of the Property (or 30 remaining portion thereof) to the Lessor or the independent purchaser thereof, as the case may be, by surrendering the same into the possession of the Lessor or such purchaser, as the case may be, free and clear of all Liens other than Lessor Liens, in good condition (as modified by Modifications permitted by this Lease), ordinary wear and tear excepted, in compliance with Applicable Law, and in "broom-swept clean" condition. The Lessee shall cooperate reasonably with the Lessor and the independent purchaser of the Property (or remaining portion thereof) in order to facilitate the purchase by such purchaser of the Property (or remaining portion thereof) which cooperation shall include the following, all of which the Lessee shall do on or before the Expiration Date: providing all books and records regarding the maintenance and ownership of the Property (or remaining portion thereof) and all know-how, data and technical information relating thereto, providing a current copy of the "as built" Plans and Specifications for the Property, granting or assigning (to the extent assignable) all existing licenses necessary for the operation and maintenance of the Property and cooperating reasonably in seeking and obtaining all necessary Governmental Action and complying with the provisions of Section 22.3 hereof. ------------ The obligations of the Lessee under this paragraph shall survive the expiration or termination of this Lease. ARTICLE XX. 20.1 Purchase Option. (a) Without limitation of the Lessee's --------------- purchase obligation pursuant to Sections 20.2 or 20.3, unless the Lessee shall ------------- ---- have given notice of its intention to exercise the Remarketing Option and the Lessor shall have entered into a binding contract to sell the Property, the Lessee shall have the option (exercisable by giving the Lessor irrevocable written notice (each, a "Purchase Notice") of the Lessee's election to exercise --------------- such option) to purchase, or to designate a third party to purchase, (i) all of the Property (the "Purchase Option") or (ii) any portion of the Land Interest --------------- now or hereafter constituting a separate legal parcel designated by the Lessee (the "Partial Purchase Option") provided that the Lessee shall have delivered to ----------------------- the Lessor with the Purchase Notice a satisfactory appraisal of the Fair Market Sales Value of the rest of the Property as of the purchase date and the Expiration Date, reflecting that (i) the Fair Market Sales Value of the Property is not less than the remaining unpaid Asset Termination Value as of such date and (ii) the Fair Market Sales Value of the Property as of the Expiration Date shall not be less than the aggregate Asset Termination Value on such date. The purchase price in respect of the entire Property (the "Purchase Option Price") --------------------- shall be equal to the Asset Termination Value or, with respect to such portion of the Property (the "Partial Purchase Option Price"), a price determined by ----------------------------- multiplying the Asset Termination Value by the percentage that the Fair Market Sales Value of the portion of the Property subject to the Partial Purchase Option bears to the Fair Market Sales Value of that portion of the Property subject to this Lease immediately prior to such purchase, in each case as shown on the most recent Appraisal delivered pursuant to the Operative Documents, plus in each case all other amounts owing in respect of Rent (including Supplemental Rent) theretofore accruing. The Lessee shall deliver the Purchase Notice to the Lessor not less than thirty (30) days prior to the purchase date. If the Lessee exercises its Purchase Option or Partial Purchase Option, pursuant to this Section 20.1, the Lessor shall transfer, free and clear of Lessor Liens and - ------------ Liens under the Operative Documents, to the Lessee or the Lessee's designee, all of the Lessor's right, title and interest in and to all or the applicable portion of the Property, as of the date specified in the Purchase Notice upon receipt of the Purchase Option Price or Partial Purchase Option Price, as the case may be, and (without duplication) all Rent and all other amounts then due and payable 31 under this Lease and any other Operative Document, in accordance with Section ------- 19.1(a). In the event of an exercise of the Partial Purchase Option, (i) Lessee - ------- or the third party acquiring such property shall grant any easements reasonably determined to be necessary by Lessor for the benefit of the remaining Property and the parties will enter into such amendments to the Operative Documents, and Lessee shall cause any such amendments to be filed, all as reasonably required by Lessor so as to preserve the Participants' interests in the retained Property; and (ii) if the Lessor and the Lessee enter into a replacement synthetic lease facility for any parcel of the Property to finance the construction of improvements to such parcel following any exercise of the Partial Purchase Option in a transaction where the Lessor remains the legal owner and lessor of such parcel, the Lessor and the Lessee agree that any 3.7(e)(ii) portion capitalized under the Operative Documents shall not be considered part of the land acquisition costs under such replacement lease facility. 20.2 Expiration Date Purchase Obligation. Unless (a) the Lessee shall ----------------------------------- have properly exercised the Purchase Option or the Partial Purchase Option pursuant to Section 20.1 and purchased all of the Property pursuant thereto, (b) ------------ the Lessee shall have properly exercised the Remarketing Option and shall have fulfilled all of the conditions of clauses (a) through (j) of Section 22.1 ----------- --- ------------ hereof, or (c) the Lessee shall have properly exercised the Renewal Option pursuant to Section 21.1 and the terms and conditions of a Renewal Term shall ------------ have been agreed upon pursuant to such Section, then, subject to the terms, conditions and provisions set forth in this Section 20.2, and in accordance with ------------ the terms of Section 19.1(a), the Lessee shall purchase from the Lessor, and the --------------- Lessor shall assign and convey to the Lessee without recourse, on the Expiration Date of the Term (as such Term may be renewed pursuant to Section 21.1) all of ------------ the Lessor's right, title and interest in the Property for an amount equal to the Asset Termination Value (the "Expiration Date Purchase Obligation"). The ----------------------------------- Lessee may designate, in a notice given to the Lessor not less than five (5) Business Days prior to the closing of such purchase (time being of the essence), the transferee or transferees to whom the conveyance shall be made (if other than to the Lessee), in which case such conveyance shall (subject to the terms and conditions set forth herein) be made to such designee; provided, however, -------- ------- that such designation of a transferee or transferees shall not cause the Lessee to be released, fully or partially, from any of its obligations under this Lease, including, without limitation, the obligation to pay the Lessor an amount equal to the Asset Termination Value that was not fully and finally paid by such designee on such Expiration Date. 20.3 Acceleration of Purchase Obligation. (a) The Lessee shall be ----------------------------------- obligated to purchase for an amount equal to the Asset Termination Value the Lessor's interest in the Property (notwithstanding any prior election to exercise its Purchase Option or Partial Purchase Option pursuant to Section ------- 20.1) (i) automatically and without notice upon the occurrence of any Lease - ---- Event of Default specified in clause (f) or (g) of Section 17.1, and (ii) as ---------- --- ------------ provided for at Section 17.2(e) immediately upon written demand of the Lessor upon the occurrence of any other Lease Event of Default (except as provided in Section 17.2(i) and subject to Section 16.1(b) and (c)) with respect to the - --------------- --------------- --- Lessee's recourse liability if such Lease Event of Default arises during the Agency Term. (b) The Lessee shall be obligated to purchase for an amount equal to the Asset Termination Value (plus all other amounts (without duplication) owing in respect of Rent (including Supplemental Rent) theretofore accruing) (offsetting against such amount, subject to 32 the terms of the Cash Collateral Agreement, the aggregate amount of the Cash Collateral) immediately upon written demand of the Lessor the Lessor's interest in the Property at any time during the Term when the Lessor ceases to have title as contemplated by Section 12.1. ------------ ARTICLE XXI. 21.1 Renewal. (a) Subject to the conditions set forth herein, the Lessee ------- shall have the option (the "Renewal Option") by written request (the "Renewal -------------- ------- Request") to the Lessor and the Agent (which request the Agent shall promptly - ------- forward to each Participant) given not later than 180 days prior to the Initial Expiration Date, to renew the Term for an additional one-year period commencing on the date following the Expiration Date then in effect. No later than the date (the "Renewal Response Date") which is ninety (90) days after such request has --------------------- been delivered to each of the Lessor and the Agent, the Lessor will notify the Lessee in writing (with a copy to Agent) whether or not it consents to such Renewal Request (which consent may be granted or denied in its sole discretion and may be conditioned on receipt of such financial information or other documentation as may be specified by the Lessor including without limitation a satisfactory appraisal of the Property), provided that if the Lessor shall fail to notify the Lessee on or prior to the Renewal Response Date, it shall be deemed to have denied such Renewal Request. If the Lessor shall have consented to the Renewal Request, the Renewal Term contemplated by such request shall become effective as of the Expiration Date then in effect after the Lessor has consented to such Renewal Request (each an "Extension Effective Date"); provided ------------------------ that such renewal shall be subject to and conditioned upon the following: (A) on both the Extension Effective Date and the date of the Renewal Request, (i) no Lease Default or Lease Event of Default shall have occurred and be continuing, and (ii) the Lessor and the Agent shall have received a Responsible Officer's Certificate of the Lessee as to the matters set forth in clause ------ (i) above, --- (B) the Lessee shall not have exercised the Remarketing Option, and (C) the Participants shall have agreed to extend the Maturity Date contemporaneously therewith pursuant to Section 3.6 of the Participation Agreement such that the Renewal Term will expire on the same date as the extended Maturity Date. (b) Any Renewal Term of this Lease shall be on the same terms and conditions as are set forth in this Lease for the original Term, with such modifications thereto, if any, as the parties hereto and to the other Operative Documents may negotiate based upon the current credit information regarding the Lessee, interest rates and such other factors as the Lessor may consider relevant. No more than two Renewal Terms shall be permitted hereunder. ARTICLE XXII. 22.1 Option to Remarket. Subject to the fulfillment of each of the ------------------ conditions set forth in this Section 22.1, the Lessee shall have the option (the ------------ "Remarketing Option") to market ------------------ 33 for the Lessor and complete the sale of all, but not less than all, of the Lessor's interest in the Property on the Expiration Date for the Lessor. The Lessee's effective exercise and consummation of the Remarketing Option shall be subject to the due and timely fulfillment of each of the following provisions as of the dates set forth below. (a) Not later than one hundred eighty (180) days prior to the Expiration Date, the Lessee shall give to the Lessor written notice of the Lessee's exercise of the Remarketing Option, which exercise shall be irrevocable (except by delivery of a Purchase Notice and consummation of the exercise of the Purchase Option prior to the earlier of (i) the Expiration Date or (ii) the date on which the Lessor enters into a binding contract to sell the Property pursuant to the exercise of the Remarketing Option). (b) The Lessee shall deliver to the Lessor an Environmental Audit of the Property together with its notice of exercise of the Remarketing Option. Such Environmental Audit shall be prepared by an environmental consultant selected by the Lessor following consultation with the Lessee, in the Lessor's reasonable discretion and shall contain conclusions reasonably satisfactory to the Lessor as to the environmental status of the Property. If such Environmental Audit indicates any material exceptions reasonably requiring remedy or further investigation, the Lessee shall have also delivered a Phase Two environmental assessment by such environmental consultant prior to the Expiration Date showing the completion of the remediation of such exceptions, if any, in compliance with Environmental Laws or such further investigation as required. (c) On the date of the Lessee's notice to the Lessor of the Lessee's exercise of the Remarketing Option, no Lease Event of Default or Lease Default shall exist, and thereafter, no uncured Lease Event of Default or Lease Default shall exist. (d) The Lessee shall have completed in all material respects all restoration and rebuilding of the Property pursuant to Section 15.1(e) and --------------- shall have fulfilled in all material respects all of the conditions and requirements in connection therewith pursuant to said Sections, by the date on which the Lessor receives the Lessee's notice of the Lessee's exercise of the Remarketing Option (time being of the essence), regardless of whether the same shall be within the Lessee's control. The Lessee shall have also paid the cost of all restoration and remodeling commenced prior to the Expiration Date. The Lessee shall not have been excused pursuant to Section 13.1 from complying with ------------ any Applicable Law that involved the extension of the ultimate imposition of such Applicable Law beyond the last day of the Term. Any Permitted Exceptions on the Property that were contested by the Lessee shall have been removed. (e) During the Marketing Period, the Lessee shall, as nonexclusive agent for the Lessor, use commercially reasonable efforts to sell the Lessor's interest in the Property on or prior to the Expiration Date (without diminishing the Lessee's obligation to consummate the sale on the Expiration Date) and will attempt to obtain the highest purchase price therefor and for not less than the Fair Market Sales Value. The Lessee will be responsible for hiring and compensating brokers and making the Property available for inspection by prospective purchasers. The Lessee shall promptly upon request permit inspection of the Property and any 34 maintenance records relating to the Property by the Lessor, any Participant and any potential purchasers, and shall otherwise do all things necessary to sell and deliver possession of the Property to any purchaser. All such marketing of the Property shall be at the Lessee's sole expense. The Lessee shall allow the Lessor and any potential qualified purchaser reasonable access to the Property for the purpose of inspecting the same. (f) The Lessee shall submit all bids to the Lessor and the Agent, and the Lessor will have the right to review the same and the right to submit any one or more bids. All bids shall be on an all-cash basis unless the Lessor, the Agent and the Participants shall otherwise agree in their sole discretion. The Lessee shall procure bids from one or more bona fide prospective purchasers and shall deliver to the Lessor and the Agent not less than ninety (90) days prior to the Expiration Date a binding written unconditional (except as set forth below), irrevocable offer by such purchaser or purchasers offering the highest bid to purchase the Property. No such purchaser shall be the Lessee, or any Subsidiary or Affiliate of the Lessee. The written offer must specify the Expiration Date as the closing date unless the Lessor, the Agent and the Participants shall otherwise agree in their sole discretion. (g) In connection with any such sale of the Property, the Lessee will provide to the purchaser all customary "seller's" indemnities, representations and warranties regarding title, absence of Liens (except Lessor Liens) and the condition of the Property, as well as such other terms and conditions as may be negotiated between the Lessee and the purchaser. The Lessee shall have obtained, at its cost and expense, and with the reasonable cooperation of Lessor, all required governmental and regulatory consents and approvals and shall have made all filings as required by Applicable Law in order to carry out and complete the transfer of the Property. As to the Lessor, any such sale shall be made on an "as is, with all faults" basis without representation or warranty by the Lessor other than the absence of Lessor Liens and Liens created by the Operative Documents. Any agreement as to such sale shall be made subject to the Lessor's rights hereunder. (h) The Lessee shall pay directly, and not from the sale proceeds, all prorations, credits, costs and expenses of the sale of the Property, whether incurred by the Lessor, the Participants or the Lessee, including without limitation, the cost of all title insurance, surveys, environmental reports, appraisals, transfer taxes, the Lessor's, the Participants' and the Agent's reasonable attorneys' fees, the Lessee's attorneys' fees, commissions, escrow fees, recording fees, and all applicable documentary and other transfer taxes (except the foregoing shall not prevent the Lessee from negotiating for the Person buying the Property to bear some or all of such costs). (i) The Lessee shall pay to the Agent on the Expiration Date (or to such other Person as the Lessor shall notify the Lessee in writing, or in the case of Supplemental Rent, to the Person entitled thereto) an amount equal to the Residual Value Guarantee Amount, plus (without duplication) all Rent and ---- all other amounts hereunder which have accrued or will accrue prior to or as of the Expiration Date, in the type of funds specified in Section 3.4 hereof. ----------- (j) If, within ninety (90) days prior to the Expiration Date, it is determined (based upon the highest bid by a purchaser to purchase the Property pursuant to paragraph (f) of this Section 22.1) that there would, after ------------- ------------ giving effect to the proposed sale of the Property, be a 35 Shortfall Amount, the Lessee (i) shall cause to be delivered to the Lessor and the Agent the End of Term Report required by Section 13.2 of the Participation Agreement and (ii) shall on the Expiration Date pay to the Agent (or to such other person as the Lessor shall notify the Lessee in writing), the amounts (not to exceed the Shortfall Amount) required to be paid pursuant to Section 13.2 of the Participation Agreement. (k) The purchase of the Property shall be consummated on the Expiration Date following the payment by the Lessee pursuant to paragraphs (i) -------------- and (j) above and contemporaneously with the Lessee's surrender of the Property --- pursuant to Section 19.1(b) and the gross proceeds (the "Gross Proceeds") of --------------- -------------- the sale of the Property (i.e., without deduction for any marketing, closing or other costs, prorations or commissions) shall be paid directly to the Agent. (l) The Lessee shall not be entitled to exercise or consummate the Remarketing Option if a circumstance that would permit the Lessor to require the Lessee to repurchase the Property under Section 16.3 exists and is continuing. ------- ---- (m) No subleases affecting the Property shall be in effect on the Expiration Date. (n) If the payment made by the Lessee pursuant to this Section 22.1 is equal to the sum of the Termination Value plus all other amounts owing in respect of Rent (including Supplemental Rent) theretofore accruing, the Lessor shall transfer, free and clear of Lessor Liens and Liens under the Operative Documents to the Lessee's designee, all of the Lessor's right, title and interest in and to the Property in accordance with Section 19.1(a). --------------- If one or more of the foregoing provisions shall not be fulfilled as of the date set forth above, then the Lessor shall declare by written notice to the Lessee the Remarketing Option to be null and void (whether or not it has been theretofore exercised by the Lessee) as to the Property, in which event all of the Lessee's rights under this Section 22.1 shall immediately terminate and the ------------ Lessee shall be obligated to vacate the Property on the Expiration Date and comply with the obligations set forth in Section 22.3. Except as expressly set forth herein, the Lessee shall have no right, power or authority to bind the Lessor in connection with any proposed sale of the Property. If the Lessee has paid the Residual Value Guarantee Amount as required herein, proceeds from a sale of the Property pursuant to the Remarketing Option or, if not sold as provided in this Section 22.1 from a sale of the Property ------------ occurring thereafter shall be distributed as provided in Section 3.14 of the Participation Agreement. 22.2 Certain Obligations Continue. During the Marketing Period, the ---------------------------- obligation of the Lessee to pay Rent (including the installment of Basic Rent due on the fifth anniversary of the Closing Date or at the end of any Renewal Term, as the case may be) shall continue undiminished until payment in full to the Lessor, for deposit into an account with the Agent, of the Gross Proceeds, the Residual Value Guarantee Amount and (without duplication) all other amounts due to the Lessor with respect to the Property under the Operative Documents. The Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of 36 the Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Article XXII. ------------ 22.3 Support Obligations. In the event that (A) the Lessee does not elect ------------------- to purchase the Property on the Expiration Date, (B) this Lease is terminated without a purchase of the Property by the Lessee as expressly permitted herein, or (C) pursuant to the Lessor's exercise of remedies under Article XVII, this ------------ Lease is terminated, the Lessee shall, upon the request of the Lessor, exercise all commercially reasonable efforts to provide the Lessor or other purchaser of the Property, effective on the Expiration Date or earlier termination of this Lease, with (i) all permits, certificates of occupancy, governmental licenses and authorizations necessary to use and operate the Property for its intended purposes (to the extent such items are transferable), (ii) such easements, licenses, rights-of-way and other rights and privileges in the nature of an easement as are reasonably necessary or desirable in connection with the use, repair, access to or maintenance of the Property, and (iii) any service agreements, contracts or subcontracts in existence at such time relating to the use and operation of the Property, in each case to the extent assignable. All assignments, licenses, easements, agreements and other deliveries required by clauses (i), (ii) and (iii) of this Section 22.3 shall be in form satisfactory ------------ to the Lessor and shall be fully assignable (including both primary assignments and assignments given in the nature of security) without payment of any fee, cost or other charge. ARTICLE XXIII. 23.1 Holding Over. If the Lessee shall for any reason remain in ------------ possession of the Property after the expiration or earlier termination of this Lease (unless the Property is conveyed to the Lessee), such possession shall be as a tenancy at sufferance during which time capitalized interest and yield shall continue to accrue, to the extent such possession occurs prior to the Basic Term Commencement Date, or the Lessee shall pay as Supplemental Rent, to the extent such possession occurs from and after the Basic Term Commencement Date, that would be payable by the Lessee hereunder were the Lease then in full force and effect and the Lessee shall continue to pay Basic Rent (or capitalized interest and yield shall continue to accrue) at an annual rate equal to 110% of the average rate of Basic Rent (or capitalized interest and yield) payable hereunder during the Basic Term or prior to the Basis Term Commencement Date, as the case may be. Such Basic Rent shall be payable from time to time upon demand by the Lessor. During any period of tenancy at sufferance, the Lessee shall, subject to the second preceding sentence, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue its occupancy and use of the Property. Nothing contained in this Article XXIII shall constitute the consent, express or implied, of the ------------- Lessor to the holding over of the Lessee after the expiration or earlier termination of this Lease (unless the Property is conveyed to the Lessee), and nothing contained herein shall be read or construed to relieve the Lessee of its obligations to purchase or remarket the Property on the Expiration Date pursuant to Article XX or Article XXII or as preventing the Lessor from maintaining a ---------- ------------ suit for possession of the Property or exercising any other remedy available to the Lessor at law or in equity or hereunder. 37 ARTICLE XXIV. 24.1 Risk of Loss. The Lessee assumes all risks of loss arising from any ------------ Casualty or Condemnation which arises or occurs prior to the Basic Term Commencement Date or while the Lessee is in possession of the Property and all liability for all personal injuries and deaths and damages to property suffered by any Person or property on or in connection with the Property which arises or occurs prior to the Basic Term Commencement Date or while the Lessee is in possession of the Property, except in each case to the extent any such loss or liability is primarily caused by the gross negligence or willful misconduct of a Lessor Party; provided, however, that the Lessee shall have no obligation under -------- ------- this Section 24.1 on account of any such loss or liability arising prior to the ------------ Basic Term Commencement Date, except as follows: (i) The Lessee shall be liable to the Lessor under this Section ------- 24.1 for all such losses and liabilities Within the Lessee's Control, ---- subject to the following: (A) if any such loss or liability is not related to an inability or failure to complete construction of any Improvements (or if such loss or liability is related to an inability or failure to complete construction of any Improvements but also constitutes or arises out of a Fully Indemnifiable Event), the Lessee's obligations in this Section 24.1 shall not be subject ------------ to any monetary limitation; and (B) if such loss or liability is related to an inability or failure to complete construction of any Improvements and such loss or liability does not constitute or arise out of a Fully Indemnifiable Event, the Lessee's monetary obligation provided in this Section 24.1, together with all other amounts payable under ------------ clause (5)(A)(ii) of Section 13.1 of the Participation Agreement or Section 13.10 of the Participation Agreement and any similarly limited payment obligation of the Lessee in connection with the return or sale of the Property under this Lease shall not exceed the maximum Residual Value Guarantee Amount. (ii) If any Lessor Party incurs any such loss or liability for which the Lessee is not liable pursuant to this Section 24.1, the ------------ amount of such loss or liability shall, if such Lessor Party shall so request by a written notice to the Lessor and the Lessor shall give its prior written consent thereto, be capitalized pursuant to Section 3.7(e)(ii) of the Participation Agreement. TO THE FULLEST EXTENT PERMITTED BY LAW, THE LESSEE HEREBY WAIVES THE PROVISIONS OF THE CALIFORNIA CIVIL CODE SECTIONS 1932(1), 1932(2) AND 1933(4), AND ANY AND ALL OTHER APPLICABLE EXISTING OR FUTURE LAWS, ORDINANCES AND GOVERNMENTAL REGULATIONS PERMITTING THE TERMINATION OF THIS LEASE AS A RESULT OF THE DAMAGE OR DESTRUCTION OF THE PROPERTY BY FIRE, THE ELEMENTS, CASUALTIES, THEFTS, RIOTS, WARS OR OTHERWISE, AND THE LESSOR SHALL IN NO EVENT BE ANSWERABLE OR ACCOUNTABLE FOR ANY RISK OF LOSS OF OR DECREASE IN THE ENJOYMENT AND BENEFICIAL USE OF THE PROPERTY AS A RESULT OF ANY SUCH EVENT. 38 ARTICLE XXV. 25.1 Subletting and Assignment. The Lessee may, without the consent of ------------------------- the Lessor, sublease the Property or portion thereof to any Person, provided, -------- that no such sublease shall, in the opinion of the Lessor, adversely affect any of the Lessor's interests, rights or remedies under the Lease or the Lessor's title to or interest in the Property. No assignment, sublease or other relinquishment of possession of the Property shall in any way discharge or diminish any of the Lessee's obligations to the Lessor hereunder and the Lessee shall remain directly and primarily liable under this Lease as to the Property, or portion thereof, so assigned or sublet. Any sublease of the Property shall be made subject to and subordinated to this Lease and to the rights of the Lessor hereunder, shall expressly provide for termination at or prior to the earlier of the applicable Expiration Date or other date of termination of this Lease unless the Lessee shall have purchased the Property pursuant to Article XX. No assignee ---------- or sublessee shall use the Property in a manner which is substantially different from the manner in which the Property is used or intended for use by the Lessee or in any manner not otherwise permitted under Section 8.2, without the prior ----------- written consent of the Lessor. ARTICLE XXVI. 26.1 Estoppel Certificates. At any time and from time to time upon not --------------------- less than twenty (20) days' prior request by the Lessor or the Lessee (the "Requesting Party"), the other party (whichever party shall have received such ---------------- request, the "Certifying Party") shall furnish to the Requesting Party (but not ---------------- more than four times per year unless required to satisfy the requirements of any sublessees and only to the extent that the required information has been provided to the Certifying Party by the other party) a certificate signed by an individual having the office of vice president or higher in the Certifying Party certifying that this Lease is in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications); the dates to which the Basic Rent and Supplemental Rent have been paid; to the best knowledge of the signer of such certificate, whether or not the Requesting Party is in default under any of its obligations hereunder (and, if so, the nature of such alleged default); and such other matters under this Lease as the Requesting Party may reasonably request. Any such certificate furnished pursuant to this Article XXVI may be relied upon by the Requesting Party, and any existing or - ------------ prospective mortgagee, purchaser or lender, and any accountant or auditor, of, from or to the Requesting Party (or any Affiliate thereof). ARTICLE XXVII. 27.1 Right to Inspect. During the Term, the Lessee shall upon reasonable ---------------- notice from the Lessor (such notice to be given five (5) Business Days in advance, except in case of emergency or where a Lease Event of Default has occurred and is continuing), permit the Lessor, the Agent and their respective authorized representatives to inspect the Property during normal business hours and so long as no Event of Default has occurred and is continuing, such inspections shall be not more than once each quarter, provided that such inspections shall not unreasonably interfere with the Lessee's business operations at the Property, and provided, further that the Lessee may, if it so chooses, be present during such inspections. 39 27.2 No Waiver. No failure by the Lessor or the Lessee to insist upon the --------- strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Lease, and this Lease shall continue in full force and effect with respect to any other then existing or subsequent default. ARTICLE XXVIII. 28.1 Acceptance of Surrender. No surrender to the Lessor of this Lease or ----------------------- of all or any portion of the Property or of any part thereof or of any interest therein shall be valid or effective unless agreed to and accepted in writing by the Lessor and, prior to the payment or performance of all obligations under the Participation Agreement and termination of the Commitments, the Agent, and no act by the Lessor or the Agent or any representative or agent of the Lessor or the Agent, other than a written acceptance, shall constitute an acceptance of any such surrender. ARTICLE XXIX. 29.1 No Merger of Title. There shall be no merger of this Lease or of the ------------------ leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, or (b) any estate of others in the Property created by any sublease permitted under this Lease, except as may expressly be stated in a written instrument duly executed and delivered by the appropriate Person. ARTICLE XXX. 30.1 Notices. All notices, demands, requests, consents, approvals and other ------- communications hereunder shall be in writing and delivered (i) personally, (ii) by a nationally recognized overnight courier service, (iii) by mail (by registered or certified mail, return receipt requested, postage prepaid) or (iv) by facsimile, addressed to the respective parties, as follows: If to the Lessee: BEA Systems, Inc. 2315 North First Street San Jose, CA 95131 Attention: Vice President of Real Estate and Corporate Services Telephone: (408) 570-8000 Facsimile: (408) 570-8923 with a copy to: 40 BEA Systems, Inc. 2315 North First Street San Jose, CA 95131 Attention: Vice President - Legal Telephone: (408) 570-8009 Facsimile: (408) 570-8923 If to the Lessor: ABN AMRO Leasing, Inc. 135 South LaSalle Street, Suite 740 Chicago, Illinois 60603 Attention: Elizabeth M. Walker Telephone: (312) 904-2809 Facsimile: (312) 904-6217 If to the Agent: ABN AMRO Bank N.V. Agency Services Department 208 South LaSalle Street, Suite 1500 Chicago, Illinois 60604 Attention: Joycelyn Gray Telephone (312) 992-5094 Facsimile: (312) 992-5157 with a copy to: ABN AMRO BANK N.V. 101 California Street, Suite 4550 San Francisco, CA 94111-5812 Attention: Jamie Dillon Telephone: (415) 984-3750 Facsimile: (415) 362-3524 and ABN AMRO Bank N.V. Credit Administration 208 S. LaSalle Street, Suite 1500 Chicago, Illinois 60604 Attention: Gregory Miller Telephone: (312) 992-5116 Facsimile: (312) 992-5111 or such additional parties and/or other address as such party may hereafter specify in writing in accordance with this Lease, and shall be effective upon receipt or refusal thereof. 41 ARTICLE XXXI. 31.1 Miscellaneous. Anything contained in this Lease to the contrary ------------- notwithstanding, all claims against and liabilities of the Lessee or the Lessor arising from events commencing prior to the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. If any term or provision of this Lease or any application thereof shall be declared invalid or unenforceable, the remainder of this Lease and any other application of such term or provision shall not be affected thereby. If any right or option of the Lessee provided in this Lease, including any right or option described in Articles XV, XVI, XX, XXI or XXII, would, in the absence of the limitation - ----------- --- -- --- ---- imposed by this sentence, be invalid or unenforceable as being in violation of the rule against perpetuities or any other rule of law relating to the vesting of an interest in or the suspension of the power of alienation of property, then such right or option shall be exercisable only during the period which shall end twenty-one (21) years after the date of death of the last survivor of the descendants of Franklin D. Roosevelt, the former president of the United States, Henry Ford, the deceased automobile manufacturer, and John D. Rockefeller, the founder of the Standard Oil Company, known to be alive on the date of the execution, acknowledgment and delivery of this Lease. 31.2 Amendments and Modifications. Subject to the requirements, ---------------------------- restrictions and conditions set forth in the Participation Agreement, neither this Lease, any Lease Supplement nor any provision hereof may be amended, waived, discharged or terminated except by an instrument in writing in recordable form signed by the Lessor and the Lessee. 31.3 Successors and Assigns. All the terms and provisions of this Lease ---------------------- shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 31.4 Headings and Table of Contents. The headings and table of contents in ------------------------------ this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 31.5 Counterparts. This Lease may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. 31.6 GOVERNING LAW. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California without reference to conflicts of law rules. 31.7 Limitations on Recourse. The parties hereto agree that the Lessor ----------------------- shall have no personal liability whatsoever to the Lessee or its respective successors and assigns for any claim based on or in respect of this Lease or any of the other Operative Documents or arising in any way from the transactions contemplated hereby or thereby; provided, however, that the Lessor shall be -------- ------- liable in its individual capacity (a) for its own willful misconduct or gross negligence (or negligence in the handling of funds), (b) for liabilities that may result from the incorrectness of any representation or warranty expressly made by it in Section 8.1 of the Participation Agreement or from the failure of the Lessor to perform its covenants and agreements set forth in Section 10.4(a) of the Participation Agreement, or (c) for any Taxes based on or measured by any fees, commission or compensation received by it for acting as the Lessor as contemplated by 42 the Operative Documents. It is understood and agreed that, except as provided in the preceding proviso: (i) the Lessor shall have no personal liability under any of the Operative Documents as a result of acting pursuant to and consistent with any of the Operative Documents; (ii) all obligations of the Lessor to the Lessee are solely nonrecourse obligations except to the extent that it has received payment from others and are enforceable solely against the Lessor's interest in the Property; and (iii) all such personal liability of the Lessor is expressly waived and released as a condition of, and as consideration for, the execution and delivery of the Operative Documents by the Lessor. 31.8 Original Lease. The single executed original of this Lease marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof and containing the receipt of the Agent therefor on or following the signature page thereof shall be the Original Executed Counterpart of this Lease (the "Original Executed Counterpart"). To the extent that this Lease ----------------------------- constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. [signature page follows] 43 IN WITNESS WHEREOF, the parties have caused this Lease be duly executed and delivered as of the date first above written. BEA SYSTEMS, INC., a Delaware corporation, as Lessee By:____________________________________ Name:__________________________________ Title:_________________________________ ABN AMRO LEASING, INC., an Illinois corporation, as Lessor By:____________________________________ Name:__________________________________ Title:_________________________________ STATE OF _________ ) ) SS.: COUNTY OF ______ ) Before me, the undersigned, a Notary Public within and for the State and County aforesaid, personally appeared _______________, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged [himself/herself] to be a _______________ of ABN AMRO LEASING, INC., the within named bargainor, a corporation, and that [he/she] as such __________________, being duly authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by [himself/herself] as such Vice President. WITNESS my hand and seal, at office, on this the ____ day of _______, 2001. ______________________________ Notary Public My Commission Expires: ____________________________ STATE OF ___________ ) ) SS.: COUNTY OF _________ ) Before me, the undersigned, a Notary Public within and for the State and County aforesaid, personally appeared __________________, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged [himself/herself] to be the _________ of BEA SYSTEMS, INC., the within named bargainor, a corporation, and that [he/she] as such _________, being duly authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by [himself/herself] as such _________. WITNESS my hand and seal, at office, on this the ____ day of ______, 2001. ______________________________ Notary Public My Commission Expires: ____________________________ THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART. Receipt of this original counterpart of the foregoing Lease is hereby acknowledged as of January ___, 2001. ABN AMRO BANK N.V., as Agent By:___________________________________ Name:_________________________________ Title:________________________________ By:___________________________________ Name:_________________________________ Title:________________________________ - -------------------------------------------------------------------------------- Recording requested by, and when recorded, please return to: [SEE DOC#42702 FOR EXECUTION McGuireWoods LLP VERSION OF LEASE SUPPLEMENT] 77 West Wacker Drive Suite 4500 Chicago, Illinois 60601 ATTN: W. Kirk Grimm, Esq. - -------------------------------------------------------------------------------- (Space Above This Line Reserved for Recorder's Use Only) EXHIBIT A TO THE LEASE LEASE SUPPLEMENT NO. 1, MEMORANDUM OF LEASE, DEED OF TRUST AND SECURITY AGREEMENT THIS LEASE SUPPLEMENT NO. 1, MEMORANDUM OF LEASE, DEED OF TRUST AND SECURITY AGREEMENT (this "Lease Supplement") dated as of February 13, 2001 ---------------- between ABN AMRO LEASING, INC., an Illinois corporation, not in its individual capacity but solely as lessor (the "Lessor"), and BEA SYSTEMS, INC., a Delaware ------ corporation, as lessee (the "Lessee"). ------ WHEREAS, the Lessor is the fee owner of the Land Interest described on Schedule 1 hereto (the "Land Interest") and wishes to lease the Land Interest to ------------- the Lessee; and WHEREAS, the Lessee desires to grant a deed of trust lien on its leasehold interest in the Land Interest created by the Lease to Chicago Title Company, as Trustee (the "Trustee") for the benefit of the Lessor to secure the Obligations ------- (as hereinafter defined) of the Lessee; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions; Interpretation. For purposes of this Lease --------------------------- Supplement, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in Appendix 1 to the Master Lease, dated as of February 13, 2001, between the Lessee and the Lessor; and the rules of interpretation set forth in Appendix 1 to the Lease shall apply to this Lease Supplement. SECTION 2. Land Interest. Attached hereto as Schedule 1 is the ------------- description of a certain Land Interest. Effective upon the execution and delivery of this Lease Supplement by the Lessor and the Lessee, the Property shall be subject to the terms and provisions of the Lease. Subject to the terms and conditions of the Lease, the Lessor hereby leases to the Lessee for the Term (as defined below) of the Lease, the Lessor's interest in the Land Interest, and the Lessee hereby Exhibit A-1 agrees, expressly for the direct benefit of the Lessor, to lease from the Lessor for the Term, the Lessor's interest in the Land Interest. SECTION 3. Parties and Addresses. The Lease is dated as of February 13, --------------------- 2001, between the Lessor, whose principal office is at 135 South LaSalle Street, Chicago, Illinois 60603 and the Lessee, whose principal office is 2315 North First Street, San Jose, CA 95131. SECTION 4. Lease Term. The term of the Lease shall consist of an Agency ---------- Term beginning on February 13, 2001 and ending on the earlier of the Completion of Construction and February 13, 2003, and a Basic Term commencing on the day following the last day of the Agency Term and ending on February 13, 2006 unless the Term is renewed or earlier terminated in accordance with the provisions of the Lease. The Lease contains two option periods of one year each which gives the Lessee the right, with the Participants' prior written consent and subject to the terms thereof, to extend the term of the Lease to no later than February 13, 2008. SECTION 5. Ownership of the Property. ------------------------- (a) It is the intent of the parties hereto that: (i) the Lease constitutes an "operating lease" pursuant to Statement of Financial Accounting Standards No. 13, as amended and interpreted, for purposes of the Lessee's financial reporting, and (ii) for purposes of federal, state, local and foreign Taxes, including without limitation income or franchise taxes (and any other tax imposed on or measured by income, including any withholding taxes), and documentary, intangibles, and transfer taxes, the transaction contemplated hereby is a financing arrangement and preserves ownership in the Property in the Lessee. Each of the Parties agrees that it will not, nor will any Person controlled by it, or under common control with it, directly or indirectly, at any time take any action or fail to take any action with respect to the filing of any Tax return, report or other statement, including any income or franchise tax return or amended income or franchise tax return, inconsistent with the intention of the parties expressed in this Section 5.1(a) unless, in the case of Lessor or any Participant, required to do so by an appropriate taxing authority or after a clearly applicable change in law or as a protective response to a proposed adjustment by a Governmental Authority, provided, however, that if an appropriate taxing authority shall require Lessor or any Participant to claim any tax attributes or benefits, such Person shall promptly notify Lessee thereof and shall permit Lessee to contest such requirement in a manner consistent with the contest provisions of Section 13.5(f). Nevertheless, the Lessee acknowledges and agrees that neither the Agent, the Lessor nor any Participant has made any representations or warranties to the Lessee concerning the tax, accounting or legal characteristics of the Operative Documents and that the Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. (b) Anything to the contrary in the Operative Documents notwithstanding, the Lessor and the Lessee intend and agree that with respect to the nature of the transactions evidenced by the Lease in the context of federal, state and local Taxes and in the context of the exercise of remedies under the Operative Documents, including, without limitation, in the case of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof or any foreign country affecting the Lessee, the Lessor, or any Exhibit A-2 Participant or any enforcement or collection actions arising out of or relating to bankruptcy or insolvency laws, (i) the transactions evidenced by the Lease shall be deemed to be loans made by the Lessor and the Participants as unrelated third party lenders to the Lessee secured by the Property, (ii) the obligations of the Lessee under the Lease to pay Basic Rent, Supplemental Rent, Asset Termination Value, Purchase Option Price, Partial Purchase Option Price or Residual Value Guarantee Amount in connection with a purchase of the Property pursuant to the Lease shall be treated as payments of interest on and principal of, respectively, loans from the Lessor and the Participants to the Lessee, and (iii) the Lease grants a security interest and mortgage or deed of trust or lien, as the case may be, in the Property to the Lessor and assigned by the Lessor to the Agent for the benefit of the Participants to secure the Lessee's performance under and payment of all amounts under the Lease and the other Operative Documents. (c) Specifically, without limiting the generality of subsections (a) and ------------------- (b) of this Section 5, the parties hereto intend and agree that, for purposes of - --- --------- filing federal, state and local returns, reports and other statements relating to income or franchise taxes, or any other taxes imposed upon or measured by income, (i) the Lessee shall be entitled to take any deduction, credit, allowance or other reporting position consistent with its status as owner of the Property; and (ii) neither the Lessor nor any Participant shall take an initial position on its federal, state and local returns, reports and other statements relating to income or franchise taxes that is inconsistent with the Lessee's status as owner of the Property. (d) Reserved. (e) In the event that, after the date hereof, the UCC as enacted and in effect in any applicable jurisdiction shall be revised or amended, the Lessee, the Lessor, the Agent and the Participants shall negotiate in good faith to enter into such amendments to the Operative Documents as may be reasonably necessary or desirable to reflect or otherwise address such revisions or amendments. (f) Specifically, without limiting the generality of subsection (b) of this Section 5, in order to secure the Lessee's obligation to pay Basic Rent, --------- Supplemental Rent, Asset Termination Value, the Residual Value Guarantee Amount, the Purchase Option Price, the Partial Purchase Option Price, and all other obligations owing by the Lessee under the Operative Documents (the "Obligations"), the Lessee hereby grants, conveys, sells, transfers, assigns and ----------- sets over unto the Trustee for the benefit of the Lessor, WITH POWER OF SALE and right of entry and possession, all of the Lessee's right, title and interest in and to the following (collectively, the "Collateral"): ---------- (i) all right, title and interest of the Lessee in and to the Property or any part thereof and the reversions, remainders, rents, issues and profits thereof; (ii) all right, title and interest of the Lessee in and to all substitutes and replacements of, and all additions and improvements to, any Improvements and the Fixtures, subsequently acquired by the Lessee or constructed, assembled or placed on the Land Interest, immediately upon such acquisition, release, construction, assembling or placement, including, without limitation, any and all building materials whether stored at Exhibit A-3 the Property or offsite, and, in each such case, without any further mortgage, conveyance, assignment or other act by the Lessee; (iii) all right, title and interest of the Lessee in, to and under all books and records relating to or used in connection with the operation of the Property or any Fixtures or any part thereof; (iv) all right, title and interest of the Lessee in and to all insurance policies (including title insurance policies) required to be maintained by the Lessee pursuant to the Lease, including the right to collect and receive such proceeds; and all awards and other compensation, including the interest payable thereon and the right to collect and receive the same, made to the owner of the Property for the taking by eminent domain, condemnation or otherwise, of all or any part of the Property or any easement or other right therein; (v) all right, title and interest of the Lessee in and to (i) all consents, licenses, building permits, certificates of occupancy and other governmental approvals relating to construction, completion, occupancy, use or operation of the Property or any part thereof, provided that any such -------- consent, license, permit, certificate or approval that by its terms or by operation of law would become void, voidable, terminable or revocable or would result in a breach or default thereunder or under any applicable law if subjected to the lien granted pursuant to this clause (v) is expressly ---------- excepted and excluded from this clause (v) to the extent necessary to avoid ---------- such result, and (ii) all plans and specifications relating to the Property, in each case to the extent assignable; (vi) all Rent and all other rents, payments, purchase prices, receipts, revenues, issues and profits payable under this Lease or pursuant to any other lease with respect to the Property; (vii) all proceeds, both cash and noncash, of the foregoing and any items acquired in substitution of, or replacement for, any of the foregoing; and (viii) all right, title and interest of the Lessee in and to all of the Operative Documents, including, without limitation, the Lease Supplement, regardless of whether the interest of the Lessee therein is that of lessee, sublessee, sublessor or borrower. (g) Specifically, without limiting the generality of subsection (b) of this Section 5, the Lessor and the Lessee further intend and agree that, for the --------- purpose of securing the Lessee's obligations for the repayment of the loans from the Lessor and the Participants to the Lessee, (i) the Lease shall also be deemed to be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code (and specifically, a construction mortgage, as said term is defined in Section 9-313(1)(c) of the Uniform Commercial Code), a fixture filing and a real property mortgage or deed of trust of the Property; (ii) the conveyance provided for in Article II of the Lease shall be deemed to be a grant by the Lessee to the Lessor and assigned by the Lessor to the Agent for the benefit of the Participants, of a mortgage lien and security interest in all of the Lessee's right, title and interest in and to the Property, except to the Exhibit A-4 extent that all or a portion of the Property is released from the Lease in accordance with the Operative Documents, and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property (it being understood that the Lessee hereby mortgages and warrants and grants a security interest in the Property to Lessor to secure such loans); (iii) the possession by the Lessor or any of its agents of any notes and such other items of the Collateral as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9- 305 of the Uniform Commercial Code; and (iv) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of the Lessee shall be deemed to have been given for the purpose of perfecting such security interest under Applicable Law. The Lessor and the Lessee shall, to the extent consistent with the Lease, take such actions and execute, deliver, file and record such other documents, financing statements, mortgages and deeds of trust as may be necessary to ensure that, if the Lease were deemed to create a security interest in the Property in accordance with this Section, such security interest would be deemed to be a perfected security interest of first priority under Applicable Law and will be maintained as such throughout the Term. SECTION 6. Lease Events of Default and Remedies. Sections 17.2 through ------------------------------------ --------------------- 17.5 of the Lease, which are hereby incorporated by reference, set forth the - ---- remedies available to the Lessor and the Trustee in the event of a Lease Event of Default. SECTION 7. Purchase Option. Sections 17.2(i) and Article XX of the Lease --------------- ---------------- ---------- contain various purchase options which may be exercised by the Lessee during the term of the Lease subject to the terms and conditions of said Sections of the Lease. SECTION 8. Liens. (a) THIS LEASE SUPPLEMENT IS SUPERIOR TO A DEED OF TRUST ----- IN FAVOR OF ABN AMRO BANK N.V., AS AGENT (THE "AGENT") UNDER THE PARTICIPATION ----- AGREEMENT DATED AS OF FEBRUARY 13, 2001 AS AMENDED OR SUPPLEMENTED, BETWEEN THE LESSOR, THE AGENT AND THE TRUSTEE NAMED THEREIN. (b) NOTICE IS HEREBY GIVEN THAT NEITHER THE LESSOR, ANY PARTICIPANT NOR THE AGENT IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO THE LESSEE, OR TO ANYONE HOLDING THE PROPERTY OR ANY PART THEREOF THROUGH OR UNDER THE LESSEE, AND THAT NO MECHANICS' OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF THE LESSOR IN AND TO THE PROPERTY. SECTION 9. Ratification. Except as specifically modified hereby, the ------------ terms and provisions of the Lease are hereby ratified and confirmed and remain in full force and effect. SECTION 10. Original Lease Supplement. The single executed original of ------------------------- this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED Exhibit A-5 COUNTERPART" on the signature page thereof and containing the receipt of the Agent therefor on or following the signature page thereof shall be the Original Executed Counterpart of this Lease Supplement (the "Original Executed ----------------- Counterpart"). To the extent that this Lease Supplement constitutes chattel - ----------- paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease Supplement may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. SECTION 11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO CONFLICTS OF LAW RULES. SECTION 12. Counterpart Execution. This Lease Supplement may be executed --------------------- in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one and the same instrument. SECTION 13. Incorporation by Reference. The terms and provisions of the -------------------------- Lease are incorporated herein as if they were fully set forth herein and are made a part of this Lease Supplement. SECTION 14. Receipt. The Lessee hereby declares and acknowledges that the ------- Lessee has received, without charge, a true copy of the Lease and this Lease Supplement No. 1. SECTION 15. Substitution of Trustee. From time to time, by a writing ----------------------- signed and acknowledged by Lessor and recorded in the Office of the Recorder of the County in which the Property is situated, Lessor may with the prior written consent of Lessee, which consent shall not be unreasonably withheld (except that Lessee's consent shall not be required during the continuance of any Lease Event of Default) appoint another trustee to act in the place and stead of Trustee or any successor. Such writing shall refer to this Lease Supplement No. 1, Memorandum of Lease, Deed of Trust and Security Agreement and set forth the date, book and page of its recordation. The recordation of such instrument of substitution shall discharge Trustee herein named and shall appoint the new trustee as the trustee hereunder with the same effect as if originally named Trustee herein. A writing recorded pursuant to the provisions of this paragraph shall be conclusive proof of the proper substitution of such new trustee. [signature page follows] Exhibit A-6 IN WITNESS WHEREOF, the parties have caused this Lease be duly executed and delivered as of the date first above written. BEA SYSTEMS, INC., a Delaware corporation, as Lessee By:__________________________________ Name:________________________________ Title:_______________________________ ABN AMRO LEASING, INC., an Illinois corporation, as Lessor By:__________________________________ Name:________________________________ Title:_______________________________ STATE OF ________ ) ) SS.: COUNTY OF ________ ) Before me, the undersigned, a Notary Public within and for the State and County aforesaid, personally appeared _______________, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged [himself/herself] to be a _______________ of ABN AMRO LEASING, INC., the within named bargainor, a corporation, and that [he/she] as such __________________, being duly authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by [himself/herself] as such Vice President. WITNESS my hand and seal, at office, on this the ____ day of _______, 2001. ______________________________ Notary Public My Commission Expires: ____________________________ STATE OF __________ ) ) SS.: COUNTY OF __________ ) Before me, the undersigned, a Notary Public within and for the State and County aforesaid, personally appeared __________________, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged [himself/herself] to be the _________ of BEA SYSTEMS, INC., the within named bargainor, a corporation, and that [he/she] as such _________, being duly authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by [himself/herself] as such _________. WITNESS my hand and seal, at office, on this the ____ day of ______, 2001. ______________________________ Notary Public My Commission Expires: ____________________________ THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART. Receipt of this original counterpart of the foregoing Lease is hereby acknowledged as of January ______, 2001. ABN AMRO BANK N.V., as Agent By:___________________________________ Name:_________________________________ Title:________________________________ By:___________________________________ Name:_________________________________ Title:________________________________ SCHEDULE 1 TO LEASE SUPPLEMENT NO. 1 Land Interest Description All that certain property in the City of San Jose, County of Santa Clara, State of California, described as follows: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on January 30, 2001, in Book 736 of Maps, at pages 30, 31 and 32. EXHIBIT B TO THE LEASE LEGAL DESCRIPTION OF LAND INTEREST All that certain property in the City of San Jose, County of Santa Clara, State of California, described as follows: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on January 30, 2001, in Book 736 of Maps, at pages 30, 31 and 32. EX-10.23 3 dex1023.txt 2001 EXECUTIVE STAFF BONUS PLAN EXHIBIT 10.23 ==================================================================== EXECUTIVE STAFF BONUS PLAN DESCRIPTION 2001 ==================================================================== ELIGIBLE POSITIONS: Presidents Executive Vice Presidents Chief Operating Officer Bonus Plan Description Bonus pool will be established based on a percentage of the base salary, as follows, which creates the Target Bonus. The basic premise is that the higher one is in the organization, the more their total compensation is "at risk". A. TARGET BONUS AMOUNTS: --------------------- Division Presidents: 60% of base salary (weighted 50% on Company Performance and 50% on Division Performance). Executive Vice Presidents: 60% of base salary (weighted on total Company Performance). Sr. Vice Presidents -Ostaff: 50% of base (weighted on total Company Excluding Division Presidents Performance). Chief Operating Officer: 100% of base salary (weighted on total Company Performance). CEO 100% of base salary (weighted on total Company Performance). B. BONUS POOL THRESHOLD --------------------- The bonus pool will be funded by BEA Systems actual Contribution for the quarter and year, assuming that a threshold of 100% of the operating plan is achieved for both components (Revenue and Contribution) for both Corporate and Business Unit bonus components. The pool will be funded by Contribution, up to 50% of Contribution, and will be paid out as outlined below. C. PAYOUT CRITERIA - QUARTERLY BONUSES ----------------------------------- The quarterly bonus is comprised of a Revenue and a Contribution component. 50% of the payout is based on Contribution achievement and 50% of the payout is based upon Revenue achievement. A threshold of 100% of the operating plan applies for both components and must be met for a payout on either component. For the Company Performance calculation: For Executive Staff Members, Revenue equals bookings. For all other executives, Revenue equals recognized revenue for the quarter/year. For the Division Performance calculation, Revenue equals bookings. 04/24/01 COMPANY CONFIDENTIAL Calculation of the bonuses will be based on the following formula and should the plan for the quarter and year be exceeded at either level (Contribution or Revenue), then the following accelerators, up to 200% of target, will apply: Actual Achievement (Contribution or Revenue) _______________________________________ : % Achievement Plan % Achievement: Payout ------------------------------ 0 to 99.99% 0 100%-105% 1% = 1. 00X *105% 115% 1% = 1. 50X *115+ 1% = 2X up to 200% total bonus * denotes greater than For example, if achievement for Revenue is 3X operating plan and achievement for Contribution is 1 X the operating plan, bonus will be paid at 2X target as the total bonus. For Division Presidents, where their bonus targets are weighted on Total Company and Business Unit Performance, a separate Revenue and Contribution calculation will be done for each entities' performance (Company and Business Unit ). The total bonus paid out cannot exceed 200% of either target (Company or Business Unit Performance), as specified in A, and under-performance in one, either Company or Business Unit, cannot be supplemented by the other component. It is also important to note that the Business Unit Contribution calculation will be based upon a "fully loaded operating margin". For the Services Business Unit, the Contribution calculation will be based on "gross margin". For example, if achievement for the Company component is 2.5x and achievement for the Business Unit component is 1.5X, the payout will be 2X and 1.5X respectively. D. PAYOUT CRITERIA - ANNUAL COMPONENT ---------------------------------- In addition to the Threshold of 100% achievement of Operating Plan goals for the year on both Contribution and Revenue, the Annual Component also includes a threshold of 80% achievement of Bill's MBO's for the Year. Should performance fall short on either of these 3 Threshold's, no Annual Component will be paid. However, if all three thresholds are met and an Annual Bonus is paid, a "Customer Satisfaction" spiff will be paid equal to an additional 10% of the Annual Bonus calculation (including accelerators), if the Customer Satisfaction Survey indicates that BEA as a Company is meeting and/or exceeding Customer expectations from year to year. This spiff may be paid in addition to the 200% cap (should it be reached) on total bonuses. E. PROVISIONS THAT APPLY TO ALL BONUSES ------------------------------------ 1. 80% of the bonus will be allocated against quarterly plan performance (20% per quarter) and 20% will be paid at year end, after the year-end audit and subject to the Annual Component, as outlined under D. 04/24/01 COMPANY CONFIDENTIAL 2. Should the total pool, funded by 50% of Contributions, not be large enough to disburse amounts to all participants as indicated in #1 above, then the employees' base salary, as a percentage of total base salaries of all participants, will be used to prorate and distribute the pool. 3. The Executive must be employed the entire quarter to receive the quarterly bonus and be employed at the time of the quarterly and annual payout to receive any bonus. The annual bonus will be prorated for partial year service, however , at least one full quarter of employment is required to receive an annual bonus. An employee may be removed from the plan at any time, at management discretion. 4. BEA Management reserves the right to modify this plan at any time, in its sole discretion. Should an acquisition or significant business initiative change the revenue and/or contribution operating plan, the plan, for the purposes of this bonus, may be modified and a new plan will go into effect at the start of the quarter following this initiative. 5. An Executive can be in only one bonus plan or variable plan at any time. Should an employee transfer from this plan to another bonus plan, their participation will cease and there will be no annual pro- ration. EXAMPLE ------- Vice President with an annual salary of $200,000 has a bonus target of 50%, or $100,000. Quarterly target is $20,000. Assuming for Q1, the projection for Operating Profit is $1,000,000. The pool would be funded up to 50% or $500,000 for all bonuses. If actual achievement is Contribution at 100% and Revenue at 115% , the following bonus would be paid the Vice President: BONUS CALCULATION
Achievement Levels Accelerators Contribution Revenue Total - -------------------------------------------------------------------------------------------- 100%-105% 1% = 1X $10,000 $10,000* ***105% to 115% 1% = 1.5X 0 $11,500 $11,500** Total Bonus for Quarter: $21,500 *$10,000 x 1X = $10,000 **10,000 + (10,000 x .10 x 1.5) = $11,500 TOTAL BONUS FOR QUARTER: $21,500
*** denotes greater than 04/24/01 COMPANY CONFIDENTIAL EX-10.24 4 dex1024.txt AMENDED 1997 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.24 BEA SYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- Adopted on March 19, 1997 Amended and Restated on September 16, 1997 Amended and Restated on May 13, 1998 Amended and Restated on May 12, 1999 Amended and Restated on January 17, 2001 The following constitute the provisions of the 1997 Employee Stock Purchase Plan of BEA Systems, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Parents or Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. As used herein, the following definitions shall ----------- apply: (a) "Accrual Period" means a period of approximately six months, -------------- commencing on each January 1 and July 1 and terminating on the next following June 30 or December 31, respectively; provided, however, that the first Accrual Period shall commence on the Effective Date and shall end on June 30, 1997. Notwithstanding the foregoing, the Accrual Periods and Exercise Dates for the following Purchase Periods are as follows: (1) The Exercise Dates for the Purchase Period commencing on December 16, 1998 and terminating on December 15, 2000 are June 30, 1999, December 15, 1999, June 30, 2000 and December 15, 2000. (2) The Exercise Dates for the Purchase Period commencing on December 16, 1999 and terminating on December 15, 2001 are June 30, 2000, December 31, 2000, June 30, 2001 and December 15, 2001. (3) The Exercise Dates for the Purchase Period commencing on December 16, 2000 and terminating on December 31, 2002 are June 30, 2001, December 31, 2001, June 30, 2002 and December 31, 2002. (4) The Exercise Dates for the Purchase Period commencing on December 16, 2001 and terminating on December 31, 2003 are June 30, 2002, December 31, 2002, June 30, 2003 and December 31, 2003. (b) "Board" means the Board of Directors of the Company. ----- 1 (c) "Code" means the Internal Revenue Code of 1986, as amended. ---- (d) "Common Stock" means the common stock of the Company. ------------ (e) "Company" means BEA Systems, Inc. a Delaware corporation. ------- (f) "Compensation" means an Employee's base salary, commissions, ------------ overtime, bonuses, annual awards, other incentive payments, from the Company or one or more Designated Parents or Subsidiaries, including such amounts of earnings as are deferred by the Employee (i) under a qualified cash or deferred arrangement described in Section 401(k) of the Code, (ii) to a plan qualified under Section 125 of the Code, or (iii) to any other qualified or non-qualified plan intended to defer the receipt of compensation. Compensation does not include reimbursements or other expense allowances, fringe benefits (cash or noncash), moving expenses, and any other payments not specifically referenced in the first sentence. (g) "Corporate Transaction" means any of the following stockholder- --------------------- approved transactions to which the Company is a party: (1) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (2) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations) in connection with complete liquidation or dissolution of the Company; or (3) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger. (h) "Designated Parents or Subsidiaries" means the Parents or ---------------------------------- Subsidiaries which have been designated by the Plan Administrator from time to time as eligible to participate in the Plan. (i) "Effective Date" means the effective date of the Registration -------------- Statement relating to the Company's initial public offering of its Common Stock. However, should any Designated Parent or Subsidiary become a participating company in the Plan after such date, then such entity shall designate a separate Effective Date with respect to its employee-participants. (j) "Employee" means any individual, including an officer or director, -------- who is an employee of the Company or a Designated Parent or Subsidiary for purposes of Section 423 of the Code. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the individual's employer. Where the period of leave exceeds ninety (90) days and the individual's 2 right to reemployment is not guaranteed either by statute or by contract, the employment relationship will be deemed to have terminated on the ninety-first (91st) day of such leave, for purposes of determining eligibility to participate in the Plan. (k) "Enrollment Date" means the first day of each Purchase Period. --------------- (l) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (m) "Exercise Date" means the last day of each Accrual Period. ------------- (n) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (1) Where there exists a public market for the Common Stock, the Fair Market Value shall be (A) the closing price for a share of Common Stock for the last market trading day prior to the time of the determination (or, if no closing price was reported on that date, on the last trading date on which a closing price was reported) on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock or the Nasdaq National Market, whichever is applicable or (B) if the Common Stock is not traded on any such exchange or national market system, the average of the closing bid and asked prices of a share of Common Stock on the Nasdaq Small Cap Market for the day prior to the time of the determination (or, if no such prices were reported on that date, on the last date on which such prices were reported), in each case, as reported in The Wall Street Journal or such other source as the Plan Administrator deems reliable; (2) In the absence of an established market of the type described in (1), above, for the Common Stock, and subject to (3), below, the Fair Market Value thereof shall be determined by the Plan Administrator in good faith; or (3) On the Effective Date, the Fair Market Value shall be the price at which the Board, or if applicable, the Pricing Committee of the Board, and the underwriters agree to offer Common Stock to the public in the initial public offering of the Common Stock, net of discounts and underwriting commissions. (o) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (p) "Participant" means an Employee of the Company or Designated ----------- Parent or Subsidiary who is actively participating in the Plan. (q) "Plan" means this Employee Stock Purchase Plan. ---- (r) "Plan Administrator" means either the Board or a committee of the ------------------ Board that is responsible for the administration of the Plan. 3 (s) "Purchase Period" means a purchase period established pursuant to --------------- Section 4 hereof. (t) "Purchase Price" shall mean an amount equal to 85% of the Fair -------------- Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (u) "Reserves" means the number of shares of Common Stock covered by -------- each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (v) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Eligibility. ----------- (a) General. Any individual who is an Employee on a given Enrollment ------- Date shall be eligible to participate in the Plan for the Purchase Period commencing with such Enrollment Date. (b) Limitations on Grant and Purchase Amount. Any provisions of the ---------------------------------------- Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (taking into account stock owned by any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Parent or Subsidiary, or (ii) which permits his/her rights to purchase stock under all employee stock purchase plans of the Company and its Parents and Subsidiaries to exceed Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the Fair Market Value of the shares at the time such option is granted) in any calendar year. (c) Other Limits on Eligibility. Notwithstanding Subsection (a), --------------------------- above, the following Employees shall not be eligible to participate in the Plan for any relevant Purchase Period: (i) Employees whose customary employment is 20 hours or less per week; (ii) Employees whose customary employment is for not more than 5 months in any calendar year; and (iii) Employees who are subject to rules or laws of a foreign jurisdiction that prohibit or make impractical the participation of such Employees in the Plan. 4. Purchase Periods. ---------------- (a) The Plan shall be implemented through overlapping or consecutive Purchase Periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated in accordance with Section 19 hereof. The maximum duration of a Purchase Period shall be twenty-seven (27) months. Initially, the Plan shall be implemented through overlapping Purchase Periods of twenty-four (24) months' duration commencing each January 1 4 and July 1 following the Effective Date; provided, however, that the following Purchase Periods shall commence and terminate as follows: (1) The initial Purchase Period shall commence on the Effective Date and shall end on June 30, 1999. (2) A Purchase Period shall commence on December 16, 1998 and terminate on December 15, 2000. (3) A Purchase Period shall commence on December 16, 1999 and terminate on December 15, 2001. (4) A Purchase Period shall commence on December 16, 2000 and terminate on December 31, 2002. (5) A Purchase Period shall commence on December 16, 2001 and terminate on December 31, 2003. The Plan Administrator shall have the authority to change the length of any Purchase Period and the length of Accrual Periods within any such Purchase Period subsequent to the initial Purchase Period by announcement at least thirty (30) days prior to the commencement of the Purchase Period and to determine whether subsequent Purchase Periods shall be consecutive or overlapping. (b) A Participant shall be granted a separate option for each Purchase Period in which he/she participates. The option shall be granted on the Enrollment Date and shall be automatically exercised in successive installments on the Exercise Dates ending within the Purchase Period. (c) An Employee may participate in only one Purchase Period at a time. Accordingly, except as provided in Section 4(d), an Employee who wishes to join a new Purchase Period must withdraw from the current Purchase Period in which he/she is participating and must also enroll in the new Purchase Period prior to the Enrollment Date for that Purchase Period. (d) If on the first day of any Accrual Period in a Purchase Period in which a Participant is participating, the Fair Market Value of the Common Stock is less than the Fair Market Value of the Common Stock on the Enrollment Date of the Purchase Period (after taking into account any adjustment during the Purchase Period pursuant to Section 18(a)), the Purchase Period shall be terminated automatically and the Participant shall be enrolled automatically in the new Purchase Period which has its first Accrual Period commencing on that date, provided the Participant is eligible to participate in the Plan on that date and has not elected to terminate participation in the Plan. (e) Except as specifically provided herein, the acquisition of Common Stock through participation in the Plan for any Purchase Period shall neither limit nor require the acquisition of Common Stock by a Participant in any subsequent Purchase Period. 5 5. Participation. ------------- (a) An eligible Employee may become a Participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the designated payroll office of the Company at least ten (10) business days prior to the Enrollment Date for the Purchase Period in which such participation will commence, unless a later time for filing the subscription agreement is set by the Plan Administrator for all eligible Employees with respect to a given Purchase Period. (b) Payroll deductions for a Participant shall commence with the first payroll period following the Enrollment Date and shall end on the last complete payroll period during the Purchase Period, unless sooner terminated by the Participant as provided in Section 10. 6. Payroll Deductions. ------------------ (a) At the time a Participant files his/her subscription agreement, he/she shall elect to have payroll deductions made during the Purchase Period in an amount not exceeding fifteen percent (15%) of the Compensation which he/she receives during the Purchase Period. (b) All payroll deductions made for a Participant shall be credited to his/her account under the Plan and will be withheld in whole percentages only. A Participant may not make any additional payments into such account. (c) A Participant may discontinue his/her participation in the Plan as provided in Section 10, or may increase or decrease the rate of his/her payroll deductions during the Purchase Period by completing and filing with the Company a new subscription agreement authorizing an increase or decrease in the payroll deduction rate. Any decrease in the rate of a Participant's payroll deductions shall be effective with the first full payroll period commencing ten (10) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. Any increase in the rate of a Participant's payroll deductions shall be effective with the first full payroll period of the next Accrual Period following the Accrual Period in which the Company receives the new subscription agreement if such agreement is filed within ten (10) business days before the commencement of the next Accrual Period unless the Company elects to process a given change in participation more quickly. A Participant's subscription agreement shall remain in effect for successive Purchase Periods unless terminated as provided in Section 10. The Plan Administrator shall be authorized to limit the number of payroll deduction rate changes during any Purchase Period. (d) A Participant's payroll deductions may be decreased to 0% at such time during any Accrual Period which is scheduled to end during the current calendar year (the "Current Accrual Period") that the aggregate of all payroll deductions which were previously used to purchase stock under the Plan in a prior Accrual Period which ended during that calendar year plus all payroll deductions accumulated with respect to the Current Accrual Period equal $21,250. Payroll deductions shall recommence at the rate provided in such Participant's subscription agreement at the beginning of the first Accrual Period which is scheduled to end in the following calendar year, unless terminated by the Participant as provided in Section 10. 6 7. Grant of Option. On the Enrollment Date, each Participant shall --------------- be granted an option to purchase (at the applicable Purchase Price) up to a number of shares of the Common Stock determined by dividing fifteen percent (15%) of such Participant's Compensation receivable during the Purchase Period by the applicable Purchase Price; provided (i) that such option shall be subject to the limitations set forth in Sections 3(b) and 12 hereof, and (ii) the maximum number of shares of Common Stock a Participant shall be permitted to purchase in any Accrual Period shall be three thousand (3,000) shares, subject to adjustment as provided in Section 18 hereof. Exercise of the option shall occur as provided in Section 8, unless the Participant has withdrawn pursuant to Section 10, and the option, to the extent not exercised, shall expire on the last day of the Purchase Period. 8. Exercise of Option. Unless a Participant withdraws from the Plan ------------------ as provided in Section 10, below, the Participant's option will be exercised automatically on each Exercise Date by applying the accumulated payroll deductions in the Participant's account to purchase the maximum number of full shares subject to the option by dividing such Participant's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price. No fractional shares will be purchased; any payroll deductions accumulated in a Participant's account which are not sufficient to purchase a full share shall be carried over to the next Accrual Period or Purchase Period, whichever applies, or returned to the Participant, if the Participant withdraws from the Plan. Any amount remaining in a Participant's account following the purchase of shares on the Exercise Date which exceeds the cost of one full share of Common Stock on the Exercise Date shall be returned to the Participant and shall not be carried over to the next Purchase Period. During a Participant's lifetime, a Participant's option to purchase shares hereunder is exercisable only by him/her. 9. Delivery. Upon receipt of a request from a Participant after -------- each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to such Participant, as promptly as practicable, of a certificate representing the shares purchased upon exercise of his/her option. 10. Withdrawal; Termination of Employment. ------------------------------------- (a) A Participant may withdraw all but not less than all the payroll deductions credited to his/her account and not yet used to exercise his/her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the Participant's payroll deductions credited to his/her account will be paid to such Participant as promptly as practicable after receipt of notice of withdrawal, such Participant's option for the Purchase Period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the Purchase Period. If a Participant withdraws from a Purchase Period, payroll deductions will not resume at the beginning of the succeeding Purchase Period unless the Participant delivers to the Company a new subscription agreement. (b) Upon a Participant's ceasing to be an Employee for any reason or upon termination of a Participant's employment relationship (as described in Section 2(j)), the payroll deductions credited to such Participant's account during the Purchase Period but not yet used to exercise the option will be returned to such Participant or, in the case of his/her death, to the 7 person or persons entitled thereto under Section 14, and such Participant's option will be automatically terminated. 11. Interest. No interest shall accrue on the payroll deductions -------- credited to a Participant's account under the Plan. 12. Stock. ----- (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 18, the maximum number of shares of Common Stock which shall be made available for sale under the Plan shall be three million six hundred sixty six thousand ninety two (3,666,092) shares, and annually, commencing with the first business day of each fiscal year of the Company beginning with February 1, 2000 and thereafter, such maximum number of shares shall be increased by a number of shares of Common Stock equal to the lesser of (i) six million (6,000,000) shares or (ii) six percent (6%) of the number of shares of Common Stock outstanding as of the last day of the immediately preceding fiscal year of the Company reduced by the number of shares of Common Stock added to the Company's 1997 Stock Incentive Plan pursuant to the terms of Section 3(a) of that plan. If on a given Exercise Date the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Plan Administrator shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) A Participant will have no interest or voting right in shares covered by his/her option until such shares are actually purchased on the Participant's behalf in accordance with the applicable provisions of the Plan. No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase. (c) Shares to be delivered to a Participant under the Plan will be registered in the name of the Participant or in the name of the Participant and his/her spouse. 13. Administration. The Plan shall be administered by the Board or a -------------- committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all persons. 14. Designation of Beneficiary. -------------------------- (a) Each Participant will file a written designation of a beneficiary who is to receive any shares and cash, if any, from the Participant's account under the Plan in the event of such Participant's death. If a Participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the Participant (and his/her spouse, if any) at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of 8 such Participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Plan Administrator), the Plan Administrator, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Plan Administrator, then to such other person as the Plan Administrator may designate. 15. Transferability. Neither payroll deductions credited to a --------------- Participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Plan Administrator may treat such act as an election to withdraw funds from a Purchase Period in accordance with Section 10. 16. Use of Funds. All payroll deductions received or held by the ------------ Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each ------- Participant in the Plan. Statements of account will be given to Participants at least annually, which statements will set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization; Corporate ----------------------------------------------------- Transactions. - ------------ (a) Adjustments Upon Changes in Capitalization. Subject to any ------------------------------------------ required action by the stockholders of the Company, the Reserves, the fixed share limit on the annual increase in the number of shares of Common Stock available for sale under the Plan, as well as the Purchase Price, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other similar event resulting in an increase or decrease in the number of issued shares of Common Stock. Such adjustment shall be made by the Plan Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. The Plan Administrator may, if it so determines in the exercise of its sole discretion, make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock. (b) Corporate Transactions. In the event of a proposed Corporate ---------------------- Transaction, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Plan Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or 9 substitution, to shorten the Purchase Period then in progress by setting a new Exercise Date (the "New Exercise Date"). If the Plan Administrator shortens the Purchase Period then in progress in lieu of assumption or substitution in the event of a Corporate Transaction, the Plan Administrator shall notify each Participant in writing, at least ten (10) days prior to the New Exercise Date, that the Exercise Date for his/her option has been changed to the New Exercise Date and that his/her option will be exercised automatically on the New Exercise Date, unless prior to such date he/she has withdrawn from the Purchase Period as provided in Section 10. For purposes of this Subsection, an option granted under the Plan shall be deemed to be assumed if, following the Corporate Transaction, the option confers the right to purchase, for each share of Common Stock subject to the option immediately prior to the Corporate Transaction, the consideration (whether stock, cash or other securities or property) received in the Corporate Transaction by holders of Common Stock for each share of Common Stock held on the effective date of the Corporate Transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if such consideration received in the Corporate Transaction was not solely common stock of the successor corporation or its Parent, the Plan Administrator may, with the consent of the successor corporation and the Participant, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Corporate Transaction. 19. Amendment or Termination. ------------------------ (a) The Plan Administrator may at any time and for any reason terminate or amend the Plan. Except as provided in Section 18, no such termination can affect options previously granted, provided that a Purchase Period may be terminated by the Plan Administrator on any Exercise Date if the Plan Administrator determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 18, no amendment may make any change in any option theretofore granted which adversely affects the rights of any Participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law or regulation), the Company shall obtain stockholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any Participant rights may be considered to have been "adversely affected," the Plan Administrator shall be entitled to change the Purchase Periods, limit the frequency and/or number of changes in the amount withheld during Purchase Periods, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participant's Compensation, and establish such other limitations or procedures as the Plan Administrator determines in its sole discretion advisable and which are consistent with the Plan. 10 20. Notices. All notices or other communications by a Participant to ------- the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Plan Administrator at the location, or by the person, designated by the Plan Administrator for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the Participant to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. In addition, no options shall be exercised or shares issued hereunder before the Plan shall have been approved by stockholders of the Company as provided in Section 23. 22. Term of Plan. The Plan shall become effective upon the earlier ------------ to occur of its adoption by the Board or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 19. 23. Approval of the Plan. The Plan became effective when adopted by -------------------- the Board on March 19, 1997, and was approved by the Company's stockholders on March 31, 1997. On September 16, 1997, the Board adopted and approved an amendment and restatement of the Plan to modify the ending date of each semi- annual Accrual Period commencing on July 1 from December 31 to December 15 and to modify the commencement dates of each semi-annual Accrual Period and twenty- four month Purchase Period commencing on January 1 from January 1 to December 16. On May 13, 1998, the Board adopted an amendment of the Plan to increase the number of shares of Common Stock available for sale under the Plan and to adopt a formula to provide for an annual automatic increase in the number of shares of Common Stock available for sale under the Plan, which amendments were approved by the Company's stockholders on June 25, 1998. Also on May 13, 1998, the Board adopted an amendment and restatement of the Plan (a) to increase the maximum rate of payroll withholding for the purchase of shares under the Plan from ten percent (10%) of Compensation to fifteen percent (15%) of Compensation (such amendment effective for Purchase Periods commencing on and after July 1, 1998) and (b) to grant options under the Plan to each Participant at the maximum fifteen percent (15%) of Compensation withholding rate (such amendment effective for Purchase Periods commencing on and after July 1, 1998), and such amendments were not subject to stockholder approval. On May 12, 1999, the Board adopted an amendment and restatement of the Plan to reduce the number of shares of Common Stock available for sale under the Plan and to adjust the formula that provides an annual automatic increase in the number of shares of Common Stock available for sale under the Plan, such amendments conditioned upon and not to take effect until stockholder approval of such amendments is obtained. 11 On January 17, 2001, the Board adopted an amendment and restatement of the Plan to resolve any potential ambiguity regarding the purchase limitations under the Plan; modify the ending date of each semi-annual Accrual Period commencing on July 1 from December 15 to December 31; and modify the commencement dates of each semi-annual Accrual Period and twenty-four month Purchase Period commencing on December 16 from December 16 to January 1. 24. No Employment Rights. The Plan does not, directly or indirectly, -------------------- create any right for the benefit of any employee or class of employees to purchase any shares under the Plan, or create in any employee or class of employees any right with respect to continuation of employment by the Company or a Designated Parent or Subsidiary, and it shall not be deemed to interfere in any way with such employer's right to terminate, or otherwise modify, an employee's employment at any time. 25. Effect of Plan. The provisions of the Plan shall, in accordance -------------- with its terms, be binding upon, and inure to the benefit of, all successors of each Participant, including, without limitation, such Participant's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Participant. 26. Applicable Law. The laws of the State of California (excluding -------------- that body of law pertaining to its conflicts of law) will govern all matters relating to this Plan except to the extent it is superseded by the laws of the United States. 12 EX-12.1 5 dex121.txt RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 BEA Systems, Inc. Ratio of Earnings to Fixed Charges (all amounts in thousands)
Fiscal years ended January 31, --------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------------------------------------------------------------------- Income (loss) before income taxes $ 47,462 $ (5,657) $ (46,726) $ (20,068) (87,034) Add fixed charges 35,426 29,385 16,615 8,531 8,238 --------------------------------------------------------------------- Earnings (as defined) $ 82,888 $ 23,728 $ (30,111) $ (11,537) $(78,796) ===================================================================== Fixed charges: Interest expense (1) 22,674 12,363 10,426 6,054 6,727 Portion of rent expense representative of interest 10,321 7,779 5,528 2,477 1,511 Amortization of debt premium and issuance costs 2,431 9,243 661 - - --------------------------------------------------------------------- Total fixed charges $ 35,426 $ 29,385 $ 16,615 $ 8,531 $ 8,238 ===================================================================== Ratio of earnings to fixed charges 2.34 * * * * =====================================================================
* Earnings (as defined) were insufficient to cover fixed charges by $5,657, $46,726, $20,068 and $87,034 for the fiscal years ended January 31, 2000, 1999, 1998 and 1997, respectively. (1) Excludes debt conversion premium of $236 and $8,054 in fiscal 2001 and 2000, respectively, which is included in amortization of debt premium and issuance costs. EX-21.1 6 dex211.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 BEA SYSTEMS, INC. SUBSIDIARIES OF THE REGISTRANT
Subsidiary Legal Name Jurisdiction of Incorporation --------------------- ----------------------------- BEA Systems (FSC), Inc. Barbados BEA International Cayman Islands BEA Systems, Ltd. Canada BEA Systems Limitada Brazil BEASystems SA de CV Mexico BEA Systems Europoe Gmbh Germany BEA Systems Europe Ltd. United Kingdom BEA Systems Italia S.P.A. Italy BEA Systems Spain S.A. Spain BEA Systems Europe N.V. Belgium BEA Systems Pty Ltd. South Africa BEA Systems AB Sweden BEA Systems, Ltd United Kingdom BEA Systems OY Finland BEA Systems S.A. France BEA Systems (Switzerland) Ltd. Switzerland BEA Systems Japan Ltd. Japan BEA Systems Korea Korea BEA Systems Pty Ltd. Australia BEA Systems HK Ltd. Hong Kong BEA Systems Holland B.V. Netherlands BEA WebXpress, LLC Delaware Avitek Inc. Delaware The Theory Center, Inc. Delaware Technology Resource Group Massachusetts BEA Systems Holding A, Inc. Delaware BEA Systems Holding B. Inc. Delaware BEA Systems Distribution B.V. Netherlands BEA Systems Netherlands B.V. Netherlands
Subsidiary Legal Name Jurisdiction of Incorporation --------------------- ----------------------------- BEA Cayman Holding I Cayman Islands BEA Cayman Holding II Cayman Islands BEA Cayman Holding III Cayman Islands BEA Systems (Ontario), Inc. Canada BEA Systems (Nova Scotia) Company Canada The Object People Limited United Kingdom The Object People GmbH Germany 1395135 Ontario Inc. Canada The Workflow Automation Company Canada BEA Systems Limited Ireland Ireland BEA Systems New Zealand, Ltd. New Zealand BEA Systems Israel, Ltd. Israel Bauhaus Technologies, Inc. Illinois Softport Systems, Inc. New York
EX-23.1 7 dex231.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-37385, 333-24941, 333-66445, 333-69241, 333-77725, 333- 77723, 333-87301, 333-92257, 333-36278 and 333-36286) pertaining to the 1995 Flexible Stock Incentive Plan, the 1997 Stock Incentive Plan, the 1997 Employee Stock Purchase Plan, the WebLogic, Inc. 1996 Stock Plan and The Theory Center, Inc. Amended, Restated 1999 Stock Option/Stock Issuance Plan and the 2000 Non-Qualified Stock Incentive Plan and the Registration Statements (Form S-3 Nos. 333-58439, 333-63117, 333-66443, 333- 34956, 333- 92085, 333-32348 and 333-40582) of BEA Systems, Inc. of our report dated February 21, 2001, with respect to the consolidated financial statements and schedule of BEA Systems, Inc. included in this Annual Report (Form 10-K) for the year ended January 31, 2001. /s/ Ernst & Young LLP Palo Alto, California April 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----