-----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, B+p7A5fqGA8PZZIF/RSpr6XNB62Kf6lQFJq6lhq91JLgPldBPQ6NQx6UsEoKf0Lh eA8Bmq8Y/Jdxgl3YXWwzJA== 0000891618-96-000960.txt : 19960624 0000891618-96-000960.hdr.sgml : 19960624 ACCESSION NUMBER: 0000891618-96-000960 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960621 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIEBEL SYSTEMS INC CENTRAL INDEX KEY: 0001006835 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943187233 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-03751 FILM NUMBER: 96583745 BUSINESS ADDRESS: STREET 1: 4005 BOHANNON DR CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4153296500 MAIL ADDRESS: STREET 1: 4005 BOHANNON DR CITY: MENLO PARK STATE: CA ZIP: 94025 S-1/A 1 AMENDMENT NO.2 TO FORM S-1 DATED JUNE 21, 1996 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996 REGISTRATION NO. 333-03751 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SIEBEL SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7372 94-3187233 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification incorporation or organization) Classification Code Number) Number)
------------------------ 4005 BOHANNON DRIVE MENLO PARK, CALIFORNIA 94025 (415) 329-6500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ THOMAS M. SIEBEL CHAIRMAN AND CHIEF EXECUTIVE OFFICER SIEBEL SYSTEMS, INC. 4005 BOHANNON DRIVE MENLO PARK, CALIFORNIA 94025 (415) 329-6500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JAMES C. GAITHER, ESQ. WILLIAM D. SHERMAN, ESQ. ERIC C. JENSEN, ESQ. C. PATRICK MACHADO, ESQ. COOLEY GODWARD CASTRO C. JEFFREY CHAR, ESQ. HUDDLESON & TATUM MORRISON & FOERSTER LLP 3000 SAND HILL ROAD, BLDG. 3, SUITE 230 755 PAGE MILL ROAD MENLO PARK, CA 94025-7116 PALO ALTO, CA 94304 (415) 843-5000 (415) 813-5600
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE - --------------------------------------------------------------------------------------------------------------------- Common Stock, $.001 par value.......... 2,300,000 $15.00 $34,500,000 $11,897 (3) - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(1) Includes 300,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933. (3) Previously paid. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SIEBEL SYSTEMS, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS ----------------------------------------------- ----------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus....... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus................................... Inside Front Cover Page and Outside Back Cover Page 3. Summary Information, Risk Factors, and Ratio of Earnings to Fixed Charges.................... Prospectus Summary; Risk Factors 4. Use of Proceeds................................ Use of Proceeds 5. Determination of Offering Price................ Outside Front Cover Page of Prospectus; Underwriting 6. Dilution....................................... Dilution 7. Selling Security Holders....................... Principal and Selling Stockholders 8. Plan of Distribution........................... Outside Front Cover Page and Inside Front Cover Page; Underwriting 9. Description of Securities to be Registered..... Prospectus Summary; Capitalization; Description of Capital Stock 10. Interests of Named Experts and Counsel......... Legal Matters; Experts 11. Information with Respect to the Registration............................. Outside Front and Inside Front Cover Pages; Prospectus Summary; Risk Factors; Dividend Policy; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal and Selling Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................................. Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 21, 1996 PROSPECTUS 1,963,000 SHARES LOGO COMMON STOCK Of the 1,963,000 shares of Common Stock offered hereby, 1,800,000 shares are being sold by the Company and 163,000 shares are being sold by the Selling Stockholders. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See "Principal and Selling Stockholders." At the request of the Company, the number of shares of Common Stock purchasable at the Per Share Price to Public for an aggregate purchase price of $2,000,000 has been reserved for sale to The Dow Chemical Company (the "Dow Shares"). The sale of such shares will reduce the number of shares offered hereby. See "Underwriting." Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $13.00 and $15.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol SEBL. Upon completion of this offering, the directors and officers of the Company and affiliated entities will exercise voting control over approximately 67% of the outstanding Common Stock. ------------------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS - ---------------------------------------------------------------------------------------------------------- Per Share..................... $ $ $ $ - ---------------------------------------------------------------------------------------------------------- Total(3)...................... $ $ $ $ - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
(1) Includes the Dow Shares, as to which the underwriting discount will be $ per share. See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $950,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 294,450 additional shares of Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount, and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be available for delivery on or about , 1996 at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST MONTGOMERY SECURITIES ROBERTSON, STEPHENS & COMPANY , 1996 4 LOGO A closed-loop sales and marketing information system allows organizations to share and manage sales opportunities and information from a marketing encyclopedia across multiple distribution channels. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 [GATEFOLD] 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Siebel Systems, Inc. ("Siebel," "Siebel Systems" or the "Company") is an industry leading provider of enterprise-class sales and marketing information software systems. The Company designs, develops, markets, and supports Siebel Sales Enterprise, a leading Internet-enabled, object oriented client/server application software product family designed to meet the sales and marketing information system requirements of even the largest multi-national organizations. In today's increasingly competitive global markets, businesses must continuously improve their operations. Having spent considerable effort and resources in previous years automating finance, manufacturing, distribution, human resources management and general office operations, many businesses are now looking to apply the leverage of information technology to their sales and marketing processes. Unlike previous automation projects which have focused on decreasing expenses, sales and marketing information systems focus primarily on increasing revenues. The Siebel Sales Enterprise is comprised of a broad range of advanced client/server application products designed to allow corporations to deploy comprehensive customer information systems, product information systems, competitive information systems, and decision support systems on a global basis. The Company's products provide support for multiple languages and multiple currencies with support for a number of frequently interdependent distribution channels, including direct field sales, telesales, telemarketing, distribution, retail, and Internet-based selling. The Siebel Sales Enterprise is built upon a modern technology foundation including intranet and Internet enablement, client/server, object oriented programming, 32-bit processing, OLE 2 automation, relational database support for Oracle, Sybase, and Informix, and system support for Windows 95, Windows NT, and UNIX. The Siebel Sales Enterprise is designed to scale to meet the needs of large organizations deploying thousands of sales and marketing professionals with very large data storage and retrieval requirements. The Siebel Sales Enterprise is designed to be comprehensive in its scope of functionality and highly configurable, allowing for highly customized industry-specific and company-specific system deployments. The Company's objective is to establish and maintain a global market leadership position in the sales and marketing information systems market. The Company's strategy is to provide high-end enterprise client/server sales and marketing applications in a broad range of industries, extend its advanced technology position, achieve universally successful customer implementations of Siebel Sales Enterprise, expand its global sales and support capacity, and continue to leverage strategic alignment with leading third-party technology providers, system integrators, and distributors. See "Business -- Strategy." The Company markets and sells its software through its direct sales force, telebusiness channels, and distributors in the Americas, Europe, and Asia. The Siebel Sales Enterprise has been licensed by customers in a wide range of industries, including transportation, financial services, securities brokerage, manufacturing, computers, communications, chemicals, and computer software. The Company's customers as of May 31, 1996 were American President Companies Ltd., AMP Incorporated, Andersen Consulting LLP, BMC Software, Inc., Charles Schwab & Co., Inc, Cisco Systems, Inc., Digital Equipment Corporation, The Dial Corp, The Dow Chemical Company, Frank Russell Company, Hewlett-Packard Japan, Ltd., Informix Software, Inc., LSI Logic Corporation, Montgomery Securities, Newbridge Networks, Inc., Platinum Technology, Inc., Pure Software, Inc., The Quaker Oats Company, Texas Commerce Bank National Association, Unisys Corporation and Viking Freight System, Inc. The Company's principal executive offices are located at 4005 Bohannon Drive, Menlo Park, CA 94025. Its telephone number is (415) 329-6500. Its e-mail address is info@siebel.com. The Company maintains an Internet home page. 3 7 THE OFFERING Common Stock offered by the Company................... 1,800,000 shares Common Stock offered by the Selling Stockholders...... 163,000 shares Common Stock to be outstanding after the offering..... 15,530,770 shares(1) Use of proceeds....................................... For general corporate purposes, including working capital Proposed Nasdaq National Market symbol................ SEBL
SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM YEAR ENDED SEPTEMBER 13, 1993 DECEMBER 31, (INCEPTION) TO ------------------- DECEMBER 31, 1993 1994 1995 ------------------ ------- ------- STATEMENT OF OPERATIONS DATA: Total revenues............................................... $ -- $ 50 $ 8,038 Operating income (loss)...................................... (114) (1,779) 372 Net income (loss)............................................ (114) (1,766) 317 Pro forma net income per share(2)............................ $ .02 Shares used in pro forma per share computation(2)............ 16,340
QUARTER ENDED ------------------------------------------------------ MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1995 1995 1995 1995 1996 -------- -------- --------- -------- --------- STATEMENT OF OPERATIONS DATA: Total revenues......................................... $ 30 $ 1,284 $ 2,564 $ 4,160 $ 4,709 Operating income (loss)................................ (1,208 ) 25 422 1,133 211 Net income (loss)...................................... (720 ) 42 287 708 198 Pro forma net income (loss) per share(2)............... $ (.05 ) $ -- $ .02 $ .04 $ .01 Shares used in pro forma per share computation(2)...... 14,642 16,777 16,856 16,803 16,859
MARCH 31, 1996 --------------------------------------- ACTUAL PRO FORMA(3) AS ADJUSTED(4) ------- ------------ -------------- BALANCE SHEET DATA: Cash and cash equivalents....................................... $ 9,757 $ 11,094 $ 33,580 Total assets.................................................... 15,609 16,946 39,432 Total stockholders' equity...................................... 10,314 11,651 34,137
- --------------- (1) Based on shares outstanding as of April 30, 1996. Excludes 3,760,450 shares of Common Stock issuable upon exercise of stock options outstanding as of April 30, 1996 at a weighted average exercise price of $3.35 per share. See "Management -- Equity Incentive Plans" and Notes 4 and 7 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements for a description of the calculation of pro forma net income (loss) per share. (3) Pro forma reflects (i) the sale of 90,000 shares of Series D Preferred Stock at $10.00 per share on April 30, 1996, (ii) the issuance of 75,000 shares of Series C Preferred Stock upon the exercise of a warrant at $5.82 per share in June 1996, and (iii) the conversion of all outstanding shares of Preferred Stock into shares of Common Stock upon the closing of this offering. (4) Adjusted to reflect the sale of 1,800,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $14.00 per share after deduction of the estimated underwriting discount and offering expenses payable by the Company. See "Use of Proceeds." ------------------------ Except as otherwise indicated, the information contained in this Prospectus assumes (i) no exercise of the Underwriters' over-allotment option and (ii) the conversion of all outstanding shares of Preferred Stock into shares of Common Stock upon the closing of this offering. See "Description of Capital Stock" and "Underwriting." 4 8 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of the Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Prospectus. Limited Operating History; History of Operating Losses. The Company commenced operations in July 1993 and shipped version 1.0 of its product, Siebel Sales Enterprise, in April 1995. As of May 31, 1996, only 21 entities have licensed Siebel Sales Enterprise and each only on a trial or limited deployment basis. Accordingly, the Company has only a limited operating history, and its prospects must be evaluated in light of the risks and uncertainties encountered by a company in its early stage of development. The new and evolving markets in which the Company operates make these risks and uncertainties particularly pronounced. To address these risks, the Company must, among other things, successfully implement its sales and marketing strategy, respond to competitive developments, attract, retain, and motivate qualified personnel, continue to develop and upgrade its products and technologies more rapidly than its competitors, and commercialize its products and services incorporating these enhanced technologies. The Company incurred net losses in each quarter from inception through the first quarter of 1995. The Company expects to continue to devote substantial resources to its product development and sales and customer support and, as a result, will need to generate significant quarterly revenues to achieve and maintain profitability. The Company's limited operating history makes it difficult to predict accurately future operating results. There can be no assurance that any of the Company's business strategies will be successful or the Company will be profitable in any future quarter or period. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating Results. Prior growth rates in the Company's revenue and net income should not be considered indicative of future operating results. Future operating results will depend upon many factors, including the demand for the Company's products, the level of product and price competition, the length of the Company's sales cycle, the size and timing of individual license transactions, the delay or deferral of customer implementations, the Company's success in expanding its customer support organization, direct sales force and indirect distribution channels, the timing of new product introductions and product enhancements, the mix of products and services sold, levels of international sales, activities of and acquisitions by competitors, the timing of new hires, changes in foreign currency exchange rates and the ability of the Company to develop and market new products and control costs. In addition, the decision to implement a sales and marketing information system is discretionary, involves a significant commitment of customer resources and is subject to the budget cycles of the Company's customers. The Company's sales generally reflect a relatively high amount of revenue per order. The loss or delay of individual orders, therefore, would have a significant impact on the revenue and quarterly results of the Company. The timing of license revenue is difficult to predict because of the length and variability of the Company's sales cycle, which has ranged to date from two to eighteen months from initial contact to the execution of a license agreement. The Company's operating expenses are based on anticipated revenue trends and, because a high percentage of these expenses are relatively fixed, a delay in the recognition of revenue from a limited number of license transactions could cause significant variations in operating results from quarter to quarter and could result in operating losses. To the extent such expenses precede, or are not subsequently followed by, increased revenues, the Company's operating results would be materially and adversely affected. To date, the Company has not experienced significant seasonality of operating results. The Company expects that future revenues for any period may be affected by the fiscal or quarterly budget cycles of its customers. As a result of these and other factors, revenues for any quarter are subject to significant variation, and the Company 5 9 believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. It is likely that the Company's future quarterly operating results from time to time will not meet the expectations of market analysts or investors, which would likely have an adverse effect on the price of the Company's Common Stock. In addition, fluctuations in operating results may also result in volatility in the price of the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business -- Marketing" and "-- Sales." Reliance on Andersen Consulting and Other Relationships; Dependence on System Integrators. The Company has established strategic relationships with a number of organizations that it believes are important to its worldwide sales, marketing and support activities and the implementation of its products. The Company believes that its relationships with such organizations provide marketing and sales opportunities for the Company's direct sales force and expand the distribution of its products. These relationships also assist it in keeping pace with the technological and marketing developments of major software vendors, and, in certain instances, provide it with technical assistance for its product development efforts. In particular, the Company has established a non-exclusive strategic relationship with Andersen Consulting, a principal stockholder of the Company. In 1995 and the first quarter of 1996, approximately 46% and 49%, respectively, of the revenues of the Company were derived from customers for which Andersen Consulting had been engaged to provide system integration services. Any deterioration of the Company's relationship with Andersen Consulting could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has relationships with Wilson Learning Corporation, Itochu Corporation and Itochu Techno-Science Corporation ("Itochu"), among others. The failure by the Company to maintain its existing relationships, or to establish new relationships in the future, could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's customers and potential customers frequently rely on Andersen Consulting, as well as other third-party system integrators to develop, deploy and/or manage Siebel Sales Enterprise. If the Company is unable to train adequately a sufficient number of system integrators or, if for any reason such integrators do not have or devote the resources necessary to facilitate implementation of the Company's products or if such integrators adopt a product or technology other than Siebel Sales Enterprise, the Company's business, operating results and financial condition could be materially and adversely affected. See "Business -- Global Strategic Alignment" and "Principal and Selling Stockholders." Dependence on the Internet. The Siebel Sales Enterprise facilitates online communication over public and private networks. The success of the Company's products may depend, in part, on the Company's ability to introduce products which are compatible with the Internet and on the broad acceptance of the Internet and the World Wide Web as a viable commercial marketplace. It is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace or whether the demand for Internet related products and services will increase or decrease in the future. The increased commercial use of the Internet could require substantial modification and customization of the Company's products and services and the introduction of new products and services, and there can be no assurance that the Company would be able to effectively migrate its products to the Internet or to successfully compete in the market for Internet-related products and services. The Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as a reliable network backbone with the necessary speed, data capability, and security, or timely development of complementary products, such as high speed modems. The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. There can be no assurance that the Internet infrastructure will continue to be able to support the demands placed on it by this continued growth. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of Internet activity or due to increased governmen- 6 10 tal regulation. Moreover, critical issues concerning the commercial use of the Internet (including security, reliability, data corruption, cost, ease of use, accessibility and quality of service) remain unresolved and may negatively affect the attractiveness of commerce and communication on the Internet. Because global commerce and online exchange of information on the Internet and other similar open wide area networks are new and evolving, there can be no assurance that the Internet will prove to be a viable commercial marketplace. If critical issues concerning the commercial use of the Internet are not favorably resolved, if the necessary infrastructure and complementary products are not developed, or if the Internet does not become a viable commercial marketplace, the Company's business, operating results and financial condition could be materially and adversely affected. See "Business -- Products" and "-- Technology." Risk Associated with Emerging Client/Server and Sales Information Markets. The client/server application software market is a relatively new market and is intensely competitive, highly fragmented and subject to rapid change. The Company markets its products only to customers who have migrated or are in the process of migrating their enterprise computing systems to client/server computing environments. The Company does not market its products to customers exclusively using legacy computer systems. The Company's future financial performance will depend in large part on continued growth in the number of organizations successfully adopting client/server computing environments. There can be no assurance that the client/server market will maintain its current level of growth or continue to grow at all. If the client/server market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition could be materially and adversely affected. Similarly, the market for sales and marketing information software is intensely competitive, highly fragmented and subject to rapid change. The Company's future financial performance will depend primarily on growth in the number of sales information applications developed for use in client/server environments. There can be no assurance that the market for sales and marketing information software will continue to grow. If the sales information software market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially and adversely affected. See "Business -- Industry Background," "-- Products," "-- Technology" and "-- Competition." Limited Deployment. The Company first shipped Siebel Sales Enterprise version 1.0 in April 1995. As of March 31, 1996, many of the Company's customers were in the pilot phase of implementing the Company's software. None of the Company's customers has completed the enterprise-wide development and deployment of Siebel Sales Enterprise, and many have not yet commenced such deployment. As a result, the Company's products are currently being used by only a limited number of sales professionals. There can be no assurance that such enterprise-wide deployments will be successful. The Company's customer licenses frequently contemplate the deployment of the product commercially to large numbers of sales and marketing personnel, many of whom have not previously used application software systems, and there can be no assurance of such end-users' acceptance of the product. The Company's product is expected to be deployed on a variety of computer hardware platforms and to be used in connection with a number of third-party software applications and programming tools. Such deployment presents very significant technical challenges, particularly as large numbers of sales personnel attempt to use the Company's products concurrently. If any of the Company's customers are not able to customize and deploy Siebel Sales Enterprise successfully and on a timely basis to the number of anticipated users, the Company's reputation could be significantly damaged, which could have a material adverse effect on the Company's business, operating results and financial condition. In addition to revenues from new customers, the Company expects that a significant percentage of any future revenues will be derived from sales to existing customers. However, such customers are not contractually committed in all cases to purchase additional licenses. If existing customers have difficulty further deploying Siebel Sales Enterprise or for any other reason are not satisfied with Siebel Sales Enterprise, the Company's business, operating results and financial condition could be materially and adversely affected. See "Business -- Products." 7 11 Reliance on Single Product Family. Approximately 94% of the Company's revenues to date have been attributable to sales of Siebel Sales Enterprise. The remaining revenues were primarily attributable to maintenance and training services related to such product family. The Company currently expects Siebel Sales Enterprise and related maintenance and training services to continue to account for a substantial majority of the Company's future revenues. As a result, factors adversely affecting the pricing of or demand for Siebel Sales Enterprise, such as competition or technological change, could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future financial performance will depend, in significant part, on the successful deployment of current versions of Siebel Sales Enterprise and the development, introduction and customer acceptance of new and enhanced versions of Siebel Sales Enterprise and other products. There can be no assurance that the Company will be successful in marketing Siebel Sales Enterprise product or other products. In the event that the Company continues to derive a substantial percentage of its revenues from perpetual license fees for Siebel Sales Enterprise and is successful in licensing such product to a very large portion of the customers in the markets targeted by the Company, the Company's business, financial condition and results of operations could be materially and adversely affected unless the Company is able to establish additional sources of revenue. See "Business -- Products" and "-- Marketing." Lengthy Sales and Implementation Cycles. The license of the Company's software products is often an enterprise-wide decision by prospective customers and generally requires the Company to provide a significant level of education to prospective customers regarding the use and benefits of the Company's products. In addition, the implementation of the Company's products involves a significant commitment of resources by prospective customers and is commonly associated with substantial reengineering efforts which may be performed by the customer or third-party system integrators. The cost to the customer of the Company's product is typically only a portion of the related hardware, software, development, training and integration costs of implementing a large-scale sales and marketing information system. For these and other reasons, the period between initial contact and the implementation of the Company's products is often lengthy (ranging to date from between two and twenty-four months) and is subject to a number of significant delays over which the Company has little or no control. The Company's implementation cycle could be lengthened by increases in the size and complexity of its license transactions and by delays in its customers' implementation of client/server computing environments. Delay in the sale or implementation of a limited number of license transactions could have a material adverse effect on the Company's business and operations and cause the Company's operating results to vary significantly from quarter to quarter. Therefore, the Company believes that its quarterly operating results are likely to vary significantly in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Sales" and " -- Marketing." Risks Associated with Expanding Distribution. To date, the Company has sold its products primarily through its direct sales force and has supported its customers with its technical and customer support staff. The Company's ability to achieve significant revenue growth in the future will depend in large part on its success in recruiting and training sufficient direct sales, technical and customer support personnel and establishing and maintaining relationships with its strategic partners. Although the Company is currently investing, and plans to continue to invest, significant resources to expand its direct sales force and its technical and customer support staff, and to develop distribution relationships with strategic partners, the Company has at times experienced and continues to experience difficulty in recruiting qualified personnel and in establishing necessary third-party relationships. There can be no assurance that the Company will be able to expand successfully its direct sales force or other distribution channels or that any such expansion will result in an increase in revenues. The Company believes the complexity of its products and the large-scale deployments anticipated by its customers will require a number of highly trained customer support personnel. There can be no assurance that the Company will successfully expand its technical and customer support staff to meet customer demands. Any failure by the Company to expand its direct sales force or other distribution channels, or to expand its technical and customer support staff, could materially and adversely affect the Company's 8 12 business, operating results and financial condition. See " -- Management of Growth; Dependence upon Key Personnel," "Business -- Strategy," " -- Sales," " -- Marketing," and " -- Customer Support and Training." Dependence on Large License Fee Contracts and Customer Concentration. A relatively small number of customers have accounted for a significant percentage of the Company's revenues. For 1995 and the first quarter of 1996, sales to the Company's 10 largest customers accounted for 93% and 98% of total revenues, respectively. For 1995, Charles Schwab & Co., Inc., Informix Software, Inc., Itochu and Unisys Corporation accounted for 23%, 20%, 12% and 10% of total revenues, respectively. The Company expects that sales of its products to a limited number of customers will continue to account for a significant percentage of revenue for the foreseeable future. The loss of any major customer or any reduction or delay in orders by any such customer, or the failure of the Company to market successfully its products to new customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Customers and Markets." Risk Associated with New Versions and New Products; Rapid Technological Change. The software market in which the Company competes is characterized by rapid technological change, frequent introductions of new products, changes in customer demands and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. For example, the Company's customers have adopted a wide variety of hardware, software, database and networking platforms, and as a result, to gain broad market acceptance, the Company must support Siebel Sales Enterprise on a variety of such platforms. The Company's future success will depend upon its ability to address the increasingly sophisticated needs of its customers by supporting existing and emerging hardware, software, database and networking platforms and by developing and introducing enhancements to Siebel Sales Enterprise and new products on a timely basis that keep pace with technological developments, evolving industry standards and changing customer requirements. The Company currently ships production versions of its software running on MS Windows 3.1, MS Windows 95 and Windows NT clients, as well as on NT application servers, and NT, Sun and HP UNIX database server platforms. The Company plans, in the future, to support subsequent versions of Microsoft's Windows client operating system, as well as UNIX application servers and Digital Alpha and additional UNIX database server platforms. There can be no assurance that the Company will be successful in releasing Siebel Sales Enterprise for use on such platforms or in developing and marketing enhancements, including Siebel Virtual Computing, that respond to technological developments, evolving industry standards or changing customer requirements, or that the Company will not experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements or that such enhancements will adequately meet the requirements of the marketplace and achieve any significant degree of market acceptance. If release dates of any future Siebel Sales Enterprise enhancements or new products are delayed or if these products or enhancements fail to achieve market acceptance when released, the Company's business, operating results and financial condition could be materially and adversely affected. In addition, the introduction or announcement of new product offerings or enhancements by the Company or the Company's competitors or major hardware, systems or software vendors may cause customers to defer or forgo purchases of the Company's products, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Technology" and "-- Development Methodology." Competition. The market for the Company's products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The Company's products are targeted at the emerging market for sales and marketing information systems, and the Company faces competition primarily from customers' internal information technology departments and systems integrators, as well as from other application software providers that offer a variety of products and services to address this market. Many of the Company's customers and potential customers have in the past attempted to develop sales and marketing 9 13 information systems in-house either alone or with the help of systems integrators. The Company is able to compete successfully against these customers' and potential customers' internal development efforts only to the extent such development efforts fail. The Company relies on a number of systems consulting and systems integration firms for implementation and other customer support services, as well as recommendations of its products during the evaluation stage of the purchase process, particularly Andersen Consulting. Although the Company seeks to maintain close relationships with these service providers, many of them have similar, and often more established, relationships with the Company's competitors. If the Company is unable to develop and retain effective, long-term relationships with these third parties, the Company's competitive position could be materially and adversely effected. Further, there can be no assurance that these third parties, many of which have significantly greater resources than the Company, will not market software products in competition with the Company in the future or will not otherwise reduce or discontinue their relationships with or support of the Company and its products. A large number of personal, departmental and other products exist in the sales automation market. Some of the Company's current and potential competitors and their products include Symantec (ACT!), Brock International (Brock Activity Manager), Early Cloud & Co. (CallFlow), IMA (EDGE), Marketrieve Company (Marketrieve PLUS), Clarify, Inc. (ClearSales), Oracle Corporation (Oracle Sales Manager), SaleSoft (PROCEED), SalesBook Systems (SalesBook), SalesKit Software Corporation (SalesKit), Aurum (SalesTrak), Sales Technologies (SNAP for Windows), Saratoga Systems (SPS for Windows) and The Vantive Corporation (Vantive Sales). Many of these competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than the Company. In addition, many competitors have well-established relationships with current and potential customers of the Company. As a result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products, than can the Company. It is also possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. The Company also expects that competition will increase as a result of consolidation in the software industry. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, operating results and financial condition. See "Business -- Competition." Reliance on Third-Party Vendors. The Company incorporates into its products certain software licensed to it by third-party software developers. Although the Company believes there are other sources for these products, any significant interruption in the supply of such products could have a material adverse impact on the Company's sales unless and until the Company can replace the functionality provided by these products. Because the Company's products incorporate software developed and maintained by third parties, the Company is to a certain extent dependent upon such third parties' abilities to enhance their current products, to develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. There can be no assurance that the Company would be able to replace the functionality provided by the third-party software currently offered in conjunction with the Company's products in the event that such software becomes obsolete or incompatible with future versions of the Company's products or is otherwise not adequately maintained or updated. The absence of or any significant delay in the replacement of that functionality could have a material adverse effect on the Company's sales. See "Business -- Products" and "-- Development Methodology." Risk of Product Defects. Software products as internally complex as those offered by the Company frequently contain errors or failures, especially when first introduced or when new versions 10 14 are released. Although the Company conducts extensive product testing during product development, the Company has been forced to delay commercial release of products until the correction of software problems and, in some cases, has provided product enhancements to correct errors in released products. The Company could, in the future, lose revenues as a result of software errors or defects. The Company's products are intended for use in sales applications that may be critical to a customer's business. As a result, the Company expects that its customers and potential customers have a greater sensitivity to product defects than the market for software products generally. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new products or releases after commencement of commercial shipments, resulting in loss of revenue or delay in market acceptance, diversion of development resources, damage to the Company's reputation, or increased service and warranty costs, any of which could have a material adverse effect upon the Company's business, operating results and financial condition. See "Business -- Development Methodology." Management of Growth; Dependence upon Key Personnel. In the event that the significant growth of the Company's revenues continues, such growth may place a significant strain upon the Company's management systems and resources. The Company's ability to compete effectively and to manage future growth, if any, will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employee work force. There can be no assurance that the Company will be able to do so successfully. The Company's failure to do so could have a material adverse effect upon the Company's business, operating results and financial condition. The Company's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel, particularly Thomas M. Siebel, the Company's Chairman and Chief Executive Officer, none of whom has entered into an employment agreement with the Company. The loss of the services of one or more of the Company's executive officers could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical, customer support, sales and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to retain its key technical, sales and managerial employees or that it can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. See "--Risks Associated with Expanding Distribution," "Business -- Sales," "-- Marketing" and "Management." Proprietary Rights; Risks of Infringement. The Company relies primarily on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company also believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technology leadership position. The Company seeks to protect its software, documentation and other written materials under patent, trade secret and copyright laws, which afford only limited protection. The Company currently has two patent applications pending in the United States. There can be no assurance that any patents issued to the Company will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications, whether or not being currently challenged by applicable governmental patent examiners, will be issued with the scope of the claims sought by the Company, if at all. Furthermore, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology or design around any patents issued to the Company. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws 11 15 of the United States. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that the Company's competitors will not independently develop similar technology. The Company has entered into agreements with substantially all of its customers which require the Company to place Siebel Sales Enterprise source code into escrow. Such agreements generally provide that such parties will have a limited, non-exclusive right to use such code in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to do business or if the Company fails to meet its support obligations. Entering into such agreements may increase the likelihood of misappropriation by third parties. The Company is not aware that it is infringing any proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company of their intellectual property rights. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Furthermore, there can be no assurance that former employers of the Company's present and future employees will not assert claims that such employees have improperly disclosed confidential or proprietary information to the Company. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require the Company to pay money damages or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all. In the event of a successful claim of product infringement against the Company and failure or inability of the Company to license the infringed or similar technology, the Company's business, operating results and financial condition would be materially and adversely affected. The Company relies upon certain software that it licenses from third parties, including software that is integrated with the Company's internally developed software and used in Siebel Sales Enterprise to perform key functions. There can be no assurance that these third-party software licenses will continue to be available to the Company on commercially reasonable terms. The loss of, or inability to maintain, any such software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated which would materially adversely affect the Company's business, operating results and financial condition. See "Business -- Intellectual Property and Other Proprietary Rights." International Operations. The Company's sales are primarily to large multi-national companies. To service the needs of such companies, both domestically and internationally, the Company must provide worldwide product support services. As a result, the Company intends to expand its existing international operations and enter additional international markets, which will require significant management attention and financial resources and could adversely affect the Company's operating margins and earnings, if any. Revenues from export sales accounted for approximately 12% and 11% of the Company's total revenues in 1995 and the first quarter of 1996, respectively. The Company believes that in order to increase sales opportunities and profitability it will be required to expand its international operations. The Company has committed and continues to commit significant management time and financial resources to developing direct and indirect international sales and support channels. There can be no assurance, however, that the Company will be able to maintain or increase international market demand for Siebel Sales Enterprise. To the extent that the Company is unable to do so in a timely manner, the Company's international sales will be limited, and the Company's business, operating results and financial condition could be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." International operations are subject to inherent risks, including the impact of possible recessionary environments in economies outside the United States, costs of localizing products for foreign markets, longer receivables collection periods and greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements, difficulties and costs of staffing and managing foreign operations, reduced protection for intellectual property rights in some countries, potentially adverse 12 16 tax consequences and political and economic instability. There can be no assurance that the Company or its distributors or resellers will be able to sustain or increase international revenues from licenses or from maintenance and service, or that the foregoing factors will not have a material adverse effect on the Company's future international revenues and, consequently, on the Company's business, operating results and financial condition. The Company's direct international revenues are generally denominated in local currencies. The Company does not currently engage in hedging activities. Revenues generated by the Company's distributors and resellers are generally paid to the Company in United States dollars. Although exposure to currency fluctuations to date has been insignificant, there can be no assurance that fluctuations in currency exchange rates in the future will not have a material adverse impact on revenues from international sales and thus the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Customers and Markets," " -- Sales" and "-- Marketing." Product Liability. The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's license agreements may not be effective under the laws of certain jurisdictions. Although the Company has not experienced any product liability claims to date, the sale and support of products by the Company may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. Legal Proceedings. The Company and Thomas M. Siebel have been served with a complaint by Debra Christoffers, a former employee of the Company, alleging various causes of action and seeking damages in connection with the termination of her employment with the Company. The Company has also received a letter from counsel to Terence Lenaghan, a former employee of the Company, seeking certain compensation in connection with the termination of his employment with the Company. The Company employed Mr. Lenaghan as Vice President Finance and Administration of the Company for a period of approximately five weeks, ending on March 1, 1996. On June 5, 1996, while the Company was in registration with the Securities and Exchange Commission, the Company received a letter from counsel representing Mr. Lenaghan raising claims against the Company and Mr. Siebel and offering to settle such claims upon the receipt of $300,000 and 140,000 shares of the Company's Common Stock. The Company strongly believes that the claims raised by Ms. Christoffers and Mr. Lenaghan are baseless and without merit and intend to vigorously defend the complaint filed by Ms. Christoffers and any action that Mr. Lenaghan may bring. There can be no assurance, however, that the outcome of either such matter will not have an adverse effect on the Company's operations or financial condition. See "Business -- Legal Proceedings." Control by Existing Stockholders. Upon completion of this offering, the Company's officers, directors and affiliated entities together will beneficially own approximately 67% of the outstanding shares of Common Stock (66% if the Underwriters' over-allotment option is exercised in full). In particular, upon completion of this offering Thomas M. Siebel, the Company's Chairman and Chief Executive Officer, will own approximately 42% of the outstanding shares of Common Stock (41% if the Underwriters' over-allotment option is exercised in full). As a result, these stockholders will be able to exercise control over matters requiring stockholder approval, including the election of directors, and the approval of mergers, consolidations and sales of all or substantially all of the assets of the Company. This may prevent or discourage tender offers for the Company's Common Stock unless the terms are approved by such stockholders. See "Principal and Selling Stockholders." No Prior Public Market for Common Stock; Possible Volatility of Stock Price. Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the offering. The initial public offering price will be determined by negotiations between the Company, the representatives of the Selling Stockholders and the representatives of the Underwriters. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The trading price of the 13 17 Company's Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant orders, changes in earning estimates by analysts, announcements of technological innovations or new products by the Company or its competitors, general conditions in the software and computer industries and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations which have affected the market price for many companies in industries similar or related to that of the Company and which have been unrelated to the operating performance of these companies. These market fluctuations may adversely affect the market price of the Company's Common Stock. Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law. Following the completion of this offering, the Company's Board of Directors will have the authority to issue up to 2,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of the Common Stock. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. Further, certain provisions of the Company's Certificate of Incorporation, including provisions that create a classified board of directors and certain provisions of the Company's Bylaws and of Delaware law, could delay or make more difficult a merger, tender offer or proxy contest involving the Company. See "Description of Capital Stock." Shares Eligible for Future Sale; Registration Rights. Sales of substantial numbers of shares of Common Stock in the public market following this offering could adversely affect the market price for the Common Stock. Upon completion of the offering, the Company will have outstanding an aggregate of 15,530,770 shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options and based upon the number of shares outstanding as of April 30, 1996. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless such shares are purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Affiliates"), except that the shares of Common Stock to be purchased by The Dow Chemical Company will be subject to an agreement not to sell any of such shares until 180 days from the date of this Prospectus without the consent of Hambrecht & Quist LLC. The remaining 13,567,770 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 under the Securities Act. As a result of contractual restrictions and the provisions of Rules 144 and 701, additional shares will be available for sale in the public market as follows: (i) no Restricted Shares will be eligible for immediate sale on the date of this Prospectus; (ii) 311,760 Restricted Shares (plus 204,775 shares of Common Stock issuable to employees and consultants pursuant to stock options that are then vested, as well as the shares purchased by The Dow Chemical Company in this offering) will be eligible for sale upon expiration of the lock-up agreements 180 days after the date of this Prospectus; and (iii) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective two-year holding periods commencing on January 3, 1997, subject to the restrictions on such sales by Affiliates and certain vesting provisions. The Securities and Exchange Commission has proposed amendments to Rules 144 and 144(k) which, if adopted, would substantially increase the number of Restricted Shares available for sale in the public market beginning 180 days after the date of this Prospectus. To the extent that a significant portion of the Restricted Shares are sold by the holders thereof, such sales may adversely effect the market price of the Company's Common Stock. A significant decline in the price of the Company's Common Stock due to these or other factors would reduce the ability of the Company 14 18 to obtain significant operating capital through the offering of additional shares of such Common Stock. See "Certain Transactions," "Description of Capital Stock" and "Shares Eligible for Future Sale." Discretion as to Use of Proceeds. The primary purposes of this offering are to create a public market for the Company's Common Stock, to facilitate future access to public markets and to obtain additional working capital. As of the date of this Prospectus, the Company has no specific plans to use the net proceeds from this offering other than for working capital and general corporate purposes. Accordingly, the Company's management will retain broad discretion as to the allocation of the net proceeds from this offering. Pending any such uses, the Company plans to invest the net proceeds in investment-grade, interest-bearing securities. See "Use of Proceeds." Immediate and Substantial Dilution. Investors participating in this offering will incur immediate and substantial dilution of $11.79 per share. To the extent outstanding options to purchase the Company's Common Stock are exercised, there will be further dilution. If the net proceeds of this offering, together with available funds and cash generated from operations, are insufficient to satisfy the Company's cash needs, the Company may be required to sell additional equity or convertible debt securities. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. See "Dilution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." THE COMPANY The Company was incorporated under the laws of California in 1993 and intends to reincorporate in Delaware prior to the completion of this offering. The Company's principal executive offices are located at 4005 Bohannon Drive, Menlo Park, CA 94025. Its telephone number is (415) 329-6500. Its e-mail address is info@siebel.com. The Company maintains an Internet home page. Siebel and Siebel Sales Enterprise are trademarks of the Company. All other trade names or trademarks appearing in this Prospectus are the property of their respective holders. 15 19 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,800,000 shares of Common Stock offered by the Company hereby, at an assumed initial public offering price of $14.00 per share, are estimated to be $22,486,000 ($26,320,000 if the Underwriters' over-allotment option is exercised in full), after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Stockholders. See "Principal and Selling Stockholders." The principal purposes of this offering are to increase the Company's equity capital and to create a public market for the Company's Common Stock, which the Company believes will facilitate future access by the Company to public equity markets and enhance the ability of the Company to use its Common Stock as consideration for acquisitions and as a means for attracting and retaining key employees. The Company intends to use the net proceeds of this offering primarily for working capital and other general corporate purposes, including expansion of general sales and marketing and customer support activities to accommodate anticipated growth in the Company's business and customer base. The amounts actually expended by the Company for working capital purposes will vary significantly depending upon a number of factors, including future revenue growth, if any, the amount of cash generated by the Company's operations and the progress of the Company's product development efforts and hence the Company's management will retain broad discretion in the allocation of the net proceeds from this offering. In addition, the Company may make one or more acquisitions of complementary technologies, products or businesses which broaden or enhance the Company's current product offerings. However, the Company has no specific plans, agreements or commitments, oral or written, and is not currently engaged in any negotiations for any such acquisition. Pending the uses described above, the net proceeds will be invested in short-term, interest-bearing, investment- grade securities. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain any future earnings to finance the growth and development of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. 16 20 CAPITALIZATION The following table sets forth (i) the capitalization of the Company as of March 31, 1996 after giving effect to the reincorporation of the Company in Delaware, (ii) the pro forma capitalization of the Company after giving effect to the sale of 90,000 shares of Series D Preferred Stock at $10.00 per share on April 30, 1996, the issuance of 75,000 shares of Series C Preferred Stock upon the exercise of a warrant at $5.82 per share in June 1996 and the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering and (iii) the capitalization as adjusted to reflect the sale by the Company of 1,800,000 shares of the Common Stock offered hereby at an assumed initial offering price of $14.00, the application of the net proceeds therefrom and the subsequent restatement of the Company's Certificate of Incorporation.
MARCH 31, 1996 -------------------------------------- ACTUAL PRO FORMA AS ADJUSTED ------- -------------- ----------- (IN THOUSANDS) Stockholders' equity: Convertible preferred stock; $.001 par value; actual -- 10,000,000 shares authorized, 4,907,655 shares issued and outstanding; pro forma -- 10,000,000 shares authorized, none issued and outstanding; as adjusted -- 2,000,000 shares authorized, none issued and outstanding........................................ $ 5 $ -- $ -- Common stock; $.001 par value; actual -- 35,000,000 shares authorized, 8,572,760 shares issued and outstanding; pro forma -- 35,000,000 shares authorized, 13,645,415 shares issued and outstanding; as adjusted -- 40,000,000 shares authorized, 15,445,415 shares issued and outstanding(1)....................... 9 14 15 Additional paid-in capital................................ 11,063 12,400 34,885 Notes receivable from stockholders........................ (57) (57) (57) Deferred compensation..................................... (1,220) (1,220) (1,220) Retained earnings......................................... 514 514 514 ------- ------- ------- Total stockholders' equity and capitalization..... $10,314 $ 11,651 $34,137 ======= ======= =======
- --------------- (1) Excludes (i) 2,367,750 shares of Common Stock issuable upon the exercise of options outstanding under the Company's 1996 Equity Incentive Plan (the "Equity Incentive Plan") as of March 31, 1996 at a weighted average exercise price of $1.84 per share and (ii) 350,000 shares of Common Stock reserved for issuance under the Employee Stock Purchase Plan (the "Purchase Plan"), none of which has been issued. As of April 30, 1996, there were outstanding options to purchase a total of 3,760,450 shares of Common Stock under the Equity Incentive Plan at a weighted average exercise price of $3.35 per share and an additional 1,533,340 shares of Common Stock reserved for grant thereunder. See "Management -- Equity Incentive Plans." 17 21 DILUTION The pro forma net tangible book value of the Company as of March 31, 1996, was approximately $11.7 million or $0.85 per share. Pro forma net tangible book value per share is equal to the Company's total tangible assets less its total liabilities, divided by the number of pro forma outstanding shares of Common Stock, after giving effect to the issuance of 90,000 shares of Series D Preferred Stock at $10.00 per share on April 30, 1996, the issuance of 75,000 shares of Series C Preferred Stock upon exercise of a warrant at $5.82 per share in June 1996 and the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering. After giving effect to the sale of the 1,800,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $14.00 per share), the pro forma net tangible book value of the Company at March 31, 1996 would have been approximately $34.1 million or $2.21 per share. This represents an immediate increase in such net tangible book value of $1.36 per share to existing stockholders and an immediate dilution of $11.79 per share to new investors purchasing shares in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share......................... $14.00 Pro forma net tangible book value per share as of March 31, 1996...... $0.85 Increase per share attributable to new investors...................... 1.36 ----- Pro forma net tangible book value per share after this offering......... 2.21 ----- Dilution per share of Common Stock to new investors..................... $11.79 =====
The following table summarizes on a pro forma basis, as of March 31, 1996, the differences between the number of shares purchased from the Company, after giving effect to the issuance of 90,000 shares of Series D Preferred Stock at $10.00 per share on April 30, 1996, the issuance of 75,000 shares of Series C Preferred Stock upon exercise of a warrant at $5.82 per share in June 1996 and the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering, the total consideration paid and the average price paid per share by the existing holders of Common Stock and by the new investors at an assumed initial public offering price of $14.00 per share:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing Stockholders(1)........... 13,645,415 88.3% $11,636,000 31.6% $ 0.85 New Investors(1)................... 1,800,000 11.7 25,200,000 68.4 14.00 ---------- --- ----------- --- Total.................... 15,445,415 100.0% $36,836,000 100.0% ========== === =========== ===
- --------------- (1) Sales by the Selling Stockholders in this offering will reduce the number of shares held by existing stockholders to 13,482,415 shares or approximately 87.3% of the total shares of Common Stock outstanding after this offering and will increase the number of shares held by new investors to 1,963,000 shares or approximately 12.7% of the total shares of Common Stock outstanding after this offering. The foregoing tables exclude 2,367,750 shares of Common Stock issuable upon the exercise of options outstanding as of March 31, 1996 at a weighted average exercise price of $1.84 per share. In addition, 350,000 shares of Common Stock have been reserved for issuance under the Purchase Plan, none of which has been issued. To the extent that options are exercised in the future, there will be further dilution to new stockholders. As of April 30, 1996, there were outstanding options to purchase a total of 3,760,450 shares of Common Stock under the Equity Incentive Plan at a weighted average exercise price of $3.35 per share and an additional 1,533,340 shares of Common Stock reserved for grant thereunder. See "Management -- Equity Incentive Plans." 18 22 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and the Notes related thereto included elsewhere in this Prospectus. The statement of operations data from September 13, 1993 (inception) to December 31, 1993 and the years ended December 31, 1994 and 1995 and the balance sheet data at December 31, 1994 and 1995 are derived from the financial statements of the Company included elsewhere in this Prospectus which have been audited by KPMG Peat Marwick LLP, independent auditors. The balance sheet data at December 31, 1993 are derived from audited financial statements not included in this Prospectus. The balance sheet data at March 31, 1996, and the statement of operations data for the three month periods ended March 31, 1995 and 1996 are derived from unaudited financial statements included elsewhere in this Prospectus. The unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position and results of operations for these periods. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. See "Risk Factors -- Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating Results."
PERIOD FROM SEPTEMBER 13, 1993 THREE MONTHS ENDED (INCEPTION) YEAR ENDED TO DECEMBER 31, MARCH 31, DECEMBER 31, ----------------- ------------------- 1993 1994 1995 1995 1996 ------------- ------- ------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS: Revenues: Software......................................... $ -- $ 50 $ 7,636 $ -- $ 4,402 Maintenance and other............................ -- -- 402 30 307 ------ ------- ------- ------- --------- Total revenues.............................. -- 50 8,038 30 4,709 Cost of revenues: Software......................................... -- -- 41 -- 26 Maintenance and other............................ -- -- 385 9 343 ------ ------- ------- ------- --------- Total cost of revenues...................... -- -- 426 9 369 ------ ------- ------- ------- --------- Gross margin................................ -- 50 7,612 21 4,340 Operating expenses: Product development.............................. 64 868 2,816 616 986 Sales and marketing.............................. 28 718 3,232 456 2,553 General and administrative....................... 22 243 1,192 157 590 ------ ------- ------- ------- --------- Total operating expenses.................... 114 1,829 7,240 1,229 4,129 ------ ------- ------- ------- --------- Operating income (loss)..................... (114) (1,779) 372 (1,208) 211 Other income, net.................................. -- 13 156 8 119 ------ ------- ------- ------- --------- Income (loss) before income taxes........... (114) (1,766) 528 (1,200) 330 Income tax expense (benefit)..................... -- -- 211 (480) 132 ------ ------- ------- ------- --------- Net income (loss)........................... $(114) $(1,766) $ 317 $ (720) $ 198 ============= ======== ======== ======== ========= Pro forma net income (loss) per share(1)........... $ .02 $ (.05) $ .01 ======== ======== ========= Shares used in pro forma per share computation(1)................................... 16,340 14,642 16,859
DECEMBER 31, ------------------------------ MARCH 31, 1993 1994 1995 1996 ------- ------- ------------------- (IN THOUSANDS) BALANCE SHEET: Cash and cash equivalents.......................... $ 703 $ 1,017 $11,391 $ 9,757 Total assets....................................... 750 1,203 16,091 15,609 Retained earnings (accumulated deficit)............ -- (1) 316 514 Stockholders' equity............................... 746 1,189 9,934 10,314
- --------------- (1) See Note 1 of Notes to Financial Statements for a description of the calculation of pro forma net income (loss) per share. 19 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was engaged principally in product and market research and development from commencement of operations (July 1993) through March 1995. The Company shipped version 1.0 of Siebel Sales Enterprise in April 1995 and shipped version 2.0 in November 1995. The Company did not record material license revenues until the second quarter of 1995. License fees for Siebel Sales Enterprise are generally based on the specific products licensed and are determined on either a per site or per user basis. Approximately 94% of the Company's revenues to date have been derived from non-recurring license fees of the Siebel Sales Enterprise product family. The remaining revenues are primarily attributable to lower margin maintenance and other revenues, including training revenues. The Company does not intend to provide a material amount of integration and other services related to its products. Accordingly, the Company currently expects that license revenues from Siebel Sales Enterprise will continue to account for a substantial majority of the Company's revenues for the remainder of 1996 and for the foreseeable future. As a result, factors adversely affecting the pricing of or demand for Siebel Sales Enterprise could have a material adverse effect on the Company's business, operating results and financial condition. Most of the Company's revenues to date have been derived from one-time license fees from customers who have received a perpetual license to the Company's products. The Company intends to also offer its customers the ability to license its products on a monthly or other short-term basis. The Company expects that these shorter term license fees could, in the future, constitute an increasing portion of its software revenues. If these shorter term fee payments increase as a percentage of total revenues, the Company believes it will be able to alleviate somewhat the periodic revenue concentration from one-time non-recurring licenses. License revenues are recognized upon execution of a license agreement by the parties and shipment of the product if no significant obligations remain and collection of the resulting receivable is probable. Maintenance revenues primarily consist of fees for ongoing support and product updates, generally determined as a percentage of the initial license fees, and are recognized ratably over the term of the contract, which to date have typically ranged from 12 to 36 months. For all periods presented, the Company has recognized revenues in accordance with Statement of Position 91-1, "Software Revenue Recognition." See Note 1 of Notes to Financial Statements. A relatively small number of customers account for a significant percentage of the Company's license revenues. For 1995 and the first quarter of 1996, sales to the Company's ten largest customers accounted for 93% and 98% of total revenues, respectively. For 1995, Charles Schwab & Co., Inc., Informix Software, Inc., Itochu and Unisys Corporation accounted for 23%, 20%, 12% and 10% of total revenues, respectively. The Company expects that licenses of its products to a limited number of customers will continue to account for a large percentage of revenue for the foreseeable future. The license of the Company's software products is often an enterprise-wide decision by prospective customers and generally requires the Company to provide a significant level of education to prospective customers regarding the use and benefits of the Company's products. In addition, the implementation of the Company's products involves a significant commitment of resources by prospective customers and is commonly associated with substantial reengineering efforts which may be performed by the customer or third-party system integrators. The cost to the customer of the Company's product is typically only a portion of the related hardware, software, development, training and integration costs of implementing a large-scale sales and marketing information system. For these and other reasons, the sales and implementation cycles associated with the license of the Company's products is often lengthy (ranging to date from between two and twenty-four months from initial 20 24 contact to product implementation) and is subject to a number of significant delays over which the Company has little or no control. Given these factors and the expected customer concentration, the loss of a major customer or any reduction or delay in sales to or implementations by such customers could have a material adverse effect on the Company's business, operating results, and financial condition. As of March 31, 1996, many of the Company's customers were in the pilot phase of implementation of Siebel Sales Enterprise. None of the Company's customers has completed the enterprise-wide development and deployment of Siebel Sales Enterprise, and many have not yet commenced such deployment. As a result, the Company's products are currently being used by only a limited number of sales professionals. If any of the Company's customers are not able to customize and deploy Siebel Sales Enterprise successfully and on a timely basis to the number of anticipated users, the Company's reputation could be significantly damaged, which could have a material adverse effect on the Company's business, operating results and financial condition. The Company markets its products in the United States through its direct sales force and internationally through its sales force and a distributor in Japan. International revenues accounted for 12% and 11% of total revenues in 1995 and the first quarter of 1996, respectively. The Company is increasing its international sales force and seeking to establish distribution relationships with appropriate strategic partners and expects international revenues will account for an increasing portion of total revenues in the future. As a result, failure to cost-effectively maintain or increase international sales could have a material adverse effect on the Company's business, operating results and financial condition. The Company's revenues have increased in each of the last five quarters, and the Company had net income in each of the last four quarters. The Company's limited operating history, however, makes the prediction of future operating results difficult. Prior growth rates in the Company's revenue and net income should not be considered indicative of future operating results. Future operating results will depend upon many factors, including the demand for the Company's products, the level of product and price competition, the length of the Company's sales cycle, the size and timing of individual license transactions, the delay or deferral of customer implementations, the Company's relationships with systems integrators, the Company's success in expanding its direct sales force, indirect distribution channels and customer support organization, the timing of new product introductions and product enhancements, the mix of products and services sold, levels of international sales, activities of and acquisitions by competitors, the timing of new hires, changes in foreign currency exchange rates, the ability of the Company to develop and market new products and control costs and the ability to attract and retain key personnel. There can be no assurance that any of the Company's business or strategies will be successful or that the Company will be able to sustain profitability on a quarterly or annual basis. The Company's sales generally reflect a relatively high amount of revenues per order. The loss or delay of individual orders, therefore, can have a significant impact on the revenues and quarterly results of the Company. The timing of license revenue is difficult to predict because of the length of the Company's sales cycle, which to date has ranged from two to eighteen months from initial contact to the execution of a license agreement. Because the Company's operating expenses are based on anticipated revenue trends and because a high percentage of the Company's expenses are relatively fixed, a delay in the recognition of revenue from a limited number of license transactions could cause significant variations in operating results from quarter to quarter and could result in losses. To the extent such expenses precede, or are not subsequently followed by, increased revenues, the Company's operating results would be materially adversely affected. As a result of these and other factors, revenues for any quarter are subject to significant variation, and the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied 21 25 upon as indications of future performance. It is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be adversely affected. To date, the Company has not experienced significant seasonality of operating results. The Company expects that future revenues for any period may be affected by the fiscal or quarterly budget cycles of its customers. RESULTS OF OPERATIONS The Company first generated significant software license revenues in the second quarter of 1995 when the Company shipped version 1.0 of Siebel Sales Enterprise. As a result, the Company believes that period-to-period comparisons solely of annual operating results are less meaningful than an analysis of recent quarterly operations. Accordingly, the Company is providing a discussion and analysis of the Company's operating results primarily focused upon the five quarters ended March 31, 1996. 22 26 The following tables set forth the quarterly statement of operations for the five quarters ended March 31, 1996, including such amounts expressed as a percentage of total revenues. This quarterly information is unaudited, but has been prepared on the same basis as the annual financial statements and, in the opinion of the Company's management, reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. Such statement of operations should be read in conjunction with the Company's audited financial statements and notes thereto included elsewhere herein. Operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED --------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1995(1) 1995 1995 1995 1996 ---------- -------- --------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS: Revenues: Software............................................... $ -- $1,186 $ 2,400 $4,050 $4,402 Maintenance and other.................................. 30 98 164 110 307 ------- ------ ------ ------ ------ Total revenues.................................... 30 1,284 2,564 4,160 4,709 Cost of revenues: Software............................................... -- 4 8 29 26 Maintenance and other.................................. 9 47 117 212 343 ------- ------ ------ ------ ------ Total cost of revenues............................ 9 51 125 241 369 ------- ------ ------ ------ ------ Gross margin...................................... 21 1,233 2,439 3,919 4,340 Operating expenses: Product development.................................... 616 621 822 757 986 Sales and marketing.................................... 456 406 903 1,467 2,553 General and administrative............................. 157 181 292 562 590 ------- ------ ------ ------ ------ Total operating expenses.......................... 1,229 1,208 2,017 2,786 4,129 ------- ------ ------ ------ ------ Operating income (loss)........................... (1,208) 25 422 1,133 211 Other income, net........................................ 8 45 56 47 119 ------- ------ ------ ------ ------ Income (loss) before income taxes................. (1,200) 70 478 1,180 330 Income tax expense (benefit)........................... (480) 28 191 472 132 ------- ------ ------ ------ ------ Net income (loss)................................. $ (720) $ 42 $ 287 $ 708 $ 198 ======= ====== ====== ====== ====== Pro forma net income (loss) per share.................... $ (.05) $ -- $ .02 $ .04 $ .01 ======= ====== ====== ====== ====== Shares used in pro forma per share computation........... 14,642 16,777 16,856 16,803 16,859
AS A PERCENTAGE OF REVENUES ----------------------------------------------------------- Revenues: Software................................................. 92.4% 93.6% 97.4% 93.5% Maintenance and other.................................... 7.6 6.4 2.6 6.5 ----- ----- ----- ----- Total revenues...................................... 100.0 100.0 100.0 100.0 Cost of revenues: Software................................................. 0.3 0.3 0.7 0.6 Maintenance and other.................................... 3.7 4.6 5.1 7.2 ----- ----- ----- ----- Total cost of revenues.............................. 4.0 4.9 5.8 7.8 ----- ----- ----- ----- Gross margin........................................ 96.0 95.1 94.2 92.2 Operating expenses: Product development...................................... 48.4 32.1 18.2 21.0 Sales and marketing...................................... 31.6 35.2 35.3 54.2 General and administrative............................... 14.1 11.4 13.5 12.5 ----- ----- ----- ----- Total operating expenses............................ 94.1 78.7 67.0 87.7 ----- ----- ----- ----- Operating income.................................... 1.9 16.4 27.2 4.5 Other income, net.......................................... 3.5 2.2 1.1 2.5 ----- ----- ----- ----- Income before income taxes.......................... 5.4 18.6 28.3 7.0 Income tax expense....................................... 2.2 7.4 11.3 2.8 ----- ----- ----- ----- Net income.......................................... 3.2% 11.2% 17.0% 4.2% ===== ===== ===== =====
- --------------- (1) Due to insignificant revenues, presentation as a percentage of revenues is not meaningful. 23 27 REVENUES Software. License revenues increased from $50,000 in 1994 to $7.6 million in 1995. License revenues increased from $1.2 million in the second quarter of 1995 to $4.4 million in the first quarter of 1996. License revenues increased during each quarter of 1995 due to an increase in the number of licenses of version 1.0 of Siebel Sales Enterprise, commencing in April 1995, and of version 2.0, commencing in November 1995. The increase in license revenues during the first quarter of 1996 was due to an increase in the number of licenses of version 2.0 of Siebel Sales Enterprise. This increase in the number of licenses was primarily due to increased market and customer awareness of Siebel Sales Enterprise product family, and, to a lesser degree, an expansion of the Company's direct sales organization over the past five quarters. Maintenance and Other. Maintenance and other revenues increased from less than $100,000 in each of the first two quarters of 1995 to $307,000 in the first quarter of 1996. Such increase was due to the more widespread licensing of products to customers pursuant to agreements with a maintenance component. Earlier licenses typically involved pilot installations which did not include maintenance. COST OF REVENUES Software. Cost of software license revenues includes product packaging, documentation and production. Cost of license revenues through March 31, 1996 have averaged less than 1% of software license revenues. All costs incurred in the research and development of software products and enhancements to existing products have been expensed as incurred, and, as a result, cost of license revenues includes no amortization of capitalized software development costs. See Note 1 of Notes to Financial Statements. Maintenance and Other. Cost of maintenance and other revenues consists primarily of personnel, facility and systems costs incurred in providing customer support. Cost of maintenance and other revenues aggregated $385,000 in 1995 and $343,000 in the first quarter of 1996. These costs increased significantly in the last two quarters of 1995 and the first quarter of 1996, and exceeded maintenance and other revenues in the fourth quarter of 1995 and the first quarter of 1996. Such increases reflect the effect of fixed costs resulting from the Company's investment during 1995 and the first quarter of 1996 in a larger maintenance and support organization in anticipation of entering into an increasing number of licenses with a maintenance component. The Company expects that maintenance and other costs will continue to increase in absolute dollar amounts as the Company expands its customer support organization to meet anticipated customer demands in connection with product implementation. OPERATING EXPENSES Product Development. Product development expenses include expenses associated with the development of new products, enhancements of existing products and quality assurance activities, and consist primarily of employee salaries, benefits, consulting costs and the cost of software development tools. Product development expenses increased from $64,000 in 1993 to $2.8 million in 1995 and were $1.0 million for the first quarter of 1996. These expenses generally decreased, as a percentage of total revenues, from approximately 48% in the second quarter of 1995 to approximately 21% for the first quarter of 1996. The increases in the dollar amount of product development expenses were primarily attributable to costs of additional personnel in the Company's product development operations. The Company anticipates that it will continue to devote substantial resources to product development and that product development expenses will increase in absolute dollar amount but are expected to decline somewhat as a percentage of total revenues from the level of the first quarter of 1996. Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, field office expenses, travel and entertainment and promotional expenses. Sales and marketing expenses increased from $28,000 in 1993 to $3.2 million in 1995 and were $2.6 million for the first quarter of 1996. These expenses increased as a percentage of total revenues from approximately 32% in the second quarter of 1995 to approximately 54% in the first 24 28 quarter of 1996. The increases in the dollar amount of expenditures on sales and marketing and the increase in these expenses as a percentage of total revenues reflects primarily the hiring of additional sales and marketing personnel and, to a lesser degree, costs associated with expanded promotional activities. The Company expects that sales and marketing expenses will continue to increase in absolute dollar amount as the Company continues to expand its sales and marketing efforts, establishes additional sales offices and increases promotional activities. These expenses are expected to remain at approximately the same percentage of total revenues as the first quarter of 1996. General and Administrative. General and administrative expenses consist primarily of salaries and occupancy costs for administrative, executive and finance personnel. These expenses increased from $22,000 in 1993 to $1.2 million in 1995 and were $590,000 for the first quarter of 1996. These expenses generally decreased as a percentage of total revenues from approximately 14% in the second quarter of 1995 to approximately 13% in the first quarter of 1996. The increases in the absolute dollar amount of general and administrative expenses were primarily due to increased staffing and associated expenses necessary to manage and support the Company's increased scale of operations. The Company believes that its general and administrative expenses will continue to increase in absolute dollar amount as a result of the anticipated expansion of the Company's administrative staff to support growing operations and the expenses associated with being a public company. The Company anticipates that its general and administrative expenses as a percentage of total revenues should decrease somewhat in the future from the level of the first quarter of 1996. OTHER INCOME, NET Other income, net is primarily comprised of interest income earned on the Company's cash and cash equivalents and reflects earnings on increasing cash balances during 1995 and the first quarter of 1996. PROVISION FOR INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The Company elected to be treated as an S corporation for 1993 and 1994. As an S corporation, any loss allocated to the Company passed through to its shareholder. Accordingly, the Company is not entitled to utilize the net operating losses of the business incurred prior to that date. The Company terminated the S corporation election effective January 1, 1995. Income taxes for 1995 and the first quarter of 1995 and 1996 have been provided at an effective rate of 40%, which is comprised primarily of federal and state taxes. LIQUIDITY AND CAPITAL RESOURCES From inception through March 31, 1996, the Company funded its operations primarily through cash flows from operations, the private sale of equity securities totaling $11.6 million and, to a limited extent, bank indebtedness. As of March 31, 1996, the Company had $9.8 million in cash and cash equivalents, and no outstanding bank indebtedness. Net cash used in operating activities was $119,000, $1.7 million and $505,000 in 1993, 1994 and for the first quarter of 1996, respectively, and net cash provided by operating activities was $2.8 million in 1995. In 1995, the $2.8 million of net cash provided by operating activities was primarily attributable to net income of $317,000 and increases in accounts payable of $479,000, accrued expenses of $1.1 million and deferred revenue of $4.2 million, offset by an increase in accounts receivable of $3.1 million and prepaid and other assets of $411,000. For the first quarter of 1996, net cash used by operating activities of $505,000 was primarily attributable to net income of $198,000 and increases in accounts payable of $313,000, offset by a decrease in deferred revenue of $692,000. Deferred revenues consist primarily of the unrecognized portion of revenues under maintenance and support contracts (which revenues are deferred and recognized ratably over the term of such contracts) and advance payment of software license fees. Capital expenditures were primarily for 25 29 computer workstations used for product development, product demonstrations, customer benchmarks and customer support. See Notes 2 and 3 of Notes to Financial Statements. To date, the Company's investing activities have consisted primarily of purchases of property and equipment, primarily for computer workstations used for product development, product demonstrations and customer support. The Company's capital expenditures were $38,000, $176,000, $872,000 and $1.3 million in 1993, 1994, 1995 and the first quarter of 1996, respectively. This increase in capital expenditures during 1995 and the first quarter of 1996 was primarily due to additional purchases of computer equipment including workstations and servers to support larger product development, sales and marketing and customer support groups. The Company expects that its capital expenditures will increase as the Company's employee base grows. As of March 31, 1996, the Company did not have any material commitments for capital expenditures. The Company believes that the net proceeds from the offering, together with the anticipated cash flows from operations, cash, cash equivalents and short-term investments, will be adequate to meet its cash needs for working capital and capital expenditures for at least the next twelve months. Thereafter, the Company may require additional funds to support its working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity financings or from other sources. There can be no assurance that such additional financing will be available at all, or that such financing, if available, will be obtainable on terms favorable to the Company and will not be dilutive to the Company's then current stockholders. 26 30 BUSINESS Siebel Systems, Inc. ("Siebel," or "Siebel Systems" or the "Company") is an industry leading provider of enterprise-class sales and marketing information software systems. The Company designs, develops, markets, and supports Siebel Sales Enterprise, a leading Internet-enabled, object oriented client/server application software product family designed to meet the sales and marketing information system requirements of even the largest multi-national organizations. In today's increasingly competitive global markets, businesses must continuously improve their operations. Having spent considerable effort and resources in previous years automating finance, manufacturing, distribution, human resources management, and general office operations, many businesses are now looking to apply the leverage of information technology to their sales and marketing processes. Unlike previous automation efforts which have focused on decreasing expenses, sales and marketing information systems focus primarily on increasing revenues. The Siebel Sales Enterprise is comprised of a broad range of advanced client/server application products designed to allow corporations to deploy comprehensive customer information systems, product information systems, competitive information systems, and decision support systems on a global basis. The Company's products provide support for multiple languages and multiple currencies with support for a number of frequently interdependent distribution channels, including direct field sales, telesales, telemarketing, distribution, retail and Internet-based selling. INDUSTRY BACKGROUND Business Need for Sales and Marketing Information Systems While the automation of finance, manufacturing, distribution, human resources management, and general office operations has brought significant improvements in efficiency and cost control to most large organizations, sales and marketing remain largely unautomated. The Company believes that the need to deploy closed-loop sales and marketing information systems is growing as organizations expand their distribution channels and increasingly face stronger competitive market pressures. The business demand to deploy sales and marketing information systems is driven typically both by the goal of increasing sales productivity as well as the concern that unless the organization applies information technology to this largely unautomated process, it will rapidly become uncompetitive. Closed-Loop Sales and Marketing LOGO A closed-loop sales and marketing information system allows organizations to share and manage sales opportunities and information from a marketing encyclopedia across multiple distribution channels. 27 31 The market for sales and marketing information systems is large and rapidly growing. META Group, Inc., an independent market research firm, estimates the market size as $750 million in 1995, growing to more than a $3 billion market in the 1998 timeframe. Availability of Enabling Technologies The Company believes the adoption of sales and marketing information systems is being further fueled by the recent availability of enabling technologies which allow, perhaps for the first time, the successful deployment of highly distributed, mobile sales and marketing applications. Some of these enabling technologies include: object oriented programming technologies including Visual C++ and ActiveX from Microsoft, 32-bit PC operating systems offering exceptionally accessible user-interface technologies like Windows 95 and Windows NT, rapid acceptance of intranets and the Internet, high bandwidth communications capability, rich data manipulation technologies such as Adobe Acrobat, SQL data replication services from Oracle, Sybase and Informix, as well as continued advances in microprocessor central processing unit (CPU) capacity from companies such as Intel. The Challenges of Developing Sales and Marketing Information Systems Enterprise-class application software includes categories such as financial information systems, manufacturing systems, human resource management systems and sales and marketing information systems. From a software engineering perspective, these applications are considered to be quite complex, requiring very large resource requirements and posing significant technical barriers. Some organizations have succeeded in internally developing enterprise-class applications on a timely and cost-effective basis. However, in other cases, completion of such projects has required resources substantially in excess of those originally budgeted or the project has been terminated due to lack of success. In some instances, companies undertaking such custom development have encountered delays in implementation of and, in certain cases, have canceled such projects prior to reaching production. To overcome the costs and risks associated with internally developed enterprise-class applications software, many organizations are seeking to purchase commercially designed, developed, tested, and supported application software solutions. Market Opportunity The Company believes that the commercial availability of a high-end, enterprise-class sales and marketing information software system will enable companies to be successful in automating their sales processes. The Company believes such an application should include the following characteristics: - Complete Functionality -- Comprehensive customer information systems, product information systems, competitive information systems and decision support. - Modern Technology Foundation -- Internet and intranet enabled, client/server, object oriented, 32-bit, Windows 95 and Windows NT, distributed relational database support, and OLE 2 automation support. - Scalability -- Support for thousands of concurrent users deployed globally, in multiple languages and multiple currencies with very large relational datastores. - Configurability -- Configurable business objects providing a high level of application customization and modification. The Company believes that an enterprise-class application which exhibits these characteristics will enable organizations to deploy sales and marketing information systems at lower cost, with lower risk, and more rapidly than internally developed, custom project developments. 28 32 THE SIEBEL SOLUTION The Company is a leading provider of Internet-enabled, object oriented, enterprise-class sales and marketing information systems designed to meet the needs of the largest and often multi-national corporations. Siebel's position as a market leader has been acknowledged by recognized industry experts, including AberdeenGroup and GartnerGroup, each an independent research organization. The Siebel Sales Enterprise is designed to offer users a sales information solution that is functionally comprehensive, is built upon a modern technology foundation, and scales to meet the requirements of global organizations with thousands of concurrent users and very large data stores. The Siebel solution is designed to be easily and extensively configured to meet industry-specific and company-specific data processing and data presentation requirements. Functionally Complete The Siebel Sales Enterprise is designed to provide comprehensive functionality for sales and marketing information systems. The product is intended to enable the organization to deploy enterprise-wide customer information systems, product information systems, competitive information systems, and decision support systems. Specific functionality includes opportunity and account management, product and revenue forecasting, quote generation, on-line sales tools, contact and activity management, correspondence, and fulfillment. The Siebel Sales Enterprise fully supports team selling across multiple distribution channels, including field sales, telesales, telemarketing, and resellers. The Siebel products are designed to improve internal and external communications by integrating with e-mail, Intranet, and Internet services. Modern Technology Foundation The Siebel solution takes advantage of advanced developments in technology and computing trends, including Internet and intranet interoperability, client/server architecture, configurable business object technology (BusObjects), 32-bit processing capability, modern client operating systems (Microsoft Windows 95 and Windows NT), relational database servers, modern development environments (Microsoft Visual C++ and Microsoft Foundation Class Libraries (MFC)), inter-application communications technologies (Microsoft OLE 2 automation), and database synchronization and replication. The Company believes that the use of these modern and industry-standard development tools and technologies has allowed Siebel Systems to rapidly develop a comprehensive, configurable, scalable, enterprise-wide sales and marketing information solution. The Company has found that sales of the Siebel Sales Enterprise have been facilitated by the fact that its customers and prospects have often adopted as their MIS standards these same technologies used by the Company to build its products. The Company believes that the technologies utilized to build Siebel Sales Enterprise -- many of which became commercially available in the mid-1990s -- are required to build an application of this nature and scope. Prior to the advent of these technologies, it was technically difficult to build an application robust enough to solve the information requirements of global sales and marketing organizations. The Company believes that its use of these technologies provides the Company with a significant market advantage. Internet-Enabled The Siebel Sales Enterprise is designed to allow organizations to harness the power of the Internet to facilitate the sales and marketing process. The Siebel Sales Enterprise enables organizations to use the Internet today for collecting leads, for accessing product, company, and competitive information through the World Wide Web, for communicating with prospects and customers via Internet-based electronic mail, and for synchronizing and replicating data for remote computing. Many companies are using their home page to collect sales leads. The information that prospects enter on these web-based forms, (e.g., name, address, etc.) can be automatically loaded into Siebel Sales Enterprise using a standard CGI (Common Gateway Interface) interface to the Siebel Open 29 33 Interface product. These leads can then be automatically processed by the Siebel Sales Enterprise Territory Manager, assigned, and distributed to the appropriate sales representatives for follow up. Siebel customers can also integrate Siebel Sales Enterprise and the Siebel Encyclopedia with a web browser, such as Netscape Navigator, to allow their sales and marketing professionals to automatically access remotely stored and managed sales and marketing information using the World Wide Web. In this fashion, sales and marketing personnel can readily gain remote access to a broad range of product marketing materials including product catalogues, data sheets, and annual reports. Using Siebel Sales Enterprise, sales professionals can send correspondence and quotes to their prospects and customers via Internet-based electronic mail. Siebel Remote offers support for sales representatives using the Internet to synchronize their remote laptop computers with the corporate databases. Users can employ a local Internet access point to communicate "directly" with the corporate headquarters to exchange account information, access new leads, and transfer new orders. The Company believes the ability to use the Internet for data synchronization or "docking" offers significant communications cost savings to Siebel users and allows easy, local, and lower cost computer access globally. Enterprise Scalability The Siebel solution is designed to scale to meet the needs of organizations whose sales forces range in size from fifty to thousands, including even the largest global organizations. Many of the Company's customers have purchased Siebel Sales Enterprise with the goal of automating thousands of sales professionals, accessing multiple gigabyte data repositories. Virtually all of the Company's customers are currently in the early stages of enterprise-wide deployment. The largest production deployments of Siebel Sales Enterprise to date are measured in hundreds of sales professionals. See "Risk Factors -- Limited Deployment." BusObject Configurability Siebel Systems employs the use of BusObjects, highly configurable object oriented business objects, as the basic building blocks of Siebel Sales Enterprise. Included in the family of Siebel BusObjects are Opportunity, Account, Customer, Product, Competitor, and Campaign. The BusObjects contain semantic information about the sales and marketing entities as well as presentation and navigation logic. BusObjects control the physical access of information from data sources, organize and inter-relate that information, and present the information to the user. The Siebel Sales Enterprise is comprised of a collection of these BusObjects. Highly configurable at the object code level, Siebel BusObjects are designed to allow organizations to rapidly configure the application to meet their business requirements while ensuring a clear and consistent upgrade path for future releases. This flexibility is expected to substantially reduce the long term maintenance costs associated with deploying a highly configured application. STRATEGY The Company's objective is to establish and maintain a clear market leadership position in the sales and marketing information systems market. The Company's strategy incorporates the following key elements: Target Large Multi-National Customers in a Broad Range of Industries The Company has designed Siebel Sales Enterprise to satisfy the most rigorous sales and marketing information requirements of multi-national corporations that frequently employ multi-tiered distribution strategies. Siebel Sales Enterprise is intended to be deployed on a global basis, and provide shared, up-to-date information for field sales, telemarketing, telesales, marketing, as well as 30 34 third party reseller sales organizations. The Company intends to leverage its experience and continue to target product development, sales and marketing activities to expand worldwide market acceptance of Siebel Sales Enterprise. Maintain and Extend Advanced Technology Position The Siebel Sales Enterprise utilizes advanced information technology. The Company employs the use of configurable business objects (BusObjects) designed to allow organizations to configure the Siebel application to fit their unique needs while ensuring a clear and consistent upgrade path for future releases. The Company has developed sophisticated database synchronization capabilities intended to allow large numbers of mobile users to intermittently connect and synchronize their local database with a server database. The Company has made extensive use of object oriented technology to develop a multi-tiered architecture that supports Internet-enabled client/server, three-tiered, and N-tiered deployment strategies. The Company intends to continue to commit substantial resources to maintain and extend its advanced technology position. Global Strategic Alignment The Company seeks to promote widespread adoption of Siebel Sales Enterprise through the establishment of strategic relationships with leading systems integrators, technology providers, and distributors. Siebel Systems has formalized a global strategic business alliance with Andersen Consulting to maximize the growth and establish the market leadership position of both companies in the sales and marketing information systems marketplace. Under this worldwide alliance agreement, Andersen Consulting provides Siebel-related professional services including sales force reengineering, change management, systems integration, configuration, installation, project management, and training. This relationship provides Siebel and Siebel's customers immediate access to a highly trained global professional service organization to customize, integrate and deploy medium- and large-scale Siebel implementations. The Company has technology and marketing relationships with other leading companies such as Itochu, Microsoft Corporation, and Adobe Systems, Inc. and intends to establish additional relationships. These relationships allow the Company to focus on its core areas of expertise of developing and marketing sales and marketing information systems software, while leveraging the strength and influence of complementary information technology leaders in their respective domains. Fully Exploit Intranets and the Internet The Siebel Sales Enterprise has been designed to expand the accessibility of comprehensive sales and marketing information to sales representatives through the use of intranets and the Internet as a global, low-cost, virtual private network. The Company believes that the Internet will enable the entire corporate sales and marketing information base, currently only available to users connected over a LAN (local area network) or WAN (wide area network), to be available without geographic limitation for the low cost of a local Internet connection. This capability will allow organizations to deploy targeted, fully-informed sales professionals wherever needed without the expense and overhead of physical offices or private leased lines. The Company plans to continue to exploit the Internet and believes that in the future it will allow customers to access comprehensive information systems which recommend and deliver customized products, goods, and services directly to customers worldwide. 31 35 Promote Successful Customer Implementations The Company's success is dependent upon its customers' successful implementation of Siebel Sales Enterprise. As a result, the Company actively supports the customer's deployment efforts by providing Internet and telephone technical support, providing comprehensive instructor-led training, and assigning an account management team that consists of a sales representative, technical account manager, and an executive sponsor. To objectively measure customer satisfaction, Siebel Systems employs an independent third-party organization to perform periodic customer satisfaction audits. Expand Global Sales Capabilities The Company intends to expand its global sales capabilities by increasing the size of its direct sales organization in major markets and continuing to leverage distributors in other selected markets. In particular, the Company plans to expand its direct sales and marketing activities in North America, Europe, Asia, and Latin America. The Company has operations in North America, the United Kingdom, and Japan and has recently introduced with Itochu localized versions of the Siebel Sales Enterprise for the Japanese market. The Company is developing localized versions for major European markets. PRODUCTS The Siebel Sales Enterprise is a client/server application software product family designed to meet the sales and marketing information system requirements of large, frequently multi-national, organizations. The Siebel Sales Enterprise is comprised of a broad range of advanced client/server application products designed to allow corporations to deploy comprehensive customer information systems, product information systems, competitive information systems and decision support systems on a global basis. The Company shipped Siebel Sales Enterprise version 1.0 in April 1995 and subsequently shipped version 2.0 in November 1995. The Siebel Sales Enterprise supports Windows for Workgroups, Windows 95 and Windows NT Workstation clients. The Siebel application server operates on Windows NT and can work with Oracle, Sybase and Informix relational databases operating on a variety of leading UNIX servers and Windows NT database server platforms. The Company generally licenses its software based on the number of users. The core system, Siebel Sales Enterprise, has a U.S. list price of $1,750 per user. Additional product options range from $250 to $500 per module, resulting in a total list price of $5,500 per user for an end-user system that includes all software options. The Siebel application server products are priced and licensed separately. Initial direct sales to an end-user customer have typically ranged from $500,000 to $2,000,000, with certain transactions that have been considerably greater than $2,000,000. The Company also provides software maintenance service, training, and associated professional services. The Siebel Sales Enterprise is usually licensed to customers who intend to automate the sales organization of an entire corporation or of a large division. Licenses to date of the Company's products range from 50 to 5,000 users. Siebel Sales Enterprise The Siebel Sales Enterprise is designed to allow teams of sales and marketing professionals to manage sales information throughout the entire sales cycle. This core application includes the Opportunity Management, Account Management, Contact Management, Activity Tracking, and Calendar Systems. The Siebel Sales Enterprise product family includes the following products: Siebel Sales Enterprise Product Options Siebel Encyclopedia Siebel Encyclopedia provides sales professionals with access to a repository of their organization's sales-related information, including complete product information, competitive information, 32 36 decision support, and on-line literature. This information is published by marketing and made available to all end users of the system. Built-in communications capabilities are designed to allow users to immediately send information to prospects, customers, and other sales team members via intranet, Internet, electronic mail, fax, or automated correspondence and fulfillment. Siebel Office Siebel Office automates the process of sending sales-related letters to customers. Correspondence includes integration with Microsoft Word, pre-built correspondence templates, and automatic mail-merge capabilities. Fulfillment center support is provided for internal and third-party fulfillment centers to ensure timely completion of fulfillment requests. Siebel Quotes Siebel Quotes allows sales professionals to develop, verify, submit and revise quotes tailored to meet customer requirements. Siebel Quotes is designed to permit the generation of quotes from the opportunity information, verify that quotes are complete and accurate, print quotes using a variety of formats, or use electronic mail integration to send quotes to customers over the Internet. Siebel Revenue Forecasting Siebel Revenue Forecasting allows sales professionals to estimate and submit forecasts based on opportunity revenues over time. Revenue Forecasting includes opportunity-driven forecasts, forecast revisions, forecast histories, forecast roll-up capabilities, and forecast reports. Forecasting for managers based on direct report forecasts is included. Siebel Product Forecasting Siebel Product Forecasting allows sales professionals to estimate and submit forecasts based on unit volume and price estimates over time. Siebel Product Forecasting includes opportunity product-driven forecasts, forecast revisions, forecast histories, forecast roll-up capabilities, and forecast reports. Forecasting for managers based on direct report forecasts is included. Siebel Reports With Siebel Reports, users have access to the full power of Query by Example to generate ad-hoc reports on-line, or view reports in graphical format. Siebel Reports integrates with multiple report writers and delivers more than forty-five pre-built reports. Siebel EIS Siebel EIS (Executive Information System) allows sales and marketing professionals and executives to dynamically visualize information in a variety of on-line graphical formats. The Siebel EIS system comes with more than thirty-five pre-defined graphical charts, as well as the ability to configure new graphics that are uniquely tailored to user requirements. Siebel Tele-Business Siebel Tele-Business enables lead generation and lead qualification by equipping Telesales and Telemarketing professionals with powerful Campaign, Call Scripting, and Campaign Administrator functionality, as well as automated call distributor (ACD) integration. Siebel Remote Siebel Remote enables mobile computing by allowing the exchange and synchronization of information between the sales professional's mobile computer and the corporate server. Mobile users can access the full functionality of Siebel Sales Enterprise on a laptop, and later "dock" to upload local 33 37 changes to the server, initiate requests for information, and download any new information from the corporate server. Siebel Remote is Internet-enabled to support database synchronization and replication over the Internet. Siebel Anywhere LOGO Organizations can unite their connected Siebel users and their mobile Siebel users in a common sales information system. Siebel provides two-way data synchronization between mobile users and the central database repository, using LAN, WAN, dial-up, as well as intranet and Internet connections. Siebel Systems Administration and Management Software Siebel Systems Administration and Management Software is separately priced and licensed and includes the following components: Siebel BusObject Configurator For application configuration, Siebel Sales Enterprise provides business object definitions to allow systems administrators, systems integrators, and application developers to configure the look, feel, data content, and layout of Siebel business objects without changing source code. Siebel Marketing Manager The Siebel Sales Enterprise provides a suite of marketing administration screens to define and manage marketing information such as product information, product lines, price lists, competitive information, and decision issues. Siebel Sales Manager The Siebel Sales Enterprise provides a suite of systems administration screens to define and manage key system information such as employees, sales territories, available views, user responsibility profiles, and system preferences. 34 38 Siebel Anywhere The Siebel Sales Enterprise provides a server component of Siebel Remote to manage all information exchanges with mobile users. Siebel Anywhere monitors this two-way exchange, and provides comprehensive conflict detection and resolution facilities designed to ensure the integrity and synchronization of both server and client databases. Siebel Enterprise Integration Manager The Siebel Enterprise Integration Manager allows Siebel customers to exchange information with other enterprise applications such as manufacturing, accounting, human resource, and customer service applications. Siebel Database Extension Manager For application configuration, the Siebel Database Extension Manager is designed to allow Siebel customers to capture the information most appropriate for their business. Siebel Database Extension Manager provides an intuitive graphical user interface for systems administrators to extend the Siebel Sales Enterprise database schema while maintaining a clear and consistent upgrade path to future releases. Siebel Product Advantages Application Configuration The Company's customers each have unique business needs requiring varying levels of application configuration. For instance, different organizations may use a combination of direct sales, field sales, telesales or third-party sales. The Company believes it has anticipated these needs and provides configurable business objects to allow organizations to configure the application to fit their unique requirements. Each business object defines the look and feel, the information displayed, and the workflow of the application to address major areas of business functionality. For example, a business object may contain the business logic and rules that describe how leads and prospects are shared across multiple sales channels. The Company provides a range of business objects that address the sales and marketing process. The Siebel Sales Enterprise is designed to allow organizations to configure and modify the properties and attributes of the business objects without needing to change application source code. The Company believes this approach to configuration provides several key benefits: - Reduces cost of configuration and maintenance, - Permits a clear and consistent upgrade path for future releases of Siebel software, and - Allows the Company to maintain and support a single source code base that addresses the varied needs of its customers. Application configuration is typically performed by a Siebel systems integration partner or the customer's MIS department. The software may be configured in a number of manners including: - User Preferences - System Administration Preferences - Server Preferences - Database Extensibility - Object Definitions This combination of configuration options offers customers extensive configurability without having to write or modify source code. 35 39 Data Synchronization and Replication Typically, field sales, telesales, and order administration personnel all have contact with the same customers. Sharing information about customers across often geographically dispersed sales teams can be difficult. The challenge is to provide every member of the sales team with up-to-date information on the account or prospect. Siebel Remote, the Company's asynchronous replication technology, addresses the data synchronization and distribution needs of these sales teams. Siebel has applied for a patent on its proprietary data synchronization and replication technology. See "-- Intellectual Property and Other Proprietary Rights." Siebel considers this technology a major source of competitive market advantage. Siebel Global Processing Architecture LOGO The Siebel global processing architecture supports a multi-tiered sales organization with stationary Siebel users who are permanently connected to the central database server and mobile Siebel users who are intermittently connected to the central database server. Mobile users can utilize Siebel Remote to synchronize their laptop or hand-held computer with the central data repository. Adhering to preestablished visibility rules, Siebel users can share overlapping subsets of data to support team selling. Traditional data synchronization approaches are typically limited, allowing only the primary user to update shared data. With such limited approaches, other synchronized users only have read access to information entered by the primary owner. Siebel Remote is designed to allow any designated member of the sales team to update records, and to automatically synchronize the updates with all other users. Giving multiple users update rights can create conflicts, particularly when some users operate in a mobile environment and are not permanently connected to the central data repository. The Siebel application supports an extensive set of configurable business rules that detect and resolve conflicts at the database field level. Siebel uses a sophisticated "net change" architecture with highly compressed transaction instructions designed to minimize network traffic, reduce data synchronization time, and limit network expense. Siebel's architecture is network independent, allowing data synchronization to occur over LAN, WAN, dial-up, as well as intranet and Internet connections. 36 40 Siebel Global Distributed Architecture LOGO The Siebel de-centralized data distribution architecture is designed to support multiple, de-centralized data servers which can be geographically located in the sales region they support. User Interface The Siebel Sales Enterprise has been ergonomically designed by human factors experts to be easy to use and easy to learn. The use of Microsoft Windows and Microsoft Office compliant user interface technology is intended to ensure that users are immediately familiar with buttons, menus, and industry-standard commands. A tab metaphor allows users to click a mouse and view the key components of their sales and marketing information system. Siebel's patent-pending Thread Manager technology displays, records, and restores the user's screen-by-screen navigation. System-wide, context sensitive help provides immediate answers to questions. Scalability and Performance Scalability and performance are key considerations in enterprise-wide deployments of sales information systems. For large deployments, thousands of users need to access a common data repository that may contain tens of gigabytes of information. Scalability and performance are impacted by design and implementation of both the client and server side of the application. The Siebel Sales Enterprise is designed to address the performance and usability issues that arise in large-scale deployments. Efficient Use of Network Bandwidth to Optimize Performance The Siebel client/server architecture is designed to minimize network traffic to optimize performance. The client is designed to intelligently cache data and group database queries and updates, thereby minimizing the number of transactions over the network. This feature is intended to allow large numbers of users to be simultaneously connected over a LAN or WAN to a single centralized database while exhibiting acceptable performance characteristics. 37 41 High Performance Application Server The Siebel Application Server has been designed to permit high throughput. Multiple application servers can run in parallel with a single database server. The number of users each Siebel Application Server can support varies depending on the type and frequency of data updates, as well as the particular server hardware. High Performance Computer Hardware and Database Support The Siebel products are designed to support scalability for large user communities by taking advantage of leading, high-performance databases and computer hardware. The Company supports industry-standard approaches to high-performance such as symmetric multi-processing hardware which allows multiple processors within one server machine. Support for Global Enterprises Built for multi-national customers, Siebel software supports international standards in several ways, including support for: - Local language support for non-English application deployment - Multiple currencies, exchange rates and automatic currency conversions - International time, date, and phone number conventions - Double-byte Asian character sets The Company recently introduced with Itochu a localized version of Siebel Sales Enterprise for the Japanese market. The Company is currently developing French and Spanish language versions which it currently expects to release in Europe in 1996. Other localized versions will be developed and released as market conditions warrant. TECHNOLOGY The Siebel Sales Enterprise exploits an advanced information technology platform. The Siebel products embrace and incorporate the utility and power of the Internet. The application is built on a multi-tiered client/server architecture supporting Microsoft Windows clients and a variety of Windows NT and UNIX servers running Informix, Oracle, and Sybase relational databases. The technology foundation includes object oriented application development, Microsoft Visual C++, MFC Libraries, OLE 2 automation, 32- or 16-bit processing, and Microsoft Windows and Microsoft Office user interface compliance. The Siebel application is a modern, scalable and customizable enterprise-wide client/server sales and marketing information system. The application uses a multi-tiered architecture with separate client, application server and database server layers connected together over a LAN or a WAN. The Siebel N-Tiered Architecture The Company has developed an advanced, N-tiered object oriented software architecture. The software architecture is designed to provide Siebel customers with robust flexibility in application deployment to meet the unique needs of the organization. Using Siebel's N-tiered architecture, customers have the flexibility of deploying their applications on remote pen-based and laptop computers, on standalone desktop workstations, on client/server systems, on highly distributed replicated "mainframe" server environments, and in the future, on the Internet, or any combination thereof. The Company believes that the utility offered by this flexible architecture provides a major source of competitive market advantage. Siebel's N-tiered architecture separates the information presentation, application logic, database access, and interprocess communications layers into separate tiers in order to partition and distribute the application components to run where necessary. 38 42 Siebel's N-tiered architecture currently supports the following application deployments: Personal Computing for mobile sales professionals and Client/Server for connected sales professionals. The Company expects that this architecture can be further exploited to support additional Internet-enabled application deployment configurations in future Siebel product releases, including the Virtual Computing for Internet-connected sales professionals, resellers, partners, and individual buyers. Siebel N-Tiered Architecture LOGO The Siebel N-tiered architecture separates the information presentation, application logic, database access, and interprocess communications layers into separate tiers in order to partition and distribute the application components to run where necessary. Personal Computing Siebel Personal Computing supports mobile sales professionals who typically use either laptop or hand-held portable computers. These users are not permanently connected to their organization's network and usually run the client disconnected from the central database. Mobile clients have a local SQL database that contains a subset of the information in the server database. While the field sales representative is disconnected from the LAN or WAN, the local database is used for information access and updates. This gives mobile users the complete range of functionality available to connected users anywhere their business takes them. The Company's patent-pending technology allows for exchange and synchronization of information between the mobile and server databases, using LANs, WANs, dial-up, or the Internet. Client/Server The Siebel Client/Server software connects the client to the server database via a LAN or WAN. Connected clients access and update information directly against the server database. A typical use for a connected client is a telesales representative based in the headquarters office, or possibly in a regional office connected to headquarters through a WAN. Virtual Computing Siebel Virtual Computing is being designed to expand the accessibility of comprehensive sales and marketing information to sales representatives through use of the Internet as a global, low-cost, virtual private network. The Company believes that the Internet will enable the entire corporate sales and marketing information base, previously available only to users connected over a LAN or WAN, to be available without geographic limitation for the cost of a local Internet connection. The Company 39 43 believes that this capability will allow organizations to deploy targeted, fully-informed sales professionals wherever needed without the expense and overhead of private leased lines or physical offices. Siebel Virtual Computing is being designed to deliver one-to-one sales and marketing on a global basis. The Company believes this may well re-define the concept of "selling on the Internet." Today, buyers can order anything from consumer goods to automobiles using the Internet to browse home pages and tour virtual shopping malls. This passive approach to selling can be characterized as using the Internet simply as an inexpensive way to deliver an electronic catalog. Electronic catalogs do not currently lead customers through the product evaluation and selection phase, do not up-sell or cross-sell, only offer limited customized alternatives, and add no incremental value to the selling process. The Company believes that such electronic catalogs are not a replacement for a true sales professional who can identify the specific product configuration that best suits the customers' needs and requirements. The Company believes that its N-tiered architecture will, in the future, be able to provide organizations with the technology foundation to deliver a powerful new generation of selling applications over the Internet. For example, through a web page, buyers may have access to a virtual sales consultant, fully knowledgeable about the buyer's demographics, interests, and buying patterns. The Company believes that this virtual sales approach will allow organizations to dynamically target marketing programs, tailor solutions, and deliver customized products, goods and services worldwide, directly to customers based on their needs. The Company believes that this use of the Internet may fundamentally change the economics of selling by permitting organizations to reduce distribution and selling costs, while simultaneously increasing revenues, and growing new markets through disintermediation. See "Risk Factors -- Risk Associated with New Versions and New Products; Rapid Technological Change." Siebel Virtual Computing LOGO The Siebel N-tiered architecture is designed to allow organizations to flexibly deploy their Siebel applications in multiple configurations, including Siebel Personal Computing, Siebel Client/Server Computing, and in the future, Siebel Virtual Computing. 40 44 CUSTOMERS AND MARKETS Siebel has targeted large organizations operating globally and conducting business through multiple sales channels. The Company believes this market has been underserved by existing vendors and offers substantial opportunities to the Company. The following were the customers of the Company as of May 31, 1996. FINANCIAL SERVICES - Charles Schwab & Co., Inc. - Frank Russell Company - Montgomery Securities - Texas Commerce Bank National Association SERVICE - Andersen Consulting LLP SOFTWARE - BMC Software, Inc. - Informix Software, Inc. - Platinum Technology, Inc. - Pure Software, Inc. TRANSPORTATION - American President Companies Ltd. - Viking Freight System, Inc. CONSUMER PACKAGED GOODS - The Dial Corp - The Quaker Oats Company MANUFACTURING - Cisco Systems, Inc. - Newbridge Networks, Inc. - The Dow Chemical Company - AMP Incorporated - LSI Logic Corporation - Hewlett-Packard Japan, Ltd. - Digital Equipment Corporation - Unisys Corporation
The Siebel Sales Enterprise has been selected for use by a wide variety of industries as illustrated by the following customer examples: Financial Services In December 1995, Charles Schwab & Co., Inc. licensed the Siebel Sales Enterprise software as an important sales system to be used by more than 4,000 brokers. After reviewing multiple products in the areas of configurability, scalability, and functionality, the firm chose the Siebel Sales Enterprise. The Siebel Sales Enterprise is designed to allow shared access to updated customer profiles and histories to improve the organization's responsiveness to its nearly 3.5 million active customer accounts and prospects. Transportation American President Companies Ltd. was challenged with providing their sales representatives with the tools necessary to compete in a global marketplace. After conducting an extensive review of sales and marketing information systems, they selected Siebel Sales Enterprise. This implementation is being designed to integrate internal customer information and government trade data, to optimize work loads and to provide increased customer service. Utilizing Siebel's work flow capabilities, these sales representatives are expected to be able to balance multiple customer inquiries and increase their revenue generating capacity. Manufacturing Unisys Corporation has adopted Siebel Sales Enterprise for use in selling complex high-technology products and services. After a multi-year internal development effort and many millions of dollars in expense, they canceled their project and selected Siebel as their sales and marketing information solution. They have employed a multi-tiered distribution strategy and plan to use Siebel to manage many elements of the sales process. The customer intends to use Siebel to help consolidate formerly 41 45 disparate customer databases and prospect lists. Operating over a worldwide WAN, telesales representatives are expected to be able to access sales history, product information, create quotations, take orders, share information and route leads to field representatives. MARKETING The Company's marketing efforts are directed at establishing a market leadership position for Siebel Systems. Targeted at sales, marketing and information technology executives within large, multi-national organizations, Siebel's marketing programs are focused on creating awareness and generating interest in the Siebel solution. Siebel Systems is an active participant in the Digital Consulting Inc. (DCI) Field and Sales Automation and Internet EXPO, a leading international conference and trade show in the sales and marketing information systems marketplace. In 1996, the DCI Field and Sales Automation/Internet Conferences are being held in San Jose, Chicago, Toronto, Boston and Atlanta. These week-long conferences will feature Thomas M. Siebel, Chairman and Chief Executive Officer of the Company, delivering the plenary Keynote Address. In addition, Siebel Systems will demonstrate its products and showcase its partners' solutions. Thomas Siebel is a frequent speaker at many software industry events, including the Sales Automation Association and Insight Technology Group's Chief Sales Officer Conferences, as well as the Andersen Global Consulting Seminar. Mr. Siebel joined Bill Gates, Chairman of Microsoft, in the delivery of the Keynote Address at WindowsWorld 95 in Atlanta, showcasing the Siebel Sales Enterprise. Supporting its worldwide direct and indirect sales channels, the Company's co-marketing efforts include conducting global Sales and Marketing Executive Briefings including the following: - Sales Automation Executive Briefings with Microsoft and Andersen Consulting Chicago Los Angeles New York Irvine Philadelphia Toronto Detroit Hartford Houston Boston - Mobile Computing for Sales Executives with Hewlett-Packard Tampa St. Louis Ft. Lauderdale Atlanta Dallas Minneapolis New York Houston Fullerton Denver Seattle San Francisco Cincinnati Van Nuys Boston Chicago - Increasing Revenue for Sales Executives with Informix Phoenix Boston Chicago New York Denver San Francisco Irvine Dallas Atlanta Detroit Minneapolis - The Impact of Sales and Marketing Information Systems in Japan with Itochu Tokyo Osaka
Thomas Siebel and Michael Malone, co-author of The Virtual Corporation, have written Virtual Selling, Going Beyond the Automated Sales Force to Achieve Total Sales Quality ("Virtual Selling"). Published by The Free Press, a division of Simon & Schuster, in February 1996, Virtual Selling describes the business benefits of applying information technology to the sales and marketing process. Siebel's marketing personnel engage in a variety of marketing activities, including managing and maintaining the Siebel web site, issuing newsletters, making direct mailings, placing advertisements, conducting public relations and establishing and maintaining close relationships with recognized industry analysts. 42 46 SALES Siebel sells its software primarily through its direct sales organization. As of April 30, 1996 the Company's direct sales force consisted of 18 sales professionals located in eight domestic offices (Boston, New York, McLean, Atlanta, Chicago, Dallas, Los Angeles, and Menlo Park) and two international offices (London and Tokyo). The field sales force is complemented by two telemarketing representatives situated in the Company's Menlo Park, California headquarters. Technical sales support is provided by 11 sales consultants co-located in the field offices. Sales in the Asia/Pacific market are leveraged through a co-exclusive distribution agreement with Itochu. The Company currently intends to add sales representatives and sales consultants in the United States, Germany, France, the United Kingdom, Spain, Japan, Australia and Singapore. The Company deploys sales teams consisting of both sales and technical professionals who work with strategic systems integration partners to create industry specific proposals, presentations and demonstrations which address the exact requirements of the customer. The decision makers within Siebel's prospective customers for the Siebel products are their executive management teams, frequently consisting of the Chief Information Officer, VP Sales, VP Marketing, the Chief Financial Officer and the Chief Executive Officer. The Company manages its business using Siebel Sales Enterprise, running on the Company's intranet. The Siebel product is used to manage all aspects of the sales process and to share information among members of the sales team and Siebel management. The Company believes that the deployment of an integrated sales and marketing information system offers a distinct competitive advantage, and that focusing corporate resources on revenue generating systems offers greater return than automation efforts focused on cost reduction in areas such as human resources and accounting. The Company believes its customers' understanding of this fact establishes the value of the Siebel Sales Enterprise and shortens the sales cycle. The Company's sales process consists of several phases: lead generation, initial contact, lead qualification, needs assessment, company overview, product demonstration, proposal generation and contract negotiations. In a number of instances the Company believes that its relationships with strategic partners, including systems integrators, has substantially shortened the Company's sales cycle. Partners have generated and qualified sales leads, made initial customer contacts and assessed needs prior to Siebel's introduction. Additionally, systems integration partners have assisted the Company in the creation of customized presentations and demonstrations which the Company believes enhance the competitive position. While the sales cycle varies substantially from customer to customer, for initial sales it has ranged to date from two to eighteen months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." GLOBAL STRATEGIC ALIGNMENT An important element of the Company's sales and marketing strategy is to continue to enhance and expand its strategic partnerships with key industry leaders in order to increase market awareness and acceptance of Siebel Systems. The Company believes these relationships with industry leaders help to ensure that Siebel Systems delivers a comprehensive solution to its customers for their sales and marketing information system needs. The Company has established relationships with organizations in three general categories: systems integrators, development and distribution partners and educational services providers. System Integrators Andersen Consulting -- Strategic Business Alliance Siebel Systems and Andersen Consulting have formalized a strategic business alliance designed to maximize the growth and establish the market leadership position of both organizations in the sales and marketing information systems marketplace. Worldwide in scope, the parties' agreement includes 43 47 cooperative specification and development of products and solutions, technology transfer and training, and joint marketing and sales programs. Under this agreement, Siebel promotes Andersen as its preferred systems integration partner, and Andersen promotes Siebel as its preferred software solution for sales and marketing information systems. In connection with the strategic alignment, Andersen Consulting has made an equity investment in Siebel Systems and George Shaheen, the Managing Partner of Andersen Consulting, serves on the Company's Board of Directors. See "Management" and "Principal and Selling Stockholders." Andersen Consulting provides Siebel-related professional services including sales force reengineering, change management, system integration, configuration, installation, project management and training. Andersen Consulting operates Siebel Configuration Centers in Menlo Park, London, and Tokyo. Siebel believes that this relationship provides Siebel and Siebel's customers immediate access to a highly trained global professional service organization to customize, integrate and deploy medium-and large-scale Siebel deployments. Andersen Consulting has provided system integration services in connection with a majority of the Company's customers to date. See "Risk Factors -- Reliance on Andersen Consulting and Other Relationships; Dependence on Other Relationships." Siebel Systems and Andersen Consulting conduct joint market development and promotional activities, including joint advertising, joint public relations, jointly developed brochures and market-specific product demonstrations, and collateral. The two companies jointly participate in industry events and conduct Executive Briefings both in worldwide seminar programs as well as in DCI Field and Sales Automation tradeshows. Siebel and Andersen Consulting have created a global joint selling model targeted at specific vertical markets and major accounts. Other Systems Integrators The relationship between Siebel Systems and Andersen Consulting is non-exclusive. As requested by its customers, Siebel Systems frequently collaborates with other systems integrators, including KPMG Peat Marwick LLP and Deloitte & Touche LLP to provide Siebel-related professional services. Technology and Distribution Partners Itochu Techno-Science Corporation -- Strategic Business Alliance Siebel and Itochu Techno-Science Corporation have entered into a strategic alliance agreement under which the two companies have agreed to jointly develop, promote, market, sell and support the Company's products in Japan. The companies are working together to localize the Siebel products for the Japanese market and jointly promote and support these products in Japan. In connection with the alliance, Itochu Techno-Science Corporation and related entities made an equity investment in the Company. See "Principal and Selling Stockholders." Itochu Techno-Science Corporation is a large technology provider to the Japanese market, representing many leading companies including Sun Microsystems, Inc., Compaq Computer Corporation and Sybase, Inc. Itochu Techno-Science Corporation is a subsidiary of Itochu Corporation, which is one of the largest companies in the world with revenues in excess of $140 billion per annum. Under the agreement, Itochu Techno-Science Corporation has agreed to prepare Japanese localized versions of the Company's products, including the software, on-line help and training materials. Acting as the co-exclusive distributor of the Siebel products in Japan, Itochu Techno-Science Corporation promotes and markets the Siebel software to Japanese end-user organizations. A dedicated, full-time marketing team within Itochu Techno-Science Corporation coordinates the marketing, promotion and distribution efforts for the Siebel products. This marketing team promotes the Siebel products through marketing programs including seminars, trade shows and conferences. In addition, Itochu Techno-Science Corporation produces Japanese versions of Siebel sales tools and collateral. 44 48 Itochu Techno-Science Corporation provides the installation, training, technical support and maintenance to Siebel end-users. To promote customer satisfaction in the Japanese market, Itochu provides technical support and administers maintenance and software upgrade programs. Other Strategic Relationships Microsoft Corporation The Company and Microsoft have a strategic technology and marketing relationship. As a member of the Microsoft Developer Network and Microsoft Solution Provider programs, the Company receives frequent briefings on Microsoft's strategic and technical product direction, as well as early access to new software releases. The Company uses Microsoft development tools extensively, including Microsoft Visual C++, MFC, and OLE 2. The Siebel applications run under Windows for Workgroups in 16-bit, and Windows 95 and Windows NT in a native 32-bit environment. Microsoft has promoted Siebel's extensive use of its technology in a Siebel Systems Solutions Datasheet, a Siebel Systems focus brochure, and has featured the Siebel Sales Enterprise in multiple Microsoft product launches. Siebel and Microsoft have collaborated in numerous joint marketing programs targeted at Microsoft's key customers and prospects. The two companies have conducted a nationwide series of Executive Sales Information Systems Briefings and jointly participated with each other in trade shows and industry events. Thomas Siebel joined Bill Gates, Chairman of Microsoft, in the delivery of the keynote address at WindowsWorld 95 in Atlanta to more than 5,000 conference attendees, and demonstrated Siebel Sales Enterprise as a Windows 95-compliant client/server application that takes advantage of the Microsoft application development and enterprise software. Adobe Systems, Inc. Siebel Systems and Adobe have a joint technology and marketing relationship. The Siebel Sales Enterprise utilizes Adobe Acrobat technology which is designed to allow sales people to more quickly access sales information and enable sales professionals to have immediate, on-line access to all of their sales tools including annual reports, brochures, customer stories and presentations. The companies have jointly promoted the integrated solution through a number of joint marketing programs, including collaboration in product announcements, tradeshows and joint sales collateral. In connection with the strategic relationship, Adobe Ventures L.P., a venture partnership associated with Adobe, has made an equity investment in the Company. See "Principal and Selling Stockholders." Mobile and Hand-Held Computer Providers Siebel Systems has relationships with Norand and Telxon Corporation, leading providers of mobile hand-held devices used by field sales personnel. Telxon and Norand's line of hand-held information workstations integrate point-and-touch pen-based computing devices with barcode data capture and wireless communications. Siebel's products will run on these hand-held devices for use in industries such as consumer packaged goods where hand-held devices enable sales representatives to implement more effective in-store promotions. Siebel collaborates with Norand and Telxon in numerous marketing activities, including joint trade shows and industry events, joint participation in user groups, and targeted joint customer calls. Educational Service Provider -- Wilson Learning Corporation Siebel Systems has a relationship with Wilson Learning Corporation, a worldwide sales training company. As part of the relationship, Wilson Learning has agreed to develop and deliver a wide range 45 49 of end-user training courses for Siebel end-users. Wilson Learning will offer instructor-led classroom training and self-paced computer-based training modules. As a part of the Siebel implementation project team, Wilson Learning's professional course developers and sales training experts will design training that reflects the customer's unique Siebel configuration and specific business processes. This strategic relationship is designed to address end-user training, the last critical step that an organization must take to successfully deploy its Siebel-based sales and marketing information system. CUSTOMER SUPPORT AND TRAINING The Company has implemented a multi-tiered strategy designed to provide comprehensive customer support programs to ensure successful implementation and customer satisfaction. This multi-tiered approach includes on-line support via the Internet, toll-free telephone technical support and direct support from a customer satisfaction team. Through on-line support, a suite of Internet-based User Groups for specific topics is available to Siebel customers. Internet support also includes a knowledge repository to address customers' questions. The Company's Internet service programs provide links to selective Siebel product documentation, technical notes and frequently asked questions (FAQs). Customers can directly check the status of their technical support requests over the Internet. Separately, a toll-free 800 phone number provides customers with direct access to technical service professionals. Another facet of Siebel's customer support is provided by the customer satisfaction team. Each Siebel customer is assigned a team which consists of a sales representative, a technical account manager and an executive sponsor. The goal of this team is to ensure the success and satisfaction of the customer by facilitating open communications to quickly identify, analyze and solve problems. Through a combination of regularly scheduled conference calls, on-site visits, and project team planning meetings, Siebel personnel participate in every phase of the customer implementation from planning to project management to system test and organizational design. Customer satisfaction is tracked on an account-by-account basis and reported weekly to the Company's executive management. Customer satisfaction is also audited periodically by an independent, objective third-party organization. The Company and Wilson Learning offer a wide range of training courses in the configuration, administration and use of the Siebel products. Training is available at the Company's Learning Center or at the customer site. Andersen Consulting also offers training services in connection with implementation of Siebel Sales Enterprise. DEVELOPMENT METHODOLOGY The Company's success is dependent in part upon its ability to continually release robust, reliable products with functionality that meets customers' needs in a timely manner. To achieve this goal, the Company's software engineering organization utilizes a number of advanced, proven methodologies in the development of its products. The Company believes that it has developed a robust product specification, development and quality assurance process which facilitates the delivery of high quality, high performance production software that has been demonstrated to meet both the product specification and the customer expectations. The Company intends to continue to invest in development to respond to customer requirements, extend its current product functionality, and introduce new products. Release Content Definition Each product development cycle begins with a formal process of determining the feature content of the upcoming release after extensive consultation with customers and analysis of industry trends. The product marketing group produces for the engineering group formal Marketing Requirements Documents and Feature Specifications. All engineering development requires input from the product 46 50 marketing group. During the development process, the product marketing group continues to test its decisions by reviewing early prototypes with customers and third-party human factors experts, modifying specifications as appropriate. Formalized Data Modeling Recognizing the importance of building a sound data representation foundation, the Company employs a formalized data modeling process which consists of a dedicated group using data modeling CASE tools. The data modeling process begins as soon as input is received from Product Marketing, before code development begins, as the Company believes that the data modeling process is a critical, central part of the development process. Project Planning After receiving input from the product marketing, the Company's development methodology requires clear assignment and ownership of each development task, an analysis of each task, a breakdown of each task into manageable subtasks, entry of all tasks into centralized project tracking software and continual monitoring of development progress against plan with load balancing as necessary. Development Tools The Company utilizes advanced object-oriented development tools and technologies in the development of its products, including Microsoft Visual C++ (to create 16-bit and native 32-bit Windows client software), Microsoft App Studio, Microsoft Foundation Classes, Microsoft OLE 2 automation, Microsoft Project, Pure Software Purify, Nu-Mega Bounds Checker, and Oracle Designer 2000 CASE tools. Coding Standards In order to ensure maintainability and readability of source code, all Siebel engineers follow formal, written coding standards that cover coding style issues such as naming conventions, indentation, common utilization of standard utility functions and consistent use of operating system calls. In order to minimize the effort involved in localizing the product to other languages, formal, written coding standards are followed to help ensure that the base product is built in a language-neutral way. This language-neutral approach has been adopted so that as the product is localized (translated) into other languages, the effort can be focused on the translation itself, rather that the difficult and time consuming process of finding and correcting code constructs which assume an English user interface. This approach aids in issues such as alternate character sets, double-byte character encoding, sort order, multiple currency support, and date/number formatting. Source Code Control Source code for every release (as well as for development in progress) is formally checked into a central source code control system (Microsoft Source Safe), which is regularly backed up. This system is designed to help ensure that code is not lost, avoid confusion over identifying the latest version of a software module, and help ensure that only one engineer is editing a piece of code at any given time. All releases of software to customers are made through a formal, repeatable build process on dedicated central machines. Code Ownership The Company employs a code "ownership" policy to ensure that every piece of code in a product is assigned to a specific engineer. The Company believes this contributes to efficient task distribution as well as to ensuring that all code is reviewed and integrated. 47 51 Quality Assurance The Quality Assurance department creates test plans for each of the product features. These test plans, driven directly from the same Marketing Requirements Documents used by Engineering to develop features, drive the testing efforts of the Quality Assurance department. The test plans are designed to ensure a repeatable, understandable and measurable method of testing the software. Also included in the test suites are a number of methods to measure the performance and scalability of the product. The Company has developed a set of Key Performance Indicators (KPI's) which it believes are a collection of representative user activities whose performance is key to ensuring customer satisfaction. The quality assurance tests include timing each of these KPI's for compliance with stated performance goals. These KPI's are generally run simulating a single user on a small database as well as simulating multiple, simultaneous users on a large database. A number of technologies are employed to execute the test plans, including automated testing software, system load simulation tools, and performance monitoring software. Error Tracking The Company maintains a central tracking system into which software errors are entered and tracked. The system allows the status of such errors to be maintained as they are routed through the organization to their eventual resolution. Management reports can be generated on demand that indicate the rate of error discovery, the rate of error correction, the areas of instability in the product and the engineering work load. Enhancement requests, user misunderstandings and customer requests are also entered into this system as well. As of March 31, 1996, there were 27 employees on the Company's product development staff. The Company's product development expenditures in 1994, 1995 and the first quarter of 1996 were $868,000, $2.8 million and $1.0 million, respectively. The Company expects that it will continue to commit substantial resources to product development in the future. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company relies primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company also believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technology leadership position. The Company seeks to protect its software, documentation and other written materials under patent, trade secret, and copyright laws, which afford only limited protection. The Company currently has two patent applications pending in the United States. There can be no assurance that any patents issued to the Company will not subsequently be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications, whether or not being currently challenged by applicable governmental patent examiners, will be issued with the scope of the claims sought by the Company, if at all. Furthermore, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology or design around any patents owned by the Company. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that competition will not independently develop similar technology. The Company has entered into agreements with substantially all of its customers which require the Company to place Siebel Sales Enterprise source code into escrow. Such agreements generally provide that such parties 48 52 will have a limited, non-exclusive right to use such code in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to do business or if the Company fails to meet its support obligations. Entering into such agreements may increase the likelihood of misappropriation by third parties. The Company is not aware that it is infringing any proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company of their intellectual property rights. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Furthermore, there can be no assurance that former employers of the Company's present and future employees will not assert claims that such employees have improperly disclosed confidential or proprietary information to the Company. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require the Company to pay money damages or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all. In the event of a successful claim of product infringement against the Company and failure or inability of the Company to license the infringed or similar technology, the Company's business, operating results and financial condition would be materially and adversely affected. The Company relies upon certain software that it licenses from third parties, including software that is integrated with the Company's internally developed software and used in Siebel Sales Enterprise to perform key functions. There can be no assurance that these third-party software licenses will continue to be available to the Company on commercially reasonable terms. The loss of, or inability to maintain, any such software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated which could materially and adversely affect the Company's business, operating results and financial condition. COMPETITION The market for the Company's products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The Company's products are targeted at the emerging market for sales and marketing information systems, and the Company faces competition from customers' internal development efforts, custom system integration products, as well as other application software providers that offer a variety of products and services designed to address this market. The Company believes that the market for global sales and marketing information systems has historically not been well served by the application software industry. The Company believes that most customer deployments have been the result of large internal development projects, custom solutions from systems integrators or the application of personal and departmental productivity tools to the global enterprise. Internal Development The Company's major competition continues to come from its customers' and potential customers' internal development efforts. Internal Information Technology departments have staffed projects to build their own systems utilizing a variety of tools. In some cases, such internal development projects have been successful in satisfying the needs of an organization. However, since software development, support and maintenance are not core competencies of these organizations in some cases such projects are unsuccessful. The competitive factors in this area require that the Company produce a product that conforms to the customer's information technology standards, scales to meet the needs of large enterprises, operates globally and costs less than the result of an internal development effort. 49 53 Custom System Integration Projects A second source of competition results from system integrators engaged to build a custom development application. The introduction of a system integrator typically increases the likelihood of success for the customer. However, this approach can be expensive as compared to the purchase of third party products and typically results in a product that has not been designed to be supported, maintained and enhanced by a focused software development company. Maintenance and support for the custom code can become burdensome in future years, with enhancements and modifications being cost-prohibitive. The competitive factors in this area require that the Company demonstrate to the customer the cost savings and advantages of a configurable, upgradeable and commercially-supported product developed by a dedicated professional software organization. The Company relies on Andersen Consulting and other system consulting and system integration firms for implementation and other customer support services, as well as recommendations of its products during the evaluation stage of the purchase process. Although the Company seeks to maintain close relationships with these service providers, many of these third parties have similar, and often more established, relationships with the Company's competitors. If the Company is unable to develop and retain effective, long-term relationships with Andersen Consulting or other such third parties, the Company's competitive position would be materially and adversely effected. Further, there can be no assurance that these third parties, many of which have significantly greater resources than the Company, will not market software products in competition with the Company in the future or will not otherwise reduce or discontinue their relationships with or support of the Company and its products. Other Competitors A large number of personal, departmental and other products exist in the sales automation market. Companies (Products) such as Symantec (ACT!), Brock International (Brock Activity Manager), Early Cloud & Co. (CallFlow), IMA (EDGE), Marketrieve Company (Marketrieve PLUS), Clarify Inc. (ClearSales), Oracle Corporation (Oracle Sales Manager), SaleSoft (PROCEED), SalesBook Systems (SalesBook), SalesKit Software Corporation (SalesKit), Aurum (SalesTrak), Sales Technologies (SNAP for Windows), and Saratoga Systems (SPS for Windows) and Vantive Corporation (Vantive Sales) are among the many firms in this market segment. Many of these competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than the Company. In addition, many competitors have well-established relationships with current and potential customers of the Company. As a result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale or their products, than can the Company. The Company believes it competes favorably in this marketplace based on the following competitive advantages: breadth and depth of functionality, configurable business objects, Internet and intranet enablement, strategic alignments with industry leaders, support for the global enterprise, scalability allowing support for large user communities and a modern and enduring product architecture. In general, the Company has priced its products at or above those of its competitors, which pricing the Company believes is justified by the scope of functionality delivered and the performance characteristics afforded by the Company's products. It is also possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. The Company also expects that competition will increase as a result of consolidation in the software industry. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, operating results and financial condition. See "Risk Factors -- Competition." 50 54 EMPLOYEES As of April 30, 1996, the Company had a total of 103 employees, of which 98 were based in the United States, 4 in the United Kingdom and 1 in Japan. Of the total, 41 were engaged in sales and marketing, 27 were in product development, 21 were in customer support and 14 were in finance, administration and operations. The Company's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel, particularly Thomas M. Siebel, the Company's Chairman and Chief Executive Officer, none of whom is bound by an employment agreement. The loss of the services of one or more of the Company's key employees could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future success also depends on its continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical, sales and managerial personnel in the future. None of the Company's employees is represented by a labor union. The Company has not experienced any work stoppages and considers its relations with its employees to be good. See "Risk Factors -- Management of Growth; Dependence upon Key Personnel." FACILITIES The Company's principal administrative, sales, marketing, support and research and development facilities are located in two sites of approximately 7,200 square feet and 12,000 square feet of space in Menlo Park, California. The leases on these office spaces expire in July 1997 and December 1996, respectively. In June 1996, the Company entered into a lease for approximately 66,000 square feet of space in San Mateo, California which expires in June 2006. The Company intends to move all of its Menlo Park operations to such facility prior to the end of 1996. The Company currently leases other domestic sales and support offices in Georgia, Illinois, New York, Texas, and Virginia. The Company also maintains international offices in the United Kingdom and Japan. LEGAL PROCEEDINGS The Company employed Debra Christoffers as a sales person for approximately ten months, ending in December 1995. On April 30, 1996, the Company received a letter from counsel for Ms. Christoffers asserting various claims against the Company relating to the termination of her employment and offering to settle such claims for a specified sum. The Company responded with a letter stating that such claims were baseless and without merit. On June 10, 1996, Ms. Christoffers filed a complaint for wrongful termination against the Company and Thomas Siebel, in the Superior Court of California, County of San Mateo. The complaint alleges tortious and contractual causes of action and seeks compensatory damages in excess of $1 million, punitive damages of an unspecified amount, unpaid wages and penalties in the amount of approximately $9,000, unpaid commissions in an amount exceeding $500,000, costs of suit and reasonable attorney's fees. The Company and Mr. Siebel strongly believe that the allegations in the complaint are baseless and without merit and intend to vigorously defend the action and pursue all applicable counterclaims. There can be no assurance, however, as to the outcome of such litigation or that such outcome will not have an adverse effect on the Company's operations or financial condition. The Company employed Terence Lenaghan as Chief Financial Officer of the Company for approximately five weeks, ending in March 1996. On June 5, 1996, the Company received a letter from counsel representing Mr. Lenaghan raising claims against the Company and Mr. Siebel relating to the termination of Mr. Lenaghan's employment and offering to settle such claims upon the receipt of $300,000 and 140,000 shares of the Company's Common Stock. The Company and Mr. Siebel strongly believe that the claims raised by Mr. Lenaghan are baseless and without merit. The Company and Mr. Siebel intend to vigorously defend any action that Mr. Lenaghan may bring and to pursue all applicable claims against Mr. Lenaghan. There can be no assurance, however, that legal action will not be commenced or that the outcome of any such action will not have an adverse effect on the Company's operations or financial condition. 51 55 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their ages as of April 30, 1996 are as follows:
NAME AGE POSITION - ---------------------------------- --- ------------------------------------------------------- Thomas M. Siebel.................. 43 Chairman, Chief Executive Officer and President Patricia A. House................. 42 Executive Vice President and Chief Operating Officer Justin R. Dooley.................. 32 Vice President Finance and Administration Ronald M. McElhaney, Ph.D. ....... 53 Vice President and Chief Technical Officer Kevin A. Johnson.................. 40 Vice President Legal Affairs Craig D. Ramsey................... 49 Senior Vice President Worldwide Operations William B. Edwards................ 41 Vice President Engineering Bruce A. Cleveland................ 37 Vice President Marketing Pehong Chen, Ph.D. ............... 38 Director James C. Gaither(1)............... 58 Director Eric E. Schmidt, Ph.D. ........... 41 Director Charles R. Schwab(1).............. 58 Director George T. Shaheen(2).............. 51 Director A. Michael Spence, Ph.D.(2)....... 52 Director
- --------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. THOMAS M. SIEBEL has served as Chairman, Chief Executive Officer, and President of the Company since its inception in July 1993. From July 1991 until December 1992, he served as Chief Executive Officer of Gain Technology, a multimedia software company which merged with Sybase in December 1992. Mr. Siebel served as President and Chief Operating Officer of Gain Technology from May 1991 to July 1991. From January 1984 until September 1990, Mr. Siebel worked at Oracle Corporation where he held a number of executive management positions including Vice President Product Line Marketing, Group Vice President Industry Marketing, Group Vice President and General Manager Direct Marketing Division, and most recently Group Vice President Oracle USA. Mr. Siebel is a graduate of the University of Illinois at Urbana-Champaign from which he holds a B.A. in History, an M.B.A. and an M.S. in Computer Science. PATRICIA A. HOUSE has been with the Company since its inception in July 1993. From February 1996 to the present, she has served as the Company's Executive Vice President and Chief Operating Officer, and from July 1993 to February 1996, she served as Senior Vice President of Marketing. From September 1989 to June 1993, Ms. House served in various senior management positions including Executive Vice President of Frame Technology Corporation, a document authoring software company. Ms. House received a B.A. in Education from Western Michigan University. JUSTIN R. DOOLEY has served as the Company's Vice President Finance and Administration since March 1996. From October 1995 to March 1996, Mr. Dooley served as Vice President Quality Programs at Siebel Systems. From May 1993 to September 1995, Mr. Dooley served as Vice President and General Manager of the Hayward Division of Davis Wire Corporation. From October 1989 to August 1991, he served as Operating Department Manager, Tin Coating and Manager of the Acid Regeneration Unit for USS/POSCO, a joint venture between US Steel and Pohang Iron and Steel. Mr. Dooley received a B.S. in Chemical Engineering from the University of Illinois of Urbana-Champaign and an M.B.A. from the Graduate School of Business at Stanford University. 52 56 RONALD M. MCELHANEY, PH.D. has served as the Company's Vice President and Chief Technical Officer since February 1996. From July 1995 to November 1995, Dr. McElhaney served as Vice President/General Manager of the Multimedia Business Unit for Asymetrix Corporation, a multimedia software company. From July 1993 to September 1994, Dr. McElhaney was Vice President/General Manager for the Advanced Products Group for Computervision Corporation, a CAD/CAM/CAE software company. Dr. McElhaney served from February 1990 to July 1992 as Vice President Core Technology at PRIME Computer. From September 1988 to September 1989 Dr. McElhaney served as Vice President, Engineering at Autodesk, a multimedia and design software development company. Dr. McElhaney received a B.S. in Physics from San Jose State University and a Ph.D. in Theoretical Physics from the University of Hawaii. KEVIN A. JOHNSON has served as the Company's Vice President Legal Affairs since November 1995. From August 1993 to October 1995, Mr. Johnson served as Assistant General Counsel to Gupta Corporation, a client/server software company. From March 1989 to July 1993, Mr. Johnson served as Vice President, Corporate Affairs, General Counsel and Assistant Secretary of NETG, a multimedia training company. Mr. Johnson received a B.S. in Business Management from the University of California at Davis and a J.D. from Santa Clara Law School. CRAIG D. RAMSEY has served as the Company's Senior Vice President Worldwide Operations since March 1996. From March 1994 to March 1996, Mr. Ramsey served as Senior Vice President of Worldwide Sales, Marketing and Support for nCUBE, a leader in distribution of digitized media. From February 1986 to March 1994, Mr. Ramsey was employed by Oracle Corporation and held a variety of executive positions, including Vice President of U.S. Commercial Sales and Vice President of OEM Strategic Accounts. Mr. Ramsey received a B.A. in Economics from Denison University. WILLIAM B. EDWARDS has served as the Company's Vice President Engineering since March 1994. From June 1993 to March 1994, Mr. Edwards served as Director of Graphical Authoring Systems at Macromedia, Inc., a multimedia software development company. From July 1989 to June 1993, Mr. Edwards served as Senior Vice President, Engineering, Research and Development of Frame Technology, a document authoring software company. Mr. Edwards received a B.S. in Computer Science from Louisiana State University, and an M.S. in Computer Science from Rutgers University. BRUCE A. CLEVELAND has served as the Company's Vice President Marketing since May 1996. From January 1992 to April 1996, Mr. Cleveland served as a Senior Director in the Object Technologies Business Unit at Apple Computer, a computer company. From April 1990 to January 1992, Mr. Cleveland served as a Vice President of Siren Software Corporation, a systems software company. From August 1985 through April 1989, Mr. Cleveland was Senior Director, Unix Product Line Division at Oracle Corporation, a relational database company. Mr. Cleveland received a B.S. in Business Administration from California State University at Sacramento. PEHONG CHEN, PH.D. has served as a Director of the Company since February 1994. From May 1993 to the present, Dr. Chen has served as President, Chairman and Chief Executive Officer of BroadVision, Inc., an electronic commerce software developer. From October 1992 to May 1993, Dr. Chen served as Vice President of Multimedia Technology at Sybase, Inc., a software company. From June 1989 to September 1992, he served as President of Gain Technology, a multimedia software company. Dr. Chen received a B.S. from National Taiwan University, an M.S. from Indiana University and a Ph.D. from the University of California at Berkeley, all in Computer Science. JAMES C. GAITHER has served as a Director of the Company since February 1994. From 1971 to the present, Mr. Gaither has been a Partner of the law firm of Cooley Godward Castro Huddleson & Tatum and was the managing partner of the firm from 1984 to 1990. Prior to beginning his law practice with the firm, he served in a variety of positions, including law clerk to The Honorable Earl Warren, Chief Justice of the United States; Special Assistant to the Assistant Attorney General in the U.S. Department of Justice; and Staff Assistant to the President of the United States, Lyndon Johnson. Mr. Gaither is the former president of the Board of Trustees at Stanford University and is a member of the Board of Trustees of the Carnegie Endowment for International Peace, RAND, The William and Flora Hewlett 53 57 Foundation and The James Irvine Foundation. Mr. Gaither is currently a Director of Amylin Pharmaceuticals, Inc., Basic American, Inc. and Levi Strauss & Company. Mr. Gaither received a B.A. in Economics from Princeton University, and a J.D. from Stanford University. ERIC E. SCHMIDT, PH.D. has served as a Director of the Company since May 1996. From 1994 to the present, Dr. Schmidt has been the Chief Technical Officer of Sun Microsystems, Inc., a producer of workstations, servers, and computer software. From 1983 to 1994, Dr. Schmidt held various other positions at Sun Microsystems, Inc., including President, Sun Technology Enterprises; Vice President, General Systems Group; and Vice President and General Manager, Software Products division. Dr. Schmidt is currently a Director of Geoworks, a developer of application software for consumer computing devices. Dr. Schmidt received a B.S. in Electrical Engineering from Princeton University, an M.S. in Electrical Engineering and a Ph.D. in Computer Science from the University of California at Berkeley. CHARLES R. SCHWAB has served as a Director of the Company since October 1994. From 1987 to the present, he has been the Chairman and Chief Executive Officer of The Charles Schwab Corporation, a discount brokerage firm founded in 1971 by Mr. Schwab. Mr. Schwab also serves as a director of The Gap, Inc., Transamerica Corporation and AirTouch Communications. Mr. Schwab is a member of the Board of Trustees of Stanford University and a member of the Board of Directors of the National Park Foundation. Mr. Schwab received a B.A. in Economics from Stanford University, and an M.B.A. from the Graduate School of Business at Stanford University. GEORGE T. SHAHEEN has served as a Director of the Company since October 1995. From 1989 to the present, Mr. Shaheen has been the Managing Partner of Andersen Consulting. Mr. Shaheen has been a partner at Andersen Consulting since 1977 and he held various other positions at Andersen Consulting from 1967 to 1977. Mr. Shaheen is on the Board of Trustees at Bradley University and is a member of the Board of Advisors for the Northwestern University J.L. Kellogg Graduate School of Business. Mr. Shaheen received a B.S. in Marketing and an M.B.A. from Bradley University. A. MICHAEL SPENCE, PH.D. has served as a Director of the Company since October 1995. From 1990 to the present, Dr. Spence has served as Dean of the Graduate School of Business at Stanford University. From 1984 to 1990, Dr. Spence served as Dean of Faculty of Arts and Sciences at Harvard University. Dr. Spence also serves as a director of BankAmerica Corporation, General Mills, Inc., Nike, Inc., Sun Microsystems, Inc. and Verifone, Inc. Dr. Spence received a B.A. in Philosophy from Princeton University, a B.A. and an M.A. in Mathematics from Oxford University, and a Ph.D. in Economics from Harvard University. The Company currently has authorized seven directors. In May 1996, the Board of Directors approved, subject to stockholder approval, the Company's Certificate of Incorporation in connection with the Company's reincorporation in Delaware. The Certificate of Incorporation provides, among other things, for a classified Board of Directors. In accordance with the terms of such Certificate of Incorporation the terms of office of the Board of Directors will be divided into three classes: Class I will expire at the annual meeting of stockholders to be held in 1997; Class II will expire at the annual meeting of stockholders to be held in 1998; and Class III will expire at the annual meeting of stockholders to be held in 1999. At each annual meeting of stockholders beginning with the 1997 annual meeting, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election and until their successors have been duly elected and qualified. COMMITTEES The Audit Committee consists of A. Michael Spence, Ph.D. and George T. Shaheen. The Audit Committee makes recommendations to the Board of Directors regarding the selection of independent auditors, reviews the results and scope of the audit and other services provided by the Company's independent auditors and reviews and evaluates the Company's audit and control functions. 54 58 The Compensation Committee consists of James C. Gaither and Charles R. Schwab. The Compensation Committee makes recommendations regarding the Company's Equity Incentive Plan and the Purchase Plan and makes decisions concerning salaries and incentive compensation for employees and consultants of the Company. DIRECTORS' COMPENSATION The Company's directors do not currently receive any cash compensation for service on the Board or any committee thereof, but directors may be reimbursed for certain expenses in connection with attendance at Board and committee meetings. In May 1996, Dr. Schmidt received an option to purchase 110,000 shares of the Company's Common Stock at an exercise price per share of $11.50; in April 1996, Drs. Chen and Spence and Messrs. Gaither, Shaheen and Schwab each received an option to purchase 22,000 shares of the Company's Common Stock at an exercise price per share of $6.50; in April 1996, Mr. Siebel received an option to purchase 1,000,000 shares of the Company's Common Stock at an exercise price per share of $5.50; in February 1996, Mr. Shaheen received an option to purchase 88,000 shares of the Company's Common Stock at an exercise price per share of $1.75; in October 1995, Dr. Spence received an option to purchase 88,000 shares of the Company's Common Stock at an exercise price per share of $0.50; and, in January 1995, Mr. Schwab received an option to purchase 90,000 shares of the Company's Common Stock at an exercise price per share of $.05 per share. Each such grant was made pursuant to the Equity Incentive Plan. EXECUTIVE COMPENSATION The following table sets forth the compensation earned by the Company's Chief Executive Officer and the three other most highly compensated executive officers (collectively, the "Named Executive Officers") whose salary and bonus for the fiscal year ended December 31, 1995 were in excess of $100,000 for services rendered in all capacities to the Company for that fiscal year: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION --------------------- ANNUAL AWARDS COMPENSATION --------------------- ------------------ SECURITIES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS COMPENSATION($)(1) - ------------------------------------------ ------- ------ --------------------- ------------------ Thomas M. Siebel.......................... 180,000 50,000 -- -- Chairman and Chief Executive Officer Patricia A. House......................... 120,000 30,000 -- -- Executive Vice President and Chief Operating Officer William B. Edwards........................ 100,833 20,000 -- -- Vice President Engineering Daniel A. Turano(2)....................... 39,000 -- 180,000 71,196 Vice President Worldwide Sales
- --------------- (1) Includes commissions in the amount of $71,196 accrued in fiscal 1995 but paid in fiscal 1996. (2) In March 1996, Craig Ramsey joined the Company as Senior Vice President Worldwide Operations. Since March 1996, Mr. Turano has served as Vice President Eastern Americas. EQUITY INCENTIVE PLANS 1996 Equity Incentive Plan. The Company's 1996 Equity Incentive Plan (the "Equity Incentive Plan") is an amendment and restatement of the Company's 1994 Stock Option Plan and 1996 Supplemental Stock Option Plan. The Company has reserved a total of 6,000,000 shares of Common 55 59 Stock for issuance under the Equity Incentive Plan. The Equity Incentive Plan provides for grants of incentive stock options to employees (including officers and employee directors) and nonstatutory stock options, restricted stock purchase awards, stock bonuses and stock appreciation rights to employees (including officers and employee directors), directors and consultants of the Company. The Equity Incentive Plan is presently administered by the Board of Directors, which determines recipients and types of awards to be granted and the terms of such grants, including the exercise price, number of shares subject to the award and the exercisability thereof. The term of a stock option granted under the Equity Incentive Plan generally may not exceed 10 years (5 years in the case of an incentive stock option granted to a holder of more than 10% of the Company's capital stock). The exercise price of options granted under the Equity Incentive Plan is determined by the Board of Directors, but, in the case of an incentive stock option, cannot be less than 100% of the fair market value of the Common Stock on the date of grant or, in the case of holders of more than 10% of the Company's voting stock, not less than 110% of the fair market value of the Common Stock on the date of grant. Options granted under the Equity Incentive Plan to new employees and consultants generally vest at the rate of 20% of the shares subject to option on the first annual anniversary of the date of hire and 5% of such shares at the end of each quarter thereafter. No option may be transferred by the optionee other than by will or the laws of descent or distribution or, in certain limited instances, pursuant to a qualified domestic relations order. An optionee whose relationship with the Company or any related corporation ceases for any reason (other than by death or permanent and total disability) generally may exercise options in the three month period following such cessation (unless such options terminate or expire sooner by their terms) or in such longer period as may be determined by the Board of Directors. Shares subject to options which have lapsed or terminated may again be subject to options granted under the Equity Incentive Plan. Furthermore, the Board of Directors may offer to exchange new options for existing options, with the shares subject to the existing options again becoming available for grant under the Equity Incentive Plan. In the event of a decline in the value of the Company's Common Stock, the Board of Directors has the authority to offer optionees the opportunity to replace outstanding higher priced options with new lower price options. Upon any merger or consolidation in which the Company is not the surviving corporation, all outstanding awards under the Equity Incentive Plan shall either be assumed or substituted by the surviving entity. If the surviving entity determines not to assume or substitute such awards, the time during which such awards may be exercised shall be accelerated and the awards terminated if not exercised prior to the merger or consolidation. Restricted stock purchase awards granted under the Equity Incentive Plan may be granted pursuant to a repurchase option in favor of the Company in accordance with a service vesting schedule determined by the Board. The purchase price of such awards will be at least 85% of the fair market value of the Common Stock on the date of grant. Stock bonuses may be awarded in consideration for past services without a purchase payment. Stock appreciation rights authorized for issuance under the Incentive Plan may be tandem stock appreciation rights, concurrent stock appreciation rights or independent stock appreciation rights. As of April 30, 1996, 706,210 shares of Common Stock have been issued upon the exercise of options granted under the Equity Incentive Plan, options to purchase 3,760,450 shares of Common Stock at a weighted average exercise price of $3.35 per share were outstanding and 1,533,340 shares remained available for future option grants. The Equity Incentive Plan will terminate in May 2006, unless terminated sooner by the Board of Directors. See Notes 4 and 7 of Notes to Financial Statements. Employee Stock Purchase Plan. In May 1996, the Board adopted the Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 350,000 shares of Common Stock. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. Under the Purchase Plan, the Board of Directors may authorize 56 60 participation by eligible employees, including officers, in periodic offerings following the adoption of the Purchase Plan. The offering period for any offering may be no more than 27 months. Employees are eligible to participate if they are employed by the Company, or an affiliate of the Company designated by the Board of Directors, for at least 20 hours per week and are employed by the Company or a subsidiary of the Company designated by the Board for at least five months per calendar year. Employees who participate in an offering can have up to 15% of their earnings withheld pursuant to the Purchase Plan. The amount withheld will then be used to purchase shares of the Common Stock on specified dates determined by the Board of Directors. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock on the commencement date of each offering period or the specified purchase date. Employees may end their participation in the offering at any time during the offering period. Participation ends automatically on termination of employment with the Company. In the event of a merger, reorganization, consolidation or liquidation to involving the Company in which the Company is not a surviving corporation, the Board of Directors has discretion to provide that each right to purchase Common Stock will be assumed or an equivalent right substituted by the successor corporation, or the Board may shorten the offering period and provide for all sums collected by payroll deductions to be applied to purchase stock immediately prior to such merger or other transaction. The Purchase Plan will terminate at the Board's direction. The Board has the authority to amend or terminate the Purchase Plan, subject to the limitation that no such action may adversely affect any outstanding rights to purchase Common Stock. See Note 7 of Notes to Financial Statements. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options made during the fiscal year ended December 31, 1995 to each of the Named Executive Officers:
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ---------------------------------------------------------- ANNUAL RATES OF PERCENTAGE STOCK PRICE NUMBER OF OF TOTAL APPRECIATION FOR SECURITIES OPTIONS OPTION TERM UNDERLYING GRANTED IN EXERCISE MARKET ($)(5) OPTIONS FISCAL PRICE PRICE EXPIRATION --------------------------------- NAME(1) GRANTED(2) 1995(3) ($/SH) ($/SH)(4) DATE 0% 5% 10% - ------------------------------- ----------- --------- --------- ---------- --------- --------- --------- Thomas M. Siebel..... -- -- -- -- -- -- -- Patricia A. House.... -- -- -- -- -- -- -- William B. Edwards... -- -- -- -- -- -- -- Daniel A. Turano..... 180,000 13.5% 0.50 14.00 10/02/2005 2,430,000 4,015,000 6,446,000
- --------------- (1) Since the end of fiscal 1995, the Company has granted options to Ms. House and Messrs. Siebel and Edwards. The grants were for the following number shares and at the following exercise prices: Ms. House received options to purchase an aggregate of 100,000 shares at an exercise price of $2.90 per share in March 1996 and 100,000 shares at an exercise price of $5.50 in April 1996, Mr. Siebel received an option to purchase 1,000,000 shares at an exercise price of $5.50 per share in April 1996 and Mr. Edwards received an option to purchase 50,000 shares at an exercise price of $5.50 per share in April 1996. (2) Options generally become exercisable at a rate of 20% on the first anniversary of the vesting commencement date and 5% each quarter thereafter and have a term of 10 years. Options may be exercised prior to vesting, subject to the Company's right to repurchase in the event service is terminated. (3) Based on an aggregate of 1,331,885 shares subject to options granted to employees of the Company in the fiscal year ended December 31, 1995, including the Named Executive Officers. (4) Based on an assumed initial public offering price of $14.00 per share. (5) The potential realizable value is calculated based on the term of the option at the time of grant (10 years). Stock price appreciation of 0%, 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and 57 61 does not represent the Company's prediction of its stock price performance. The potential realizable value is calculated by assuming that the assumed initial public offering price of $14.00 per share appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. AGGREGATED OPTIONS EXERCISED IN 1995 AND YEAR-END OPTION VALUES The following table sets forth for each of the Named Executive Officers the shares acquired and the value realized on each exercise of stock options during the year ended December 31, 1995 and the number and value of securities underlying unexercised options held by the Named Executive Officers at December 31, 1995:
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT ACQUIRED DECEMBER 31, 1995(#) DECEMBER 31, 1995($)(2) ON VALUE ------------------------------ --------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE - ------------------------- ----------- ----------- ----------- ---------------- ----------- ------------- Daniel A. Turano......... -- -- 180,000 0 2,430,000 0
- --------------- (1) Options are immediately exercisable; however, the shares purchasable under such options are subject to repurchase by the Company at the original exercise price paid per share upon the optionee's cessation of service prior to the vesting of such shares. (2) Based on the difference between an assumed initial public offering price of $14.00 per share and the exercise price. 401(K) PLAN In October 1995, the Board adopted an employee savings and retirement plan (the "401(k) Plan") covering certain of the Company's employees who have at least one month of service with the Company and have attained the age of 21. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 20% of such compensation or the statutorily prescribed annual limit ($9,500 in 1996) and have the amount of such reduction contributed to the 401(k) Plan. The Company may make contributions to the 401(k) Plan on behalf of eligible employees. Employees become 20% vested in these Company contributions after one year of service, and increase their vested percentages by an additional 20% for each year of service thereafter. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so that contributions by employees or by the Company to the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the 401(k) Plan employee salary deferrals in selected investment options. The Company made no contributions to the 401(k) Plan in 1995, or in the first quarter of fiscal 1996. The Company does not presently expect to make any contributions to the 401(k) Plan during fiscal 1996. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Bylaws provide that the Company will indemnify its directors and executive officers and may indemnify its other officers, employees and other agents to the fullest extent permitted by Delaware law. The Company is also empowered under its Bylaws to enter into indemnification contracts with its directors and officers and to purchase insurance on behalf of any person it is required or permitted to indemnify. Pursuant to this provision, the Company has entered into indemnity agreements with each of its directors and executive officers. In addition, the Company's Certificate of Incorporation provides that, to the fullest extent permitted by Delaware law, the Company's directors will not be liable for monetary damages for breach of the directors' fiduciary duty of care to the Company and its stockholders. This provision in the Certificate of Incorporation does not eliminate the duty of care, and in appropriate circumstances 58 62 equitable remedies such as an injunction or other forms of non-monetary relief would remain available under Delaware law. Each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for any transaction from which the director derived an improper personal benefit, for improper transactions between the director and the Company and for improper distributions to stockholders and loans to directors and officers. This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. There is no pending litigation or proceeding involving a director or officer of the Company as to which indemnification is being sought, nor is the Company aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. CERTAIN TRANSACTIONS In September 1993, Siebel Systems, L.P., a California limited partnership (the "Partnership") was formed and Siebel Systems, Inc., a California corporation and the predecessor of the Company, became the general partner of the Partnership. In September 1993, Mr. Siebel purchased an aggregate of 50,000 shares of Common Stock of the Company for an aggregate consideration of $50,000. In January 1995, all limited partners of the Partnership voluntarily exchanged their limited partnership units on a one-for-one basis for an aggregate of 8,080,683 shares of Common Stock and 2,344,500 shares of Series A Preferred Stock (the "Series A Stock") of the Company. In connection with the exchange, the Company issued (i) 6,250,000 shares of Common Stock and 280,000 shares of Series A Stock to Thomas M. Siebel, an officer, director and principal stockholder of the Company, (ii) 600,000 shares of Common Stock to Patricia A. House, an officer of the Company, (iii) 295,000 shares of Common Stock to William B. Edwards, an officer of the Company, (iv) 50,000 shares of Common Stock and 740,000 shares of Series A Stock to Pehong Chen, a director and principal stockholder of the Company, (v) 88,000 shares of Common Stock to James C. Gaither, a director of the Company and (vi) 310,000 shares of Series A Stock to Charles R. Schwab, a director of the Company. Mr. Siebel, Ms. House, Mr. Edwards, Dr. Chen, Mr. Gaither, and Mr. Schwab purchased their partnership units for an aggregate consideration of $602,500, $6,000, $14,750, $802,500, $4,400, and $387,500, respectively. In March and July 1995, the Company issued 1,900,000 shares of Series B Preferred Stock (the "Series B Stock") for an aggregate consideration $4,560,000. In connection with such financing, the Company issued 1,250,000 shares of Series B Stock to Andersen Consulting LLP, a principal stockholder of the Company. In April 1996, the Company issued 90,000 shares of Series D Preferred Stock (the "Series D Stock") for an aggregate consideration of $900,000. In connection with such financing, the Company issued 50,000 shares of Series D Stock to Andersen Consulting LLP, 20,000 shares of Series D Stock to Charles R. Schwab and 20,000 shares of Series D Stock to Pehong Chen. The Company and Andersen Consulting LLP have entered into a Master Alliance Agreement, dated March 17, 1995, and a Software License and Services Agreement, dated January 1, 1995. See "Business -- Global Strategic Alignment." George T. Shaheen, the Managing Partner of Andersen Consulting, is a director of the Company. In September 1995, the Company and Thomas M. Siebel entered into an assignment agreement pursuant to which Mr. Siebel assigned certain rights and the Company assumed certain obligations under a publishing agreement between Mr. Siebel, Michael S. Malone and Simon & Schuster, Inc., dated December 13, 1994, relating to the publication of the book entitled Virtual Selling, Going Beyond the Automated Sales Force to Achieve Total Sales Quality. In May 1996, Craig D. Ramsey, an officer of the Company, exercised an option to purchase 160,000 shares of Common Stock and paid the exercise price by issuing a promissory note to the Company in the amount of $464,000. The note is secured by the shares of Common Stock issued upon exercise. The note accrues interest at the rate of 7% per annum and is due in May 2000. James C. Gaither, a director of the Company, is a partner of Cooley Godward Castro Huddleson & Tatum, which has provided legal services to the Company since its inception. 59 63 The Company and Charles Schwab & Co., Inc. have entered into a Software License and Services Agreement pursuant to which Charles Schwab & Co., Inc. made payments to the Company of approximately $1,836,000 in fiscal 1995 in connection with the license of Siebel Sales Enterprise. Charles R. Schwab, a director of the Company, is the founder, Chairman and Chief Executive Officer of The Charles Schwab Corporation, the parent of Charles Schwab & Co, Inc. Such transaction was negotiated on an arms-length basis between the parties, with the agreement to purchase the Company's products entered into in December 1995, subsequent to the acquisition by Mr. Schwab of Series A Stock in January 1995 and his appointment to the Company's Board of Directors in October 1994. The Company believes that the foregoing transactions were on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 60 64 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's outstanding Common Stock as of April 30, 1996, and as adjusted to reflect the sale of the Common Stock being offered hereby by (i) each person (or group of affiliated persons) who is known by the Company to own beneficially more than 5% of the Common Stock, (ii) other principal stockholders who are known by the Company to own beneficially more than 2% of the Common Stock, (iii) each of the Company's directors, (iv) each of the Named Executive Officers, (v) all directors and executive officers of the Company as a group, and (vi) the Selling Stockholders. The table assumes the conversion of all outstanding Preferred Stock into Common Stock upon the completion of this offering. Unless otherwise specified, the address of stockholders owning more than 5% of the Company's Common Stock is the address of the Company set forth herein.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING(1) NUMBER OF OFFERING(1)(2) PRINCIPAL STOCKHOLDERS, DIRECTORS ---------------------- SHARES ---------------------- AND OFFICERS NUMBER PERCENT BEING OFFERED NUMBER PERCENT - ---------------------------------- ---------- ------- ------------- ---------- ------- Thomas M. Siebel(3)............... 6,580,000 47.9% 50,000 6,530,000 42.0% Andersen Consulting LLP(4)........ 1,388,000 10.0 -- 1,388,000 8.9 1661 Page Mill Road Palo Alto, CA 94304 Pehong Chen and Adele Chi, Trustees of the Chen Family Trust(5)........................ 810,000 5.9 -- 810,000 5.2 Patricia A. House(6).............. 600,000 4.4 -- 600,000 3.9 Adobe Ventures L.P.(7)............ 588,488 4.3 -- 588,488 3.8 Itochu Corporation(8)............. 343,642 2.5 92,783 250,859 1.6 William B. Edwards(9)............. 295,000 2.1 10,217 284,783 1.8 Daniel A. Turano(10).............. 180,000 1.3 -- 180,000 1.1 James C. Gaither(11).............. 116,000 * -- 116,000 * Pehong Chen, Ph.D.(12)............ 810,000 5.9 -- 810,000 5.2 Eric E. Schmidt, Ph.D. ........... 0 -- -- 0 -- A. Michael Spence, Ph.D.(13)...... 88,000 * -- 88,000 * George T. Shaheen(14)............. 1,388,000 10.0 -- 1,388,000 8.9 Charles R. Schwab(15)............. 414,000 3.0 -- 414,000 2.7 All directors and executive officers as a group (14 persons)(16).................... 10,956,000 75.7 60,217 10,895,783 67.0 OTHER SELLING STOCKHOLDERS LSI Logic Corporation............. 75,000 * 10,000 65,000 *
- --------------- * Represents beneficial ownership of less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 13,730,770 shares of Common Stock outstanding as of April 30, 1996 and 15,530,770 shares of Common Stock outstanding after completion of this offering. (2) Assumes no exercise of the Underwriters' over-allotment option to purchase up to an aggregate of 294,450 shares of Common Stock from the Company. (3) Includes 120,000 shares held by Mr. Siebel's minor children, for which Mr. Siebel has sole voting power. (4) Mr. Shaheen, a director of the Company, is the Managing Partner of Andersen Consulting. Mr. Shaheen disclaims beneficial ownership of such shares held by Andersen Consulting LLP except to the extent of his partnership interest therein. Also includes 88,000 shares issuable to Mr. Shaheen upon exercise of options subject to vesting through February 2001. 61 65 (5) Dr. Chen, a director of the Company, is the co-trustee of the Chen Family Trust. Includes 50,000 shares which are subject to a right of repurchase in favor of the Company which expires ratably through March 1998. (6) Includes 400,000 shares which are subject to a right of repurchase in favor of the Company which expires ratably through February 1998. (7) Adobe Ventures, L.P. is a venture fund managed by Hambrecht & Quist LLC which is one of the Representatives. See "Underwriting." (8) Includes 171,821 shares held by Itochu Techno-Science Corporation and 34,364 shares held by Itochu Technology, Inc., affiliates of Itochu Corporation. 51,546 of the shares are being offered by Itochu Techno- Science Corporation and 41,237 of the shares are being offered by Itochu Corporation. (9) Includes 240,000 shares which are subject to a right of repurchase in favor of the Company which expires ratably through March 1998. (10) Includes 180,000 shares issuable upon exercise of options subject to vesting through March 2001. (11) Includes 28,000 shares held by GC&H Investments. Mr. Gaither, a partner of GC&H Investments, disclaims beneficial ownership of such shares, except to the extent of his partnership interest therein. Also includes 88,000 shares which are subject to a right of repurchase in favor of the Company which expires ratably through March 1998. (12) Includes shares held by the Chen Family Trust, of which Dr. Chen is a co-trustee. Also includes 50,000 shares which are subject to a right of repurchase in favor of the Company which expires ratably through March 1998. (13) Includes 88,000 shares which are subject to a right of repurchase in favor of the Company which expires ratably through October 2000. (14) Includes 1,300,000 shares held by Andersen Consulting LLP. Mr. Shaheen, the Managing Partner of Andersen Consulting, disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein. Also includes 88,000 shares issuable upon exercise of options subject to vesting through February 2001. (15) Includes 90,000 shares which are subject to a right of repurchase in favor of the Company which expires ratably through October 1999. Also includes 4,000 shares held by Mr. Schwab's children. (16) Includes 1,300,000 shares held by Andersen Consulting LLP. See footnote (4) above. Also includes 733,000 shares issuable upon exercise of options held by all officers and directors subject to vesting on various dates through March 2002. See footnotes (3), (6) and (9) through (15) above. 62 66 DESCRIPTION OF CAPITAL STOCK Following the closing of this offering, the authorized capital stock of the Company, after giving effect to the conversion of all outstanding Preferred Stock into Common Stock, will consist of 40,000,000 shares of Common Stock, $.001 par value and 2,000,000 shares of Preferred Stock, $.001 par value. As of April 30, 1996 there were approximately 100 holders of record of the Company's Common and Preferred Stock. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. The holders of Common Stock are not entitled to cumulative voting rights with respect to the election of directors, and as a consequence, minority stockholders will not be able to elect directors on the basis of their votes alone. Subject to preferences that may be applicable to any then outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of the Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of Preferred Stock (including 31,430 shares of Series B Preferred Stock issued in April 1996) will be converted into 5,104,085 shares of Common Stock. See Note 4 of Notes to Financial Statements for a description of the currently outstanding Preferred Stock. Following the closing of this offering, the Company's Certificate of Incorporation will be restated to delete all references to the prior series of Preferred Stock, and the Board of Directors will have the authority, without further action by the stockholders, to issue up to 2,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, without any further vote or action by stockholders. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. REGISTRATION RIGHTS After this offering, the holders of 11,047,090 shares of Common Stock will be entitled to certain rights with respect to the registration of such shares under the Securities Act, pursuant to the Restated Investor Rights Agreement among such holders and the Company, dated December 1, 1995, as amended through June 14, 1996 (the "Investor Rights Agreement"). Under the terms of the Investor Rights Agreement, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled, subject to certain limitations, to include shares therein. The holders may also require the Company to file a registration statement under the Securities Act with respect to their shares, and the Company is required to use its best efforts to effect two such registrations. Furthermore, the holders may require the Company to register their shares on Form S-3 when such form becomes available to the Company. Generally, the Company is required to bear all registration and selling expenses incurred in connection with any such 63 67 registrations. These rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration. Such registration rights terminate five years from the date of this offering. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. The Company's Certificate of Incorporation also requires that, effective upon the closing of this offering, (a) any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing and (b) the stockholders may amend the Company's Bylaws or adopt new Bylaws, only by the affirmative vote of 2/3 of the outstanding voting securities. In addition, special meetings of the stockholders of the Company may be called only by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. These provisions may have the effect of delaying, deferring or preventing a change in control of the Company. TRANSFER AGENT AND REGISTRAR ChaseMellon Shareholder Services L.L.C. has been appointed as the transfer agent and registrar for the Company's Common Stock. Its telephone number is (415) 954-9512. 64 68 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have outstanding an aggregate of 15,530,770 shares of Common Stock, assuming no exercise of outstanding options and based upon the number of shares outstanding as of April 30, 1996. Of these shares, the 1,963,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Affiliates"), except that the shares to be sold to The Dow Chemical Company will be subject to an agreement not to sell any of such shares for a period of 180 days from the date of this Prospectus without the consent of Hambrecht & Quist LLC. The remaining 13,567,770 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. As a result of the contractual restrictions described below and the provisions of Rules 144 and 701, additional shares will be available for sale in the public market as follows: (i) no Restricted Shares will be eligible for immediate sale on the date of this Prospectus; (ii) 311,760 Restricted Shares (plus 212,875 shares of Common Stock issuable to employees and consultants pursuant to stock options that are then vested) will be eligible for sale upon expiration of the lock-up agreements 180 days after the date of this Prospectus (plus the shares to be purchased by The Dow Chemical Company in this offering); and (iii) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective two-year holding periods beginning January 3, 1997, subject to restrictions on such sales by Affiliates and certain vesting provisions on certain units. See "Certain Transactions." Upon completion of this offering, the holders of 11,047,090 shares of Common Stock, or their transferees, will be entitled to certain rights with respect to the registration of such shares under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradeable without restriction under the Securities Act (except for shares purchased by Affiliates) immediately upon the effectiveness of such registration. See "Description of Capital Stock -- Registration Rights." The Company and its officers, directors and certain stockholders holding an aggregate of approximately 13,364,663 shares of Common Stock after this offering have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, directly or indirectly, offer, sell, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any other right to purchase or acquire shares of Common Stock owned by them during the 180-day period commencing on the date of this Prospectus. The Dow Chemical Company has entered into a similar agreement with respect to the shares it is purchasing in this offering. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, an Affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) one percent of the then outstanding shares of the Company's Common Stock or (ii) the average weekly trading volume of the Company's Common Stock in the Nasdaq National Market during the four calendar weeks immediately preceding 65 69 the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or person whose shares are aggregated) who is not deemed to have been an Affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned Restricted Shares for at least three years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. The Securities and Exchange Commission has proposed revisions to Rule 144, the effect of which would be to shorten the holding periods under Rule 144 from two years to one year and to shorten the holding period under Rule 144(k) from three years to two years. If enacted, these proposed revisions would increase substantially the number of shares that would be available for sale in the public market 180 days after the date of this Prospectus. An employee, officer or director of or consultant to the Company who purchased or was awarded shares or options to purchase shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701 under the Securities Act, which permits Affiliates and non-Affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares without complying with the public information, volume and notice provisions of Rule 144. The Company intends to file a registration statement under the Securities Act covering shares of Common Stock reserved for issuance under the Company's Equity Incentive Plan and Purchase Plan. Based on the number of options outstanding and options and shares reserved for issuance at April 30, 1996, such registration statement would cover approximately 5,643,790 shares. Such registration statement is expected to be filed and to become effective as soon as practicable after the date hereof. Shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to Affiliates, be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the lock-up agreements described above. See "Management." 66 70 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, through their Representatives, Hambrecht & Quist LLC, Montgomery Securities, and Robertson, Stephens & Company LLC, have severally agreed to purchase from the Company and the Selling Stockholders the following respective number of shares of Common Stock:
NUMBER OF NAME SHARES ------------------------------------------------------------------------ --------- Hambrecht & Quist LLC................................................... Montgomery Securities................................................... Robertson, Stephens & Company LLC....................................... -------- Total......................................................... 1,963,000 ========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel and independent auditors. The nature of the Underwriters' obligations is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to an aggregate of 294,450 additional shares of Common Stock at the initial public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Common Stock offered hereby. At the request of the Company, the number of shares of Common Stock purchasable at the per share price to the public set forth on the cover of this Prospectus for an aggregate purchase price of $2,000,000 has been reserved for sale to The Dow Chemical Company. The sale of such shares shall reduce the number of shares offered hereby. The underwriting discount on the shares to be purchased by The Dow Chemical Company will be $ per share. The Dow Chemical Company is a customer of the Company. See "Business -- Customers and Markets." The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. 67 71 The Selling Stockholders, and certain other stockholders of the Company, including the officers and directors, who will own in the aggregate approximately 13,278,000 shares of Common Stock after this offering, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC ("H&Q"), offer, sell, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock owned by them during the 180-day period following the date of this Prospectus. The Company has agreed, subject to certain exceptions, that it will not, without the prior written consent of H&Q, offer, sell or otherwise dispose of any share of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock during the 180-day period following the date of this Prospectus. The Representatives have informed the Company that the Underwriters do not intend to confirm sales of Common Stock offered hereby to any accounts over which they exercise discretionary authority. In March 1995 and December 1995, Adobe Ventures L.P., a venture capital fund managed by H&Q, Hambrecht & Quist L.P., an affiliate of H&Q, and certain employees and directors of H&Q and of entities affiliated with H&Q purchased from the Company an aggregate of 525,002 shares of Series B Preferred Stock and an aggregate of 205,878 shares of Series C Preferred Stock for aggregate cash purchase prices of approximately $1,260,000 and $1,198,000, respectively. On the closing of this offering, the Series B and Series C Preferred Stock will be converted into an aggregate of 730,880 shares of Common Stock, representing approximately 4.7% of the outstanding Common Stock, assuming no exercise of the Underwriters' over-allotment option. The Company and Montgomery Securities have entered into a Software License and Services Agreement dated March 29, 1996, pursuant to which Montgomery Securities received a license to use Siebel Sales Enterprise. The terms of such agreement were negotiated by the parties at arms-length prior to the Company's selection of Montgomery Securities as an underwriter of this offering. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock will be determined by negotiation among the Company and the Representatives. Among the factors to be considered in determining the initial public offering price are prevailing market conditions, revenues and earnings of the Company, market valuations of other companies engaged in activities similar to those of the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company and the Selling Stockholders by Cooley Godward Castro Huddleson & Tatum, Menlo Park, California ("Cooley Godward"). As of the date of this Prospectus, certain members of Cooley Godward own through an investment partnership an aggregate of 28,000 shares of Common Stock and James C. Gaither, a director of the Company and a partner of Cooley Godward, owns 88,000 shares of Common Stock and has an option to purchase 22,000 shares of Common Stock. Certain legal matters will be passed upon for the Underwriters by Morrison & Foerster LLP, Palo Alto, California. 68 72 EXPERTS The financial statements of Siebel Systems, Inc. as of December 31, 1994 and 1995, for the period from September 13, 1993 (inception) to December 31, 1993, and for each of the years in the two-year period ended December 31, 1995 have been included in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION A Registration Statement on Form S-1, including amendments thereto, relating to the Common Stock offered hereby has been filed by the Company with the Securities and Exchange Commission, Washington, D.C. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement, exhibits and schedules. A copy of the Registration Statement may be inspected by anyone without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission. 69 73 SIEBEL SYSTEMS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of KPMG Peat Marwick LLP, Independent Auditors................................. F-2 Balance Sheets........................................................................ F-3 Statements of Operations.............................................................. F-4 Statements of Stockholders' Equity.................................................... F-5 Statements of Cash Flows.............................................................. F-6 Notes to Financial Statements......................................................... F-7
F-1 74 INDEPENDENT AUDITORS' REPORT The Board of Directors Siebel Systems, Inc.: We have audited the accompanying balance sheets of Siebel Systems, Inc. as of December 31, 1994 and 1995, and the related statements of operations, stockholders' equity, and cash flows for the period from September 13, 1993 (inception) to December 31, 1993, and for the years ended December 31, 1994 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reason- able basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Siebel Systems, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for the period from September 13, 1993 (inception) to December 31, 1993, and for the years ended December 31, 1994 and 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP San Jose, California April 26, 1996, except as to Note 7, which is as of May 14, 1996 F-2 75 SIEBEL SYSTEMS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, MARCH 31, 1996 ----------------- ------------------- 1994 1995 ACTUAL PRO ------ ------ ------ FORMA -------- (NOTE 7) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................ $1,017 11,391 9,757 11,094 Accounts receivable.................................. -- 3,066 3,112 3,112 Deferred income taxes................................ -- 314 314 314 Prepaids and other................................... 29 440 398 398 ------ ------ ----- ------ Total current assets......................... 1,046 15,211 13,581 14,918 Property and equipment, net............................ 133 863 2,006 2,006 Other assets........................................... 24 17 22 22 ------ ------ ----- ------ Total assets................................. $1,203 16,091 15,609 16,946 ====== ====== ===== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 14 493 806 806 Accrued expenses..................................... -- 1,075 895 895 Income taxes payable................................. -- 395 92 92 Deferred revenue..................................... -- 4,166 3,474 3,474 ------ ------ ----- ------ Total current liabilities.................... 14 6,129 5,267 5,267 Deferred income taxes.................................. -- 28 28 28 ------ ------ ----- ------ Total liabilities............................ 14 6,157 5,295 5,295 Commitments and contingencies Stockholders' equity: Partners' capital.................................... 1,153 -- -- -- Convertible preferred stock; $.001 par value; 10,000 shares authorized; actual -- no shares issued and outstanding in 1994, 4,906 and 4,908 shares issued and outstanding in 1995 and 1996, respectively; pro forma -- no shares issued and outstanding..... -- 5 5 -- Common stock; $.001 par value; 35,000 shares authorized; actual -- 50, 8,249, and 8,573 shares issued and outstanding in 1994, 1995, and 1996, respectively; pro forma -- 13,646 shares issued and outstanding................................... 1 8 9 14 Additional paid-in capital........................... 49 9,999 11,063 12,400 Notes receivable from stockholders................... (13) (13) (57) (57) Deferred compensation................................ -- (381) (1,220) (1,220) Retained earnings (accumulated deficit).............. (1) 316 514 514 ------ ------ ----- ------ Total stockholders' equity................... 1,189 9,934 10,314 11,651 ------ ------ ----- ------ Total liabilities and stockholders' equity... $1,203 16,091 15,609 16,946 ====== ====== ===== ======
See accompanying notes to financial statements. F-3 76 SIEBEL SYSTEMS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM SEPTEMBER 13, 1993 YEAR ENDED THREE MONTHS (INCEPTION) DECEMBER 31, ENDED MARCH 31, TO DECEMBER 31, ----------------- ---------------- 1993 1994 1995 1995 1996 ------------------ ------- ------- ------- ------ (UNAUDITED) Revenues: Software................................. $ -- 50 7,636 -- 4,402 Maintenance and other.................... -- -- 402 30 307 ----- ------- ------ ------- ------- Total revenues................... -- 50 8,038 30 4,709 Cost of revenues: Software................................. -- -- 41 -- 26 Maintenance and other.................... -- -- 385 9 343 ----- ------- ------ ------- ------- Total cost of revenues........... -- -- 426 9 369 ----- ------- ------ ------- ------- Gross margin..................... -- 50 7,612 21 4,340 Operating expenses: Product development...................... 64 868 2,816 616 986 Sales and marketing...................... 28 718 3,232 456 2,553 General and administrative............... 22 243 1,192 157 590 ----- ------- ------ ------- ------- Total operating expenses......... 114 1,829 7,240 1,229 4,129 ----- ------- ------ ------- ------- Operating income (loss).......... (114) (1,779) 372 (1,208) 211 Other income, net.......................... -- 13 156 8 119 ----- ------- ------ ------- ------- Income (loss) before income taxes.......................... (114) (1,766) 528 (1,200) 330 Income tax expense (benefit)............... -- -- 211 (480) 132 ----- ------- ------ ------- ------- Net income (loss)................ $ (114) (1,766) 317 (720) 198 ===== ======= ====== ======= ======= Pro forma net income (loss) per share...... $ 0.02 (0.05) 0.01 ====== ======= ======= Shares used in pro forma net income (loss) per share computation.................... 16,340 14,642 16,859 ====== ======= =======
See accompanying notes to financial statements. F-4 77 SIEBEL SYSTEMS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CONVERTIBLE NOTES RETAINED PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED EARNINGS TOTAL PARTNERS' --------------- --------------- PAID-IN FROM STOCK (ACCUMULATED STOCKHOLDERS' CAPITAL SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT) EQUITY -------- ------ ------ ------ ------ ---------- ------------ ------------ ------------ ------------ Partners' initial capital contribution... $ 810 -- $ -- -- $-- -- -- -- -- 810 Issuance of common stock.... -- -- -- 50 1 49 -- -- -- 50 Net loss..... (114 ) -- -- -- -- -- -- -- -- (114) -- ------- ----- ------ ----- --- --- ----- --- ------ Balances, December 31, 1993..... 696 -- -- 50 1 49 -- -- -- 746 Partners' capital contributions... 2,222 -- -- -- -- -- (13) -- -- 2,209 Net loss..... (1,765 ) -- -- -- -- -- -- -- (1) (1,766) -- ------- ----- ------ ----- --- --- ----- --- ------ Balances, December 31, 1994..... 1,153 -- -- 50 1 49 (13) -- (1) 1,189 Conversion of partners' capital... (1,153 ) 2,344 2 8,081 7 1,144 -- -- -- -- Compensation related to stock options... -- -- -- -- -- 381 -- (381) -- -- Issuance of common stock.... -- -- -- 328 -- 83 -- -- -- 83 Repurchase of common stock.... -- -- -- (210 ) -- (9) -- -- -- (9) Issuance of Series B preferred stock.... -- 1,967 2 -- -- 4,892 -- -- -- 4,894 Issuance of Series C preferred stock.... -- 595 1 -- -- 3,459 -- -- -- 3,460 Net income... -- -- -- -- -- -- -- -- 317 317 -- ------- ----- ------ ----- --- --- ----- --- ------ Balances, December 31, 1995..... -- 4,906 5 8,249 8 9,999 (13) (381) 316 9,934 Issuance of common stock (unaudited)... -- -- -- 324 1 170 (44) -- -- 127 Issuance of Series B preferred stock (unaudited)... -- 2 -- -- -- 12 -- -- -- 12 Compensation related to stock options (unaudited)... -- -- -- -- -- 882 -- (882) -- -- Amortization of deferred stock compensation (unaudited)... -- -- -- -- -- -- -- 43 -- 43 Net income (unaudited)... -- -- -- -- -- -- -- -- 198 198 -- ------- ----- ------ ----- --- --- ----- --- ------ Balances, March 31, 1996 (unaudited)... $ -- 4,908 $ 5 8,573 $9 11,063 (57) (1,220) 514 10,314 ======= ===== ====== ===== == === === ===== === ======
See accompanying notes to financial statements. F-5 78 SIEBEL SYSTEMS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM SEPTEMBER 13, 1993 YEAR ENDED THREE MONTHS (INCEPTION) DECEMBER 31, ENDED MARCH 31, TO DECEMBER 31, ----------------- ---------------- 1993 1994 1995 1995 1996 ------------------ ------- ------- ------ ------- (UNAUDITED) Cash flows from operating activities: Net income (loss)................................. $ (114) (1,766) 317 (720) 198 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Compensation related to stock options.......... -- -- -- -- 43 Depreciation and amortization.................. 6 75 142 28 125 Deferred income taxes.......................... -- -- (286) -- -- Changes in operating assets and liabilities: Accounts receivable.......................... -- -- (3,066) (392) (46) Prepaids and other........................... (6) (23) (411) (651) 42 Other assets................................. (9) (15) 7 (10) (5) Accounts payable............................. 4 10 479 209 313 Accrued expenses............................. -- -- 1,075 103 (180) Income taxes payable......................... -- -- 395 -- (303) Deferred revenue............................. -- -- 4,166 787 (692) ----- ------- ------- ------ ------- Net cash provided by (used in) operating activities.............................. (119) (1,719) 2,818 (646) (505) ----- ------- ------- ------ ------- Cash used in investing activities -- purchases of property and equipment............................ (38) (176) (872) (147) (1,268) ----- ------- ------- ------ ------- Cash flows from financing activities: Partners' capital contributions................... 810 2,209 -- -- -- Proceeds from issuance of common stock............ 50 -- 83 -- 127 Repurchases of common stock....................... -- -- (9) -- -- Proceeds from issuance of preferred stock......... -- -- 8,354 4,482 12 ----- ------- ------- ------ ------- Net cash provided by financing activities.............................. 860 2,209 8,428 4,482 139 ----- ------- ------- ------ ------- Change in cash and cash equivalents................. 703 314 10,374 3,689 (1,634) Cash and cash equivalents, beginning of period...... -- 703 1,017 1,017 11,391 ----- ------- ------- ------ ------- Cash and cash equivalents, end of period............ $ 703 1,017 11,391 4,706 9,757 ===== ======= ======= ====== ======= Supplemental disclosures of cash flows information: Cash paid: Taxes.......................................... $ -- -- 100 -- 385 ===== ======= ======= ====== ======= Noncash investing and financing activities: Conversion of partnership units into common stock and Series A preferred stock........... $ -- -- 1,153 1,153 -- ===== ======= ======= ====== =======
See accompanying notes to financial statements. F-6 79 SIEBEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1993, 1994, AND 1995 (1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Siebel Systems, Inc. (the "Company") is a provider of enterprise-class sales and marketing information software systems. The Company designs, develops, markets, and supports Siebel Sales Enterprise, an Internet-enabled, object oriented client/server application software product family designed to meet the sales and marketing information system requirements of large multi-national organizations. The Company was incorporated in the state of California on September 13, 1993 and elected to be treated as an S corporation effective on that date. Its principal activity prior to January 1995 was serving as the general partner of Siebel Systems, L.P. (the Partnership), a limited partnership. Accordingly, the financial statements for the period from September 13, 1993 (inception) to December 31, 1993, and as of and for the year ended December 31, 1994, reflect the combined financial position and operating results of the Company and the Partnership. The Company terminated its S corporation election on January 1, 1995. On January 3, 1995, under provisions of the Partnership agreement, all partners elected to dissolve the Partnership and convert their partnership units into common stock and preferred stock of the Company. REVENUE RECOGNITION The Company recognizes revenue in accordance with Statement of Position No. 91-1, Software Revenue Recognition. Software license revenue is recognized when all of the following criteria have been met: there is an executed license agreement, software has been shipped to the customer, no significant vendor obligations remain, and collection is deemed probable. Maintenance and other revenues consist primarily of maintenance and are recognized ratably over the term of the maintenance contract, typically 12 to 36 months. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents are classified as "available-for-sale," and are carried at fair value with any unrealized gains or losses reported as a separate component of stockholders' equity. Gross unrealized gains and losses to date have not been material. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives, generally three to seven years. F-7 80 SIEBEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, (CONTINUED) CAPITALIZED SOFTWARE Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, the Company's software development has been completed concurrent with the establishment of technological feasibility, and, accordingly, no costs have been capitalized. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. PRO FORMA NET INCOME (LOSS) PER SHARE Pro forma net income (loss) per share is computed using net income (loss) and is based on the weighted average number of shares of common stock outstanding, convertible preferred stock, on an "as if converted" basis, using the exchange rate in effect at the initial public offering date, and dilutive common equivalent shares from stock options and warrants outstanding using the treasury stock method. In accordance with certain Securities and Exchange Commission (SEC) Staff Accounting Bulletins, such computations include all common and common equivalent shares issued within 12 months of the offering date as if they were outstanding for all periods presented using the treasury stock method and the anticipated initial public offering price. RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995, and will require that the Company either recognize in its financial statements costs related to its employee stock-based compensation plans, such as stock option and stock purchase plans, or make pro forma disclosures of such costs in a footnote to the financial statements. The Company expects to continue to use the intrinsic value-based method of Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to account for all of its employee stock-based compensation plans. Therefore, in its financial statements for fiscal 1996, the Company will make the required pro forma disclosures in a footnote to the financial statements. SFAS No. 123 is not expected to have a material effect on the Company's results of operations or financial position. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable, as the majority of the Company's customers are large, well established companies. The Company maintains reserves for potential credit losses, but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. F-8 81 SIEBEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, (CONTINUED) UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying unaudited financial statements as of March 31, 1996, and for the three months ended March 31, 1995 and 1996, have been prepared on substantially the same basis as the audited financial statements, and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. (2) FINANCIAL STATEMENT DETAILS PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands):
DECEMBER 31, --------------- MARCH 31, 1994 1995 1996 ----- ------ ----------- (UNAUDITED) Computer equipment.................................... $183 666 1,353 Furniture and fixtures................................ 31 46 113 Computer software..................................... -- 374 888 ---- --- ----- 214 1,086 2,354 Less accumulated depreciation......................... 81 223 348 ---- --- ----- $133 863 2,006 ==== === =====
ACCRUED EXPENSES Accrued expenses consisted of the following (in thousands):
DECEMBER 31, --------------- MARCH 31, 1994 1995 1996 ---- ------ ------------ (UNAUDITED) Bonuses................................................ $-- 133 167 Commissions............................................ -- 152 238 Vacation............................................... -- 79 125 Sales tax.............................................. -- 486 118 Other.................................................. -- 225 247 --- ----- --- $-- 1,075 895 === ===== ===
OTHER INCOME, NET Other income, net consisted of the following (in thousands):
DECEMBER 31, ------------- MARCH 31, 1994 1995 1996 ---- ---- ------------ (UNAUDITED) Interest income......................................... $15 163 124 Interest expense........................................ (2 ) (7 ) (5) --- --- --- $13 156 119 === === ===
F-9 82 SIEBEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, (CONTINUED) (3) COMMITMENTS AND CONTINGENCIES BANK BORROWINGS In October 1995, the Company entered into a $500,000 equipment line of credit with a bank. Borrowings under the agreement bear interest at the bank's prime rate plus 1% (9.75% as of December 31, 1995). In October 1995, the Company borrowed $231,000 on the line of credit, which was subsequently repaid in December 1995. The line of credit expired on April 15, 1996. LEASE OBLIGATIONS As of December 31, 1995, the Company leased facilities under noncancelable leases expiring between 1996 and 2001. Future minimum lease payments are as follows (in thousands):
YEAR ENDING DECEMBER 31, -------------------------------------------------------------------- 1996................................................................ $ 383 1997................................................................ 228 1998................................................................ 157 1999................................................................ 157 2000................................................................ 157 Thereafter.......................................................... 26 ------ $ 1,108 ======
Rent expense for the period from September 13, 1993 (inception) to December 31, 1993, and for the years ended December 31, 1994 and 1995, was $18,000, $86,000, and $191,000, respectively. EMPLOYEE BENEFIT PLAN During 1995, the Company adopted a 401(k) plan that allows eligible employees to contribute up to 20% of their compensation, limited to $9,500 in 1995. Employee contributions and earnings thereon vest immediately. Although, the Company may make discretionary contributions to the 401(k) plan, none have been made to date. LEGAL ACTIONS The Company is engaged in certain legal actions arising in the ordinary course of business. The Company believes it has adequate legal defenses and believes that the ultimate outcome of these actions will not have a material effect on the Company's financial position or results of operations. (4) STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK The rights, preferences, and privileges of the Series A, B, and C convertible preferred stock are as follows: - Each share of Series A, B, and C preferred stock may be converted into common stock at the option of the holder on a one-for-one basis. Automatic conversion will occur upon an affirmative vote of a majority of the holders of preferred stock or upon the closing of an initial public offering of common stock in which the per share price is at least $7.00, and gross proceeds to the Company are at least $7,500,000. The conversion rate is subject to certain antidilution provisions. F-10 83 SIEBEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, (CONTINUED) - Holders of preferred stock are entitled to noncumulative annual dividends, when and if declared by the Board of Directors, of $.08, $.19, and $.47 per share for Series A, B, and C, respectively. - Holders of Series A, B, and C preferred stock have the right to one vote for each share of common stock into which such shares could be converted. - Holders of Series A, B, and C preferred stock have a liquidation preference of $1.00, $2.40, and $5.82 per share, respectively, plus all declared but unpaid dividends. In January 1995, the Company issued 2,344,000 shares of Series A preferred stock in exchange for the Partnership's Class C and D partnership units, on a one-for-one basis. Convertible preferred stock issued and outstanding as of December 31, 1995, is as follows (in thousands):
ISSUED AND CARRYING LIQUIDATION SERIES AUTHORIZED OUTSTANDING AMOUNT PREFERENCE ------------------------------- ---------- ----------- -------- ----------- A.............................. 2,400 2,344 $1,139 $ 2,344 B.............................. 2,500 1,967 4,894 4,721 C.............................. 601 595 3,460 3,463 ----- ----- ------ ------- 5,501 4,906 $9,493 $10,528 ===== ===== ====== =======
In December 1995, the Company issued to a customer a warrant to purchase 75,000 shares of Series C preferred stock at $5.82 per share. The warrant had nominal value on the date of issuance. The warrant expires upon the earlier of December 15, 1996, or the closing of an initial public offering of the Company's common stock (see Note 7). COMMON STOCK In January 1995, the Company issued 8,081,000 shares of common stock in exchange for the Partnership's Class A and B partnership units, on a one-for-one basis. During 1995, the Company repurchased approximately 210,000 shares of common stock from employees who had terminated employment with the Company. These repurchases were at each employee's original purchase price. 1994 STOCK OPTION PLAN In December 1994, the Board of Directors approved the 1994 Stock Option Plan (the Plan) which provides for the issuance of up to 3,000,000 shares of common stock to employees, directors, and consultants. The Plan provides for the issuance of incentive and nonstatutory stock options. Under the Plan, the exercise price for incentive options is at least 100% of the fair market value on the date of the grant. The exercise price for nonstatutory stock options is at least 85% of the fair market value on the date of grant. The exercise price for incentive stock options is at least 110% of the fair market value on the date of the grant for persons with greater than 10% of the voting power of all classes of stock. Under the Plan, options generally expire in 10 years; however, incentive stock options may expire in 5 years if the optionee owns stock representing more than 10% of the voting power of all classes of stock. Vesting periods are determined by the Board of Directors and generally provide for shares to vest ratably over 5 years. F-11 84 SIEBEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, (CONTINUED) Plan activity is summarized as follows:
OPTIONS AVAILABLE NUMBER EXERCISE PRICE FOR GRANT OF SHARES PER SHARE ---------- --------- -------------- Authorized........................................ 3,000,000 -- $ -- Options granted................................... (92,000) 92,000 .05 -- .10 ---------- ---------- Balances, December 31, 1994......................... 2,908,000 92,000 .05 -- .10 Options granted................................... (1,440,785) 1,440,785 .10 -- .50 Options exercised................................. -- (328,285) .10 -- .50 Options canceled.................................. 245,500 (245,500) .10 -- .50 ---------- ---------- Balances, December 31, 1995......................... 1,712,715 959,000 .05 -- .50 Additional shares authorized (unaudited).......... 3,000,000 -- -- Options granted (unaudited)....................... (1,784,750) 1,784,750 1.75 -- 2.90 Options exercised (unaudited)..................... -- (324,000) .05 -- 2.90 Options canceled (unaudited)...................... 52,000 (52,000) .10 -- 1.75 ---------- ---------- Balances, March 31, 1996 (unaudited)................ 2,979,965 2,367,750 .10 -- 2.90 ========== ==========
As of December 31, 1995, 41,900 options were vested. The Plan also allows for the exercise of otherwise unvested options, which are subject to repurchase by the Company, at a rate equivalent to the current vesting schedule of each option. As of December 31, 1995, 252,500 unvested options had been exercised which were subject to repurchase. During the period from October 1995 through April 1996, the Company granted options to purchase an aggregate of 4,076,250 shares of common stock at exercise prices ranging from $0.50 to $6.50 per share. Based in part on an independent appraisal obtained by the Company's Board of Directors, and other factors, the Company recorded $381,000 of deferred compensation expense in 1995 and an additional $882,000 deferred compensation expense (unaudited) for the three months ended March 31, 1996 relating to these options. These amounts are being amortized over the vesting period of the individual options, generally five years. (5) INCOME TAXES As discussed in Note 1, the Company was an S corporation and the general partner in the Partnership prior to January 3, 1995. For tax purposes, losses incurred through December 31, 1994 were allocated to the Partners in accordance with the Partnership loss sharing agreement. The portion of losses allocated to the Company as general partner was passed through to its stockholder. Therefore, the Company is not entitled to any net operating loss carryforwards from periods prior to January 1995. The S corporation election was terminated on January 1, 1995. Accordingly, income tax expense has been provided only for operations during the year ended December 31, 1995. F-12 85 SIEBEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, (CONTINUED) The components of income tax expense for the year ended December 31, 1995 are as follows (in thousands): Current: Federal........................................................... $ 289 State............................................................. 108 Foreign........................................................... 100 ----- Total current............................................. 497 Deferred: Federal........................................................... (228) State............................................................. (58) ----- Total deferred............................................ (286) ----- Total income taxes........................................ $ 211 =====
The difference between the "expected" income tax expense computed at the federal statutory rate of 34% and the Company's actual income tax expense for the year ended December 31, 1995, is as follows (in thousands): Expected income tax expense......................................... $ 180 State income taxes, net of federal tax benefit...................... 33 Other, net.......................................................... (2) ---- Total income taxes........................................ $ 211 ====
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of December 31, 1995, are as follows (in thousands): Deferred tax assets: Deferred state taxes.............................................. $ 17 Accruals and reserves, not currently taken for tax purposes....... 297 ---- Net deferred assets............................................ 314 Deferred tax liability: Depreciation...................................................... (28) ---- Net deferred liability......................................... (28) ---- Net deferred assets............................................ $ 286 ====
(6) RELATED PARTIES, SIGNIFICANT CUSTOMERS, AND GEOGRAPHIC INFORMATION In 1995, the Company had revenues of $1.0 million and $1.8 million (12% and 23% of total revenues, respectively) from each of two related parties, both of which are holders of preferred stock. Accounts receivable from these parties at December 31, 1995 were $900,000 and $200,000, respectively. The Company also had revenues in 1995 of $1.6 million and $823,000, or approximately 20% and 10% of total revenues, respectively, from each of two customers. The Company has a royalty arrangement with a party affiliated with a holder of preferred stock relating to the licensing of certain products. To date, royalty obligations under this arrangement have not been material. The Company's export sales in 1995 were comprised of the $1.0 million sale to the related party, which is located in Japan. F-13 86 SIEBEL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS, (CONTINUED) (7) SUBSEQUENT EVENTS AND PRO FORMA INFORMATION REINCORPORATION In May 1996, the Board of Directors approved the reincorporation of the Company as a Delaware corporation. The Certificate of Incorporation provides for 35,000,000 authorized shares of common stock with a $.001 par value per share and 10,000,000 authorized shares of preferred stock with a $.001 par value per share. The financial statements have been retroactively restated to give effect to the reincorporation. SERIES B PREFERRED STOCK In April 1996, the Company closed the sale of 31,430 shares of Series B preferred stock for proceeds of $183,000. SERIES D PREFERRED STOCK On April 30, 1996, the Company closed the sale of 90,000 shares of Series D preferred stock for proceeds of $900,000. The rights, preferences, and privileges of the Series D preferred stock are similar to those of the Series A, B and C preferred stock. REGISTRATION STATEMENT In May 1996, the Board of Directors approved a proposed filing of a registration statement with the SEC to sell up to 2,000,000 shares of the Company's common stock to the public, plus any over-allotment option. If the offering is consummated under the proposed terms, the Company's outstanding shares of A, B, C, and D convertible preferred stock will automatically convert into shares of its common stock upon the closing of the offering. The issuance of the Series D preferred stock, the exercise of the Series C preferred stock warrant described in Note 4, and this conversion have been reflected in the accompanying pro forma balance sheet as of March 31, 1996. 1996 EMPLOYEE STOCK PURCHASE PLAN In May 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the Purchase Plan) and reserved 350,000 shares for issuance thereunder. The Purchase Plan will become effective upon the completion of the Company's proposed initial public offering. The Purchase Plan permits eligible employees to purchase common stock, through payroll deductions of up to 10% of the employee's compensation, at a price equal to 85% of the fair market value of the common stock at either the beginning or the end of each offering period, whichever is lower. 1996 EQUITY INCENTIVE PLAN In May 1996, the Board of Directors approved the 1996 Equity Incentive Plan (Equity Incentive Plan) which amended and restated the Plan (see Note 4) and reserved a total of 6,000,000 shares of common stock for issuance under the Equity Incentive Plan. The Equity Incentive Plan provides for the issuance of incentive and nonstatutory stock options. F-14 87 - ------------------------------------------------------------ - ------------------------------------------------------------ NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................ 3 Risk Factors.............................. 5 The Company............................... 15 Use of Proceeds........................... 16 Dividend Policy........................... 16 Capitalization............................ 17 Dilution.................................. 18 Selected Financial Data................... 19 Management's Discussion And Analysis of Financial Condition And Results of Operations........................... 20 Business.................................. 27 Management................................ 52 Certain Transactions...................... 59 Principal and Selling Stockholders........ 61 Description Of Capital Stock.............. 63 Shares Eligible For Future Sale........... 65 Underwriting.............................. 67 Legal Matters............................. 68 Experts................................... 69 Additional Information.................... 69 Index To Financial Statements............. F-1
------------------ UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER AS PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ 1,963,000 SHARES LOGO COMMON STOCK ----------------------- PROSPECTUS ----------------------- HAMBRECHT & QUIST MONTGOMERY SECURITIES ROBERTSON, STEPHENS & COMPANY , 1996 - ------------------------------------------------------------ - ------------------------------------------------------------ 88 APPENDIX -- (DESCRIPTION OF GRAPHICS) INSIDE FRONT COVER [Graphic: Closed-Loop Sales and Marketing. This graphic depicts a closed-loop sales and marketing information system in which sales opportunities and information from a marketing encyclopedia are shared and managed across multiple distribution channels.] Graphic Caption: A closed-loop sales and marketing information system allows organizations to share and manage sales opportunities and information from a marketing encyclopedia across multiple distribution channels. GATEFOLD FOLLOWING INSIDE FRONT COVER [Graphic: Siebel N-Tiered Architecture. This graphic depicts Siebel's N-tiered architecture and illustrates several tiers including Siebel Applet Objects, Siebel Universal Applet Manager, Siebel Business Object Manager, Siebel Data Manager, Siebel Universal Data Exchange, and Siebel Data Repository.] PAGE 27 [Graphic: Closed-Loop Sales and Marketing. This graphic depicts a closed-loop sales and marketing information system in which sales opportunities and information from a marketing encyclopedia are shared and managed across multiple distribution channels.] Graphic Caption: A closed-loop sales and marketing information system allows organizations to share and manage sales opportunities and information from a marketing encyclopedia across multiple distribution channels. PAGE 34 [Graphic: SIEBEL ANYWHERE: This graphic depicts Siebel connected clients, Siebel mobile clients, and the two-way database synchronization between mobile Siebel users and the central database repository.] Graphic Caption: Organizations can unite their connected Siebel users and their mobile Siebel users in a common sales information system. Siebel provides two-way data synchronization between mobile users and the central database repository, using LAN, WAN, dial-up, as well as intranet and Internet connections. PAGE 36 [Graphic: Siebel Global Processing Architecture. This graphic depicts a typical configuration of a multi-channel sales organization with stationary Siebel users who are permanently connected to the central database server and mobile Siebel users who are intermittently connected to the central database server.] Graphic Caption: The Siebel global processing architecture supports a multi-tiered sales organization with stationary Siebel users who are permanently connected to the central database server and mobile Siebel users who are intermittently connected to the central database server. 89 PAGE 37 [Graphic: Siebel Global Distributed Architecture. This graphic depicts the Siebel application running in an environment in which multiple database servers provide support for different connected and mobile subsets of the sales organization.] Graphic Caption: The Siebel de-centralized data distribution architecture is designed to support multiple, de-centralized data servers which can be geographically located in the sales region they support. PAGE 39 [Graphic: Siebel N-Tiered Architecture. This graphic depicts Siebel's N-tiered architecture, separating the information presentation, application logic, database access, and interprocess communications layers into separate tiers.] Graphic Caption: The Siebel N-tiered architecture separates the information presentation, application logic, database access, and interprocess communications layers into separate tiers in order to partition and distribute the application components to run where necessary. PAGE 39 [Graphic: Siebel Virtual Computing. This graphic depicts how Siebel's N-tiered architecture can support the Personal Computer, Client/Server, and the Virtual Computer.] Graphic Caption: The Siebel N-tiered architecture is designed to allow organizations to flexibly deploy their Siebel applications in multiple configurations including Siebel Personal Computing, Siebel Client/Server Computing, and in the future, Siebel Virtual Computing. INSIDE BACK COVER [Graphic: Siebel Sales Enterprise. The Siebel Sales Enterprise provides a list of all sales opportunities and allows users to graphically visualize a Pipeline Analysis and a Pipeline Revenue Analysis.] Graphic Caption: Opportunity and Account Management. Enables sales professionals to track and manage an opportunity with shared information about accounts, contracts, product interest, and historical activity Graphic Caption: Siebel Encyclopedia. Provides a repository of the organization's sales-related information, including Product Information, Competitive Information, Decision Support, and On-Line Literature. Graphic Caption: Siebel Forecasting. Allows sales professionals to estimate and submit forecasts based on revenue or products. Graphic Caption: Siebel EIS (Executive Information System). Allows sales and marketing professionals and executives to dynamically visualize information in a variety of graphical on-line formats. Graphic Caption: Siebel Reports. Provides users with access to Query by Example to generate ad-hoc reports on-line, or view reports in graphical format. 90 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registration in connection with the sale of the Common Stock being registered. All the amounts shown are estimates except for the registration fee and the NASD filing fee. Registration fee.......................................................... $ 11,897 NASD filing fee........................................................... 3,950 Nasdaq application fee.................................................... 50,000 Blue sky qualification fee and expenses................................... 20,000 Printing and engraving expenses........................................... 100,000 Directors and officers insurance.......................................... 150,000 Legal fees and expenses................................................... 350,000 Accounting fees and expenses.............................................. 225,000 Transfer agent and registrar fees......................................... 30,000 Miscellaneous............................................................. 9,153 -------- Total................................................................ $950,000 ========
- --------------- * To be supplied by amendment. ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Under Section 145 of the Delaware General Corporation Law, the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). The Registrant's Certificate of Incorporation provides for the elimination of liability for monetary damages for breach of the directors' fiduciary duty of care to the Registrant and its stockholders. These provisions do not eliminate the directors' duty of care and, in appropriate circumstances, equitable remedies such an injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for any transaction from which the director derived an improper personal benefit, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into agreements with its directors and executive officers that require the Registrant to indemnify such persons against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director or officer of the Registrant or any of its affiliated enterprises, provided such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Registrant and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act or otherwise. II-1 91 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since September 13, 1993, the Registrant has sold and issued the following unregistered securities: (1) In September 1993, the Registrant sold 50,000 shares of Common Stock to its founder, Thomas M. Siebel, for cash in the aggregate amount of $50,000. (2) In January 1995, the Registrant issued 8,080,683 shares of Common Stock and 2,344,500 shares of Series A Preferred Stock in exchange for the limited partnership units of Siebel Systems, L.P. (3) In March and July 1995, the Registrant sold 1,900,000 shares of Series B Preferred Stock to a group of accredited investors for cash in the aggregate amount of $4,560,000. (4) In November and December 1995 and February and April 1996, the Registrant sold 100,000 shares of Series B Preferred Stock to accredited investors for cash in the aggregate amount of $528,116. (5) In December 1995, the Registrant sold 594,585 shares of Series C Preferred Stock to a group of accredited investors for cash in the aggregate amount of $3,460,484.70. (6) In April 1996, the Registrant sold 90,000 shares of Series D Preferred Stock to a group of accredited investors for cash in the aggregate amount of $900,000. (7) In April 1996, the Registrant issued a warrant to purchase 75,000 shares of its Series C Preferred Stock at an exercise price of $5.82 per share to a customer. The warrant was exercised in full in June 1996. (8) During the period, the Registrant granted incentive stock options and supplemental stock options to employees, directors and consultants under its 1996 Equity Incentive Plan covering an aggregate of 2,336,000 shares of the Company's Common Stock, at an average exercise price of $4.61. (9) During the period, the Registrant granted incentive stock options and supplemental stock options to employees, directors and consultants under its 1996 Equity Incentive Plan covering an aggregate of 2,623,535 shares of the Company's Common Stock, at an average exercise price of $1.64. Options to purchase 304,375 shares of Common Stock have been canceled and none of these options have lapsed without being exercised. The Registrant sold an aggregate of 866,210 shares of its Common Stock to employees, directors and consultants of the Registrant for consideration in the aggregate amount of $752,291 pursuant to the exercise of stock options granted under the Stock Option Plan. The sales and issuances of securities in the transactions described in paragraphs (1) through (8) above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated under the Securities Act. The purchasers in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends are affixed to the stock certificates issued in such transactions. Similar legends were imposed in connection with any subsequent sales of any such securities. All recipients either received adequate information about the Registrant or had access, through employment or other relationships, to such information. The sales and issuance of securities in the transaction described in paragraph (9) above were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated thereunder in that they were offered and sold either pursuant to written compensatory benefit plans or pursuant to a written contract relating to compensation, as provided by Rule 701. II-2 92 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------------ -------------------------------------------------------------------------------- (1) 1.1 Form of Underwriting Agreement. (1) 2.1 Form of Agreement and Plan of Merger between the Registrant and Siebel Systems, Inc., a California corporation. (1) 3.1 Amended and Restated Articles of Incorporation of Siebel Systems, Inc., a California corporation. (1) 3.2 Bylaws of Siebel Systems, Inc., a California corporation. (1) 3.3 Restated Certificate of Incorporation of the Registrant, to be effective upon the completion of this offering. (1) 3.4 Bylaws of the Registrant, to be effective upon the completion of this offering. (1) 4.1 Reference is made to Exhibits 3.1 through 3.4. 4.2 Specimen Stock Certificate. (1) 4.3 Restated Investor Rights Agreement, dated December 1, 1995, between the Registrant and certain investors, as amended April 30, 1996. 4.4 Amendment Number 2 to the Amended and Restated Investor Rights Agreement dated June 14, 1996. (1) 5.1 Opinion of Cooley Godward Castro Huddleson & Tatum. 10.1 Registrant's 1996 Equity Incentive Plan, and forms of incentive and nonstatutory stock options. (1) 10.2 Registrant's Employee Stock Purchase Plan. (1) 10.3 Form of Indemnity Agreement to be entered into between the Registrant and its officers and directors. (1) 10.4 Industrial Real Estate Lease, dated November 10, 1994, between the Registrant and WVP Income Plus, III, as amended March 15, 1996. (1) 10.5 Lease Agreement, dated December 8, 1995, between the Registrant and Bohannon Trust Partnership, as amended December 13, 1995. (1)(2) 10.6 Master Alliance Agreement, dated March 17, 1995, between the Registrant and Andersen Consulting LLP. (1)(2) 10.7 Software License and Services Agreement, dated March 29, 1996, by and between the Registrant and Montgomery Securities. (1)(2) 10.8 Strategic Alliance and Software License Agreement, dated December 12, 1995, by and among the Registrant, Itochu Techno-Science Corporation and Itochu Corporation. (1) 10.9 Assignment Agreement, dated September 20, 1995, by and between the Registrant and Thomas M. Siebel. 10.10 Lease Agreement, dated June 4, 1996, by and between the Registrant and Crossroad Associates and Clocktower Associates. (1) 11.1 Statement Regarding Computation of Pro Forma Net Income (Loss) Per Share. 23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors. (1) 23.2 Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made to Exhibit 5.1. (1) 24.1 Power of Attorney. Reference is made to the Signature page. (1) 27.1 Financial Data Schedule.
- --------------- (1) Previously filed with the Commission. (2) Confidential treatment requested. II-3 93 (b) Financial Statement Schedules. All schedules are omitted because they are not required, are not applicable, or the information is included in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The Registrant hereby undertakes to provide the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described in Item 14 or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant undertakes that: (1) for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus as filed as part of the registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective, and (2) for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 94 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has caused this Amendment to the Registration Statement (No. 333-03751) to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park, State of California, on the 21st day of June, 1996. SIEBEL SYSTEMS, INC. By: /s/ THOMAS M. SIEBEL ------------------------------------ Thomas M. Siebel Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------ -------------------------------------------------- /s/ THOMAS M. President, Chief Executive Officer June 21, 1996 SIEBEL and Chairman of the Board - ------------------------------------------ (Principal Executive Officer) Thomas M. Siebel * Vice President Finance and June 21, 1996 - ------------------------------------------ Administration Justin R. Dooley (Principal Financial and Accounting Officer) * Director June 21, 1996 - ------------------------------------------ Pehong Chen * Director June 21, 1996 - ------------------------------------------ James C. Gaither * Director June 21, 1996 - ------------------------------------------ George T. Shaheen * Director June 21, 1996 - ------------------------------------------ Charles R. Schwab * Director June 21, 1996 - ------------------------------------------ A. Michael Spence * Director June 21, 1996 - ------------------------------------------ Eric E. Schmidt *By: /s/ THOMAS M. June 21, 1996 SIEBEL - ------------------------------------------ Thomas M. Siebel Attorney-in-fact
II-5 95 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------------ ----------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. (1)2.1 Form of Agreement and Plan of Merger between the Registrant and Siebel Systems, Inc., a California corporation. (1)3.1 Amended and Restated Articles of Incorporation of Siebel Systems, Inc., a California corporation. (1)3.2 Bylaws of Siebel Systems, Inc., a California corporation. (1)3.3 Restated Certificate of Incorporation of the Registrant, to be effective upon the completion of this offering. (1)3.4 Bylaws of the Registrant, to be effective upon the completion of this offering. 4.1 Reference is made to Exhibits 3.1 through 3.4. 4.2 Specimen Stock Certificate. (1)4.3 Restated Investor Rights Agreement, dated December 1, 1995, between the Registrant and certain investors, as amended April 30, 1996. 4.4 Amendment Number 2 to the Amended and Restated Investor Rights Agreement dated June 14, 1996. (1)5.1 Opinion of Cooley Godward Castro Huddleson & Tatum. 10.1 Registrant's 1996 Equity Incentive Plan, and forms of incentive and nonstatutory stock options. (1)10.2 Registrant's Employee Stock Purchase Plan. (1)10.3 Form of Indemnity Agreement to be entered into between the Registrant and its officers and directors. (1)10.4 Industrial Real Estate Lease, dated November 10, 1994, between the Registrant and WVP Income Plus, III, as amended March 15, 1996. (1)10.5 Lease Agreement, dated December 8, 1995, between the Registrant and Bohannon Trust Partnership, as amended December 13, 1995. (1)(2)10.6 Master Alliance Agreement, dated March 17, 1995, between the Registrant and Andersen Consulting LLP. (1)(2)10.7 Software License and Services Agreement, dated March 29, 1996, by and between the Registrant and Montgomery Securities. (1)(2)10.8 Strategic Alliance and Software License Agreement, dated December 12, 1995, by and among the Registrant, Itochu Techno-Science Corporation and Itochu Corporation. (1)10.9 Assignment Agreement, dated September 20, 1995, by and between the Registrant and Thomas M. Siebel. 10.10 Lease Agreement, dated June 4, 1996, by and between the Registrant and Crossroad Associates and Clocktower Associates. (1)11.1 Statement Regarding Computation of Pro Forma Net Income (Loss) Per Share. 23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors. (1)23.2 Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made to Exhibit 5.1. (1)24.1 Power of Attorney. Reference is made to the Signature page. (1)27.1 Financial Data Schedule.
- --------------- (1) Previously filed with the Commission. (2) Confidential treatment requested. EX-4.2 2 SPECIMEN STOCK CERTIFICATE 1 Exhibit 4.2 SIEBEL SYSTEMS, INC. INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR STATEMENTS RELATING THE STATE OF DELAWARE TO RIGHTS, PREFERENCES, PRIVILEGES AND INSTRUCTIONS, IF ANY This Certifies that CUSIP 826170 10 2 is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.001 PER SHARE, OF SIEBEL SYSTEMS, INC. transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. TRANSFER AGENT AND REGISTRAR BY: AUTHORIZED SIGNATURE ___________________________________________________ AMERICAN BANK NOTE COMPANY JUNE 13, 1996 3504 ATLANTIC AVENUE SUITE 12 LONG BEACH, CA 90807 044584bk (310) 989-2333 (FAX) (310) 426-7450 NEW ___________________________________________________ 2 SIEBEL SYSTEMS, INC. A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of determination, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request and without charge at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of the certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT--_______Custodian_________ (Cust) (Minor) under Uniform Gifts to Minors Act__________________________ (State) UNIF TRF MIN ACT--_______Custodian (until age____) (Cust) _____________under Uniform Transfers to (Minor) Minors Act___________________ (State) ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST. FOR VALUE RECEIVED,________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _______________________________________ _______________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated____________________________ X_________________________________________ X_________________________________________ THE SIGNATURE(S) TO THIS ASSIGNMENT MUST NOTICE: CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR, INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT LENDERS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15. ___________________________________________________ AMERICAN BANK NOTE COMPANY JUNE 13, 1996 3504 ATLANTIC AVENUE SUITE 12 LONG BEACH, CA 90807 044584bk (310) 989-2333 (FAX) (310) 426-7450 NEW ___________________________________________________ EX-4.4 3 AMEND 2 TO AMENDED & RESTATED INVESTOR RIGHTS AGR 1 Exhibit 4.4 AMENDMENT NO. 2 TO THE SIEBEL SYSTEMS, INC. RESTATED INVESTOR RIGHTS AGREEMENT This Amendment No. 2 dated June 14, 1996 (the "Amendment") to the Restated Investor Rights Agreement, as amended April 30, 1996 (the "Investor Rights Agreement") is entered into by and among Siebel Systems, Inc. (the "Company"), certain Holders (as defined in the Investor Rights Agreement) and LSI Logic Corporation ("LSI Logic"). W I T N E S S E T H WHEREAS, LSI Logic Corporation ("LSI Logic") and the Company entered into a Warrant Agreement dated December 22, 1995, pursuant to which the Company granted the Company a warrant to purchase 75,000 shares of Series C Preferred Stock (the "Warrant"). NOW, THEREFORE, in consideration of LSI Logic agreeing to be bound by the restrictions on transfers and other limitations set forth in the Investor Rights Agreement, the parties hereby agree as follows: 1. The Company and the holders of a majority of the Registrable Securities agree that LSI Logic shall become a Holder as defined in the Investor Rights Agreement. 2. Pursuant to section 4.6.1 of the Investor Rights Agreement, the definition of the word "Shares" under section 1.1 of the Investor Rights Agreement to read as follows: "`Shares' shall mean the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock originally issued to the Purchasers and the shares issued to LSI Logic Corporation pursuant to the Warrant Agreement, dated December 22, 1995, entered into by and between the Company and LSI Logic Corporation." 3. LSI Logic hereby agrees to be bound by the restrictions on transfers and other limitations as set forth in the Investor Rights Agreement. 2 IN WITNESS WHEREOF, the parties have duly authorized and caused this Amendment to be executed as follows: SIEBEL SYSTEMS, INC. ----------------------- Andersen Consulting LLP By: ------------------------------- Thomas M. Siebel, President By: -------------------------------- Title: ----------------------------- LSI LOGIC CORPORATION By: ------------------------------- ----------------------------------- Thomas M. Siebel ----------------------------------- Dr. Pehong Chen ----------------------------------- Charles Schwab ----------------------------------- Adobe Ventures, L.P. By: -------------------------------- Title: ----------------------------- 3 EXHIBIT A RESTATED INVESTOR RIGHTS AGREEMENT EX-10.1 4 REGISTRANT'S 1996 EQUITY INCENTIVE PLAN 1 Exhibit 10.1 SIEBEL SYSTEMS, INC. 1996 EQUITY INCENTIVE PLAN ADOPTED MAY 14, 1996 APPROVED BY SHAREHOLDERS MAY 14, 1996 INTRODUCTION. In December 1994, the Board of Directors adopted the Siebel Systems, Inc. 1994 Stock Option Plan, which was later amended in February 1996. In February 1996, the Board of Directors adopted the Siebel Systems, Inc. 1996 Supplemental Stock Option Plan. On May 14, 1996, the Board of Directors amended and restated both of the above plans in the form of this 1996 Equity Incentive Plan. 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company and its Affiliates may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase restricted stock, and (v) stock appreciation rights, all as defined below. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock appreciation rights granted pursuant to Section 8 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. 1. 2 (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means Siebel Systems, a California corporation. (f) "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means a right granted pursuant to subsection 8(b)(2) of the Plan. (g) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the employment or relationship as a Director or Consultant is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between locations of the Company or between the Company, Affiliates or their successors. (i) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (j) "DIRECTOR" means a member of the Board. (k) "DISINTERESTED PERSON" means a Director who either: (i) was not during the one year prior to service as an administrator of the Plan granted or awarded equity securities pursuant to the Plan or any other plan of the Company or any Affiliate entitling the participants therein to acquire equity securities of the Company or any Affiliate except as permitted by Rule 16b-3(c)(2)(i); or (ii) is otherwise considered to be a "disinterested person" in accordance with Rule 16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission. (l) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 2. 3 (n) "FAIR MARKET VALUE" means, as of any date, the value of the common stock of the Company determined as follows: (1) If the common stock is listed on any established stock exchange or a national market system, including without limitation the National Market of The Nasdaq Stock Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (2) If the common stock is quoted on The Nasdaq Stock Market (but not on the National Market thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (3) In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board. (o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means a right granted pursuant to subsection 8(b)(3) of the Plan. (q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (r) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "OPTION" means a stock option granted pursuant to the Plan. (t) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (u) "OPTIONEE" means an Employee, Director or Consultant who holds an outstanding Option. (v) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury regulations 3. 4 promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (w) "PLAN" means this Siebel Systems, Inc. 1996 Equity Incentive Plan. (x) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (y) "STOCK APPRECIATION RIGHT" means any of the various types of rights which may be granted under Section 8 of the Plan. (z) "STOCK AWARD" means any right granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock, and any Stock Appreciation Right. (aa) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (ab) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right granted pursuant to subsection 8(b)(1) of the Plan. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (1) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; whether a person shall be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which a Stock Award shall be granted to each such person. (2) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the 4. 5 exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (3) To amend the Plan or a Stock Award as provided in Section 14. (4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee shall be Disinterested Persons and may also be, in the discretion of the Board, Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Notwithstanding anything in this Section 3 to the contrary, at any time the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Stock Awards to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, or (ii) not persons with respect to whom the Company wishes to avoid the application of Section 162(m) of the Code. (d) Any requirement that an administrator of the Plan be a Disinterested Person shall not apply if the Board or the Committee expressly declares that such requirement shall not apply. Any Disinterested Person shall otherwise comply with the requirements of Rule 16b-3. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate six million (6,000,000) shares of the Company's common stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan shall not be available for subsequent issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. 6 5. ELIGIBILITY. (a) Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants. (b) No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant, or in the case of a restricted stock purchase award, the purchase price is at least one hundred percent (100%) of the Fair Market Value of such stock at the date of grant. (c) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, following the expiration of the extended reliance period for compliance with the requirements of Code Section 162(m) set forth in Treasury Regulations Section 1.162-27(f)(2), no person shall be eligible to be granted Options covering more than five hundred thousand (500,000) shares of the Company's common stock in any calendar year. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) 6. 7 with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Incentive Stock Option is granted only by such person. A Nonstatutory Stock Option shall not be transferable except by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 and any administrative interpretations or pronouncements thereunder (a "QDRO"), and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person or any transferee pursuant to a QDRO. Notwithstanding the foregoing, the person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. (e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. 7. 8 An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant (other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the first paragraph of this subsection 6(f), or (ii) the expiration of a period of three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the Option would not be in violation of such registration requirements. (g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. 8. 9 (i) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. (j) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board or Committee to make or not to make grants of Options hereunder, the Board or Committee shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionee to a further Option (a "Re-Load Option") in the event the Optionee exercises the Option evidenced by the Option agreement, in whole or in part, by surrendering other shares of common stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (ii) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) shall have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the common stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option which is an Incentive Stock Option and which is granted to a 10% shareholder (as described in subsection 5(c)), shall have an exercise price which is equal to one hundred ten percent (110%) of the Fair Market Value of the stock subject to the Re-Load Option on the date of exercise of the original Option and shall have a term which is no longer than five (5) years. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board or Committee may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on exercisability of Incentive Stock Options described in subsection 12(d) of the Plan and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and shall be subject to such other terms and conditions as the Board or Committee may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK. Each stock bonus or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate: 9. 10 (a) PURCHASE PRICE. The purchase price under each restricted stock purchase agreement shall be such amount as the Board or Committee shall determine and designate in such agreement but in no event shall the purchase price be less than eighty-five percent (85%) of the stock's Fair Market Value on the date such award is made. Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company for its benefit. (b) TRANSFERABILITY. No rights under a stock bonus or restricted stock purchase agreement shall be transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 and any administrative interpretations or pronouncements thereunder, so long as stock awarded under such agreement remains subject to the terms of the agreement. (c) CONSIDERATION. The purchase price of stock acquired pursuant to a stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement with the person to whom the stock is sold; or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (d) VESTING. Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee. (e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event a Participant's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person. 8. STOCK APPRECIATION RIGHTS. (a) The Board or Committee shall have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights under the Plan to Employees, Directors of and Consultants to the Company or its Affiliates. To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such right. If a Stock Appreciation Right is granted to an individual who is at the time subject to Section 16(b) of the Exchange Act (a "Section 16(b) Insider"), the Stock Award Agreement of grant shall incorporate all the terms and conditions at the time necessary to assure that the subsequent exercise of such right shall qualify for the safe-harbor exemption from short-swing profit liability provided by Rule 16b-3 promulgated under the Exchange Act (or any successor rule or regulation). Except 10. 11 as provided in subsection 5(d), no limitation shall exist on the aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of a Stock Appreciation Right. (b) Three types of Stock Appreciation Rights shall be authorized for issuance under the Plan: (1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation Rights will be granted appurtenant to an Option, and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. Tandem Stock Appreciation Rights will require the holder to elect between the exercise of the underlying Option for shares of stock and the surrender, in whole or in part, of such Option for an appreciation distribution. The appreciation distribution payable on the exercised Tandem Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the Option surrender) in an amount up to the excess of (A) the Fair Market Value (on the date of the Option surrender) of the number of shares of stock covered by that portion of the surrendered Option in which the Optionee is vested over (B) the aggregate exercise price payable for such vested shares. (2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of stock subject to the underlying Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. A Concurrent Right shall be exercised automatically at the same time the underlying Option is exercised with respect to the particular shares of stock to which the Concurrent Right pertains. The appreciation distribution payable on an exercised Concurrent Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Concurrent Right) in an amount equal to such portion as shall be determined by the Board or the Committee at the time of the grant of the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Concurrent Right) of the vested shares of stock purchased under the underlying Option which have Concurrent Rights appurtenant to them over (B) the aggregate exercise price paid for such shares. (3) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights will be granted independently of any Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6. They shall be denominated in share equivalents. The appreciation distribution payable on the exercised Independent Right shall be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Company stock equal to the number of share equivalents in which the holder is vested under such Independent Right, and with respect to which the holder is exercising the Independent Right on such date, over (B) the aggregate Fair Market Value (on the date of the grant of the Independent Right) of such number of shares of Company stock. The appreciation distribution payable on the exercised Independent Right shall be in cash or, if 11. 12 so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Independent Right. 9. CANCELLATION AND RE-GRANT OF OPTIONS. (a) The Board or the Committee shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding Options and/or any Stock Appreciation Rights under the Plan and/or (ii) with the consent of any adversely affected holders of Options and/or Stock Appreciation Rights, the cancellation of any outstanding Options and/or any Stock Appreciation Rights under the Plan and the grant in substitution therefor of new Options and/or Stock Appreciation Rights under the Plan covering the same or different numbers of shares of stock, but having an exercise price per share not less than: eighty-five percent (85%) of the Fair Market Value for a Nonstatutory Stock Option, one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option or, in the case of an Incentive Stock Option held by a 10% shareholder (as described in subsection 5(c)), not less than one hundred ten percent (110%) of the Fair Market Value per share of stock on the new grant date. Notwithstanding the foregoing, the Board or the Committee may grant an Option and/or Stock Appreciation Right with an exercise price lower than that set forth above if such Option and/or Stock Appreciation Right is granted as part of a transaction to which section 424(a) of the Code applies. (b) Shares subject to an Option or Stock Appreciation Right canceled under this Section 9 shall continue to be counted against the maximum award of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(d) of the Plan. The repricing of an Option and/or Stock Appreciation Right under this Section 9, resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and/or Stock Appreciation Right and the grant of a substitute Option and/or Stock Appreciation Right; in the event of such repricing, both the original and the substituted Options and Stock Appreciation Rights shall be counted against the maximum awards of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(d) of the Plan. The provisions of this subsection 9(b) shall be applicable only to the extent required by Section 162(m) of the Code. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking shall not require the Company to register under the Securities Act of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any 12. 13 liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. 11. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company. 12. MISCELLANEOUS. (a) The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest pursuant to subsection 6(e), 7(d) or 8(b), notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) Neither an Employee, Director or Consultant, nor any person to whom a Stock Award is transferred in accordance with the Plan, shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Director or Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate or to continue acting as a Director or Consultant, or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without notice and with or without cause, the right of the Company's Board of Directors and/or the Company's shareholders to remove any Director pursuant to the terms of the Company's Bylaws and the provisions of the California Corporations Code, or the right to terminate the relationship of any Consultant pursuant to the terms of such Consultant's agreement with the Company or Affiliate. (d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred in accordance with the Plan, as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of 13. 14 exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (f) To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company. 13. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the maximum number of shares subject to award to any person during any calendar year pursuant to subsection 5(d), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Stock Awards. Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company".) (b) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then to the extent permitted by applicable law: (i) any surviving corporation or an Affiliate of such surviving corporation shall assume any Stock Awards outstanding under the 14. 15 Plan or shall substitute similar Stock Awards for those outstanding under the Plan, or (ii) such Stock Awards shall continue in full force and effect. In the event any surviving corporation and its Affiliates refuse to assume or continue such Stock Awards, or to substitute similar options for those outstanding under the Plan, then, with respect to Stock Awards held by persons then performing services as Employees, Directors or Consultants, the time during which such Stock Awards may be exercised shall be accelerated and the Stock Awards terminated if not exercised prior to such event. 14. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 13 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) Increase the number of shares reserved for Stock Awards under the Plan; (ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or (iii) Modify the Plan in any other way if such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3. (b) The Board may in its sole discretion submit any other amendment to the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees, Directors or Consultants with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. (e) The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award 15. 16 shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate ten (10) years from the date the Plan is adopted by the Board or approved by the shareholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the Stock Award was granted. 16. EFFECTIVE DATE OF PLAN. The Plan shall become effective on the effective date of the registration statement with respect to the Company's initial public offering of shares of common stock, but no Stock Awards granted under the Plan shall be exercised unless and until the Plan has been approved by the shareholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 16. 17 SIEBEL SYSTEMS, INC. 1996 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT SIEBEL SYSTEMS, INC. (the "Company") is pleased to inform you that its Board of Directors has granted you an option to purchase shares of the common stock of the Company ("Common Stock") under the SIEBEL SYSTEMS, INC. 1996 Equity Incentive Plan (the "Plan"). The details of your option are as follows: Optionee Name: ------------------------ Number of Shares: --------------------- Exercise Price: $ per share ---------------- Grant Date: --------------------------- Expiration Date: , unless it ends sooner for the reasons ------------------ described in Section 5 of the Additional Terms and Conditions attached. Vesting Commencement Date: ----------- Vesting Schedule: % on anniversary of the Vesting -------- -------------- Commencement Date and % each anniversary thereafter until -------- ------------ fully vested. Vesting is subject to termination under the circumstances set forth in the Supplemental Terms and Conditions attached. Tax Qualification: This option is is not intended to qualify for the --- --- federal income tax benefits available to an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Additional Terms and Optionee's Acknowledgements: This option is also subject to all the terms of the Additional Terms and Conditions attached to this Agreement. The undersigned optionee acknowledges receipt of this option agreement, the Additional Terms and Conditions with the exhibits referred to therein, and understands and agrees to all their terms. Optionee further acknowledges that as of the date of grant of this option, this option, the Additional Terms and Conditions and its exhibits set forth the entire understanding between optionee and the Company regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (i) the option agreements previously granted and delivered to optionee under the Plan (including its predecessors), and (ii) the following agreements only: OTHER AGREEMENTS: ------------------------------- ------------------------------- ------------------------------- SIEBEL SYSTEMS, INC. OPTIONEE: ---------------------------- By: ---------------------------------- ------------------------------------- Signature Name: -------------------------------- Date: Date: -------------------------------- -------------------------------- 1. EX-10.10 5 LEASE AGREEMENT CROSSROAD ASSOCIATES & CLOCKTOWER 1 Exhibit 10.10 LEASE AGREEMENT THIS LEASE, made this 4th day of June, 1996, between CROSSROADS ASSOCIATES AND CLOCKTOWER ASSOCIATES, hereinafter called "Landlord," and SIEBEL SYSTEMS, INC. a California Corporation, hereinafter called "Tenant." WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the "Premises") outlined in red on Exhibit A1 through A4 attached hereto and incorporated herein by this reference thereto more particularly described as follows: The entire five story Building located at 1855 South Grant Street, San Mateo, San Mateo County, California. The total rentable area of the five story Building is approximately 66,426 square feet. As used herein the Complex shall mean and include all of the land outlined in red and described in Exhibit A1 through A4 attached hereto, and all of the buildings. improvements, fixtures and equipment now or hereafter situated on said land. Landlord agrees to construct such improvements as are set forth in Exhibit "C" attached hereto, and upon such terms and conditions as set forth in Exhibit "D" attached hereto and incorporated herein by this reference thereto. Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. USE Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of General Office and for no other purpose. Tenant shall not do or permit to be done in or about the Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises or the Complex anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Complex or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of its contents. Tenant shall not do or permit to be done anything in, on or about the Premises or the Complex which will in any way obstruct or interfere with the tights of other tenants or occupants of the Complex or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises or the Complex. No sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the 2 building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of common area of the Complex. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, attorneys' fees, or liability arising out of failure of Tenant to comply with any applicable law. Tenant shall comply with any covenant, condition, or restriction ("CC&R's") affecting the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Complex. 2. TERM A. The term of this Lease shall be for a period of Ten (10) years (unless sooner terminated as hereinafter provided) and, subject to Paragraphs 2(B) and 3, shall commence on the 1st day of August, 1996, and end on the 31st day of July, 2006. B. Possession of the Premises shall be deemed tendered and the term of this Lease shall commence when the first of the following occurs: (1) One day after a Certificate of Occupancy is granted by the proper governmental agency, or, if the governmental agency having jurisdiction over the area in which the Premises are situated does not issue certificates of occupancy, then the same number of days after certification by Landlord's architect or contractor that Landlord's construction work has been completed; or (2) Upon the occupancy of the Premises by any of Tenant's operating personnel; or (3) N/A. 3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver possession of said Premises to Tenant at the commencement of the said term, as hereinbefore specified, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby shall be reissued to conform to the date of Landlord's delivery of possession, as specified in Paragraph 2 (b), above. The above is, however, subject to the provision that the period of delay of delivery of the Premises shall not exceed 60 days from the commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord's control shall be excluded in calculating such period) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this Lease. 4. RENT A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of Fifteen million, Five Hundred Forty Three Thousand, Six Hundred Eighty Four -2- 3 ($15,543,684.00) Dollars in lawful money of the United States of America, payable as follows: $129,530.70 (66,426 x $1.95) shall be due and payable upon execution of this Lease and shall represent payment of the Basic Rent for the first month of the Lease term. This amount shall be due and payable for the first twelve months of the Lease term. The monthly Basic Rent shall be due and payable on or before the first day of each month of the Lease term. Monthly Basic Rent shall be adjusted according to paragraph 38. This paragraph continues on page 10 below. It is agreed that, as the Basic Rent provided for herein is adjusted according to Paragraph 38, the total Basic Rent and schedule of payments described above shall be adjusted accordingly. B. Time for Payments. In the event that the term of this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant is in default in the payment of rent as set forth in this Paragraph 4 when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) days. Said late charge shall equal ten (10%) percent of each rental payment so in default. D. Additional Rent. Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as Additional Rent the following: (1) Tenant's proportionate share of all utilities relating to the Complex as set forth in Paragraph 11, and (2) Tenant's Proportionate share of all Taxes relating to the Complex as set forth in Paragraph 12, and (3) Tenant's proportionate share of all insurance premiums relating to the Complex, as set forth in Paragraph 15, and (4) Tenant's proportionate share of expenses for the operation, management, maintenance and repair of the Building (including common areas of the Building) and Common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and (5) All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including attorneys' fees and legal expenses, that may accrue thereto in the event of Tenant's failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant's part to comply with the terms of this Lease. In the event of nonpayment by Tenant of Additional Rent, -3- 4 Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of rent. Tenant shall pay to Landlord monthly, in advance, Tenant's prorata share of an amount estimated by Landlord to be Landlord's approximate average monthly expenditure for such Additional Rent items, which estimated amount shall be reconciled at the end of each calendar year as compared to Landlord's actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand, any amount of actual expenses expended by Landlord in excess of said estimated amount, or Landlord refunding to Tenant (providing Tenant is not in default in the performance of any of the terms, covenants and conditions of this Lease) any amount of estimated payments made by Tenant in excess of Landlord's actual expenditures for said Additional Rent items. Tenant's payment for such Additional Rent as of the commencement of the term of this lease shall be Twenty Seven Thousand Nine Hundred and 00/100 ($27,900.00) Dollars per month. Any payments required to be made by Tenant for Additional Rent shall be made by check or instrument separate from that check or instrument used by Tenant to make any payments for Basic Rent, pursuant to paragraph 4 A. This paragraph is continued below. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the term hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. E. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of Landlord at 3201 Ash Street, Palo Alto, CA 94306 or to such other person or to such other place as Landlord may from time to time designate in writing. F. Security Deposit. Concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of One Hundred Seventy Five Thousand and 00/100 ($175,000.00) Dollars. Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent and any of the monetary sums due herewith, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at -4- 5 Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said Deposit to Landlord's successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. This paragraph is continued below. 5. RULES AND REGULATIONS AND COMMON AREA Subject to the terms and conditions of this Lease and such Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as "Common Area". This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex. The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such Rules and Regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations. Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. 6. PARKING Tenant shall have the right to use with other tenants or occupants of the Complex 200 parking spaces in the common parking areas of the Complex. Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use parking spaces in excess of said 200 spaces allocated to Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion, to specifically designate the location of Tenant's parking spaces within the common parking areas of the Complex (and such designation shall be on a non-discriminatory and equitable basis) in the event of a dispute among the tenants occupying the building and/or Complex referred to herein, in which event Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant's use. Said parking spaces, if specifically designated by Landlord to Tenant, may be relocated by Landlord at any time, and from time to time. Landlord reserves the right, at Landlord's sole discretion, to rescind any specific designation of parking spaces, thereby returning Tenant's parking spaces to the common parking area. Landlord shall give Tenant written notice of any change in Tenant's parking spaces. Tenant shall not, at any time, park, or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park, or permit the parking of Tenant's trucks or other vehicles or the trucks and vehicles of Tenant's suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant. Tenant shall not park nor permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex. Tenant agrees to assume responsibility for compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than such designated parking areas, then -5- 6 Landlord may charge Tenant, as an additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant's employees parked in violation of these provisions, or to attach violation stickers or notices to such vehicles. Tenant shall use the parking areas for vehicle parking only, and shall not use the parking areas for storage. Landlord hereby agrees to designate 4 parking spaces as "Reserved" as indicated in blue on Exhibit A-1 and 4 parking spaces as "Visitor" as indicated in green on Exhibit A-1. 7. EXPENSES OF OPERATION, MANAGEMENT AND MAINTENANCE OF THE COMMON AREAS OF THE COMPLEX, PREMISES AND BUILDING IN WHICH THE PREMISES ARE LOCATED As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of all expenses of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit and inspection fees; security; utility charges associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance of landscaped areas, lakes, parking lots, sidewalks, driveways; maintenance, repair and replacement of all fixtures and electrical, mechanical and plumbing systems; structural elements and exterior surfaces of the buildings; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at _____ prime rate ___ percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. As Additional Rent and in accordance with paragraph 4D of this Lease, Tenant shall pay its proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the cost of operation (including common utilities), management, maintenance and repair of the Premises and the building (including common areas such as lobbies, restrooms, janitor's closets, hallways, elevators, mechanical and telephone rooms, stairwells, entrances, spaces above the ceilings) in which the Premises are located. The maintenance items herein referred to include, but are not limited to, janitorization, electrical systems (such as outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating and air conditioning controls (such as mixing boxes, thermostats, time clocks, supply and return grills), all interior improvements within the Premises including but not limited to: wall coverings, window coverings, acoustical ceilings, vinyl tile, carpeting, partitioning, doors (both interior and exterior, including closing mechanisms, latches, locks), and all other interior improvements of any nature whatsoever, all windows, window frames, plate glass, glazing, truck doors, main plumbing systems of the building (such as water and drain lines, sinks, toilets, faucets, drains, showers and water fountains. main electrical systems (such as panels and conduits), heating and air conditioning systems (such as compressors, fans, air handlers, ducts, boilers, heaters), store fronts, roofs, downspouts, building common area interiors (such as wall coverings, window coverings, floor coverings and partitioning), ceilings, building exterior doors, skylights (if any), automatic fire extinguishing systems and elevators; license, permit, and inspection fees; security; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at ___________ prime rate __________ per annum on the unamortized balance) as an operating expense in accordance with standard -6- 7 accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. Tenant hereby waives all rights under, and benefits of, subsection I of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. Tenant agrees to be responsible for wear and tear of the carpet caused by rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant's sole expense upon Lease termination. "Additional Rent" as used herein shall not include Landlord's debt repayments; interest on charges; expenses directly or indirectly incurred by Landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; cost of attracting tenants; depreciation; interest, or executive salaries. Landlord agrees to provide five-day janitorial service for the leased Premises and to maintain the Complex in a first-class manner. 8. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Acts of God, fire or normal wear and tear excepted), with all interior walls painted, or cleaned so that they appear freshly painted, and repaired and replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the air conditioning and heating equipment serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been Tenant's responsibility during the term of this Lease) together with all alterations, additions and improvements which may have been made in, to, or on the Premises (except movable trade fixtures installed at the expense of Tenant) except that Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant's sole cost and expense. Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such removal at Tenant's sole cost. If the Premises be not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as a consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant or a mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies. -7- 8 9. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord first had and obtained by Tenant, but at the cost of Tenant, and any addition to, or alteration of, the Premises, except moveable furniture and trade fixtures, shall at once become a part of the Premises and belong to Landlord. If Landlord consents to the making of any alteration, addition, or improvement to or of the Premises by Tenant, the same shall be made by Landlord at Tenant's sole cost and expense. At the time such modifications are requested, Landlord shall identify which items, if any, shall be subject to the restoration provision of paragraph 8. Any modifications to the building or building systems required by governmental code or otherwise as a result of Tenant's alterations, additions or improvements shall be made at Tenant's sole cost and expense. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, lighting, electrical, air conditioning, partitioning, drapery, carpeting and floor installations made by Tenant, together with all property that has become an integral part of the Premises, shall not be deemed trade fixtures. Tenant agrees that it will not proceed to make any alterations or additions, without having obtained consent from Landlord to do so, and until five (5) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for such work. Tenant further covenants and agrees that any mechanic's lien filed against the Premises or against the Complex for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10) days after the fling thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant. This paragraph continues below. 11. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED As Additional Rent and in accordance with paragraph 4D of this Lease, Tenant shall pay its proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) or the cost of all utility charges such as water, gas, electricity, telephone, telex and other electronic communications service, sewer service, waste pick-up and any other utilities, materials or services furnished directly to the building in which the Premises are located, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts or other labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Provided that Tenant is not in default in the performance or observance of any of the terms, covenants or conditions of this Lease to be performed or observed by it, Landlord shall furnish to -8- 9 the Premises between the hours of 8:00AM and 6:00PM, Mondays through Fridays (holidays excepted) and subject to the rules and regulations of the Complex hereinbefore referred to, reasonable quantities of water, gas and electricity suitable for the intended use of the Premises and heat and air conditioning required in Landlord's judgment for the comfortable use and occupation of the Premises for such purposes. Tenant agrees that at all times it will cooperate fully with Landlord and abide by all regulations and requirements that Landlord may prescribe for the proper functioning and protection of the building heating, ventilating and air conditioning systems. Whenever heat generating machines, equipment, or any other devices (including exhaust fans) are used in the Premises by Tenant which affect the temperature or otherwise maintained by the air conditioning system, Landlord shall have the right to install supplementary air conditioning units on the Premises and the costs thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. If Tenant shall require water, gas or electric current in excess of that usually furnished or supplied to premises being used as general office space, Tenant shall first obtain the written consent of Landlord, which consent shall not be unreasonably withheld and Landlord may cause an electric current, gas, or water meter to be installed in the Premises in order to measure the amount of electric current, gas or water consumed for any such excess use. The cost of any such meter and of the installation, maintenance and repair thereof, all charges for such excess water, gas and electric current consumed (as shown by such meters and at the rates then charged by the furnishing public utility); and any additional expense incurred by Landlord in keeping account of electric current, gas, or water so consumed shall be paid by Tenant, and Tenant agrees to pay Landlord therefor promptly upon demand by Landlord. The gas and electric meters directly servicing the Building at 1855 South Grant Street shall be placed in Tenant's own name and account, and Tenant shall pay directly to the providing public utilities the cost of the gas and electric associated solely with the Building at 1855 South Grant Street. This paragraph continues below. 12. TAXES A. As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real Property Taxes, which prorata share shall be allocated to the leased Premises by square footage or other equitable basis, as calculated by Landlord. The term "Real Property Taxes," as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership of the Complex) now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Complex (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein: any improvements located within the Complex (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex; and (iii) all costs and fees (including attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the term of this Lease the taxation or assessment of the Complex prevailing as of the -9- 10 commencement date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Complex or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlord's business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such Real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. B. Taxes on Tenant's Property (1) Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest, and any amount so recovered shall belong to Tenant. (2) If the Tenant improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for Real Property Tax purposes at a valuation higher than the valuation at which standard office improvements in other space in the Complex are assessed, then the Real Property Taxes and assessments levied against Landlord or the Complex by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of 12A(i), above. If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office improvements in other space in the Complex, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used. 13. LIABILITY INSURANCE Tenant, at Tenant's expense, agrees to keep in force during the term of this Lease a policy of comprehensive public liability insurance with limits in the amount of $1,000,000/$1,000,000 for injuries to or death of persons occurring in, on or about the Premises or the Complex, and property damage insurance with limits of $500,000. The policy or policies affecting such insurance, certificates of which shall be furnished to Landlord, shall name Landlord as additional insureds, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including -10- 11 any failure of Tenant to observe or perform any of its obligations hereunder; shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days' prior written notice to Landlord. If, during the term of this Lease, in the considered opinion of Landlord's Lender, insurance advisor or counsel, the amount of insurance described in this paragraph 13 is not adequate, Tenant agrees to increase said coverage to such reasonable amount as Landlord's Lender, insurance advisor or counsel shall deem adequate. 14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKER'S COMPENSATION INSURANCE Tenant shall maintain a policy or policies of fire and property damage insurance in "all risk" form with a sprinkler leakage endorsement ensuring the personal property, inventory, trade fixtures and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be used for the repair or replacement of such items so insured. Tenant shall also maintain a policy or policies of worker's compensation insurance and any other employee benefit insurance sufficient to comply with all laws. 15. PROPERTY INSURANCE Landlord shall purchase and keep in force and, as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the cost of policy or policies of insurance covering loss or damage to the Premises and Complex in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risks" insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as Additional Rent. If such insurance cost is increased due to Tenant's use of the Premises or the Complex, Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex. Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in the releasing party's insurance policies, irrespective of the cause of such fire or casualty; provided, however, that if the insurance policy of either releasing party prohibits such waiver, then this waiver shall not take effect until consent to such waiver is obtained. If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof. 16. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises or the Complex but excluding, however, the negligence of Landlord, its agents, servants, employees, invitees, or contractors of which negligence Landlord has knowledge and reasonable time to correct. Except as to injury to persons or damage to property the principal cause of which is the negligence of Landlord, Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including reasonable attorneys' fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring, in, on or about the Premises, or any part thereof, from any cause whatsoever. -11- 12 17. COMPLIANCE Except as may be limited per paragraph 43 (as amended) Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in effect; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such failure shall be deemed a breach of the provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation. requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant. This paragraph shall not be interpreted as requiring Tenant to make structural changes or improvements, except to the extent such changes or improvements are required as a result of Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Premises. This paragraph is continued below. 18. LIENS Tenant shall keep the Premises and the Complex free from any liens arising out of any work performed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. 19. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer or hypothecate the leasehold estate under this Lease, or any interest therein. and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld or delayed. Tenant agrees to pay to Landlord, as additional rent, 50% of all rents or additional consideration excluding any consideration for use of Tenant's personal property such as furniture, telephones, etc. received by Tenant from its assignees, transferees or subtenants in excess of the rent payable by Tenant to Landlord hereunder. Tenant shall, by one hundred twenty (120) days' written notice, advise Landlord of its intent to assign or transfer Tenant's interest in the Lease or sublet the Premises or any portion thereof for any part of the term hereof. In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of Landlord. A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease. The leasehold estate under this Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord. As a condition to its consent, Landlord may require Tenant to pay all expenses in connection with the assignment and Landlord may require Tenant's assignee or transferee (or other assignees or -12- 13 transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease. This paragraph is continued below. 20. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold interest is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and buildings in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as "Lender") to Landlord, Tenant shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender's deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease. Tenant hereby irrevocably appoints Landlord the attorney in fact of Tenant to execute, deliver and record any such instrument or instruments for and in the name and on behalf of Tenant. Notwithstanding any such subordination, Tenant's possession under this Lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all rent and observe and perform all of the provisions set forth in this Lease. Tenant agrees to send to any mortgagees and/or deed of trust holders, by registered mail, a copy of any notice of default served by Tenant upon the Landlord, provided that prior to such notice, Tenant has been notified, in writing (by way of notice of assignment of rents or otherwise) of the addresses of such mortgagees and/or deed of trust holders. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, any such mortgagees and/or deed of trust holders shall have an additional thirty (30) days within which to cure such default, or if such default is not reasonably susceptible of cure within that time, then such additional time as may be reasonably necessary if within such (30) days, any mortgagee and/or deed of trust holder has commenced and is diligently pursuing the remedies necessary to cure such default, (including but not limited to commencement of foreclosure proceedings), in which event this Lease shall not be terminated when such remedies are being diligently pursued. This paragraph is continued below. 21. ENTRY BY LANDLORD Except in the case of an emergency, upon 2 hours advanced notice Landlord reserves, and shall at all reasonable times have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to submit the Premises to prospective purchasers, mortgagers or tenants; to post notices of nonresponsibility; and to alter, improve or repair the Premises and any portion of the Complex, all without abatement of rent; and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however, that the business of Tenant shall be interfered with to the least extent that is reasonably practical. For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall also have the right at any time to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets or other public parts of the Complex and to change the name, number or designation by which the Complex is commonly known. and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of rent hereunder. 22. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option, constitute a breach of this Lease by Tenant. If the trustee or -13- 14 receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption of the Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate assurance of future performance, as used herein, includes, but shall not be limited to: (i) assurance of source and payment of rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Lease will not breach substantially any provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant. In no event shall the leasehold estate under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord. In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period of five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustment thereto. Tenant shall have a period of ten (10) days from the date of written notice from Landlord within which to cure or commence to cure any other default under this Lease and shall not be in default as long as Tenant diligently proceeds to cure the non-monetary default. Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity: (a) The rights and remedies provided for by California Civil Code Section 1951.2, including but not limited to, recovery of the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the Premises and in the same geographic vicinity. Such two real estate brokers shall select a third licensed real estate broker, and three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided from the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. (b) The rights and remedies provided by California Civil Code which allows Landlord to continue the Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, for so long as Landlord does not terminate Tenant's right to possession; acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. -14- 15 (c) The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. (d) The right and power, as attorney-in-fact for Tenant, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant and to sell such property and apply such proceeds therefrom pursuant to applicable California law. Landlord, as attorney-in-fact for Tenant, may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the term of this Lease) and at such rent and such other terms as Landlord in its sole discretion may deem advisable, with the right to make alteration and repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness other than rent due hereunder, the cost of such subletting, including, but not limited to, reasonable attorneys' fees, and any real estate commissions actually paid, and the cost of such alterations and repairs incurred by Landlord and the amount, if any, by which the rent hereunder for the period of such subletting (to the extent such period does not exceed the term hereof, exceeds the amount to be paid as rent for the Premises for such period or (ii) at the option of Landlord, rents received from such subletting shall be applied first to payment of indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third to payment of rent due to unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same becomes due hereunder. If Tenant has been credited with any rent to be received by such subletting under option (i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or if such rentals received from such subletting under option (ii) during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. For all purposes set forth in this subparagraph (d), Landlord is hereby irrevocably appointed attorney-in-fact for Tenant, with power of substitution. No taking possession of the Premises by Landlord, as attorney-in-fact for Tenant, shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time hereafter elect to terminate this Lease for such previous breach. (e) The right to have a receiver appointed for Tenant upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord as attorney-in-fact for Tenant pursuant to subparagraph (d) above. 23. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time during the term of this Lease; and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by the process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 24. DESTRUCTION In the event the Premises are destroyed in whole or in part from any cause, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction, or (b) Terminate this Lease. If Landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event -15- 16 Landlord agrees, at its expense, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction. Tenant shall be entitled to a reduction in rent while such repair is being made in the proportion that the area of the Premises rendered untenantable by such damage bears to the total area of the Premises. If Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord), then Tenant shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord's obligation to rebuild or restore shall be limited to the building and interior improvements constructed by Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant's trade fixtures, equipment, merchandise or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense provided this Lease is not cancelled according to the provisions above. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4 of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than 33 1/3% of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be injured or not. In the event the destruction of the Premises is caused by Tenant, Tenant shall pay the deductible portion of Landlord's insurance proceeds. 25. EMINENT DOMAIN If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business, Tenant's personal property, moving cost or loss of goodwill, shall be and remain the property of Tenant. If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the Premises or any portion thereof, or (ii) any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or if any such spaces so taken or conveyed in lieu of such taking and Landlord shall decide to discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then, in any of such events Landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place as of the first to occur of the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor. In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its -16- 17 business. Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. If a portion of the Premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 26. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the Complex or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. 27. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord in the land and buildings in which the leased Premises are located (whether such interest of Landlord is a fee title interest or a leasehold interest) is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee's foreclosure sale, Tenant hereby agrees to attorn to the purchaser at any such foreclosure sale and to recognize such purchaser as the Landlord under this Lease. In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the lease, this Lease shall nonetheless continue in full force and effect for the remainder of the unexpired term hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained. 28. HOLDING OVER Any holding over by Tenant after expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease Any holding over after the expiration or other termination of the term of this lease, with the consent of Landlord, shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to two hundred (150%) percent of the monthly Basic Rent required during the last month of the Lease term. 29. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten (10) days' prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's -17- 18 failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord; that there are no uncured defaults in Landlord's performance, and that not more than one month's rent has been paid in advance. 30. CONSTRUCTION CHANGES It is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises, and no such changes, or any changes in plans for any other portion of the Complex shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant. 31. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail to pay any sum of money, or other rent, required to be paid by it hereunder or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for five (5) days after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obligated to, make any such payment or perform any such other term or covenant on Tenant's part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment of performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 32. ATTORNEYS' FEES (A) In the event that Landlord should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against Tenant hereunder, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgement. (B) Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including a reasonable attorney's fee. 33. WAIVER The waiver by either party of the other party's failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of, or in any way affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. -18- 19 34. NOTICES All notices, demands, requests, advices or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advices or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the Premises: Attention: Chief Financial Officer with a copy to V.P. Legal Affairs. All notices, demands, requests, advices or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid. addressed to Landlord at its offices at 3201 Ash Street, Palo Alto, CA 94306. Each notice, request, demand, advice or designation referred to in this paragraph shall be deemed received on the date of the personal service or mailing thereof in the manner herein provided, as the case may be. 35. EXAMINATION OF LEASE Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. Landlord and Tenant mutually intend that neither shall have any binding contractual obligations to the other with respect to the matters referred to herein unless and until this instrument has been fully executed by both parties. 36. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord's obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 37. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership) each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by-laws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease, deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 38. BASIC RENT ADJUSTMENT It is understood that on each and every anniversary of the date Tenant takes possession, the Basic Rent provided for in Paragraph 4 A of the Lease shall be adjusted in accordance with the following formula based on the Consumer Price Index ("CPI") for all urban Consumers, subgroup "All Items," San Francisco-Oakland, California Metropolitan Area (1967 = 100) published by the Bureau of Labor Statistics, U.S. Department of Labor (the "Index") published nearest the date Tenant taken possession of the Premises (the "Beginning Index") and the Index which is published nearest but prior to each and every anniversary of the date on which Tenant takes possession of the Premises (the "Adjustment Index"). The "CPI" adjusted Basic Rent shall be calculated by multiplying the Basic Rent provided for in Paragraph 4 A of the Lease by a fraction, the numerator of which is the Adjustment Index and the denominator of which is the Beginning Index. In no event, however, shall the "CPI" adjusted Basic Rent -19- 20 decrease below the Basic Rent provided for in Paragraph 4A of the Lease or any subsequent adjustment thereof. If the Index is changed so that the Base Year of the Index differs from that used as of the month immediately preceding the month in which the term commences, the Index shall be convened in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the term, such other government index or other computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the Index had not been discontinued or revised. In no event shall the annual adjustment exceed 6% for any given year to year adjustment. If the CPI exceeds 6% for any given annual period, the increase for the subsequent 12 month period shall be 6%. 39. LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (i) the sole and exclusive remedy shall be against Landlord and Landlord's assets; (ii) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership); (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); (iv) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (v) no judgment shall be taken against any partner of Landlord; (vi) any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing; (vii) no writ of execution will ever be levied against the assets of any partner of Landlord; (viii) these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. (ix) The term "Landlord," as used in this section, shall mean only the owner or owners from time to time of the fee title or the tenant's interest under a ground lease of the land described in Exhibit "B," and in the event of any transfer of such title or interest, Landlord herein named (and in case of any subsequent transfers the then grantor) shall be relieved from and after the date of such transfer of all liability as respects Landlord's obligations thereafter to be performed, provided that any funds in the hands of Landlord or the then grantor at the time of such transfer in which Tenant has an interest shall be delivered to the grantee. Similarly, the obligations contained in this Lease to be performed by Landlord shall be binding on Landlord's successors and assigns only during their respective periods of ownership. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 40. BROKERS Tenant warrants that it had dealing with only the following real estate brokers or agents in connection with the negotiation of this Lease: CB Commercial Real Estate Group and Cornish & Carey and that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. 41. SIGNS No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed, printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or affix or in -20- 21 any way place a sign in, on, or about the Premises, then upon expiration or other sooner termination of this Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and repair all damage in such a manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises. This Paragraph 41 continues below. 42. FINANCIAL STATEMENTS In the event Tenant tenders to Landlord any information on the financial stability, creditworthiness or ability of the Tenant to pay the rent due and owing under the Lease, then Landlord shall be entitled to rely upon the information provided in determining whether or not to enter into this Lease Agreement with Tenant and Tenant hereby represents and warrants to Landlord the following: (i) That all documents provided by Tenant to Landlord are true and correct copies of the original; and (ii) Tenant has not withheld any information from Landlord which is material to Tenant's creditworthiness, financial condition or ability to pay the rent; and (iii) all information supplied by Tenant to Landlord is true, correct and accurate; and (iv) no part of the information supplied by Tenant to Landlord contains misleading or fraudulent statements. A default under this paragraph shall be a non curable default on behalf of Tenant and Landlord shall be entitled to pursue any right or remedy available to Landlord under the terms of this Lease or available to Landlord under the laws of the State of California. 43. HAZARDOUS MATERIALS A. As used herein, the term "Hazardous Material" shall mean any substance or material which has been determined by any state, federal or local governmental authority to be capable of posing a risk of injury to health, safety or property including all of those materials and substances designated or defined as "hazardous" or toxic by (i) the Environmental Protection Agency, the California Water Quality Control Board, the Department of Labor, the California Department of Industrial Relations, the Department of Transportation, the Department of Agriculture, the Consumer Product Safety Commission, the Department of Health and Human Services, the Food and Drug Agency or any other governmental agency now or hereafter authorized to regulate materials and substances in the environment, or by (ii) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. 9601 et seq., as amended; the Hazardous Materials Transportation Act, 49 U.S.C. 1801, et seq., as amended; the Resource Conservation and Recovery Act, 42 U.S.C. 6901, et seq., as amended; the Hazardous Waste Control Law, California Health & Safety Code 25100 et seq., as amended; Sections 66680 through 66685 of Title 22 of the California Administration Code, Division 4, Chapter 30, as amended; and in the regulations adopted and publications promulgated pursuant to said laws. B. Tenant shall not cause or permit any Hazardous Material to be improperly or illegally used, stored, discharged, released or disposed of in, from, under or about the Premises or the Complex, or any other land or improvements in the vicinity of the Premises or the Complex. Without limiting the generality of the foregoing, Tenant, at its sole cost, shall comply with all laws relating to Hazardous Materials. If the presence of Hazardous Materials on the Premises or the Complex caused or permitted by Tenant results in contamination of the Premises or the Complex or any soil in or about the Premises or the Complex, Tenant, at its expense shall promptly take all actions necessary to return the Premises or the Complex to the condition existing prior to the appearance of such Hazardous Material. The termination of this Lease shall not terminate or -21- 22 reduce the liability or obligations of Tenant under this Section, or as may be required by law, to clean up, monitor or remove any Hazardous Materials from the Premises or the Complex. Tenant shall defend, hold harmless and indemnify Landlord and its agents and employees with respect to all claims, damages and liabilities arising out of or in connection with any Hazardous Material used, stored, discharged, released or disposed of in, from, under or about the Premises or the Complex, where said Hazardous Material is or was attributable to the activities of Tenant, its agents or contractors during the Lease term and whether or not Tenant had knowledge of such Hazardous Material, including, without limitation, any cost of monitoring or removal, any reduction in the fair market value or fair rental value of the Premises or the Complex and any loss, claim or demand by any third person or entity relating to bodily injury or damage to real or personal property. Tenant shall not suffer any lien to be recorded against the Premises or the Complex as a consequence of a Hazardous Material, including any so called state, federal or local "super fund" lien related to the "clean up" of a Hazardous Material in or about the Premises, where said Hazardous Material is or was attributable to the activities of Tenant. C. In the event Hazardous Materials are discovered in or about the Premises or the Complex, and Landlord has substantial reason to believe that Tenant was responsible for the presence of the Hazardous Material, then Landlord shall have the right to appoint a consultant, at Tenant's expense, to conduct an investigation to determine whether Hazardous Materials are located in or about the Premises or the Complex and to determine the corrective measures, if any, required to remove such Hazardous Materials. Tenant, at its expense, shall comply with all recommendations of the consultant, as required by law. To the extent it is determined that Tenant was not responsible for the presence of the Hazardous Materials, then Landlord shall reimburse Tenant for any costs incurred by Landlord and paid by Tenant under the terms of this paragraph 45.C. Tenant shall immediately notify Landlord of any inquiry, test, investigation or enforcement proceeding by or against Tenant or the Premises or the Complex concerning a Hazardous Material. Tenant acknowledges that Landlord, as the owner of the Property, at its election, shall have the sole right, at Tenant's expense, to negotiate, defend, approve and appeal any action taken or order issued with regard to a Hazardous Material by an applicable governmental authority. Provided Tenant is not in default under the terms of this Lease, Tenant shall likewise have the right to participate in any negotiations, approvals or appeals of any actions taken or orders issued with regard to the Hazardous Material and Landlord shall not have the right to bind Tenant in said actions or orders. D. It shall not be unreasonable for Landlord to withhold its consent to any proposed assignment or subletting if (i) the proposed assignee's or subtenant's anticipated use of the Premises involves the storage, use or disposal of Hazardous Material; (ii) if the proposed assignee or subtenant has been required by any prior landlord, lender or governmental authority to "clean up" Hazardous Material; (iii) if the proposed assignee or subtenant is subject to investigation or enforcement order or proceeding by any governmental authority in connection with the use, disposal or storage of a Hazardous Material. E. Tenant shall surrender the Premises to Landlord, upon the expiration or earlier termination of the Lease, free of Hazardous Materials which are or were attributable to Tenant. If Tenant fails to so surrender the Premises, Tenant shall indemnify and hold Landlord harmless from all damages resulting from Tenant's failure to surrender the Premises as required by this paragraph, including, without limitation, any claims or damages in connection with the condition of the Premises including, without limitation, damages occasioned by the inability to relet the -22- 23 Premises or a reduction in the fair market and/or rental value of the Premises or the Complex by reason of the existence of any Hazardous Materials, which are or were attributable to the activities of Tenant, in or around the Premises or the Complex. Notwithstanding any provision to the contrary in this Lease, if any action is required to be taken by a governmental authority to clean-up, monitor or remove any Hazardous Materials, which are or were attributable to the activities of Tenant, from the Premises or the Complex and such action is not completed prior to the expiration or earlier termination of the Lease, then at Landlord's election (i) this Lease shall be deemed renewed for a term commencing on the expiration date of this Lease and ending on the date the clean-up, monitoring or removal procedure is completed (provided, however, that the total term of this Lease shall not be longer than 34 years and 11 months); or (ii) Tenant shall be deemed to have impermissibly held over and Landlord shall be entitled to all damages directly or indirectly incurred in connection with such holding over, including without limitation damages occasioned by the inability to relet the Premises or a reduction in the fair market and/or fair rental value of the Premises or the Complex by reason of the existence of the Hazardous Material. F. Upon the Lease Commencement Date, Tenant shall provide to Landlord a complete list of all chemicals, toxic waste or Hazardous Materials employed by Tenant within the Premises. Throughout the term of the Lease, Tenant shall continue to update this list of chemicals, contaminants and Hazardous Materials. This paragraph is continued below. 44. MISCELLANEOUS AND GENERAL PROVISIONS a. Tenant shall not, without the written consent of Landlord, use the name of the building for any purpose other than as the address of the business conducted by Tenant in the Premises. b. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. c. The term "Premises" includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto. The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord. The term "Tenant" or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations, and their and each of their respective heirs, executors, administrators, successors and permitted assigns, according to the context hereof, and the provisions of this Lease shall inure to the benefit of and bind such heirs, executors, administrators, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include other genders. If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof. d. Time is of the essence of this Lease and of each and all of its provisions. e. At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to -23- 24 Tenant, any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real property of which Tenant's Premises are a part. f. This instrument along with any exhibits and attachments hereto constitutes the entire agreement between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant hereby agree that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement. g. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other. h. Tenant further agrees to execute any amendments required by a lender to enable Landlord to obtain financing, so long as Tenant's rights hereunder are not substantially affected. i. Paragraph(s) 45 through 49 are/is added hereto and are/is included as a part of this Lease. j. Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof. k. Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall in any way affect this Lease, entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the day and year first above written. LANDLORD: TENANT: CROSSROADS ASSOCIATES AND SIEBEL SYSTEMS, INC., a CLOCKTOWER ASSOCIATES California Corporation By ________________________________ By __________________________________ Title ______________________________ Title ________________________________ -24- 25 Paragraph 4.A. BASIC RENT (continued) As of the execution date of this Lease, Landlord and Tenant hereby acknowledge that it is Tenant's intention to sublease the second and third floors of the Premises. The agreed upon rentable square footage for the second and third floors (which square footage indicated for each floor includes that particular floor's proportionate share of Building common areas such as the first floor Lobby, elevators, restrooms, stairwells and exit corridors) is hereby agreed to be 13,961 rentable square feet per floor. The monthly Basic Rent for each of the second and third floors as of the commencement of the Lease is hereby agreed to be $27,223.95 per month (13,961 s.f. x $1.95). Notwithstanding anything herein to the contrary, Landlord agrees to postpone the commencement of Basic Rent on the second floor to September 1st, 1996 and on the third floor to October 15th, 1996 for the purpose of phasing in Tenant's subtenants. In the event that a subtenant occupies and commences payment of Basic Rent prior to September 1st, 1996 for the second floor and October 15, 1996 for the third floor, then Tenant's Basic Rent obligations shall commence upon the same day as the commencement of the subtenants obligations. Any credits due Tenant under this "phase-in" arrangement shall be credited against the November Basic Rent payment. Paragraph 4D. ADDITIONAL RENT (continued) Tenant hereby acknowledges that the Additional Rent estimated per paragraph 4D of the Lease has been prepared by Landlord. The actual cost incurred is directly related to the manner in which Tenant uses and occupies the Premises. Landlord's estimate is based on the following per square foot per month estimate of expenses: Management .058 Insurance .045 Taxes .119 Exterior Maintenance .015 Building Utilities Direct by Tenant Other Utilities .020 Maintenance (Bldg.) .075 Security .018 Janitorial .070 ---- Total .420
The above estimate is for calendar year 1996, and shall be adjusted per paragraph 4D of the Lease. The following squire footages are stated for reference: 1825 South Grant Street (Building I) 155,489 s.f. 1875 South Grant Street (Building II) 170,922 s.f. 1855 South Grant Street (Building III) 66,426 s.f. ------------ Total square footage 392,837 s.f.
Tenant's percentage occupancy is therefore as follows: Percent of Building = 100% Percent of Complex 66,426 divided by 392,387 = 16.9% The following shall be exclusions to any operating expenses as defined under this Lease. a) Costs incurred to provide services to other tenants which are not furnished to Tenant. b) Expenses for which the Landlord is reimbursed or indemnified either by an insured, condemnor, tenant or otherwise. c) Any Ground Lease rental expenses. 10 26 d) The cost of correcting defects in the construction of the Building or defects in the Building equipment (excluding normal maintenance.) Within 90 days after receipt of Landlord's Statement (the "Statement") setting forth Tenant' share of actual expenses of operation, management and maintenance of the Complex, Premises and Building and any other items of Additional Rent (the "Operating Expenses and Real Property Taxes"), Tenant shall have the right to audit at Landlord's local offices, at Tenant's expense, Landlord's accounts and records relating thereto. Such audit shall be conducted by a certified public accountant approved by Landlord, which approval shall not be unreasonably withheld. If such audit reveals that Landlord has overcharged Tenant, the amount overcharged shall be paid to Tenant within 30 days after the audit is concluded, together with interest thereon at the rate of 10% per annum, from the date the Statement was delivered to Tenant until payment of the overcharge is made to Tenant. In addition, if the Statement exceeds the actual Operating Expenses and Real Property Taxes which should have been charged to Tenant by more than 5%, the cost of the audit shall be paid by Landlord. Paragraph 4F. SECURITY DEPOSIT (continued) In addition to the cash security deposit as defined in paragraph 4.F., Tenant agrees to tender to Landlord, within 20 days of execution of this Lease and irrevocable standby Letter of Credit in the amount of $1,325,000. The form of the irrevocable standby Letter of Credit must be acceptable to Landlord. The Letter of Credit must provide that Landlord have the ability to cash or draw the entire amount solely upon Landlord's representing to the issuing Bank that Tenant is in uncured monetary default of the Lease. The Letter of Credit required hereunder shall remain in full force and effect until August 1, 2001. At such time after August 1st, 2001 as the value of Tenant's shareholder equity becomes $70,000,000, then Landlord hereby agrees to cancel the requirement for the additional security provided by this Letter of Credit and to return the Letter of Credit to Tenant. The expiration date of the Letter of Credit shall be the expiration date of this Lease. In the event Tenant has not provided Landlord the Letter of Credit as required, Landlord may prohibit Tenant from occupying the Premises until such time as the Letter of Credit is received by Landlord, and Tenant agrees that Tenant's Basic and Additional Rent obligations shall nevertheless commence without offset or delay even if Tenant is prohibited from occupying the Premises because of Tenant's failure to deliver the Letter of Credit. Paragraph 9. ALTERATIONS AND ADDITIONS (continued) Any alteration or addition to the Premises made by Landlord (or Landlord's contractors) shall be on a "open book" basis. Landlord shall obtain a minimum of three bids on any major cost items involved in any tenant improvements. Tenant may request Landlord bid subcontractors of Tenant's choosing, and subcontractors must be licensed to do business in the State of California. Landlord (or Landlord's contractors) shall receive a 10% fee, which 10% is based on the actual direct cost of construction. The 10% fee shall include general conditions, overhead, and profit. Paragraph 11. UTILITIES (continued) As stated above the gas and electric meters shall be placed in Tenant's own name and account and the cost of these utilities shall be paid directly by Tenant. Tenant shall have access to the Premises (and notwithstanding paragraph 11 access to all utilities) 24 hours a day, seven days a week. Landlord's standard operating times are 8am to 6pm, five days a week for a total of 50 hours per week x 52 weeks = 2600 hours per year. In the event Tenant uses 11 27 the main HVAC Systems more than 2600 hours per year, for each hour in excessive 2600 hours Tenant agrees to pay the amount of $3.33 per hour as the cost of accelerated wear and tear on the main HVAC System. This amount is calculated as follows: Replacement cost of main System and components $ 125,000 Average Life expectancy of main System and components divided by 37,500 hours Dollars per hour (A divided by B) $ 3.33 per hour
Paragraph 17. COMPLIANCE (continued) Landlord and Tenant each hereby agree that the City of San Mateo issuance of an occupancy permit for the Premises represents that as of the date of the occupancy permit the Premises and Common Areas of the Complex are in full compliance with all applicable building codes, ADA laws, and all other regulations and statutes affecting the Building. If a violation in compliance with the above referenced building codes, etc., is discovered within 180 days of the commencement of this Lease and such violation was caused by Landlord or Landlord's contractors, or agents, Landlord shall correct such violation at Landlord's sole cost and expense. Paragraph 19. ASSIGNMENT/SUBLETTING (continued) Notwithstanding anything to the contrary herein, Landlord's consent shall be deemed given for Tenant to assign or sublet to an affiliate, subsidiary, parent company or successor to the corporate business of Tenant (a "Permitted Assignee") and Tenant agrees to remain liable for the full performance of all lease obligations. Paragraph 20. SUBORDINATION AND MORTGAGES (continued) Notwithstanding anything to the contrary herein, the provisions of any mortgages or the underlying groundlease concerning the Premises shall not increase the financial obligations of Tenant hereunder or adversely affect the leasehold interest of Tenant created hereunder including Tenant's rights and Landlord's obligations. Paragraph 41. SIGNS (continued) Notwithstanding anything herein to the contrary, Landlord agrees to allow Tenant at no additional charge to place one exterior sign on the Building, which sign must be approved by Landlord, and which approval will not be unreasonably withheld. Tenant may also "silkscreen" signage on the exterior lobby entry doors. Tenant shall pay for the cost of said signage. Exhibit "E" is an example of such signage. Exhibit "E" is used for representative purposes only and is not intended to be to scale. Any exterior sign placed on the Building by Tenant must be in complete compliance with the City of San Mateo sign ordinances. Landlord has not received specific approval from the City of San Mateo to place a lighted sign on the Premises. Landlord and Landlord's architect shall use its best efforts to obtain such approval. Two lighted signs have been approved for the Complex and one lighted sign exists on each of the two high rise buildings. In the event the City of San Mateo allows only two lighted signs at the Complex, Landlord agrees to offer to the City of San Mateo to remove the west facing lighted sign on the Building at 1875 South Grant Street and use that approved signage as a trade for Tenant's Premises, or denies Landlord's trade of the lighted sign on 1875 South Grant for a sign on Tenant's Premises, an the result is Tenant does not have signage on the Premises, this shall in no way effect the obligations between Landlord and Tenant hereunder and the Lease shall remain in full force and effect without any diminution of rent or other offset against Landlord. In the event that Tenant occupies more 12 28 than 200,000 square feet in the Complex, Landlord agrees to substitute Tenant's name for the "Crossroads" west facing sign on the Building at 1875 South Grant Street. The cost of substitution shall be borne by Tenant. Notwithstanding anything herein to the contrary, Landlord hereby approves an internally illuminated sign with the "SIEBEL" logo in PMS-541 blue as shown by the drawing represented by Exhibit E-2. Paragraph 43. HAZARDOUS MATERIALS (continued) Landlord, to the best of Landlord's knowledge without a duty to inspect, has no knowledge of the presence of any hazardous materials in the Building, in the soil upon which the Building is located, or in the groundwater under the Complex. Landlord shall defend, hold harmless and indemnify Tenant with respect to all claims, damages and liabilities arising out of or in connection with any Hazardous Material used, stored, discharged, released or disposed of in, from, under or about the Premises or the Complex, where said Hazardous Material is or was not attributable to the activities of Tenant during the Lease term and whether or not Tenant had knowledge of such Hazardous Material, including, without limitation, any cost of monitoring or removal. Paragraph 45. TENANT'S OPTION TO EXPAND
Date of Floor Rentable Square Exercise Date of Floor Plan Footage of Option Availability 10 17,702 12/31/96 2/15/98 F-2 9 17,702 5/30/97 7/31/98* F-3 8 17,702 7/30/97 9/30/98 F-4 4 17,702 10/30/96 11/15/97 F-5
* Subject to existing tenant's option to extend. The ten story Building located at 1875 South Grant Street, as outlined in green on Exhibit F1, has the following full floors coming available on the dates as indicated above. Floor plans of each of the floors becoming available are shown as Exhibits F-2, 3, 4, 5. The existing tenant on the Ninth Floor has a preexisting option to extend its lease. In the even said Tenant exercises its option to extend, the Ninth Floor will not be available and is not subject to this paragraph 45. Landlord hereby grants to Tenant the Option (Subject to the Ninth floor Tenant's option to extend on the 9th floor only) to lease the 10th, 9th, 8th and 4th floors at 1875 South Grant Street. Tenant shall have the Option to lease any or all of the floors subject to this Option. For each floor for which Tenant has this Option, Tenant must exercise its Option to Lease by delivering an Exercise of Option to Landlord in writing on or before the "Date of Exercise of Option" as indicated in the above table. Each floor will become available on the date of availability as indicated. The Lease commencement date for each floor shall be 30 days after the date of availability or upon occupancy of all or a portion of the floor by Tenant's operating personnel, whichever occurs sooner. Tenant shall lease each floor in an as-is condition, with Landlord granting Tenant an improvement allowance of $77,000 per floor towards standard office improvements requested by Tenant. This $77,000 shall be adjusted by the CPI (said CPI as defined in paragraph 38) for the adjustment period beginning August 1st, 1996 to the date of availability for each particular floor represented by this option. The improvement allowance granted Tenant hereunder shall be in form of Basic Rent abatement. For example, if a particular floor leased by Tenant used $77,000 of Landlord's improvement allowance, then for the month immediately succeeding the commencement of Lease for that particular floor, the Basic Rent due and payable due under this Lease shall be reduced by the amount of allowance used. The Termination Date of Lease for each of the 13 29 floors leased under this paragraph shall be co-terminus with the Lease for the Building at 1855 South Grant Street. Each Floor leased under this paragraph 45 shall also be subject to Tenant's Option to Extend as described below. The Basic Rent for each floor leased under this paragraph 45 shall be at the same Basic Rent per square foot per month as is described in paragraph 4A of the Lease. For example, if Tenant leased the Fourth Floor with a commencement date of 12/15/97, and at that time Tenant's Basic Rent was $2.00 per square foot per month, Tenant's monthly Basic Rent would be 17,702 x $2.00 = $35,404. The Basic Rent per square foot per month will be increased at the same rate per square foot and upon the same dates and in the same manner as is provided for in paragraphs 4.A. and 38 of the Lease. Tenant's Additional Rent shall be at the same rate per square foot per month as is then applicable at the time of occupancy of the floors leased hereunder. For each floor so leased by Tenant, Tenant's parking shall be increased by 52 spaces. Any modifications to the Floors leased by Tenant under this Option shall be made in accordance with Paragraphs 8 to 9 of this Lease, with Tenant paying (subject to Landlord's $77,000 per Floor allowance as indicated above) all costs and expenses associated with any remodel. Upon the date of availability', Tenant shall be granted access to each floor leased by Tenant for the installation of telephone and other communications. Tenant's installation shall not interfere with any of Tenant's requested Improvements to be made by Landlord, and the installation by Tenant of telephone, communication, furniture, and fixtures shall not constitute actual occupancy, but only occupancy with Tenant's operating personnel prior to the 30 day period indicated above shall commence the payment of Basic and Additional Rent. Paragraph 46. SECURITY SYSTEMS Tenant shall have the right to establish its own procedures so as to maintain and protect the internal security of the Premises in accordance with Tenant's needs. Tenant shall have the right to install additional security devices for the Premises, including, without limitation, Security Card Systems for control of access to the Premises. Landlord shall have the reasonable right to review and approve these systems. Tenant acknowledges that Landlord's approval shall be subject to Tenant's agreement to repair any damage to any portion of the Premises resulting from Tenant's installation of any security system, and Tenant agrees to completely restore the Premises to the condition prior to the installation of any security system. Tenant acknowledges that this restoration potentially require replacement of doors, window mullions, door frames and the like. All restoration shall be in accordance with the terms of the Lease. Paragraphs 47. RIGHT OF FIRST OFFER. Exhibits G1 and G2 each show an additional floor: the ninth floor and eighth floor of the Building located at 1825 South Grant Street, California. These two floors are subject to this paragraph 47 whereby Landlord grants to Tenant a Right of First Offer to lease these two floors. The two floors are currently leased to VISA U.S.A. and VISA INTERNATIONAL (hereinafter referred to as VISA) with a Lease expiration date of April 30th, 2001. Provided Tenant is not in default under any terms, covenants and conditions of this Lease, commencing August 1st, 1996 and ending on the Lease Termination (as it may be extended pursuant to paragraph 48), Landlord hereby grants to Tenant the right of First Offer to Lease the Eighth and Ninth Floor of the Building at 1825 South Grant Street, San Mateo, San Mateo County, California as shown on Exhibits G1 and G2. Tenant's Right of First Offer shall be upon and subject to the following terms and conditions: a) Tenant's right to lease the two floors shall be the right to accept a proposal by Landlord to lease such space that becomes available during the time period referenced above. It is specifically agreed that Landlord shall have the right to extend 14 30 the term of Lease for VISA for any time period that Landlord and VISA may so agree. In the event that VISA's lease expires and the space becomes available Landlord shall notify Tenant in writing of the availability of the space and shall tender to Tenant the terms under which Landlord will lease the space to Tenant. The terms shall include the rent, increases in rent, the term, the size of the space, the Tenant improvement allowances, if any, and the like. Tenant shall have 10 business days within which to accept the proposal made by Landlord. b) In the event Tenant does not accept the proposal by Landlord, then Landlord agrees that it will not lease that same space to another tenant on terms that are more favorable than those proposed to Tenant without first offering the more favorable terms to Tenant and allowing Tenant three business days within which to accept the more favorable terms. c) In the event Tenant fails to accept the proposal from Landlord to lease the floors described on Exhibits G1 and G2 which become available for lease, then Landlord shall have no further obligations to Tenant with respect to these two floors. Paragraph 48. OPTIONS TO EXTEND Provided Tenant is not in default under any of the terms, covenants or conditions of this Lease, and subject to the terms and conditions set forth hereafter, Tenant is granted two options to extend this Lease for two successive five year periods. In the event Tenant does not extend the initial term of Lease for five years per this paragraph 47 then Tenant's Option to Extend for a second five year period shall be null and void. (a) Tenant shall notify Landlord in writing of Tenant's exercise of its first Option to Extend this Lease on or before August 1, 2005. Tenant shall notify Landlord in writing of Tenant's exercise of its Second Option to Extend on or before August 1, 2010. (b) The Fist Extended Term of this Lease shall commence on August 1st, 2006 and shall terminate upon July 31st, 2011. The Second Extended Term of this Lease shall commence August 1, 2011 and shall terminate July 31st, 2016. (c) The monthly Basic Rent as of the commencement date of each extended term of Lease shall be the then prevailing market rate with interim adjustments (if any) then being charged for comparable space of comparable quality in the immediate geographical area, but in no event shall the monthly Basic Rent be less than the monthly Basic Rent for the last month of the initial term of the Lease (in the case of the First Extended Term) or less than the monthly Basic Rent for the last month of the First Extended Term (in the case of the Second Extended Term). (d) The then current payment for Additional Rent described in 4D of the Lease shall continue to be adjusted according to paragraphs 4D of this Lease. (e) This option to extend can be exercised only by Sibel Systems, Inc. or any Permitted Assignee for use of the Premises by Siebel or a Permitted Assignee and may not be transferred or assigned to any other sublessee or other party, nor may this option be exercised by Siebel Systems, Inc. for the use of the Premises by any sublessee or party other than Siebel Systems, Inc. (f) The Options to Extend described herein shall apply to all the space then leased by Tenant as of the date of exercise of each option. 15 31 Paragraphs 49. INCORPORATION Tenant was incorporated under the laws of California in 1993, and it is anticipated that Tenant will reincorporate in Delaware prior to the completion of a public offering. At such time as Tenant reincorporates in Delaware, the reincorporated Delaware Corporation shall be defined as Tenant hereunder, and shall have all the rights and obligations as Tenant hereunder. 16 32 EXHIBITS LEASE AGREEMENT BETWEEN CROSSROADS ASSOCIATES AND CLOCKTOWER ASSOCIATES AND SIEBEL SYSTEMS, INC. 1. EXHIBIT A-1: Site Plan - Final, including proposed YMCA Building and proposed Building 3, of 1825 South Grant Street, Building 1 and 1875 South Grant Street, Building 2 and surrounding parking area. 2. EXHIBIT A2: Plan of Floor 1 of Crossroads Building Three, 1855 South Grant Street, San Mateo, CA. 3. EXHIBIT A3: Plan of Floor 2 of Crossroads Building Three, 1855 South Grant Street, San Mateo, CA. 4. EXHIBIT A4: Plan of Floor 3 of Crossroads Building Three, 1855 South Grant Street, San Mateo, CA. 5. EXHIBIT A5: Plan of Floor 4 of Crossroads Building Three, 1855 South Grant Street, San Mateo, CA. 6. EXHIBIT A6: Plan of Floor 5 of Crossroads Building Three, 1855 South Grant Street, San Mateo, CA. 7. EXHIBIT B: Site Plan - Final, including proposed YMCA Building and proposed Building 3, of 1825 South Grant Street, Building 1 and 1875 South Grant Street, Building 2 and surrounding parking area. 8. EXHIBIT E: Diagram of Building with Proposed "Siebel" sign (wide-angle view). 9. EXHIBIT E-2: Close-up view of "Siebel" sign on Building. 10. EXHIBIT F-1: Site Plan - final, including proposed YMCA Building and proposed Building 3, of 1825 South Grant Street, Building 1 and 1875 South Grant Street, Building 2 and surrounding parking area. 11. EXHIBIT F-2: Plan of Floor 10 of Crossroads Building Two, 1875 South Grant Street, San Mateo, CA. 12. EXHIBIT F-3: Plan of Floor 9 of Crossroads Building Two, 1875 South Grant Street, San Mateo, CA. 33 13. EXHIBIT F-4: Plan of Floor 8 of Crossroads Building Two, 1875 South Grant Street, San Mateo, CA. 14. EXHIBIT F-5: Plan of Floor 4 of Crossroads Building Two, 1875 South Grant Street, San Mateo, CA. 15. EXHIBIT G1: Plan of Floor 9 of Crossroads Building One, 1825 South Grant Street, San Mateo, CA. 16. EXHIBIT G2: Plan of Floor 8 of Crossroads Building One, 1825 South Grant Street, San Mateo, CA. 34 EXHIBIT "C" CROSSROADS III STANDARD TENANT IMPROVEMENTS AND ALLOWANCES (Based on Net Usable Area of 58,795 sq. ft.) - -------------------------------------------------------------------------------- PARTITIONING Standard Drywall Construction at 9' 0" high with a smooth painted finish. Tenant partitions to extend to the bottom face of the suspended ceiling except as otherwise required by code. as indicated DOORS 3' 0" x 9' 0" (full height)( solid core doors "natural oak" finish. as indicated. HARDWARE All door frames to be anodize bronze and hardware a "polish chrome" finish. Locksets provided at entry doors. Passage set hardware on all other doors. LIGHT FIXTURES 2 x 4 drop-in fluorescent light fixtures with white trim Parabolume chrome finish diffusers. 1 ea. per 85 SqFt. SWITCHES Double light switches mounted on interior partitions at 48" high. Color to be white. 1 ea. per 250 SqFt. ELECTRICAL (See Below) Floor 1 (10) dedicated 110V outlets ( 5) duplex outlets (20) fourplex outlets (30) data location drops J Box power in ceilings for 2 screens and (1) VCR ( 3) screens in ceilings with electrical adjustment Floors 2 & 3 ( 6) dedicated 110V outlets (20) duplex outlets (20) fourplex outlets (20) data locations Power/Data for 51 furniture cubicles, maximum 3 cubicles per circuit ( 4) core drills for power/data Floor 4 ( 2) Isolated ground outlets for telephone/Server ( 8) Dedicated 110V outlets (20) Duplex 100V (20) Fourplex outlets 110V (20) Data Locations Power/Data for 51 furniture cubicles, maximum 3 cubicles per circuit ( 4) Core drill locations for power/data Floor 5 ( 6) Dedicated 110V outlets
1 35 (25) Fourplex 110V outlets (25) Duplex outlets (25) Data Locations Power/Data for 30 furniture cubicles, maximum 3 cubicles per circuit ( 3) Core drill locations TELEPHONE OUTLETS Junction boxes, plaster rings and pull wires for telephone outlets mounted on interior partitions. Telephone and data cabling supplied by Tenant must be rated to meet Building code requirements. HVAC SYSTEM Return and supply air diffusers will be perforated drop-in grills that fit into the grid ceiling system. Color off white. Zones 1 ea. per 850 SqFt. Outlets 1 ea. per 180 SqFt. Returns 1 ea. per 275 SqFt. Landlord to provide one 24 hour HVAC System to 1 Server Room FIRE SPRINKLER Building standard semi-recessed chrome pendant heads with escutcheon. Designed for normal office use (light hazard). 1 ea. per 135 SqFt. CEILING 2 x 2 drop-in tegular acoustical tile with white fissured pattern. Ceiling grid is exposed tee bar with a white finish. All areas. CARPET 32 oz. dense plush cut pile nylon or level loop of equal value. Carpet to be direct glued for maximum durability. Color selection available. All areas. WINDOW COVERINGS 1" horizontal off white window blinds. All Exterior Windows
The scope of Landlord's tenant improvement work is indicated Exhibits A-2, A-3, A-4, A-5 & A-6, each page representing a schematic floor plan layout. Landlord and Tenant acknowledge that this is the approved layout which Landlord is to include at Landlord's sole cost and expense. Landlord agrees to install all partitioning as indicated on the floor plan together with all doors, hardware and glass sidelights as indicated. The millwork to be included at Landlord's cost is shown in yellow and includes: Floor 1 * Kitchen cabinet, upper and lower as indicated. * Long shelf with partitions in the telephone area as indicated. Floors 2, 3, 4 * Upper and lower cabinets in coffee/copy area as indicated and lower cabinets where the sink is located. 2 36 Floor 5 * Upper and lower cabinets in coffee/copy area and lower cabinets and sink unit as indicated and lower cabinets in coffee area and sink as indicated. Landlord's cabinet work will be plastic laminate with color selection be made by Tenant. * Lower cabinets adjacent to contract room. PLUMBING Landlord's plumbing (outside of finished bathrooms in the core) in one sink in the kitchen area and on floors 2, 3, 4 & 5 sink in coffee/copy area. Fifth floor, second sink outside of Board Room. GLASS Landlord will provide glass sidelights adjacent to the doors as indicated and glass adjacent to the wooden doors on the fifth floor Board Room as indicated. The glass of the fifth floor Board Room will be frameless and but must contain wire in order to obtain fire rating. Specifically excluded from Landlord's scope of work is the following, which items if installed at the request of Tenant, shall be paid for by Tenant per paragraph 3.2 of Exhibit "D". Some of these items are shown in orange on Exhibit A-2 through A-6. First Floor * Any kitchen equipment such as serving counter, freezers, dishwashing equipment, walk-in coolers, vending machines, cooktops, any special ventilation or any other items associated with the "Cafe". * The main reception desk, the visitors center desk. * Any and all audio visual equipment in the training rooms (excluding the 3 screens as described under Landlord's electrical above). * Any "whiteboards" that Tenant may choose to install. Tenant shall also pay for any and all millwork and plumbing not described as by Landlord including a separate bathroom that Tenant may wish to install in the fifth floor. * Any computer/communications wiring, electronic security systems, any custom lighting that will substitute for Landlord's standard lighting fixtures, special lock-off mechanisms in elevators. * Any special sound attenuation or other specialized construction in the training and multimedia areas or any other custom built-in furniture or millwork associated in the Board Room, the president's office or the multimedia rooms and any additional offices that Tenant may choose to install over and above those indicated on Exhibits A2 through A6 shall be installed at Tenant's sole cost and expense. * All furniture, modular partitions, furniture systems. 3 37 EXHIBIT D CONSTRUCTION OF IMPROVEMENTS It is hereby agreed: 1. PLANS AND SPECIFICATIONS. Landlord shall prepared at Landlord's sole cost in accordance with Exhibit "C" complete plans and specifications covering all tenant improvement work to be done in order to prepare the Leased Premises for occupancy. Such plans and specifications shall include the following: a. A fully dimensioned partition layout. b. An electrical plan showing all electrical, computer and telephone outlets. c. A reflected ceiling plan showing all light fixtures and light switches. d. Specifications for all materials, equipment, finishes and colors. e. Specification of any special electrical, plumbing, or HVAC requirements. f. Construction details for all cabinetry, millwork, glass installation, sound control and other special construction details as required. Landlord shall construct the tenant improvements in substantial compliance with the plans and specifications to be supplied by Tenant, which said plans and specifications shall be included with and become part of Exhibit "C". It is further agreed that in the event the tenant improvements do not conform exactly to the plans and specifications, but nevertheless the general appearance, structural integrity, tenant improvements and Tenant's use and occupancy of the leased Premises are not, in Landlord's reasonable discretion, materially or unreasonably affected by such deviation, then Tenant's obligation to pay rent shall not be affected and Tenant hereby agrees to accept the leased Premises and tenant improvements as constructed by Landlord. 2. AUTHORIZATION TO PROCEED. Tenant shall make all decisions necessary in order for Landlord to prepare working drawings, and Tenant shall make said decisions (including finish schedules) by June 7th, 1996. Landlord shall determine Tenant's share, if any, of the cost of the tenant improvements requested and shall submit a statement which sets forth Tenant's share of the cost of the requested improvements to Tenant on or before June 14th, 1996. Tenant shall authorize Landlord to proceed with construction of the tenant improvements on or before June 18th, 1996 and shall submit payment to Landlord as required by paragraph 3 below. 3. ALLOWANCES AND PAYMENT. Should the Tenant Improvements required by Tenant exceed the quantities set forth in Exhibit "C", or require the installation of any non-standard items, then Landlord and Tenant agree that said over-standard and non-standard items shall be paid for as follows: Tenant's shall pay Tenant's portion of excess Tenant Improvements (if any) as follows: 50% of July 1st, 1996, 40% on August 1st, 1996, and 10% upon completion of any punch list items. 4. COMMENCEMENT OF RENT. The commencement date of the Lease and Tenant's obligation to pay rent under the terms and conditions of the Lease shall not be delayed, affected, or changed as a result of the happening of any of the following: a) Delays in completion of tenant improvement work, if Tenant fails to deliver complete plans and specifications as required in paragraph 2 above. 38 Exhibit D Page 2 b) Delays in completion of tenant improvement work, if Tenant fails to authorize Landlord to proceed with construction as required by paragraph 2 above. c) Delays in completion of tenant improvement work, if Tenant fails to make the timely payment to Landlord for such work, as required in paragraph 3 above. d) Delays in completion of tenant improvement work, if Tenant fails to make the timely payment to Landlord for such work, as required in paragraph 3 above. e) Delays in completion of tenant improvement work, caused by work to be done by Tenant's subcontractors or delays caused by Tenant changing, amending or modifying Tenant's plans and specifications, amending or modifying Tenant's plans and specifications. f) Delays in completion of tenant improvement work experience by Landlord in the installation of Tenant's non-standard improvements. 5. PUNCH LIST. Landlord shall have a reasonable time, after completion by Landlord of the standard and non-standard tenant improvements as set forth in Exhibit "C", to complete the "punch list" items which pertain to the newly constructed tenant improvements without affecting Tenant's obligation to pay rent under the terms of the Lease to which this Exhibit is attached. 6. RESTORATION. Non-standard items shall be installed on behalf of Tenant by Landlord at Tenant's sole cost and expense. It is specifically agreed that upon expiration of the term of this Lease or upon any sooner termination, Tenant, at Tenant's sole cost and expense, shall remove such non-standard items as may be required by Landlord, repair any and all damage caused by such removal and restore the Premises to a condition whereby standard administrative offices may be readily installed. Notwithstanding anything herein to the contrary, any non-standard items subject to the restoration provisions of paragraph 8, including such items in Tenant's initial build-out, will be so identified within three days of receipt of Tenant's plans. 7. ADDITIONAL OBLIGATIONS. The obligations to be performed under the terms of this Exhibit "D" are intended to be obligations in addition to those required by paragraphs 8 and 9 of the Lease to which this Exhibit is attached and it is not the intent of the parties hereto that this Exhibit "D" shall alter or supersede those paragraphs 8 and 9. 39 RULES AND REGULATIONS OF THE BUILDING 1 No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any party of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such sign, placard, advertisement, name or notice without notice to and at the expense of Tenant. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises. 2 Tenant shall not occupy or permit any portion of the Premises to be occupied for the manufacture or sale of liquor, narcotics or tobacco in any form 3 The bulletin board or directory of the Premises will be provided for the display of the number and location of Tenant, and Landlord will provide directory service to a reasonable extent for Tenant at initial occupancy. Changes thereafter shall be at Tenant's expense. 4 The sidewalks, passages, exits, entrances, elevators and stairways shall not be obstructed by Tenant or used by it for any purpose other than ingress to and egress from its Premises. The passages, exits, entrances, stairways, balconies and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of Landlord shall be prejudicial to the safety, character, reputation and interests of the Premises and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of Tenant's business unless such persons are engaged in illegal activities. Tenant, employees or invites of Tenant shall not go upon the roof of the Premises. 5 The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they are constructed and no foreign substance of any kinds whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of the rule shall be borne by Tenant who, or whose employees or invitees shall have caused. 6 Tenant shall not overload the floor of the Premises or in any way deface the Premises or any part thereof. 7 Landlord shall have the right to prescribe the weight, size and pollution of all safes and other heavy equipment brought into the Premises and also the times and manner of moving the same in and out of the Premises. Safes or other heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as is necessary to properly distribute the weight. Landlord shall not be responsible for loss of or damage to any such safe or property from any cause and all damage done to the Premises by moving or maintaining any such safe or other property shall be repaired at the expense of Tenant. 8 Tenant shall not employ any person or persons other than the Janitor of Landlord or Tenant's personnel for the purpose of cleaning the Premises unless otherwise agreed to by Landlord. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. 9 Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Premises by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals or birds with the exception of Dog Guides for the blind, be brought in or kept about the Premises. 10 11 Landlord will direct electricians as to where and how telephone and telegraph wires are to be introduced. No boring or cutting for wires will be allowed without the consent of Landlord. The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to the approval of Landlord. 40 12 Tenant upon the termination of the tenancy, shall deliver to Landlord the keys of offices, rooms and toilet rooms which have been furnished the Tenant or which Tenant shall have had made, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 13 Tenant shall see the doors of the Premises are closed and securely locked before leaving the Premises and must observe strict care and caution that all water faucets or water apparatus within the Premises are entirely shut off before Tenant or Tenant's employees leave the Premises, and that all electricity shall likewise be carefully cut off, so as to prevent waste or damage. 14 Landlord reserves the right to exclude or expel from the Premises any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the Premises. 15 The requirements of Tenant will be attended to only upon application to Landlord at 755 Page Mill Road, Palo Alto, California 94304. Employees of Landlord shall not perform any work or do anything outside of the regular duties under special instructions from Landlord. 16 17 Tenant shall not disturb, solicit, or canvass any occupant of the Premises and shall cooperate to prevent same. 18 Landlord's initials Tenant's initials EX-23.1 6 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Siebel Systems, Inc.: We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. KPMG PEAT MARWICK LLP San Jose, California June 21, 1996 -----END PRIVACY-ENHANCED MESSAGE-----