-----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, JN8HbsyG2Is52W/JMQB8dq49UhZ0Png+3tC+L+D0vx9In6Kfwspqu/kGYYsBn3rK QGsp6VrL79p9plgZM6gGwg== 0000891618-97-004919.txt : 19971216 0000891618-97-004919.hdr.sgml : 19971216 ACCESSION NUMBER: 0000891618-97-004919 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19971212 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROMUSE INC CENTRAL INDEX KEY: 0001036425 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-42177 FILM NUMBER: 97737738 BUSINESS ADDRESS: STREET 1: 139 TOWNSEND STREET STREET 2: MEZZANINE FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94107 MAIL ADDRESS: STREET 1: 139 TOWNSEND STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94107 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1997. REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 MICROMUSE INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7372 94-3288385 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
139 TOWNSEND STREET SAN FRANCISCO, CALIFORNIA 94107 (415) 538-9090 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) CHRISTOPHER J. DAWES CHIEF EXECUTIVE OFFICER AND PRESIDENT MICROMUSE INC. 139 TOWNSEND STREET SAN FRANCISCO, CALIFORNIA 94107 (415) 538-9090 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: STEVEN M. SPURLOCK, ESQ. MARK A. BERTELSEN, ESQ. MARK P. LONG, ESQ. JAMES N. STRAWBRIDGE, ESQ. RICHARD R. HESP, ESQ. JON C. GONZALES, ESQ. GUNDERSON DETTMER STOUGH WILSON SONSINI GOODRICH & ROSATI VILLENEUVE FRANKLIN & HACHIGIAN, LLP PROFESSIONAL CORPORATION 155 CONSTITUTION DRIVE 650 PAGE MILL ROAD MENLO PARK, CALIFORNIA 94025 PALO ALTO, CALIFORNIA 94304 (650) 321-2400 (650) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE ================================================================================================================== PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------ Common Stock, $0.01 par value................................. $31,050,000 $9,160 ==================================================================================================================
(1) Includes shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. SUBJECT TO COMPLETION, DATED , 1998 LOGO - -------------------------------------------------------------------------------- COMMON STOCK SHARES - -------------------------------------------------------------------------------- Of the shares (the "Shares") of Common Stock, par value $0.01 per share ("Common Stock"), of Micromuse Inc. (the "Company") offered hereby (the "Offering"), shares are being offered by the Company and shares are being offered by certain stockholders of the Company (the "Selling Stockholders"). The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Stockholders. See "Principal and Selling Stockholders" and "Underwriting." Prior to this Offering, there has been no public market for the Common Stock. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied to have the Common Stock approved for listing on the Nasdaq National Market under the symbol "MUSE." FOR INFORMATION CONCERNING CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 5. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDER(2) Per Share $ $ $ $ Total(3) $ $ $ $
(1) See "Underwriting" for information relating to indemnification and compensation of the Underwriters and other matters. (2) Before deducting expenses of the Offering of approximately $ , all of which are payable by the Company. (3) The Company and certain of the Selling Stockholders have granted to the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to additional shares of Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Stockholders will be increased to $ , $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock offered hereby are offered, subject to prior sale, by the Underwriters on a firm commitment basis when, and as if delivered and accepted by them, and subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. Delivery of shares of Common Stock offered hereby to the Underwriters is expected to be made in New York, New York, on or about , 1998. DEUTSCHE MORGAN GRENFELL NATIONSBANC MONTGOMERY SECURITIES SALOMON SMITH BARNEY The date of this Prospectus is , 1998. 3 [PHOTOGRAPH FOR INSIDE COVER TO BE INSERTED HERE] Except as otherwise noted, all information in this Prospectus, including share and per share information, (i) assumes no exercise of the Underwriters' over-allotment option, (ii) assumes the exercise of a warrant to purchase 1,500,000 shares of Series A Convertible Preferred Stock at an exercise price of $2.00 per share and (iii) except in the Consolidated Financial Statements and Notes thereto, excludes 120,000 shares of Common Stock held as treasury stock and reflects the conversion of all outstanding shares of Preferred Stock of the Company into an aggregate of 5,988,336 shares of Common Stock and the filing of a Restated Certificate of Incorporation upon the closing of the Offering. See "Description of Capital Stock" and "Underwriting." CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS OR OTHERWISE. SUCH ACTIVITIES, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. THE COMPANY Micromuse develops, markets and supports a family of scalable, highly configurable, rapidly deployable software solutions that enable Service Level Management -- the effective monitoring and management of multiple elements underlying an Information Technology infrastructure, including network devices, computing systems and applications, and the mapping of these elements to the business services they impact. The Company's Netcool product suite collects, normalizes and consolidates high volumes of event information from heterogeneous network management environments into an active database which de-duplicates and correlates the resulting data in real time, and then rapidly distributes graphical views of the information to operators and administrators responsible for monitoring service levels. Netcool's unique architecture allows for the rapid, programmerless association of devices and specific attributes of those devices to the business services they impact. This readily enables administrators to create and modify their service views during systems operations to monitor particular business services, rapidly identify which users are affected by which network faults, pinpoint sources of network problems, automate operator responses, facilitate problem resolution and report on the results. The Company markets and distributes to customers through its own sales force, OEMs, value added resellers and systems integrators. The Company has distribution agreements with Bay Networks, Cisco Systems, Ericsson, N.E.T., and Vanstar. As of September 30, 1997, the Company had over 90 customers operating in and serving a variety of industries. Customers include America Online, British Telecommunications, Cable and Wireless, Cellular One, First Data Resources, Genuity, GE Information Services, GTE Internetworking, Merrill Lynch, MindSpring, Morgan Stanley, Netcom, Pacific Bell, PSINet, Siemens, and WorldCom/MFS/UUNet. THE OFFERING Common Stock offered................................ shares (including shares by the Company and shares by the Selling Stockholders) Common Stock to be outstanding after the Offering... shares(1) Use of proceeds..................................... For working capital and other general corporate purposes. Proposed Nasdaq National Market symbol.............. MUSE
SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
YEAR ENDED SEPTEMBER 30, ----------------------------- 1995 1996 1997 ------ ------ ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.......................................................................... $1,446 $4,515 $ 9,292 Loss from continuing operations................................................... (945) (805) (8,933) Income (loss) from discontinued operations, net of taxes.......................... 711 569 (104) Gain on disposal of discontinued operations, net of taxes......................... -- -- 1,161 Net loss.......................................................................... (234) (236) (7,876) Accretion on redeemable convertible preferred stock............................... -- -- (755) Net loss applicable to holders of common stock.................................... (234) (236) (8,631) Pro forma net loss from continuing operations per share........................... $ (0.83) Pro forma loss from discontinued operations per share............................. $ (0.01) Pro forma gain on disposal of discontinued operations per share................... $ 0.11 Pro forma loss per share.......................................................... $ (0.80) Shares used in per share calculation(1)........................................... 10,817
AT SEPTEMBER 30, 1997 -------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.......................................................... $13,741 $ Working capital.................................................................... 13,181 Total assets....................................................................... 22,740 Redeemable convertible preferred stock............................................. 22,865 Total stockholders' equity (deficit)............................................... (7,234)
- --------------- (1) Based on the number of shares outstanding as of September 30, 1997. Excludes 1,312,086 shares of Common Stock issuable upon exercise of outstanding options as of September 30, 1997 with a weighted average exercise price of $2.38 and as of September 30, 1997, 100,000 shares of Common Stock reserved for issuance under the Company's stock plans. See "Management -- 1997 Stock Option/Stock Issuance Plan," "-- 1997 Employee Stock Purchase Plan" and Note 6 of Notes to Consolidated Financial Statements. (2) Adjusted to reflect the sale of shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, and the application of the net proceeds therefrom. See "Capitalization" and "Use of Proceeds." 3 5 THE COMPANY Micromuse develops, markets and supports a family of scalable, highly configurable, rapidly deployable software solutions that enable Service Level Management ("SLM") -- the effective monitoring and management of multiple elements underlying an Information Technology ("IT") infrastructure, including network devices, computing systems and applications, and the mapping of these elements to the business services they impact. The Company's Netcool product suite collects, normalizes and consolidates high volumes of event information from heterogeneous network management environments into an active database which de-duplicates and correlates the resulting data in real time, and then rapidly distributes graphical views of the information to operators and administrators responsible for monitoring service levels. Netcool's unique architecture allows for the rapid, programmerless association of devices and specific attributes of those devices to the business services they impact. This readily enables administrators to create and modify their service views during systems operations to monitor particular business services, rapidly identify which users are affected by which network faults, pinpoint sources of network problems, automate operator responses, facilitate problem resolution and report on the results. IT has become increasingly mission critical for businesses as vital communications, control and information services depend on reliable IT performance. Effective, adaptable management of IT infrastructure is particularly important for organizations in the business of providing network services, such as telecommunications carriers and Internet Service Providers ("ISPs"). With SLM, network service providers can both manage their large internal networks and offer additional network services to corporations that require ongoing service guarantees, as set forth in their Service Level Agreements ("SLAs"). The market for these services, known as Managed Network Services or Network Operations Outsourcing, has grown rapidly as corporations outsource the management and operation of their LANs and WANs to service providers, and was estimated to be approximately $5 billion in 1996, and projected to grow to approximately $11 billion in 2001, according to International Data Corp ("IDC"). In the enterprise, SLM permits IT staffs to guarantee network availability and performance, predict problems and maintain SLA-defined service levels for mission critical services such as credit card verification and electronic commerce. Traditional solutions typically have been unable to deliver SLM cost effectively. To capitalize on this opportunity, the Company's products have been specifically designed to deliver SLM through ease of use and the efficient management of complex, evolving and mission critical networks. The Company believes that Netcool products provide customers a rapid return on investment by offering: (i) cost-effective solutions with shorter implementation times and a high level of configurability; (ii) efficient solutions that leverage customers' existing network management products and services; and (iii) scalable solutions that enable both the expansion and enhancement of current services as well as the rapid deployment of new services to end-users. The Company's initial target market has been organizations with large, technically complex and heterogeneous networks, the majority of whom have been in the telecommunications, ISP and investment banking markets. The Company markets and distributes to customers through its own sales force, OEMs, value added resellers and systems integrators. The Company has distribution agreements with Bay Networks, Cisco Systems, Ericsson, N.E.T., and Vanstar. As of September 30, 1997, the Company had over 90 customers operating in and serving a variety of industries. Customers include America Online, British Telecommunications, Cable and Wireless, Cellular One, First Data Resources, Genuity, GE Information Services, GTE Internetworking, Merrill Lynch, MindSpring, Morgan Stanley, Netcom, Pacific Bell, PSINet, Siemens, and WorldCom/MFS/UUNet. Micromuse plc was incorporated in England in 1989 and in March 1997 became a subsidiary of Micromuse Inc., a Delaware corporation formed in connection with a corporate reorganization and relocation of the corporate headquarters to San Francisco, California (the "Reorganization"). As used herein, the term "Micromuse" or the "Company" refers to Micromuse Inc., Micromuse plc, and their other subsidiaries, unless the context otherwise requires or unless otherwise expressly stated. The Company's principal executive offices are located at 139 Townsend Street, San Francisco, California 94107, and its telephone number at that address is (415) 538-9090. 4 6 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. The following factors, in addition to the other information contained in this Prospectus, should be considered carefully in evaluating the Company and its business before purchasing shares of Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" as well as those discussed elsewhere in this Prospectus. LIMITED OPERATING HISTORY AS A SOFTWARE COMPANY; ANTICIPATED CONTINUING LOSSES; UNCERTAINTY OF FUTURE OPERATING RESULTS. Although the Company began offering services for the network and systems integration market in 1989, the Company first shipped its internally developed software product, Netcool/OMNIbus, for the Service Level Management ("SLM") market in January 1995. Accordingly, the Company has only a limited operating history as a developer and provider of SLM software upon which an evaluation of its business and prospects can be based. Since inception, the Company's software business has incurred significant losses that were partially offset by profits from the Company's systems integration business, which was divested in the fourth quarter of fiscal 1997. The Company does not expect to achieve profitability for the next several quarters, and there can be no assurance that it will be profitable thereafter, or that the Company will sustain any such profitability if achieved. The limited operating history of the Company makes the prediction of future results of operations difficult if not impossible, and the Company and its prospects must be considered in light of the risks, costs and difficulties frequently encountered by emerging companies, particularly companies in the competitive software industry. Although the Company has achieved recent revenue growth, there can be no assurance that the Company can generate the substantial additional revenue growth on a quarterly or annual basis necessary for the Company to become profitable, or that any revenue growth that is achieved can be sustained. In addition, the Company has increased, and plans to increase further, its operating expenses in order to develop new distribution channels, increase its sales and marketing efforts, implement and improve its operational, financial and management information systems, broaden its technical services and customer support capabilities, fund higher levels of research and development and expand its administrative resources in anticipation of future growth. To the extent that increases in such expenses are not subsequently followed by increased revenues, the Company's business, operating results and financial condition would be materially adversely affected. In addition, in view of recent revenue growth, the rapidly evolving nature of its business and markets and its limited operating history in its current market, the Company believes that period-to-period comparisons of financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. As of September 30, 1997, the Company had accumulated net losses of $9.2 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY. The Company's quarterly operating results have fluctuated significantly in the past, and will likely continue to fluctuate in the future, as a result of a number of factors, many of which are outside the Company's control. These factors include changes in the demand for the Company's software products and services; the size and timing of specific sales; the timing of new hires; the level of product and price competition that the Company encounters; changes in the mix of, and lack of demand from, distribution channels through which products are sold; the length of sales cycles; spending patterns and budgetary resources of its customers on network management software solutions; the success of the Company's new customer generation activities; introductions or enhancements of products, or delays in the introductions or enhancements of products, by the Company or its competitors; market acceptance of new products; the Company's ability to anticipate and effectively adapt to developing markets and rapidly changing technologies; the mix of products and services sold; 5 7 changes in the Company's sales incentives; changes in the renewal rate of support agreements; the mix of international and domestic revenue; product life cycles; software defects and other product quality problems; the Company's ability to attract, retain and motivate qualified personnel; changes in the mix of sales to new and existing customers; the extent of industry consolidation; expansion of the Company's international operations; and general domestic and international economic and political conditions. The timing of large individual sales has been difficult for the Company to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those anticipated by the Company. There can be no assurance that the loss or deferral of one or more significant sales would not have a material adverse effect on the Company's quarterly operating results. In addition, the Company's business has experienced and may continue to experience significant seasonality. Historically, a disproportionate amount of the Company's annual revenues have been generated by sales of its products during the Company's fourth fiscal quarter. There can be no assurance that this trend will not continue. The Company's software products are typically shipped when orders are received, and consequently, license backlog at the beginning of any quarter has typically represented only a small portion of that quarter's expected revenue. In addition, the Company typically realizes a significant portion of license revenue in the last month of a quarter, frequently in the last weeks or even days of a quarter. As a result, license revenue in any quarter is difficult to forecast because it is substantially dependent on orders booked and shipped in that quarter. Moreover, the Company's sales cycles, from initial evaluation to delivery of software, vary substantially from customer to customer. In addition, the Company's expense levels are based in part on its expectations of future orders and sales, which, given the Company's limited operating history, are extremely difficult to predict. A substantial portion of the Company's operating expenses are related to personnel, facilities, and sales and marketing programs. The level of spending for such expenses cannot be adjusted quickly and is, therefore, relatively fixed in the short term. If revenue falls below the Company's expectations in a particular quarter, the Company's operating results could be materially adversely affected. See "-- Lengthy Sales Cycle." Based on all of the foregoing, the Company believes that future revenue, expenses and operating results are likely to vary significantly from quarter-to-quarter. As a result, quarter-to-quarter comparisons of operating results are not necessarily meaningful or indicative of future performance. Furthermore, the Company believes it is possible that in some future quarter the Company's operating results will be below the expectations of public market analysts or investors. In such event, or in the event that adverse conditions prevail, or are perceived to prevail, with respect to the Company's business or generally, the market price of the Company's Common Stock would likely be materially adversely affected. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." MANAGEMENT OF GROWTH; NEED TO IMPROVE FINANCIAL SYSTEMS AND CONTROLS. The Company has recently experienced a period of rapid revenue and customer growth and a substantial expansion in the number of its personnel, and in the scope and the geographic area of its operations. The Company has grown from 57 employees on March 31, 1997 to 135 employees on September 30, 1997 and currently plans to continue to recruit more staff. This growth has resulted in new and increased responsibilities for management personnel and has placed and continues to place a significant strain upon the Company's management, operating and financial systems and resources. Moreover, members of the Company's management team, including, without limitation, the Senior Vice President, Finance and Senior Vice President, Sales, have been in their current positions with the Company for a limited period of time. To accommodate recent growth and to compete effectively and manage future growth, if any, the Company will be required to continue to implement and improve a variety of operational, financial and management information systems, procedures and controls on a timely basis and to expand, train, motivate and manage its work force. In particular, the Company will be required to improve its accounting and financial reporting systems, which currently require substantial management effort, and to suc- 6 8 cessfully manage an increasing number of relationships with customers, suppliers and employees. These demands will require the addition of new management personnel, and the Company currently is in the process of recruiting individuals to fill important management positions such as Chief Financial Officer, controller for U.S. operations, human resources director and managers for research and development projects. Further, as a consequence of the Reorganization, the Company will need to implement a U.S.-based financial and accounting system. The Company's future success will depend to a significant extent on the recruitment and retention of these key personnel, particularly a Chief Financial Officer, controller for U.S. operations, the implementation and improvement of operational, financial and management systems and the ability of its current and future executive officers to operate effectively, both independently and as a group. There can be no assurance that the Company will be able to execute on a timely and cost-effective basis all that is necessary to successfully manage any growth, and any failure to do so could have a material adverse effect on the Company's business, operating results or financial condition. See "Business -- Employees." NEED TO EXPAND AND IMPROVE PRODUCTIVITY OF SALES FORCE, TECHNICAL SERVICES AND CUSTOMER SUPPORT ORGANIZATION. To increase market penetration, the Company has increased the size of its sales organization from 14 to 31 individuals during the nine months ended September 30, 1997. Based on the Company's experience, it takes at least six months, if not longer, for a salesperson to become fully productive. There can be no assurance that the Company will be successful in increasing the productivity of its sales personnel, and the failure to do so could have a material adverse effect on the Company's business, financial condition or results of operations. As a result of the recent expansion of the installed base of Netcool/OMNIbus, the demands on the Company's technical services and customer support resources have grown rapidly. The Company believes that a high level of technical services, training and customer support is essential to maintaining its competitive position. The Company will be required to significantly expand its technical services and customer support organizations if it is to achieve significant additional revenue growth. In addition, the Company has recently redeployed personnel from its discontinued systems integration business and other newly hired personnel and the Company expects that increased resources will be spent on training and transitioning such personnel. Competition for additional qualified technical personnel to perform the required functions is intense. There can be no assurance that the Company's technical services and customer support resources will be sufficient to manage any future growth in the Company's business, and any failure of the Company to expand its technical services and customer support organizations commensurate with any expansion of the installed base of Netcool/OMNIbus would have a material adverse effect on the Company's business, operating results and financial condition. See "Business -- Technical Services" and "-- Customer Support." NEED TO EXPAND DISTRIBUTION CHANNELS; DEPENDENCE ON THIRD-PARTY RELATIONSHIPS. A key element of the Company's business strategy is to develop relationships with leading network equipment and telecommunications providers and to expand the third-party channel of distribution. The Company is currently investing, and plans to continue to invest, significant resources to develop these relationships and channels of distribution, which could adversely affect the Company's ability to generate profits. Third-party distributors accounted for approximately 11% of the Company's total revenues in fiscal 1997. There can be no assurance that the Company will be able to attract additional distributors that will be able to market the Company's products effectively. Many of the Company's agreements with third-party distributors are nonexclusive, and many of the companies with which the Company has agreements also have similar agreements with the Company's competitors or potential competitors. The Company's third-party distributors have significantly greater sales and marketing resources than the Company, and there can be no assurance that their sales and marketing efforts will not conflict with the Company's direct sales efforts. In addition, although sales through third-party distributors result in reduced sales and marketing expense with respect to such sales, the Company sells its products to third-party distributors at reduced prices, resulting in lower gross margins on such third-party sales. The 7 9 Company believes that its success in penetrating markets for its SLM applications depends in large part on its ability to maintain its current distribution relationships, in particular, those with Cisco Systems ("Cisco") and Bay Networks ("Bay"), to cultivate additional distribution relationships and to cultivate alternative distribution relationships if distribution channels change. There can be no assurance that network equipment and telecommunications providers and distributors will not discontinue their relationships with the Company, compete directly with the Company or form additional competing arrangements with the Company's competitors or that the Company will be able to expand its distribution relationships beyond what currently exists. See "Business -- Sales and Marketing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." EMERGING SERVICE LEVEL MANAGEMENT MARKET; DEPENDENCE ON TELECOMMUNICATIONS CARRIERS AND OTHER SERVICE PROVIDERS; DEMAND FOR SLM PRODUCTS. The market for the Company's products is in an early stage of development. Although the rapid expansion and increasing complexity of computer networks in recent years and the resulting emergence of SLAs has increased the demand for SLM software products, the awareness of and the need for such products is a recent development. Because the market for these products is only beginning to develop, it is difficult to assess the size of this market, the appropriate features and prices for products to address this market, the optimal distribution strategy and the competitive environment that will develop. Failure of the SLM market to grow at anticipated rates or failure of the Company to properly assess and address the demands from such market would have a material adverse effect on the Company's business, operating results and financial condition. Historically, a significant portion of the Company's revenues have been derived from sales to investment banks. However, as a result of the Company's strategy to focus on telecommunications carriers, ISPs and other providers of managed networks, the Company expects sales to investment banks to comprise a decreasing portion of total revenues over the long-term. A majority of the Company's revenues to date have been derived from the sale of its Netcool family of products to telecommunications carriers, such as ISPs, that deliver advanced communications services to their customers. In addition, these providers are the central focus of the Company's sales strategy. There can be no assurance that telecommunications carriers and other service providers will be able to market their communications services successfully, that SLM will gain widespread market acceptance or that telecommunications carriers and other service providers will use the Company's products in the deployment of their services. Delays in the introduction of advanced services, such as network management outsourcing, failure of such services to gain widespread market acceptance or the decision of telecommunications carriers and other service providers not to use the Company's products in the deployment of these services would have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance the Company will be able to penetrate these markets further. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Customers." COMPETITION. The Company's products are designed for use in the evolving SLM and enterprise network management markets. Competition in these markets is intense and is characterized by rapidly changing technologies, new and evolving industry standards, frequent new product introductions and rapid changes in customer requirements. The Company's current and prospective competitors offer a variety of solutions to address the SLM and enterprise network management markets and generally fall within the following five categories: (i) customer's internal design and development organizations that produce SLM and network management applications for their particular needs, in some cases using multiple instances of products from hardware and software vendors such as Sun Microsystems, Inc. ("Sun"), Hewlett-Packard Company ("HP") and Cabletron Systems, Inc. ("Cabletron"); (ii) vendors of network and systems management frameworks including Computer Associates International, Inc. ("CA") and International Business Machines Corporation ("IBM"); (iii) vendors of network and systems management applications including HP, Sun and IBM; (iv) providers of specific market applications including Boole & Babbage, Inc. ("Boole & Babbage") and several smaller software vendors; and (v) systems 8 10 integrators which primarily provide programming services to develop customer specific applications including TCSI Corporation (formerly Teknekron Communications Systems, Inc.) and Objective Systems Integrators, Inc. ("OSI"). In the future, as the Company enters new markets, the Company expects that such markets will have additional, market-specific competitors. In addition, because there are relatively low barriers to entry in the software market, the Company expects additional competition from other established and emerging companies. Increased competition is likely to result in price reductions and may result in reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results or financial condition. Many of the Company's existing and potential customers continuously evaluate whether to design and develop their own network operations support and management applications or purchase them from outside vendors. Sometimes these customers internally design and develop their own software solutions for their particular needs and therefore may be reluctant to purchase products offered by independent vendors such as the Company. As a result, the Company must continuously educate existing and prospective customers as to the advantages of the Company's products versus internally developed network operations support and management applications. Many of the Company's current and potential competitors have longer operating histories and have significantly greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base, than the Company. As a result, they may be able to devote greater resources to the development, promotion, sale and support of their products or to respond more quickly to new or emerging technologies and changes in customer requirements than the Company. Existing competitors could also increase their market share by bundling products having management functionality offered by the Company's products with their current applications. Moreover, the Company's current and potential competitors may increase their share of the SLM market by strategic alliances and/or the acquisition of competing companies. In addition, network operating system vendors could introduce new or upgrade and extend existing operating systems or environments that include management functionality offered by the Company's products, which could render the Company's products obsolete and unmarketable. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results or financial condition. See "Business -- Competition." LENGTHY SALES CYCLE. The Company's software is generally used for division- or enterprise-wide, business-critical purposes and involves significant capital commitments by customers. Potential customers generally commit significant resources to an evaluation of available enterprise software and require the Company to expend substantial time, effort and money educating them about the value of the Company's solutions. Sales of the Company's software products often require an extensive sales effort throughout a customer's organization because decisions to license such software generally involve the evaluation of the software by a significant number of customer personnel in various functional and geographic areas, each often having specific and conflicting requirements. A variety of factors, including actions by competitors and other factors over which the Company has little or no control, may cause potential customers to favor a particular supplier or to delay or forego a purchase. As a result of these and other factors, the sales cycle for the Company's products is long, typically about three to six months. As a result of the length of the sales cycle for its software products, the Company's ability to forecast the timing and amount of specific sales is limited, and the delay or failure to complete one or more large license transactions could have a material adverse effect on the Company's business, operating results or financial condition and cause the Company's operating results to vary significantly from quarter to quarter. See "-- Variability of Quarterly Operating Results; Seasonality," and "Business -- Sales and Marketing." 9 11 DEPENDENCE ON KEY PERSONNEL. The Company's success is substantially dependent upon a limited number of key management, sales, product development, technical services and customer support personnel. The loss of the services of one or more of such key employees could have a material adverse effect on the Company's business, financial condition or results of operations. In particular, the Company would be materially adversely affected if it were to lose the services of Christopher J. Dawes, Chief Executive Officer of the Company, who has provided significant leadership and direction to the Company since its inception. The Company does not have employment contracts with any of its key personnel. In addition, the Company's success will be dependent upon its continuing ability to attract, train and retain additional highly qualified management, sales, product development, technical services and customer support personnel. The Company has at times and continues to experience difficulty in recruiting qualified personnel. Because the Company faces intense competition in its recruiting activities, there can be no assurance that the Company will be able to attract and/or retain qualified personnel, including without limitation a Chief Financial Officer and a controller for U.S. operations. Failure to attract and retain the necessary qualified personnel on a timely basis could have a material adverse effect on the Company's business, operating results or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PRODUCT CONCENTRATION. Other than discontinued operations, all of the Company's revenues have been derived from licenses for its Netcool family of products and related maintenance, training and consulting services. The Company currently expects that Netcool/OMNIbus-related revenues will continue to account for all or substantially all of the Company's revenues for the remainder of fiscal 1998 and for the foreseeable future thereafter. Therefore, the Company's future operating results, particularly in the near term, are significantly dependent upon the continued market acceptance of Netcool/OMNIbus, improvements to Netcool/OMNIbus and new and enhanced Netcool/OMNIbus applications. There can be no assurance that Netcool/OMNIbus will continue to achieve market acceptance or that the Company will be successful in developing, introducing or marketing improvements to Netcool/OMNIbus or new or enhanced Netcool/OMNIbus applications. The life cycles of Netcool/OMNIbus, including the Netcool/OMNIbus applications, are difficult to estimate due in large part to the recent emergence of many of the Company's markets, the effect of future product enhancements and competition. A decline in the demand for Netcool/OMNIbus as a result of competition, technological change or other factors would have a material adverse effect on the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Products and Technology" and "-- Research and Development." SALES CONCENTRATION. To date, a significant portion of the Company's revenues in any particular period has been attributable to a limited number of customers. In fiscal 1997, entities affiliated with WorldCom and entities affiliated with British Telecommunications, accounted for 19% and 11%, respectively, of the Company's total revenues. In addition, entities affiliated with British Telecommunications accounted for 53% and 14% of the Company's total revenues for fiscal 1995 and fiscal 1996, respectively. The Company expects that it will continue to be dependent upon a limited number of customers for a significant portion of its revenues in future periods. As a result of this concentration of sales, the Company's business, operating results or financial condition could be materially adversely affected by the failure of anticipated orders from significant customers to materialize or by deferrals or cancellations of orders by significant customers. In addition, there can be no assurance that revenue from customers that have accounted for significant revenues in past periods, individually or as a group, will continue, or if continued will reach or exceed historical levels in any future period. The terms of the Company's agreements with its customers typically contain a one-time license fee and a prepayment of one year of maintenance fees. The maintenance agreement is renewable annually at the option of the customer and there are no minimum payment obligations or obligations to license additional software. Therefore, there can be no assurance that any of the Company's current customers will 10 12 generate significant revenues in future periods. For example, pre-existing customers may be part of, or become part of, large organizations which standardize using a competitive product. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Sales and Marketing." NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; NEED TO MANAGE PRODUCT TRANSITIONS; DEPENDENCE ON THIRD-PARTY SOFTWARE PLATFORMS. The market for the Company's products is characterized by rapidly changing technologies, evolving industry standards, changing regulatory environments, frequent new product introductions and rapid changes in customer requirements. The introduction or announcement of products by the Company or its competitors embodying new technologies and the emergence of new industry standards and practices can render existing products obsolete and unmarketable. As a result, the life cycles of the Company's products are difficult to estimate. The Company's future success will depend on its ability to enhance its existing products and to develop and introduce, on a timely and cost-effective basis, new products and product features that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. Historically, the Company has used its close working relationship with large customers to define its product development direction. There can be no assurance that the Company will be successful in developing and marketing new products or product features that respond to technological change or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products and features, or that its new products or product features will adequately meet the requirements of the marketplace and achieve market acceptance. In particular, the widespread adoption of the Telecommunications Management Network ("TMN") architecture for managing telecommunications networks would force the Company to adapt its products to such standard, and there can be no assurance that this could be done on a timely or cost-effective basis, if at all. In addition, to the extent that any product upgrade or enhancement requires extensive installation and configuration, current customers may postpone or forgo the purchase of new versions of the Company's products. If the Company is unable, for technological or other reasons, to develop and introduce enhancements of existing products or new products in a timely manner, the Company's business, operating results and financial condition will be materially adversely affected. In addition, there can be no assurance that the introduction or announcement of new product offerings by the Company or one or more of its competitors will not cause customers to defer licensing of existing Company products. Any such deferment of purchases could have a material adverse effect on the Company's business, operating results or financial condition. The Company's products are designed to operate on a variety of hardware and software platforms employed by its customers in their networks. The Company must continually modify and enhance its products to keep pace with changes in hardware and software platforms and database technology. As a result, uncertainties related to the timing and nature of new product announcements, introductions or modifications by systems vendors, particularly Sun, IBM, HP, Cabletron and Cisco and by vendors of relational database software, particularly Oracle Corporation ("Oracle") and Sybase, Inc. ("Sybase"), could materially adversely impact the Company's business, operating results or financial condition. For example, the Company is currently endeavoring to modify certain of its products to operate with the Microsoft Windows NT operating system. The failure of the Company's products to operate effectively across the various existing and evolving versions of hardware and software platforms and database environments employed by customers could have a material adverse effect on the Company's business, operating results or financial condition. See "Business -- Research and Development." RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY. Software products as internally complex as Netcool/OMNIbus frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Despite extensive product testing by the Company, the Company has in the past released versions of Netcool/OMNIbus with defects and has 11 13 discovered software errors in certain of its products after their introduction. For example, version 3.0 of Netcool/OMNIbus, released in 1995, had a number of material defects. The Company has in the past had to use a significant portion of its technical personnel's time to address such defects without additional revenue commensurate with such services. To the extent future product defects require the allocation of a significant portion of the Company's technical personnel's time, the Company business, operating results or financial condition could be materially adversely affected. See " -- Need to Expand and Improve Productivity of Sales Force, Technical Services and Customer Support Organization." Additionally, there can be no assurance that, despite testing by the Company and by current and potential customers, defects and errors will not be found in new versions or enhancements after commencement of commercial shipments, resulting in loss of revenues, delay in market acceptance or damage to the Company's reputation, any of which could have a material adverse effect upon the Company's business, operating results or financial condition. Since the Company's products are used by its customers to monitor and address network problems and avoid failures of the network to support critical business functions, design defects, software errors, misuse of the Company's products, incorrect data from network elements or other potential problems within or out of the Company's control that may arise from the use of the Company's products could result in financial or other damages to the Company's customers. Such customers could seek damages from the Company for any such losses, which, if successful, could have a material adverse effect on the Company's business, operating results or financial condition. Furthermore, the Company does not maintain product liability insurance. Although the Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential claims as well as any liabilities arising from such claims, such provisions may not effectively protect the Company against such claims and the liability and costs associated therewith. Accordingly, any such claim could have a material adverse effect upon the Company's business, results of operations or financial condition. See "Business -- Products and Technology" and "-- Research and Development." DEPENDENCE UPON PROPRIETARY TECHNOLOGY; RISK OF THIRD-PARTY CLAIMS OF INFRINGEMENT. The Company's success and ability to compete is dependent in significant part upon its proprietary software technology. The Company relies on a combination of trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect its proprietary rights. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the steps taken by the Company to protect its proprietary technology will prevent misappropriation of such technology, and such protections may not preclude competitors from developing products with functionality or features similar to the Company's products. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. While the Company believes that its products and trademarks do not infringe upon the proprietary rights of third parties, there can be no assurance that the Company will not receive future communications from third parties asserting that the Company's products infringe, or may infringe, the proprietary rights of third parties. The Company expects that software product developers will be increasingly subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, cause product shipment delays or require the Company to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. In the event of a successful claim of product infringement against the Company and failure or inability of the Company to develop non-infringing technology or license the infringed or similar technology, the Company's business, operating results or financial condition could be 12 14 materially adversely affected. See "Business -- Intellectual Property and Other Proprietary Rights." RISKS ASSOCIATED WITH INTERNATIONAL LICENSING AND OPERATIONS. License, maintenance and service revenue outside of the United States accounted for 76%, 55% and 48% of the Company's total revenue in fiscal 1995, 1996 and 1997, respectively. The Company expects that international license, maintenance and consulting revenue will continue to account for a significant portion of its total revenue in future periods. The Company intends to enter into additional international markets and to continue to expand its operations outside of the United States by expanding its direct sale force and pursuing additional strategic relationships. Such expansion will require significant management attention and expenditure of significant financial resources and could adversely affect the Company's ability to generate profits. To the extent that the Company is unable to establish additional foreign operations in a timely manner, the Company's growth, if any, in international sales will be limited, and the Company's business, operating results or financial condition could be materially adversely affected. The Company maintains a significant portion of its operations, including the bulk of its software development operations, in the United Kingdom. The Company's international operations and revenue involve a number of inherent risks, including longer receivables collection periods and greater difficulty in accounts receivable collection, difficulty in staffing and managing foreign operations, an even lengthier sales cycle than with domestic customers, the impact of possible recessionary environments in economies outside the United States, unexpected changes in regulatory requirements, including a slowdown in the rate of privatization of telecommunications service providers, reduced protection for intellectual property rights in some countries and tariffs and other trade barriers. There can be no assurance that the Company will be able to sustain or increase revenue derived from international licensing and service or that the foregoing factors will not have a material adverse effect on the Company's future international license, service and other revenue, and, consequently, on the Company's business, operating results or financial condition. The Company pays the expenses of its international operations in local currencies and does not currently engage in hedging transactions with respect to such obligations. Currency exchange fluctuations in countries in which the Company licenses its products or conducts operations could have a material adverse effect on the Company's business, operating results or financial condition by resulting in pricing levels that are not competitive or expense levels that adversely impact profitability. In such event, gains and losses on the conversion to United States dollars of accounts receivable and accounts payable arising from international operations may contribute to fluctuations in the Company's operating results. In addition, sales in Europe and certain other parts of the world typically are adversely affected in the quarter ending September 30 as many customers reduce their business activities during the summer months. If the Company's international sales become a greater component of total revenue, these seasonal factors may have a more pronounced effect on the Company's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Customers" and "-- Sales and Marketing." RISKS ASSOCIATED WITH THIRD-PARTY LICENSES. The Company relies on certain software that it licenses from third parties, including software that is integrated with internally developed software and used in the Company's products to perform key functions. There can be no assurance that these third-party software licenses will continue to be available to the Company on commercially reasonable terms or at all. Although the Company believes that alternative software is available from other third-party suppliers, the loss of or inability to maintain any of these software licenses or the inability of the third parties to enhance in a timely and cost-effective manner their products in response to changing customer needs, industry standards or technological developments could result in delays or reductions in product shipments by the Company until equivalent software could be developed internally or identified, licensed and integrated, which would have a material adverse effect on the Company's business, operating results and financial condition. See "Business -- Intellectual Property and Other Proprietary Rights." 13 15 YEAR 2000 COMPLIANCE. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. In the Company's standard license agreements, the Company warrants to licensees that its software routines and programs are Year 2000 compliant (i.e. that they accurately process date-related data within any century and between two or more centuries). Although the Company believes its software products are Year 2000 compliant, there can be no assurance that the Company's software products contain all necessary software routines and programs necessary for the accurate calculation, display, storage and manipulation of data involving dates. If any of the Company's licensees experience Year 2000 problems, such licensee could assert claims for damages against the Company. Any such litigation could result in substantial costs and diversion of the Company's resources even if ultimately decided in favor of the Company. In addition, many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company. The occurrence of any of the foregoing could have a material adverse effect on the Company's business, operating results or financial condition. NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE. Prior to this Offering, there has been no public market for the Common Stock of the Company, and there can be no assurance that an active trading market will develop or be sustained after this Offering. The initial public offering price will be determined through negotiations among the Company, the Selling Stockholders and the representatives of the Underwriters based on several factors and may not be indicative of the market price of the Common Stock after this Offering. The market price of the shares of Common Stock is likely to be highly volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's operating results, announcements of technological innovations, new products or new contracts by the Company or its competitors, developments with respect to copyrights or proprietary rights, adoption of new accounting standards affecting the software industry, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market price for the common stocks of technology companies. These types of broad market fluctuations may adversely affect the market price of the Company's Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been initiated against such company. Such litigation could result in substantial costs and a diversion of management's attention and resources which could have a material adverse effect upon the Company's business, operating results or financial condition. See "Underwriting." GENERAL ECONOMIC AND MARKET CONDITIONS. Segments of the software industry have experienced significant economic downturns characterized by decreased product demand, price erosion, work slowdowns and layoffs. The Company's operations may in the future experience substantial fluctuations from period to period as a consequence of general economic conditions affecting the timing of orders from major customers and other factors affecting capital spending. Although the Company has a diverse client base, it has targeted certain vertical markets. Therefore, any economic downturns in general or in the targeted vertical segments in particular would have a material adverse effect on the Company's business, operating results and financial condition. CONTROL BY EXISTING STOCKHOLDERS. Immediately after the closing of this Offering, % of the outstanding Common Stock will be held by the directors and executive officers of the Company, together with certain entities affiliated with them, assuming no exercise of outstanding 14 16 stock options. As a result, these stockholders, if acting together, would be able to control substantially all matters requiring approval by the stockholders of the Company, including the election of all directors and approval of significant corporate transactions. See "Management -- Executive Officers and Directors," "Certain Transactions" and "Principal and Selling Stockholders." ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW. Certain provisions of the Company's Restated Certificate of Incorporation and Bylaws and certain provisions of Delaware law could delay or make difficult a merger, tender offer or proxy contest involving the Company. The authorized but unissued capital stock of the Company includes 5,000,000 shares of preferred stock. The Board of Directors is authorized to provide for the issuance of such preferred stock in one or more series and to fix the designations, preferences, powers and relative, participating, optional or other rights and restrictions thereof. Accordingly, the Company may in the future issue a series of preferred stock, without further stockholder approval, that will have preference over the Common Stock with respect to the payment of dividends and upon liquidation, dissolution or winding-up of the Company. See "Description of Capital Stock -- Preferred Stock." Further, Section 203 of the General Corporation Law of the State of Delaware (as amended from time to time, the "DGCL"), which is applicable to the Company, prohibits certain business combinations with certain stockholders for a period of three years after they acquire 15% or more of the outstanding voting stock of a corporation. In addition, the Restated Certificate of Incorporation provides that, upon the closing of this Offering, the Board of Directors will be divided into two classes of directors, with each class serving a staggered two-year term. The classification of the Board of Directors has the effect of generally requiring at least two annual stockholder meetings, instead of one, to replace a majority of the Board members. Any of the foregoing could adversely affect holders of the Common Stock or discourage or make difficult any attempt to obtain control of the Company. See "Description of Capital Stock -- Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law." SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of Common Stock (including shares issued upon the exercise of outstanding options) in the public market after this Offering could materially adversely affect the market price of the Common Stock. Such sales also might make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that the Company deems appropriate. See "Management -- Employee Benefit Plans," "Shares Eligible for Future Sale" and "Underwriting." DILUTION; POTENTIAL NEED FOR ADDITIONAL FINANCING; DIVIDEND POLICY. Investors participating in this offering will incur immediate and substantial dilution of pro forma net tangible book value per share of $ from the initial public offering price. To the extent outstanding options to purchase the Company's Common Stock are exercised, there will be further dilution. There can be no assurance that the Company will not require additional funds to support its working capital requirements or for other purposes, in which case the Company may seek to raise such additional funds through public or private equity financing or from other sources. There can be no assurance that such additional financing will be available or that, if available, such financing will be obtained on terms favorable to the Company and would not result in additional dilution to the Company's stockholders. The Company did not pay or declare any cash dividends on the Common Stock or other securities during fiscal 1996 or fiscal 1997 and does not anticipate paying cash dividends in the foreseeable future. See "Dilution" and "Dividend Policy." 15 17 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock to be sold by the Company in this Offering are estimated to be $ million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholders. The principal purposes of the Offering are to increase the Company's equity capital, to create a public market for the Common Stock, to facilitate future access by the Company to public equity markets, to provide liquidity for certain of the Company's existing stockholders and to provide increased visibility of the Company in a marketplace where many of its competitors are publicly held companies. The Company intends to use the proceeds of the Offering for working capital and general corporate purposes. The Company may also use a portion of the net proceeds for possible acquisition of businesses, products and technologies that are complementary to those of the Company. Although the Company has not identified any specific businesses, products or technologies that it may acquire, nor are there any current agreements or negotiations with respect to any such transactions, the Company from time to time evaluates such opportunities. Pending such uses, the Company plans to invest the net proceeds in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY The Company did not declare or pay any cash dividends on its capital stock during fiscal 1996 or fiscal 1997 and does not expect to do so in the foreseeable future. The Company anticipates that all future earnings, if any, generated from operations will be retained by the Company to develop and expand its business. Any future determination with respect to the payment of dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's operating results, financial condition and capital requirements, the terms of then-existing indebtedness, general business conditions and such other factors as the Board of Directors deems relevant. 16 18 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1997: (i) on an actual basis; (ii) on a pro forma basis to reflect (A) the filing of a Restated Certificate of Incorporation upon the closing of this Offering, (B) the exercise of a certain warrant resulting in the issuance of 1,500,000 shares of the Company's Series A Preferred Stock at an exercise price of $2.00 per share, and (C) the conversion of all outstanding shares of the Company's Preferred Stock into Common Stock; and (iii) on such pro forma basis as adjusted to reflect the offering of shares of Common Stock offered by the Company hereby and the receipt of the estimated net proceeds therefrom at an assumed initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
SEPTEMBER 30, 1997(1) ------------------------------------ ACTUAL PRO FORMA(2) ------- ------------ PRO FORMA AS ADJUSTED ----------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) Redeemable convertible preferred stock $0.01 par value; 5,988,336 shares authorized, actual; 5,000,000 shares authorized, pro forma and pro forma as adjusted; 4,488,336 shares issued and outstanding, actual; none, pro forma and pro forma as adjusted, respectively..... $22,865 $ -- $ -- Stockholders' equity (deficit): Common stock, $0.01 par value, 18,500,000 shares authorized, 6,705,853 shares issued and outstanding, actual; 60,000,000 shares authorized, pro forma and pro forma as adjusted; 12,694,189 shares issued and outstanding, pro forma; 60,000,000 shares authorized, shares issued and outstanding, pro forma as adjusted.............................................. 366 426 Additional paid-in capital.............................. 2,091 27,896 Treasury stock, at cost: 120,000 shares................. (300) (300) (300) Deferred compensation................................... (215) (215) (215) Currency translation adjustment......................... 52 52 52 Accumulated deficit..................................... (9,228) (9,228) (9,228) ------- ------- ------- Total stockholders' equity (deficit).................. (7,234) 18,631 ------- ------- ------- Total capitalization............................... $15,631 $ 18,631 $ ======= ======= =======
- --------------- (1) Based on the number of shares outstanding as of September 30, 1997. Excludes 1,312,086 shares of Common Stock issuable upon exercise of outstanding options as of September 30, 1997 with a weighted average exercise price of $2.38 per share; and as of September 30, 1997, 100,000 shares reserved for issuance under the Company's stock plans. See "Management -- 1997 Stock Option/Stock Issuance Plan," "-- 1997 Employee Stock Purchase Plan" and Note 6 of Notes to Consolidated Financial Statements. (2) Reflects the issuance of 1,500,000 shares of Series A Preferred Stock issuable upon exercise of a warrant issued to Sierra Ventures V, L.P. at an exercise price of $2.00 per share (the "Series A Warrant"). See Note 6 of Notes to Consolidated Financial Statements. 17 19 DILUTION As of September 30, 1997, the Company had a net pro forma net tangible book value of $18,631,000, or approximately $1.47 per share of Common Stock after giving pro forma effect to the exercise of a certain warrant for 1,500,000 shares of Series A Preferred Stock and the conversion of all outstanding preferred stock to common stock. "Net tangible book value" represents the amount of tangible assets less total liabilities. Without taking into account any other changes in the net tangible book value after September 30, 1997, other than to give effect to the receipt by the Company of the net proceeds from the sale of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and after deducting underwriting discounts and estimated offering expenses, the pro forma net tangible book value of the Company as of September 30, 1997 would have been $ , or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to purchasers of Common Stock in the Offering. Investors participating in this Offering will incur immediate, substantial dilution. This is illustrated in the following table: Assumed initial public offering price per share................... $ Pro forma net tangible book value per share as of September 30, 1997......................................................... $ 1.47 Increase per share attributable to new investors................ Adjusted pro forma net tangible book value per share as of September 30, 1997.............................................. ------ ------ Dilution per share to new investors............................... $ ======
The following table summarizes on the pro forma basis described above as of September 30, 1997, the difference between the existing stockholders and the purchasers of shares in the Offering (at an assumed initial public offering price of $ per share) with respect to the number of shares of Common Stock purchased from the Company, the total cash consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders......... % $ % $2.22 New investors................. ---------- ----- ----------- ----- ----- Total............... 100.0% $ 100.0% ========== ===== =========== =====
The foregoing computations are based on the number of shares outstanding as of September 30, 1997 and exclude 1,312,086 shares of Common Stock issuable upon exercise of outstanding options as of September 30, 1997 with a weighted average exercise price of $2.38 per share, and as of September 30, 1997, an additional 100,000 shares reserved for issuance under the Company's stock plans. To the extent outstanding options are exercised, there will be further dilution to new investors. See "Management -- 1997 Stock Option/Stock Issuance Plan," "-- 1997 Employee Stock Purchase Plan" and Note 6 of Notes to Consolidated Financial Statements. - --------------- (1) Sales by Selling Stockholders in this Offering will reduce the number of shares held by existing stockholders to , or approximately % ( shares or approximately % if the Underwriters' over-allotment option is exercised in full), and will increase the number of shares held by new investors to , or approximately % ( shares or approximately % if the Underwriters' over-allotment option is exercised in full) of the total number of shares of Common Stock to be outstanding after this Offering. 18 20 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data at September 30, 1996 and 1997 and for each of the years in the three-year period ended September 30, 1997 are derived from consolidated financial statements of the Company that have been audited by KPMG Peat Marwick LLP ("KPMG"), independent certified public accountants, and are included elsewhere in this Prospectus. The consolidated balance sheet data at September 30, 1995 is derived from the audited consolidated financial statements of the Company that are not included herein. The consolidated statements of operations data for the years ended September 30, 1993 and 1994 and the consolidated balance sheet data at September 30, 1993 and 1994 are derived from unaudited consolidated financial statements and are not included herein. The historical results are not necessarily indicative of the operating results to be expected in the future. The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
YEAR ENDED SEPTEMBER 30, ------------------------------------------------- 1993 1994 1995 1996 1997 ----- ----- ------ ------ ------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License.................................................. $ -- $ 111 $1,077 $3,374 $ 6,968 Maintenance and services................................. -- 3 369 1,141 2,324 ----- ----- ------ ------ ------- Total revenues.................................... -- 114 1,446 4,515 9,292 ----- ----- ------ ------ ------- Cost of revenues: License.................................................. -- 61 163 311 523 Maintenance and services................................. -- -- 102 384 1,042 ----- ----- ------ ------ ------- Total cost of revenues............................ -- 61 265 695 1,565 ----- ----- ------ ------ ------- Gross profit............................................... -- 53 1,181 3,820 7,727 Operating expenses: Sales and marketing...................................... -- 30 728 1,768 8,970 Research and development ................................ 224 318 708 1,582 2,042 General and administrative............................... 78 236 584 996 4,244 ----- ----- ------ ------ ------- Total operating expenses.......................... 302 584 2,020 4,346 15,256 ----- ----- ------ ------ ------- Loss from operations....................................... (302) (531) (839) (526) (7,529) Interest expense........................................... (17) (68) (106) (179) (1,404) ----- ----- ------ ------ ------- Loss before income taxes................................... (319) (599) (945) (705) (8,933) Income taxes .............................................. -- -- -- 100 -- ----- ----- ------ ------ ------- Loss from continuing operations............................ (319) (599) (945) (805) (8,933) Discontinued Operations: Income (loss) from discontinued operations, net of taxes.................................................. 633 335 711 569 (104) Gain on disposal of discontinued operations, net of taxes(1)............................................... -- -- -- -- 1,161 ----- ----- ------ ------ ------- Net income (loss).......................................... $ 314 $(264) $ (234) $ (236) $(7,876) Accretion on redeemable convertible preferred stock........ -- -- -- -- (755) ----- ----- ------ ------ ------- Net income (loss) applicable to holders of common stock.... $ 314 $(264) $ (234) $ (236) $(8,631) ===== ===== ====== ====== ======= Per Share of Common Stock: Pro forma loss from continuing operations................ $ (0.83) Pro forma loss from discontinued operations.............. $ (0.01) Pro forma gain on disposal of discontinued operations.... $ 0.11 Pro forma net loss applicable to holders of common stock........................................... $ (0.80) Shares used in per share calculation(2).................... 10,817 Cash dividends per share................................... $ -- $ -- $ 0.01 $ -- $ -- ===== ===== ====== ====== =======
SEPTEMBER 30, ---------------------------------------------------- 1993 1994 1995 1996 1997 ------ ----- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................... $ -- $ 18 $ 12 $ 594 $13,741 Working capital (deficiency)............................ (259) (453) (383) (847) 13,181 Total assets............................................ 4,375 4,492 5,767 9,107 22,740 Redeemable convertible preferred stock.................. -- -- -- -- 22,865 Total stockholders' equity (deficit) ................... 351 93 (203) (222) (7,234)
- --------------- (1) See Note 2 of Notes to Consolidated Financial Statements. (2) See Note 1 of Notes to Consolidated Financial Statements. 19 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed below and in "Risk Factors" and "Business" as well as those discussed elsewhere in this Prospectus. OVERVIEW Micromuse develops, markets and supports a family of scalable, highly configurable, rapidly deployable software solutions that enable Service Level Management. The Company was founded in 1989 in London, England and historically operated a systems integration business, reselling computer hardware and software products and providing consulting services principally for managing networks. Leveraging its expertise in network management and using funds generated from the systems integration business, the Company developed its Netcool/OMNIbus software, which the Company began shipping in January 1995. In March 1997, the Company was reorganized in Delaware and relocated its headquarters from London to San Francisco. In connection with the Reorganization, the Company raised $4.9 million through the sale of equity securities and arranged a $3.0 million credit facility. In September 1997, the Company raised an additional $15.9 million through the sale of equity securities and sold its systems integration business for approximately $400,000, net of fees. With the proceeds from the financings and the sale of the systems integration business, the Company expanded operations and substantially increased development, sales and administrative headcount for the Netcool business throughout the second half of fiscal 1997, growing from 57 employees on March 31, 1997 to 135 employees on September 30, 1997. To accommodate recent growth and to compete effectively and manage future growth, if any, the Company will be required to continue to implement and improve operational, financial and management information systems, procedures and controls on a timely basis and to expand, train, motivate and manage its work force. See "Risk Factors -- Management of Growth; Need to Improve Financial Systems and Controls" and "-- Need to Expand and Improve Productivity of Sales Force, Technical Services and Customer Support Organization." The Company's consolidated financial statements have been restated to reflect the discontinuation of the operations associated with the Company's systems integration business. In connection with such sale, the Company was indemnified by the purchaser for work-in-process under existing contracts, warranty claims under completed contracts and maintenance agreements, but retained liability for completed contracts. See Note 2 of Notes to Consolidated Financial Statements for information concerning this restatement. Other than discontinued operations, all of the Company's revenues have been derived from licenses for its Netcool family of products and related maintenance, training and consulting services. The Company currently expects that Netcool-related revenues will continue to account for all or substantially all of the Company's revenues for the remainder of fiscal 1998 and for the foreseeable future thereafter. As a result, the Company's future operating results are dependent upon continued market acceptance of its Netcool products and enhancements thereto. See "Risk Factors -- Emerging Service Level Management Market; Dependence on Telecommunications Carriers and Other Service Providers; Demand for SLM Products," and "-- Product Concentration." As of September 30, 1997, Micromuse had licensed its Netcool products to more than 90 customers worldwide. Micromuse licenses its software through its direct sales force, OEMs and value added resellers. License revenues from OEMs and resellers accounted for approximately 20 22 12%, 8% and 11% of the Company's total license revenues for fiscal 1995, 1996 and 1997 respectively. The Company's ability to achieve significant additional revenue growth in the future will depend in large part on its success in recruiting and training sufficient sales and technical services personnel, maintaining its current distribution relationships and establishing additional relationships with OEMs, resellers and systems integrators. For a discussion of the risks associated with expanding distribution, see "Risk Factors -- Need to Expand Distribution Channels; Dependence on Third-Party Relationships." To date, the Company has sold its products primarily to telecommunications carriers, ISPs and investment banks and has generated a significant portion of its revenues from sources outside the U.S. Although the Company's revenues have increased in each of the last four quarters, after giving effect to the restatement of the financial statements due to the sale of the systems integration business, the Company incurred net losses in each quarter from inception through the quarter ended September 30, 1997, and had an accumulated deficit of $9.2 million as of September 30, 1997. In addition, the Company expects to incur net losses for the next several quarters. The Company's limited operating history as a software developer, rapid expansion of operations and headcount and the emerging nature of the market for SLM software make the prediction of future operating results difficult. Accordingly, although the Company has recently experienced revenue growth, such growth should not be considered indicative of future revenue growth, if any, or of future operating results. There can be no assurance that the Company's business strategies will be successful or that the Company will be able to achieve profitability on a quarterly or annual basis. See "Risk Factors -- Limited Operating History as a Software Company; Anticipated Continuing Losses; Uncertainty of Future Operating Results" and "-- Variability of Quarterly Operating Results; Seasonality" and "-- Management of Growth; Need to Improve Financial Systems and Controls." 21 23 RESULTS OF OPERATIONS The following table sets forth certain items in the Company's consolidated statement of operations as a percentage of total revenues, except as indicated, for the periods indicated:
YEAR ENDED SEPTEMBER 30, ------------------------- AS A PERCENTAGE OF TOTAL REVENUES 1995 1996 1997 ----- ----- ----- Revenues: License..................................................... 74.5% 74.7% 75.0% Maintenance and services.................................... 25.5 25.3 25.0 ----- ----- ----- Total revenues........................................... 100.0 100.0 100.0 Cost of revenues: License..................................................... 11.3 6.9 5.6 Maintenance and services.................................... 7.0 8.5 11.2 ----- ----- ----- Total cost of revenues................................... 18.3 15.4 16.8 ----- ----- ----- Gross profit............................................. 81.7 84.6 83.2 ----- ----- ----- Operating expenses: Sales and marketing......................................... 50.3 39.2 96.5 Research and development.................................... 49.0 35.0 22.0 General and administrative.................................. 40.4 22.1 45.7 ----- ----- ----- Total operating expenses................................. 139.7 96.3 164.2 ----- ----- ----- Loss from operations..................................... (58.0) (11.7) (81.0) Interest expense.............................................. (7.4) (3.9) (15.1) Loss before income taxes................................. (65.4) (15.6) (96.1) Income taxes.................................................. -- 2.2 -- ----- ----- ----- Loss from continuing operations.......................... (65.4) (17.8) (96.1) Income (loss) from discontinued operations, net of taxes...... 49.2 12.6 (1.1) Gain on disposal of discontinued operations, net of taxes..... -- -- 12.4 Net loss................................................. (16.2) (5.2) (84.8) ===== ===== ===== Accretion on redeemable convertible preferred stock........... -- -- (8.1) ----- ----- ----- Net loss applicable to holders of common stock................ (16.2) (5.2) (92.9) ----- ----- ----- AS A PERCENTAGE OF RELATED REVENUES Cost of license revenues...................................... 15.1 9.2 7.5 Cost of maintenance and services revenues..................... 27.6 33.7 44.8
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 Revenues. The Company's total revenues are derived from license revenues for its Netcool family of products as well as associated maintenance, consulting and training services revenues. License revenues are recognized upon the acceptance of a purchase order and shipment of the software if no significant obligations on the part of the Company remain and collection of the resulting receivable is probable. Allowances for credit losses and for estimated future returns are provided for upon shipment. Returns to date have not been material. Maintenance revenues from ongoing customer support and product upgrades are deferred and recognized ratably over the term of the maintenance agreement, typically 12 months. Payments for maintenance fees (on initial order or on renewal) are generally made in advance and are nonrefundable. Revenues for consulting and training services are recognized as the services are performed. See Note 1 of Notes to Consolidated Financial Statements. The Company has recognized revenue, for all periods presented, in accordance with American Institute of Certified Public Accountants Statement of Position 91-1 entitled Software Revenue Recognition. 22 24 The Company's total revenues increased from $1.4 million in fiscal 1995 to $4.5 million in fiscal 1996 and to $9.3 million in fiscal 1997. License revenues increased from $1.1 million in fiscal 1995 to $3.4 million in fiscal 1996 and to $7.0 million in fiscal 1997, primarily as a result of an increase in the number of product licenses sold and in average transaction size, reflecting increased acceptance of Netcool/OMNIbus and expansion of the Company's direct sales organization. Maintenance and services revenues increased from $369,000 in fiscal 1995 to $1.1 million in fiscal 1996 and to $2.3 million in fiscal 1997, as a result of providing maintenance and services to a larger installed base in each successive year. The percentage of the Company's total revenues attributable to software licenses has remained relatively constant at 75% in each of fiscal 1995, 1996 and 1997. Maintenance and services revenues accounted for 25% of total revenues in each of fiscal 1995, 1996 and 1997. Revenues from U.S. operations grew from 24% of revenues in fiscal 1995 to 45% of revenues in fiscal 1996 and to 52% of revenues in fiscal 1997, reflecting the Company's expansion of U.S. operations. International revenues include all revenues other than from the United States. For a discussion of risks associated with international sales see "Risk Factors -- Risks Associated with International Licensing and Operations." See Note 8 of Notes to Consolidated Financial Statements. To date, the Company's revenues have resulted primarily from sales to the telecommunications industry, ISPs, and to investment banks. License revenues from telecommunications industry customers and ISPs, accounted for 74%, 34% and 58% of the Company's total license revenues in fiscal 1995, 1996 and 1997 respectively. License revenues from investment banks accounted for 14%, 29% and 15% of total license revenues in fiscal 1995, 1996 and 1997, respectively. In fiscal 1997, entities affiliated with WorldCom and entities affiliated with British Telecommunications, accounted for 19% and 11%, respectively, of the Company's total revenue. In addition, entities affiliated with British Telecommunications accounted for 53% and 14% of the Company's total revenues in fiscal 1995 and fiscal 1996, respectively. See "Risk Factors -- Sales Concentration" and Note 9 of Notes to Consolidated Financial Statements. Cost of Revenues. Cost of license revenues consists primarily of technology license fees paid to third party software vendors and the costs of software media, packaging and production. Cost of license revenues decreased as a percentage of license revenues from 15% in fiscal 1995 to 9% in fiscal 1996, and to 8% in fiscal 1997, as a result of economies of scale. Cost of maintenance and services revenues consists primarily of personnel-related costs incurred in providing maintenance, consulting and training to customers. Cost of maintenance and services revenues increased as a percentage of maintenance and services revenues from 28% in fiscal 1995 to 34% in fiscal 1996, and to 45% in fiscal 1997, principally due to increased personnel, facilities and travel costs associated with growth in the customer support and technical services organizations. The Company expects that cost of maintenance and services will continue to increase in dollar amounts in future periods as the Company continues to hire additional customer support and technical services personnel and expands its maintenance consulting and training activities. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by personnel engaged in sales, technical presales and marketing activities as well as the costs of trade shows, public relations, marketing materials and other marketing activities. Sales and marketing expenses increased from $728,000 in fiscal 1995 to $1.8 million in fiscal 1996 and to $9.0 million in fiscal 1997. The increases in both fiscal 1996 and fiscal 1997 reflected the hiring of additional personnel in connection with the building of the Company's sales force. In addition, sales and marketing expenses increased in fiscal 1997 due to increased technical staff and marketing personnel, compensation expense related to bonus shares issued, increased facilities costs and costs associated with expanded marketing activities. Sales and marketing expenses represented 50%, 39% and 96% of total revenues in fiscal 1995, 1996 23 25 and 1997, respectively. The Company expects that sales and marketing expenses will continue to increase in absolute dollar amounts in future periods as the Company continues to hire additional sales, technical services and marketing personnel, to increase marketing activities and to build its indirect sales channel. See Note 6 of Notes to Consolidated Financial Statements. Research and Development Expenses. Research and development expenses consist primarily of salaries and other personnel-related expenses and costs of computer systems and software development tools. Research and development expenses increased 123% from $708,000 in fiscal 1995 to $1.6 million in fiscal 1996 and 29% to $2.0 million in fiscal 1997. The increase in research and development expenses in each year was primarily attributable to increased personnel, additional facilities and an increase in the computer systems and software development tools required by the additional personnel. In addition to expanding its research and development facility in London, the Company established a research and development team focused on application development in its New York office in fiscal 1997. Research and development expenses represented 49%, 35% and 22% of total revenue in fiscal 1995, 1996 and 1997, respectively. The decrease as a percentage of total revenues was due to growth in the Company's total revenues. The Company anticipates that it will commit increasing resources to research and development in future periods to enhance and extend its core technology and product line and, as a result, expects that research and development expenses will increase in absolute dollars in future periods. To date, all research and development costs have been expensed as incurred. See Note 1 of Notes to Consolidated Financial Statements. General and Administrative Expenses. General and administrative expenses consist primarily of personnel costs for administration, finance, information systems and human resources, as well as professional fees. General and administrative expenses increased from $584,000 in fiscal 1995 to $996,000 in fiscal 1996 and to $4.2 million in fiscal 1997. These increases in each year were primarily due to increased staffing, facilities costs and associated expenses necessary to manage and support the Company's increased scale of operations and, in fiscal 1997, due to compensation expense related to bonus shares issued. General and administrative expenses as a percentage of total revenues were 40% in fiscal 1995, 22% in fiscal 1996 and 46% in fiscal 1997. The decrease of general and administrative expenses as a percentage of total revenues from fiscal 1995 to 1996 was primarily attributable to growth in total revenues. The increase in general and administrative expenses as a percentage of total revenues from fiscal 1996 to fiscal 1997 was primarily attributable to personnel-related costs and to the payment of professional fees for various matters, including the Reorganization associated with the transfer of the Company's headquarters from London to San Francisco. The Company expects that its general and administrative expenses will increase in absolute dollar amounts as the Company expands its administrative staff, adds infrastructure and incurs additional costs related to the growth of its business and related to being a public company, such as expenses related to directors' and officers' insurance, investor relations programs and increased professional fees. See Note 6 of Notes to Consolidated Financial Statements. Interest Expense. The increase in interest expense from fiscal 1996 to fiscal 1997 was primarily attributable to the imputed interest relating to the issuance of a warrant to purchase shares of Series A Preferred Stock issued in connection with the provision of a line of credit to the Company. See Note 6 of Notes to Consolidated Financial Statements. Provision for Income Taxes. As of September 30, 1997, the Company had approximately $2.4 million and $1.4 million of net operating loss carryforwards for federal and state tax purposes. The federal net operating loss carryforwards expire in 2012, and the state net operating loss carryforwards expire primarily in 2002. Federal and state tax laws impose substantial restrictions on the utilization of net operating loss carryforwards in the event of an "ownership change" as defined in Section 382 of the Internal Revenue Code. The Company has not yet determined whether an ownership change occurred due to significant stock transactions in each of the reporting years disclosed. If an ownership change has occurred, utilization of the net operating loss 24 26 carryforwards could be significantly reduced. Additionally, loss carryforwards of either Micromuse Inc. or Micromuse USA Inc. cannot be utilized against future profits generated by the other company. As of September 30, 1997, the Company also had approximately $1.8 million and $200,000 of loss carryforwards in England and Australia, respectively. The Company has provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, because of uncertainty regarding its realizability. See Note 7 of Notes to Consolidated Financial Statements. Discontinued Operations. In July 1997, the Company adopted a formal plan to discontinue its Systems Integration division based in England. In September the Company sold the division for approximately $400,000 in cash, net of fees. The disposition of the division in September 1997 has been accounted for as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30 and prior period consolidated financial statements have been restated to reflect the discontinuation of the Systems Integration business. Revenue from discontinued operations was $16.6 million, $14.0 million and $15.7 million, respectively in fiscal 1995, 1996 and 1997. The income (loss) from discontinued operations of $711,000, $569,000, and ($104,000) in fiscal 1995, 1996, and 1997, respectively, represents the operation's operating income, net of taxes. The gain on disposal of discontinued operations of $1.2 million in fiscal 1997 represents the gain on disposal of the operation including net income from operations of $256,000 from the measurement date to the disposal date. See Note 2 of Notes to Consolidated Financial Statements. 25 27 QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited quarterly consolidated statement of operations data for each quarter of fiscal 1996 and 1997, as well as such data expressed as a percentage of the Company's total revenues for the periods indicated. In the opinion of management, this information has been presented on the same basis as the consolidated financial statements appearing elsewhere in this Prospectus, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the consolidated financial statements of the Company and related notes thereto appearing elsewhere in this Prospectus. The operating results for any quarter should not be considered indicative of results of any future period.
QUARTER ENDED --------------------------------------------------------------------------------------- DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1995 1996 1996 1996 1996 1997 1997 1997 -------- -------- -------- --------- -------- -------- -------- --------- (IN THOUSANDS) Revenues: License............. $ 442 $ 528 $ 684 $ 1,720 $ 802 $ 1,095 $ 2,094 $ 2,977 Maintenance and services.......... 67 234 322 518 424 616 590 694 ----- ----- ------ ------ ------ ------- ------- ------- Total revenues.... 509 762 1,006 2,238 1,226 1,711 2,684 3,671 ----- ----- ------ ------ ------ ------- ------- ------- Cost of revenues: License............. 50 75 54 132 61 108 155 199 Maintenance and services.......... 28 92 115 149 166 180 303 393 ----- ----- ------ ------ ------ ------- ------- ------- Total cost of revenues........ 78 167 169 281 227 288 458 592 ----- ----- ------ ------ ------ ------- ------- ------- Gross profit.......... 431 595 837 1,957 999 1,423 2,226 3,079 Operating expenses: Sales and marketing......... 241 294 528 705 1,004 1,951 1,714 4,301 Research and development....... 267 371 410 534 303 383 596 760 General and administrative.... 143 142 272 439 467 1,553 714 1,510 ----- ----- ------ ------ ------ ------- ------- ------- Total operating expenses........ 651 807 1,210 1,678 1,774 3,887 3,024 6,571 ----- ----- ------ ------ ------ ------- ------- ------- Income (loss) from operations.......... (220) (212) (373) 279 (775) (2,464) (798) (3,492) Interest income (expense)........... (51) (44) (53) (31) 26 (450) (464) (516) ----- ----- ------ ------ ------ ------- ------- ------- Income (loss) before income taxes........ (271) (256) (426) 248 (749) (2,914) (1,262) (4,008) Income taxes.......... -- 59 30 11 -- -- -- -- ----- ----- ------ ------ ------ ------- ------- ------- Income (loss) from continuing operations.......... (271) (315) (456) 237 (749) (2,914) (1,262) (4,008) Discontinued operations: Income (loss) from discontinued operations, net of taxes............. 211 218 197 (57) (120) 18 (2) -- Gain on disposal of discontinued operations, net of taxes............. -- -- -- -- -- -- -- 1,161 ----- ----- ------ ------ ------ ------- ------- ------- Net income (loss)..... (60) (97) (259) 180 (869) (2,896) (1,264) (2,847) Accretion on redeemable convertible preferred stock..... -- -- -- -- -- (89) (264) (402) ----- ----- ------ ------ ------ ------- ------- ------- Net income (loss) applicable to holders of common stock............... $ (60) $ (97) $ (259) $ 180 $ (869) $ (2,985) $ (1,528) $ (3,249) ===== ===== ====== ====== ====== ======= ======= =======
26 28
AS A PERCENTAGE OF TOTAL REVENUES --------------------------------------------------------------------------------------- DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1995 1996 1996 1996 1996 1997 1997 1997 -------- -------- -------- --------- -------- -------- -------- --------- Revenues: License............... 86.8% 69.3% 68.0% 76.9% 65.4% 64.0% 78.0% 81.1% Maintenance and services............ 13.2 30.7 32.0 23.1 34.6 36.0 22.0 18.9 ----- ----- ----- ----- ----- ----- ----- ----- Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- ----- ----- ----- Cost of revenues: License............... 9.8 9.8 5.4 5.9 5.0 6.3 5.8 5.4 Maintenance and services............ 5.5 12.1 11.4 6.7 13.5 10.5 11.3 10.7 ----- ----- ----- ----- ----- ----- ----- ----- Total cost of revenues.. 15.3 21.9 16.8 12.6 18.5 16.8 17.1 16.1 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit............ 84.7 78.1 83.2 87.4 81.5 83.2 82.9 83.9 Operating expenses: Sales and marketing... 47.3 38.6 52.5 31.5 81.9 114.0 63.8 117.2 Research and development......... 52.5 48.7 40.8 23.8 24.7 22.4 22.2 20.7 General and administrative...... 28.1 18.6 27.0 19.6 38.1 90.8 26.6 41.1 ----- ----- ----- ----- ----- ----- ----- ----- Total operating expenses.......... 127.9 105.9 120.3 74.9 144.7 227.2 112.6 179.0 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations............ (43.2) (27.8) (37.1) 12.5 (63.2) (144.0) (29.7) (95.1) Interest income (expense)............. (10.0) (5.8) (5.2) (1.4) 2.1 (26.3) (17.3) (14.1) ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes.......... (53.2) (33.6) (42.3) 11.1 (61.1) (170.3) (47.0) (109.2) ----- ----- ----- ----- ----- ----- ----- ----- Income taxes............ -- 7.7 3.0 0.5 -- -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) from continuing operations............ (53.2) (41.3) (45.3) 10.6 (61.1) (170.3) (47.0) (109.2) Discontinued operations: Income (loss) from discontinued operations, net of taxes............... 41.4 28.6 19.6 (2.6) (9.8) 1.0 (0.1) -- Gain on sale of discontinued operations, net of taxes............... -- -- -- -- -- -- -- 31.7 ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)....... (11.8) (12.7) (25.7) 8.0 (70.9) (169.3) (47.1) (77.5) Accretion on redeemable convertible preferred stock................. -- -- -- -- -- (5.2) (9.8) (11.0) ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss) applicable to holders of common stock....... (11.8) (12.7) (25.7) 8.0 (70.9) (174.5) (56.9) (88.5) ===== ===== ===== ===== ===== ===== ===== =====
Revenues. The Company's total revenues have increased in each quarter presented other than the quarter ended December 31, 1996. The increases have been generally due to increased acceptance of the Company's Netcool products, expansion of the Company's direct sales and technical presales organizations, increased transaction sizes and increased maintenance revenues reflecting the growth in the installed base. The decrease in total revenues reflected in the quarter ended December 31, 1996 was primarily attributable to the Company's sales incentive program then in place, which encouraged fiscal year-end sales in the preceding quarter. The Company expects such year-end-related fluctuations to be reduced in future periods due to changes in the Company's sales incentive program as well as to an anticipated increase in the percentage of revenues through indirect channels, which are less subject to year-end fluctuations. If the changes in the sales incentive program do not impact the sales process as expected or the increased sales through indirect channels do not occur, year-end fluctuations in the quarterly results may continue. 27 29 Operating Expenses. Operating expenses have generally increased in absolute dollar amounts over the quarters shown due to the Company's increased staffing in sales and marketing, product development and general and administrative functions. In the quarter ended March 31, 1997, sales and marketing expenses increased due to compensation expense related to shares bonused and an increase in the number of sales and marketing personnel. General and administrative expenses increased during the same quarter due to compensation expense related to bonus shares issued and professional fees associated with the Reorganization. In the quarter ended September 30, 1997, sales and marketing expense increased due to increased commissions on higher bookings and a significant increase in the number of sales and marketing personnel. General and administrative expenses increased in the same quarter due to increased professional fees. The Company's total operating expenses as a percentage of total revenues for the quarter ended September 30, 1996 were lower than the preceding or following periods presented as a result of the substantial increase in total revenues during the quarter primarily attributable to the Company's sales incentive program then in place, which encouraged fiscal year-end sales in the preceding quarter. The Company's operating expenses represented a higher percentage of total revenues in the quarters ended December 31, 1997, March 31, 1997, and September 30, 1997 than in the quarter ended June 30, 1997 as a result of: (i) greater growth in revenues during the quarter ended June 30, 1997; (ii) slower growth in personnel-related expenses during the quarter ended June 30, 1997; and (iii) professional fees paid related to various matters, including the Company's Reorganization, during the quarters ended December 31, 1997, March 31, 1997, and September 30, 1997. Interest Expense. Interest expense in the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 increased primarily due to the imputed interest related to the issuance of the Series A Warrant issued in connection with the provision of a line of credit to the Company and due to greater borrowings under a credit facility the Company maintained with National Westminster Bank. FACTORS AFFECTING QUARTERLY OPERATING RESULTS. The Company's quarterly operating results have fluctuated significantly in the past, and will likely continue to fluctuate in the future, as a result of a number of factors, many of which are outside the Company's control. These factors include changes in the demand for the Company's software products and services; the size and timing of specific sales; the timing of new hires; the level of product and price competition that the Company encounters; changes in the mix of, and lack of demand from, distribution channels through which products are sold; the length of sales cycles; spending patterns and budgetary resources of its customers on network management software solutions; the success of the Company's new customer generation activities; introductions or enhancements of products, or delays in the introductions or enhancements of products, by the Company or its competitors; market acceptance of new products; the Company's ability to anticipate and effectively adapt to developing markets and rapidly changing technologies; the mix of products and services sold; changes in the Company's sales incentives; changes in the renewal rate of support agreements; the mix of international and domestic revenue; product life cycles; software defects and other product quality problems; the Company's ability to attract, retain and motivate qualified personnel; changes in the mix of sales to new and existing customers; the extent of industry consolidation; expansion of the Company's international operations; and general domestic and international economic and political conditions. The timing of large individual sales has been difficult for the Company to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those anticipated by the Company. There can be no assurance that the loss or deferral of one or more significant sales would not have a material adverse effect on the Company's quarterly operating results. In addition, the Company's business has experienced and may continue to experience significant seasonality. Historically, a disproportionate amount of the Company's annual revenues have been generated by sales of its products during the Company's fiscal fourth quarter. There can be no assurance that this trend will not continue. 28 30 The Company's software products are typically shipped when orders are received, and consequently, license backlog at the beginning of any quarter has typically represented only a small portion of that quarter's expected revenue. In addition, the Company typically realizes a significant portion of license revenue in the last month of a quarter, frequently in the last weeks or even days of a quarter. As a result, license revenue in any quarter is difficult to forecast because it is substantially dependent on orders booked and shipped in that quarter. Moreover, the Company's sales cycles, from initial evaluation to delivery of software, vary substantially from customer to customer. In addition, the Company's expense levels are based in part on its expectations of future orders and sales, which, given the Company's limited operating history, are extremely difficult to predict. A substantial portion of the Company's operating expenses are related to personnel, facilities, and sales and marketing programs. This level of spending for such expenses cannot be adjusted quickly and is, therefore, relatively fixed in the short term. If revenue falls below the Company's expectations in a particular quarter, the Company's operating results could be materially adversely affected. See "Risk Factors -- Lengthy Sales Cycle." In the Company's standard license agreements, the Company warrants to licensees that its software routines and programs are Year 2000 compliant (i.e. that they accurately process date-related data within any century and between two or more centuries). Although the Company believes its software products are Year 2000 compliant, there can be no assurance that the Company's software products contain all necessary software routines and programs necessary for the accurate calculation, display, storage and manipulation of data involving dates. If any of the Company's licensees experience Year 2000 problems, such licensee could assert claims for damages against the Company. Any such litigation could result in substantial costs and diversion of the Company's resources even if ultimately decided in favor of the Company. In addition, many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company. The occurrence of any of the foregoing could have a material adverse effect on the Company's business, operating results or financial condition. See "Risk Factors -- Year 2000 Compliance." Based on all of the foregoing, the Company believes that future revenue, expenses and operating results are likely to vary significantly from quarter to quarter. As a result, quarter-to-quarter comparisons of operating results are not necessarily meaningful or indicative of future performance. Furthermore, the Company believes it is possible that in some future quarter the Company's operating results will be below the expectations of public market analysts or investors. In such event, or in the event that adverse conditions prevail, or are perceived to prevail, with respect to the Company's business or generally, the market price of the Company's Common Stock would likely be materially adversely affected. See "Risk Factors -- Variability of Quarterly Operating Results; Seasonality." LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations to date primarily through bank debt, private sales of preferred equity securities totaling $20.8 million, cash generated from discontinued operations and capital equipment lease lines. In March 1997, the Company sold shares of Series B Preferred Stock for an aggregate of $4.9 million and entered into a credit agreement (the "Credit Agreement") that provided the Company with a $3.0 million revolving credit line that terminates upon the earlier of the Offering or after five years. In connection with the Credit Agreement, the Company issued a warrant to purchase shares of Series A Preferred Stock for an aggregate exercise price of $3.0 million that terminates upon the Offering if not exercised prior thereto. During fiscal 1997, the Company had borrowed and repaid a total of $1.0 million under the Credit Agreement and there was no balance outstanding thereunder as of September 30, 1997. In September 1997, the Company sold shares of Series C Preferred Stock for an aggregate of $15.9 million. In November 1997, the Company repurchased shares of Common Stock for $5.0 million. As of Septem- 29 31 ber 30, 1997, the Company had $13.7 million in cash and cash equivalents. See "Certain Transactions" and Notes 4, 6 and 11 of Notes to Consolidated Financial Statements. Net cash used in operating activities in fiscal 1995 was primarily attributable to a net loss and increases in accounts receivable and prepaid expenses and other current assets. Net cash provided by operating activities in fiscal 1996 was primarily attributable to growth in accounts payable and deferred revenue, as well as the non-cash nature of depreciation and amortization, which more than offset a net loss and growth in accounts receivable and prepaid expenses and other current assets. Net cash used in operating activities in fiscal 1997 was primarily attributable to a net loss of $7.9 million. Cash flows used in investing activities in each of fiscal 1995, 1996 and 1997 were attributable to capital expenditures. Net cash provided by financing activities was primarily attributable to proceeds from a bank overdraft and short-term notes in fiscal 1995, fiscal 1996 and to proceeds from the issuance of redeemable convertible preferred stock in fiscal 1997. As of September 30, 1997, the Company's principal commitments consisted of obligations under operating leases. As of September 30, 1997, the Company had a $300,000 capital lease line which was not used. See Note 10 of Notes to Consolidated Financial Statements. The Company believes that the net proceeds received by the Company from this Offering, together with it current cash balances, its capital equipment lease facility and the cash flows generated by operations, if any, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for the next 12 months. Thereafter, if cash generated from operations is insufficient to satisfy the Company's liquidity requirements, the Company may seek to sell additional equity or convertible debt securities or obtain credit facilities. The sale of additional equity or debt securities could result in additional dilution to the Company's stockholders. A portion of the Company's cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, the Company evaluates potential acquisitions of such businesses, products or technologies. The Company has no current plans, agreements or commitments, and is not currently engaged in any negotiations with respect to any such transaction. 30 32 BUSINESS Micromuse develops, markets and supports a family of scalable, highly configurable, rapidly deployable software solutions that enable Service Level Management ("SLM") -- the effective monitoring and management of multiple elements underlying an Information Technology ("IT") infrastructure, including network devices, computing systems and applications, and the mapping of these elements to the business services they impact. The Company's Netcool product suite collects, normalizes and consolidates high volumes of event information from heterogeneous network management environments into an active database which de-duplicates and correlates the resulting data in real time, and then rapidly distributes graphical views of the information to operators and administrators responsible for monitoring service levels. Netcool's unique architecture allows for the rapid, programmerless association of devices and specific attributes of those devices to the business services they impact. This readily enables administrators to create and modify their service views during systems operations to monitor particular business services, rapidly identify which users are affected by which network faults, pinpoint sources of network problems, automate operator responses, facilitate problem resolution and report on the results. The Company's initial target market has been organizations with large, technically complex and heterogeneous networks, the majority of whom have been in the telecommunications, Internet Service Provider and investment banking markets. The Company markets and distributes to these potential customers through its own sales force, OEMs, value added resellers and systems integrators. The Company has distribution agreements with Bay Networks, Cisco Systems, Ericsson, N.E.T., and Vanstar. As of September 30, 1997, the Company had over 90 customers operating in and serving a variety of industries. Customers include America Online, British Telecommunications, Cable and Wireless, Cellular One, First Data Resources, Genuity, GE Information Services, GTE Internetworking, Merrill Lynch, MindSpring, Morgan Stanley, Netcom, Pacific Bell, PSINet, Siemens, and WorldCom/MFS/UUNet. INDUSTRY BACKGROUND IT has become increasingly mission critical for businesses as vital communications, control and information services depend on reliable IT performance. As a result, corporate management is increasingly requiring that IT staffs meet pre-defined availability and performance levels for computing processes, commonly known as service level agreements ("SLAs"). At the same time, efficient management of IT infrastructure has become more difficult as corporations have migrated from mainframe-based to distributed, client/server computing environments resulting in complex and heterogeneous computing systems, applications and networks. The advent of the Internet, intranets and extranets has exacerbated this problem by increasing corporate reliance on IT while accelerating the adoption of client/server distributed computing and adding equipment complexities such as remote access technologies. In addition, corporations must address rapid and unpredictable change in technology, in the composition of their networks and in the demands of the business environment. As a result, the ability to manage complex, growing and rapidly changing IT environments cost-effectively is becoming a key driver of business performance and, in some cases, a basis of competitive advantage. The importance of effective, adaptable management of IT infrastructure is particularly acute for organizations in the business of providing network services, such as telecommunications carriers and ISPs. The size and complexity of public networks has grown rapidly in response to the explosion of data traffic caused by the Internet, intranets and extranets. Service providers now must manage voice, data and video traffic over wireline or wireless architectures by integrating numerous proprietary, legacy and emerging technologies, such as ATM, CDMA, Frame Relay, GSM, IP, ISDN, SNA, SONET/SDH, TDM, WDM, X.25 and xDSL, across vast geographies. At the same time, deregulation and privatization have produced an environment of intense competition in these markets. For example, fierce competition in the Internet access market has forced ISPs to offer customers low, flat-rate, unlimited usage programs. In this new environment, service 31 33 providers are seeking to maximize profits and differentiate themselves based on the breadth, quality, flexibility and cost of their services. One method of differentiation used by service providers is the ability to offer customized SLAs, guaranteeing the customer end-to-end service availability and performance. Service Level Management ("SLM") is the effective monitoring and management of multiple elements underlying an IT infrastructure, including network devices, computing systems and applications, and the mapping of these elements to the SLAs they impact. Efficient SLM allows service providers to associate these elements with the services specified in SLAs and to maximize utilization of their IT infrastructures. With SLM, network service providers can both manage their large internal networks and offer additional network services to corporations that require ongoing service guarantees. The market for these services, known as Managed Network Services or Network Operations Outsourcing, has grown rapidly as corporations outsource the management and operation of their LANs and WANs to service providers, and was estimated to be approximately $5 billion in 1996, and projected to grow to approximately $11 billion in 2001, according to IDC. In the enterprise, SLM permits IT staffs to guarantee network availability and performance, perform capacity planning, predict problems and maintain SLA-defined service levels for mission critical services such as Wall Street trading, credit card verification and electronic commerce. Cost- effectively delivering the services specified in SLAs through the management of IT infrastructure is the goal of SLM. Effective SLM requires: - -------------------------------------------------------------------------------------------- COLLECTION OF DATA MANAGEMENT OF SERVICES MANAGEMENT OF CHANGE - -------------------------------------------------------------------------------------------- - Collect data in real time - Map and associate elements - Adapt service profiles to to services changes in IT or business priorities during systems operations - Collect data from every - Create service profiles - Enable rapid provision of element and management customized to SLAs new services platform in an IT infrastructure - Process high volume of - Centralized monitoring of - Integrate new IT elements data elements affecting seamlessly into profiles services - Filter redundancies - Remotely diagnose and - Scale operations to meet resolve service impact network and business demands - --------------------------------------------------------------------------------------------
Software solutions that deliver these benefits can provide customers rapid return on investment ("ROI") on their SLM software purchases by enabling reductions in the cost of management and ownership of these systems, as well as by generating additional financial returns from existing IT infrastructures. Traditional solutions typically have been unable to deliver SLM cost effectively. Historically, communications providers have designed internal network management systems based on proprietary applications. It has proven difficult to integrate new technologies into these proprietary solutions, and such systems often require costly development teams to maintain and update. In addition, some organizations have used multiple third-party domain-based management systems to monitor and manage all the elements that comprise a service. However, since these systems only provide component-level views of a portion of the IT infrastructure, they are unable to provide a comprehensive view of all of the elements that may affect the services being offered. More recently, third parties have designed operations support and network management systems to integrate all the various components of a service. However, these systems frequently require long development cycles and extensive consulting projects to implement and therefore hinder an organization's ability to adapt rapidly to changes in their business environment. As a result, these 32 34 applications have generally proved either to be incapable of providing the level of aggregation necessary for end-to-end SLA compliance, incapable of monitoring the technical complexity and volume of events produced by complex and heterogeneous networking environments, or too cumbersome to allow service providers to cope with the increasing rate at which network services must be deployed. The result has been the inability of such traditional approaches to deliver SLM cost effectively. Moreover, corporate management, confronted with environments of rapid change and intense competition, is increasingly demanding end-to-end SLM solutions that deliver rapid ROI. THE MICROMUSE SOLUTION Micromuse develops, markets and supports a family of scalable, highly configurable, rapidly deployable software solutions that enable SLM. The Company's Netcool product suite collects, normalizes and consolidates high volumes of event information from heterogeneous network management environments into an active database which de-duplicates and correlates the resulting data in real time, and then rapidly distributes graphical views of the information to operators and administrators responsible for monitoring service levels. Netcool's unique architecture allows for the rapid, programmerless association of devices and specific attributes of those devices to the business services they impact. This readily enables administrators to create and modify their service views during systems operations to monitor particular business services, rapidly identify which users are affected by which network faults, pinpoint sources of network problems, automate operator responses, facilitate problem resolutions and report on the results. The Company's products are specifically designed for ease of use and configuration and for the efficient management of and rapid deployment in complex, evolving, large scale mission critical networks. In addition, service providers can also use Netcool to remotely manage customer IT infrastructures and provide their customers with views of the status of their IT environments. The Company believes that Netcool products provide customers a rapid ROI by offering: (i) cost-effective solutions with shorter implementation times and a high level of configurability; (ii) efficient solutions that leverage customers' existing network management products and services; and (iii) scalable solutions that enable both the expansion and enhancement of current services as well as the rapid deployment of new services to end users. The Netcool product suite has the following features designed to enable the cost-effective delivery of Service Level Management: Efficient Management of Heterogeneous IT Infrastructure Elements. The Company's Netcool suite of products utilizes sophisticated software agent technology to gather event information from network devices and network management platforms regardless of the transmission technology, management protocols or media used in the network. After receiving all this data, Netcool's Probes and object-oriented, memory-resident, active database technology automatically normalizes and consolidates all events, de-duplicates repeated events and then correlates the remaining information. Netcool enables the easy association of events with services, and its sophisticated filtering capabilities allow operators to focus on mission critical services and elements of the network. Operators can manage their entire network and related services though Netcool's common user interface. This approach to network management helps to protect a customer's investment in their current systems. In addition, Netcool helps to increase the efficiency of operators by minimizing the volume and complexity of data generated from a customer's entire network and by allowing additional underlying technologies to be implemented on the network without costly operator training. Rapid Deployment and Adaptability to Evolving IT Infrastructure. Due to its unique design, the limited amount of programming necessary to install and configure the product, and the extensive range of pre-existing Probes, Netcool can be typically implemented in a matter of weeks into complex networking environments. Netcool allows network administrators to quickly obtain an enterprise-wide view of their networks and to manage fault data "out-of-the-box." In addition, 33 35 new Probes can be developed and deployed quickly during systems operation, which allows for rapid and easy configuration of Netcool to meet new or changing network environments. Furthermore, Netcool can easily adapt existing associations to changes in network elements or business priorities. These features allow customers to rapidly expand, scale and adapt to their evolving networks without losing management control. Programmerless Configuration and Ease of Use. Netcool's object-oriented design enables programmerless configuration of the product through familiar "drag-and-drop" principles and graphical user interfaces. As a result, network administrators are easily able to create, modify and monitor specific views of the status of any segment of the network during systems operation. Such rapid configuration allows service providers to quickly introduce network services and provision customized SLAs. Netcool's rapid installation and ease of configuration minimizes the need for users to seek outside consultation. Scalability Across Customer IT Infrastructure. Netcool's advanced architecture allows customers to scale their networks without impairing their ability to monitor and manage their networks. Netcool's scalability addresses network management needs relating to performance, capacity, geography and corporate structure, and is the reason many of the world's largest telecommunications carriers and ISPs have selected Netcool as their management platform. For example, one Netcool customer uses Netcool to manage in excess of 250,000 network devices. Rapid Return on Investment. Netcool's products, which are designed for rapid deployment and implementation, can provide a rapid ROI to customers. Netcool products are generally operational in a matter of weeks. For example, a leading ISP implemented Netcool throughout its U.S. network operating center in one week. In addition, Netcool leverages existing infrastructure investment by providing a common user interface that can be implemented alongside existing management products such as HP OpenView, IBM NetView, Microsoft Windows NT, Seagate Nervecenter Pro and Sun SunNet Manager, as well as tightly integrating helpdesk products from companies like Remedy Corporation into the SLM environment. Finally, Netcool products reduce the number of network operations personnel required to effectively manage an enterprise-wide distributed network. For example, Netcool permitted MindSpring to double the number of subscribers it serves and the number of network devices it manages without increasing network operations personnel. STRATEGY Micromuse's objective is to maintain its leadership position in the market for Service Level Management software solutions. To achieve this objective, Micromuse is pursuing the following strategies: Maintain Focus on Telecommunications Carriers, ISPs and Other Providers of Managed Network Services. Telecommunications carriers, ISPs and other network service providers operate some of the largest, most complex and fastest growing IT infrastructures in the world. The Company originally developed Netcool to deliver SLM to these service providers. As a result, these organizations can use Netcool both to manage their own highly complex networks and to remotely manage customer LAN and WAN IT infrastructures and provide their customers with views of the status of their IT environments. With many large organizations outsourcing network services and requiring more sophisticated SLAs, the Company believes that continuing to target MNS providers, including telecommunications carriers, ISPs, systems integrators and outsourcers, can accelerate expansion of the Company's existing customer base. In addition, the Company believes that the size, performance requirements and evolving nature of these companies' IT infrastructures will provide direction for the Company's future products and SLM solutions. Expand Global Distribution Channels. The Company believes that Netcool's ease of operation, design, adaptability and pricing make it well suited for resale through indirect channels. Accordingly, the Company has complemented its direct sales effort with a dedicated indirect sales force 34 36 which focuses on distribution relationships with selected OEMs, value added resellers, and systems integrators and intends to expand these channels. Current distributors of the Company's products include Bay Networks, Cisco, Ericsson, Network Equipment Technologies, Vanstar Corporation, and Wandel and Goltermann. In addition, the Company intends to expand its direct sales force, currently located in San Francisco, Boston, Chicago, Dallas, New York, Los Angeles, Washington, D.C., London and Sydney. Increase Penetration of Existing Customer Base. The Company has historically generated a significant amount of revenue from sales to existing customers. Opportunities to increase sales to existing customers include: (i) expansion of initial Netcool deployments; (ii) sales of new products to current Netcool users; and (iii) the adoption of Netcool to manage networks of other departments or subsidiaries of existing customers. The Company's current customer base includes organizations with large, fast growing IT infrastructures that present significant additional opportunity to the Company. Extend Technical Leadership. Netcool contains a real-time, object-oriented, memory-resident, active database optimized for the collection and processing of event information from hundreds of thousands of computing devices. All data de-duplication, correlation and response automation occur within the Netcool active database. This design allows customers to collect and process all the information in their networks rapidly and then view only the necessary subset of that information needed to manage a particular SLA during systems operation. In addition, the Netcool architecture attaches descriptive information to network events which readily enables the association of these events with multiple services. The Company believes that these technical advantages provide customers with critical, real-time information about their networks and services and allow them to implement Netcool faster than competing products. The Company plans to leverage this key technical advantage into the development of new products through its internal research and development efforts and partnerships with leading research institutes such as Cambridge University Centre for Communication Systems Research. Leverage and Enhance Core Customer Relationships. The Company has historically developed, and plans to continue to develop, its products in close cooperation with its key customers. This is designed to enable the Company to deliver timely solutions that effectively fulfill market requirements in rapidly changing technology and business environments. For example, the Company worked with a service provider to offer a customer network management service by implementing Netcool to deliver views of the customer's managed network directly to the customer and to associate customer circuit information with events. In addition to these types of efforts, the Company plans to continue its annual user groups and customer support programs in an effort to continue to further understand market requirements. Leverage Third-Party Applications. The Company plans to enhance the functionality of its products by continuing to develop interfaces to complementary third-party software applications. These applications include Remedy's helpdesk system, standard relational database management systems, the performance management systems of Concord Communications and Kaspia Systems, and the network management application of Seagate Software. In addition, the Company intends to further integrate the Netcool product suite with other broadly-deployed management platforms such as HP OpenView, Sun SunNet Manager, IBM NetView and Seagate NerveCenter Pro. PRODUCTS AND TECHNOLOGY Micromuse provides a suite of software products that enable SLM. The Company's Netcool SLM solution includes Netcool/OMNIbus and its components for event management, Netcool/ Reporter for service level reporting, and associated related technical services. Netcool/OMNIbus collects, consolidates, de-duplicates and correlates information from a wide range of network management platforms and devices and then presents user-configurable views of subsets of 35 37 network data. Netcool/Reporter uses this data to provide real-time and historical reporting. Since customers can quickly associate each network element (a network device, computing system or application) with a particular service, Netcool products enable companies to efficiently set up, monitor, manage and report on SLAs. An illustration of the architecture of Netcool is set forth below: LOGO NETCOOL/OMNIBUS. Netcool/OMNIbus is based on a three-tier, client/server architecture and is the core application of the product suite. Netcool/OMNIbus consists of four components: Netcool/OMNIbus Probes, the Netcool/OMNIbus ObjectServer, Netcool/OMNIbus Desktops, and Netcool/OMNIbus Gateways. Probes collect event information from existing network management systems, as well as event messages from network devices, computing systems, applications or legacy systems. The Probes then normalize and feed this event data into the ObjectServer, an object-oriented, memory-resident active database. At the ObjectServer, the event data is de-duplicated, correlated and associated with other event data. By manipulating the data in the ObjectServer through the Desktops, users can design customized views of event data to monitor segments of the network or services that span the entire network. Gateways permit data to be shared between multiple ObjectServers for load balancing or fail-over facilities, exported to common relational database management systems (Oracle or Sybase) for historical service level views, or integrated with other applications such as Remedy's helpdesk application. Probes. Probes are the first tier of Netcool's three-tier architecture. Probes are primarily passive software interfaces that collect network event data (including messaged network data such as faults, alerts, and traps) from elements on the network or from domain-based network management systems. These Probes can collect information presented from either management platforms and devices (e.g. HP OpenView, Cabletron SPECTRUM, Cisco StrataView Plus, and Newbridge 46020) and standard protocols such as screen oriented ASCII character streams, application log files (e.g., syslog) TL1, SMNP, or any other method of management information provision. They recognize Management Information Base ("MIB") information from switches and routers from leading vendors, including Bay Networks, Cabletron, Cisco, 3Com and N.E.T. Probes use rules and lookup tables to categorize and add information to events. As a result, network data collected by the Probes is normalized into a common alert format and then passed to the ObjectServer. 36 38 The Company has developed over 39 pre-built Probes, and a Probe API development kit is available for customers to build probes for specialized in-house or legacy systems. The following table lists Micromuse's existing Probes: - -------------------------------------------------------------------------------- NETCOOL PROBES - ---------------------------------------------------------------------------------------------------------------- Agile ATM Switch HP OpenView KBU Fivemere Ping Probe Management IT/Operations Microsoft Windows NT Polycentre Watchdog Ascom TimePlex Center v.4.x Event Log RoboMon Element TimeView/2000 HP OpenView NNM Modular Probe Manager Probe Cabletron SPECTRUM v.3.31 NET IDNX SimNet Cisco StrataView v8.4 HP OpenView NNM NET Open/5000 Solstice Enterprise Ericsson ACP1000 v.4.x HP Netlabs Manager Ericsson MD110 OpenView NNM Newbridge 46020 Solstice SNM 2.3 Fibermux LightWatch v.5.x Nortel TN-MS Element Sybase Table Generic Probe HTTP Command Controller for TN-1X Telematics Switch GPT EMOS Log Format Netcool Probes Trapd (SNMP) Probe Heartbeat Probe HTTP Server Error Log Operator Communications Unix Syslog Probe HP OpenView IBM NetView Facility Probe IT/Operations Informix Table Oracle Table Center v.3.x - ----------------------------------------------------------------------------------------------------------------
ObjectServer. The ObjectServer, which is the second tier of Netcool's three-tier architecture, is a real-time, object-oriented, memory-resident, active database which stores and manages all the collected network events. The ObjectServer consolidates, associates and de-duplicates normalized data from the Probes, converting events, such as faults and alarms, into event objects that can be easily manipulated to create associations and filters. The active components of the ObjectServer include its de-duplication capability and its ability to correlate event objects with other event objects, make decisions on information, automate operator responses and facilitate problem resolution. The ObjectServer, which has been designed and optimized for handling large volumes of events messages, can process hundreds of alarms per second and can collect data from multiple Probes concurrently. The ObjectServer architecture also permits multiple authenticated users to view all the events throughout the enterprise. In addition, since one network fault can impact several locations in a distributed environment and can therefore trigger multiple events, the ObjectServer is designed to automatically de-duplicate repeated events so that network operators can easily identify the root cause. The Company believes that the ObjectServer architecture provides the Company with a competitive advantage in both the speed with which it collects network events and the ability to associate event information with the services it manages. Desktops. A Desktop, the third tier in Netcool's three-tier architecture, is an integrated suite of software tools designed for use by operators and administrators to create filters, customize views of network event data, monitor several services simultaneously, and automatically resolve service problems. Network operators can quickly build filters by responding to simple onscreen queries about user preferences. They can also associate events with services through the use of simple "drag-and-drop" technology that automatically creates the Boolean logic and SQL required to retrieve the data from the ObjectServer. In this way, non-programmers can manipulate the data in the ObjectServer to custom-design views of event data. In addition, each operator can use Desktops to resolve element problems directly or automate responses to common network problems when critical thresholds are reached. Operators can use Desktops to monitor services through either EventLists, the EventList Console or ObjectiveView. The EventList presents a configurable spreadsheet-like view of the de-duplicated faults and acts as the primary interface through which operators access problem resolution tools. The EventList Console depicts a concise view of the EventLists for several services while the ObjectiveView provides a graphical view of the network or services which depend upon it. Administrators can use Desktops to configure the ObjectServer and the operator's 37 39 desktop environments. Desktops run on multiple computing platforms, including UNIX/Motif, Microsoft Windows NT, or Web browsers via Java applications. Gateways. Gateways are interfaces to other Micromuse products or to third-party applications that allow sharing of Netcool event data. For example, multiple Netcool ObjectServers can share data using a Gateway to offer customers load-balancing and fail-over facilities. In addition, event data can be exported through Gateways to databases such as Oracle or Sybase for historical analysis and reporting or to trouble-ticketing packages such as Remedy's help desk application. NETCOOL/REPORTER. Netcool/Reporter, which is not yet commercially available, is a Java-based application that generates reports on the real-time and historical availability of network services, applications, business processes or any customer-defined grouping of IT resources (both physical and logical). Since Netcool/Reporter has been designed to leverage the archived data from the service profiles created within Netcool/OMNIbus, it allows operators to report on SLA compliance. Netcool/Reporter can produce availability data in several graphical formats, including spreadsheets, 2D or 3D charts, and billing forms. Netcool/Reporter provides both Service Level Reports and generic reports. Service Level Reports allow operators to define individualized service levels by designing their own report metrics. They can also be tailored to precisely match the service level availability criteria described by SLAs. Generic reports are pre-configured reports that use event time and frequency categories as the primary variables. Netcool/Reporter is expected to be commercially available in the second quarter of fiscal 1998. 38 40 The following table summarizes the Netcool product suite: - ---------------------------------------------------------------------------------------------- DATE OF NETCOOL PRODUCT INTRODUCTION DESCRIPTION - ---------------------------------------------------------------------------------------------- NETCOOL/OMNIBUS OBJECTSERVER ObjectServer Solaris1 1994 Real-time, object-oriented, memory- ObjectServer Solaris 2.x 1994 resident, active database system that ObjectServer HP-UX9.x 1994 stores and manages all collected network ObjectServer HP-UX10.x 1995 events. ObjectServer AIX 4.x PowerPC 1997 - ---------------------------------------------------------------------------------------------- NETCOOL/OMNIBUS DESKTOP X11/Motif Desktop 1994 Integrated suite of software tools that Java EventList Desktop 1996 creates filters and customized views of Microsoft Windows NT Desktop 1997 network event data, monitors several services simultaneously and automatically resolves service problems. - ---------------------------------------------------------------------------------------------- NETCOOL/OMNIBUS GATEWAY Remedy ARS 1994 Interfaces to other Micromuse products Sybase RDBMS 10.x/11.x 1994 or third party applications that allow ObjectServer 1994 sharing of Netcool event data. SNMP Trap Forwarder 1995 Oracle RDBMS 7.x, 8.x 1997 File/Socket 1997 - ---------------------------------------------------------------------------------------------- NETCOOL/OMNIBUS PROBE Basic Probes 1994-1997 Software that collects network event Generic Probe 1996 data from network element devices or Probe Development Kit 1994 from network management systems. - ---------------------------------------------------------------------------------------------- NETCOOL/REPORTER* 1998 A Java-based application that uses information stored by Netcool/OMNIbus to generate reports on the real-time and historical availability of networks or other services. - ----------------------------------------------------------------------------------------------
- --------------- * Netcool/Reporter is expected to be commercially available in the second quarter of fiscal 1998. Product Pricing. At least one Probe, ObjectServer, and Desktop are required for Netcool/ OMNIbus to operate. Netcool/Reporter will be sold as an add-on feature to Netcool/OMNIbus. Customers can choose the particular configuration of Probes, ObjectServers, Desktops, and Gateways required for their existing network configuration. The list price in the United States for each ObjectServer is $25,000, each Probe, Gateway and Desktop is $7,500, and the list price for Netcool/Reporter will be $15,000. Fees for implementations of Netcool/OMNIbus typically range from $40,000 to $1.0 million. CUSTOMERS Micromuse sells its products to organizations with large and medium-size networks, as well as network service providers which include telecommunications carriers, ISPs, systems integrators and outsourcers. The Company's products are used by a diverse set of customers in a variety of industries. As of September 30, 1997, the Company had over 90 customers in the following 6 countries: the United States, Canada, the United Kingdom, Italy, Mexico, and Netherlands. The 39 41 following is a list of customers that have purchased in excess of $100,000 of the Company's Netcool family of products and services: - ---------------------------------------------------------------------------------------------- Telecommunications Internet Service Providers Investment Banking British Telecommunications America Online Bear Stearns British Telecommunications BT Internet Deutsche Morgan Grenfell MNS Genuity Merrill Lynch BT Labs GTE Internetworking Morgan Stanley BT North America Netcom Salomon Smith Barney BT Syncordia PSInet CableTel (NTL) Southwestern Bell Internet Concert UUNet Commercial GEIS Ionica Cellular Automobile Association (U.K.) MFS Communications First Data Resources Multisys Cellular One J.C. Penney Pacific Bell Hutchinson Orange PCS Nationwide Building Society TMI Xypoint Pemex Oil Vyvx Royal Automobile Club WorldCom Communications Equipment Shell Oil Services TRW Ascom Timeplex Bay Networks Cisco Ericsson Motorola N.E.T. Siemens - ----------------------------------------------------------------------------------------------
SELECTED CUSTOMER APPLICATIONS - --------------------------------------------------------------------------------------------------- CUSTOMER APPLICATION - --------------------------------------------------------------------------------------------------- MANAGED NETWORK SERVICE GEIS is a managed network services provider that maintains a PROVIDER chain of support centers in locations around the world, including (GEIS) the Netherlands, Hong Kong and Maryland. The worldwide GEIS network comprises a variety of technologies, including Cisco router-based IP, Telematics-based X.25, Stratacom-based frame relay, and GEIS' own proprietary network. By installing Netcool, GEIS was able to win the business of a large, multinational conglomerate that required a secure view of the entire virtual private network ("VPN") being provided by GEIS. Netcool made this possible via its ability to easily append information to events and associate them with specific customers, and to support a firewalled Netcool server at the customer site. - --------------------------------------------------------------------------------------------------- INTERNET SERVICE PROVIDER MindSpring, a leading ISP focusing on delivering outstanding (MINDSPRING) service and support to its customers, offers local Internet service in more than 250 locations throughout the United States and has over 240,000 customers. MindSpring uses Netcool to provide next-generation management of the e-mail, Internet access, and Web hosting services at its state-of-the-art Network Operations Center ("NOC"). To manage these services, Netcool is used in conjunction with Seagate's NerveCenter application to collect data from over 15,000 modems, 400 terminal servers, 60 CSU/DSUs, 60 UNIX servers of various types, 50 hubs and switches, and 60 Cisco routers. Netcool assimilates the information from these diverse components and presents them as distinct service views. Since installing Netcool in January 1997, MindSpring has significantly increased the network infrastructure it maintains (increasing from 7,500 managed devices to over 15,000) and the customers it serves (100,000 to over 240,000) without increasing the network operations staff. The entire operation is efficiently managed by only 6 network administrators. - ---------------------------------------------------------------------------------------------------
40 42 SALES AND MARKETING The Company markets its software and services primarily through its direct sales organization in San Francisco, Boston, Chicago, Dallas, New York, Los Angeles, Washington, D.C., London and Sydney. Additionally, the Company has a growing channel organization and expects to generate an increasing percentage of total sales through its OEMs, value added resellers and systems integrators. As of September 30, 1997, the Company's sales organization consisted of 31 individuals. Six members of the sales organization work exclusively with the OEMs, value added resellers and systems integrators in both a sales and a channel marketing capacity. Typically, the sales process will include an initial sales presentation, a product demonstration, at times a proof of concept evaluation, a closing meeting and a purchase process. The sales process typically takes 90 to 180 days. Companies often purchase Netcool products to manage their internal data network initially and upon its demonstrated effectiveness subsequently make additional and larger purchases. A significant portion of the Company's sales are from repeat customers, who generally purchase additional software as their networks expand or as additional sites within a customer learn of the services provided by, and the benefits of, Netcool. The Company has a number of marketing programs designed to inform potential customers about the capabilities and benefits of the Company's products. The Company's marketing efforts include technical leadership, participation in industry trade shows, technical conferences and technology seminars, preparation of competitive analyses, sales training, publication of technical and educational articles in industry journals and advertising. As of September 30, 1997, the Company's marketing organization employed six people. Although the Company increased the size of its sales organization from 14 to 31 individuals during the nine-month period ended September 30, 1997, the Company experienced difficulty in recruiting a sufficient number of qualified sales people during that period. If the Company is to achieve significant revenue growth in the future, it must both train successfully the members of its existing sales force and recruit additional sales personnel. Competition for such persons is intense, and there can be no assurance that the Company will be able to either retain and adequately train its current sales force or attract qualified sales personnel in the future. During the last fiscal year, the Company hired a Senior Vice President, Sales, who is expected to be heavily involved, among other things, in the recruitment of additional sales personnel. Consequently, the Company is expected to have additional management capacity to assist in the recruitment of additional sales personnel. If the Company is unable to hire such people on a timely basis, the Company's business, operating results or financial condition could be adversely affected. See "Risk Factors -- Need to Expand and Improve Productivity of Sales Force, Technical Services and Customer Support Organization." To achieve significant growth in revenues in the future the Company must continue to expand its network of distribution partners. The Company's network of distribution partners currently includes VARs, systems integrators and OEM partners, including Bay, Cisco, Ericsson, Network Equipment Technologies, Vanstar Corporation, and Wandel and Goltermann. Such partners license the Company's products at a discount to list price for re-licensing and may provide training, support and technical and customer services to the end users of the Company's products. At times, members of the Company's technical services organization will assist a channel partner with training and technical support. The Company offers a comprehensive channel partnering program consisting of training, certification, technical support, priority communications regarding upcoming activities and products, and joint sales and marketing activities. The Company also has joint marketing programs with Concord Communications and Seagate Software. There can be no assurance that the Company will be able to continue to attract and retain VARs, systems integrators and OEMs or that such organizations will be able to market and sell the Company's products effectively. In addition, there can be no assurance that the Company's existing or future 41 43 channel partners will continue to represent the Company's products. See "Risk Factors -- Need to Expand Distribution Channels; Dependence on Third-Party Relationships." Because the Company first sold its software in the United Kingdom and was previously domiciled in London, sales outside of the United States (i.e., "international sales") have historically comprised a significant portion of the Company's total revenue. International sales accounted for 76%, 55%, and 48% of total revenues in fiscal 1995, 1996, and 1997, respectively. The majority of these international sales were made in the United Kingdom and Europe. While the Company believes that there are significant opportunities in the United Kingdom and Europe, it expects international revenues from the United Kingdom and Europe as a percentage of total revenues to decline in future quarters as the Company more fully exploits opportunities in the United States and in the Pacific Rim. See "Risk Factors -- Risks Associated with International Licensing and Operations." TECHNICAL SERVICES The Company's technical services organization provides customers with a full range of support services including pre-sales demonstrations, evaluations, implementations, consulting services, training, and ongoing technical support. In addition, the technical services organization serves a variety of internal functions, including drafting support and training documentation, product management, product testing, research and development related to specific customer industries. The Company believes that superior technical services and support is critical to customer satisfaction and the development of customer relationships. As of September 30, 1997, there were 32 individuals in the Company's technical services organization. Members of the technical services organization work closely with the Company's direct sales representatives and channel partners to provide the following services to customers: Pre-Sales Technical Support. Technical services personnel will often accompany sales representatives to a customer site to provide a technical overview and demonstration of the product or to educate customers about the Company's products. In addition, they may help specify and implement a small evaluation test environment at a customer site for more detailed customer review of the product. Post-Sales Technical Support and Consulting. Technical services personnel will also assist end-users with the implementation and use of the Company's products. In some cases, the Company's technical services personnel will be engaged for limited post-sales consulting, which may include on-site custom Probe development, implementation of the Company's products, or project management. After full implementation, ongoing customer support obligations are transferred to the Company's customer support organization, although technical services personnel may be engaged for further support. Education and Training. The technical services organization offers product training to customers and product training and certification to channel partners. The Company offers operator, administrator, and advanced administrator training classes. The recent growth of the Company and the expansion of the customer base of Netcool has increased the demands on its technical services organization. Competition for qualified technical personnel is intense. There can be no assurance that the current resources in the Company's technical services organization will be sufficient to manage any future growth in the Company's business. Failure of the Company to expand its technical services organization at least commensurate with the expansion in the installed base of Netcool products would have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors -- Need to Expand and Improve Productivity of Sales Force, Technical Services and Customer Support Organization" and "-- Dependence on Key Personnel." 42 44 CUSTOMER SUPPORT The customer support organization is responsible for providing ongoing technical support for the Company's customers after implementation of the product and for training the next generation of the Company's software engineers and technical services personnel. Based on feedback by customers, the Company believes that the quality and responsiveness of its customer support organization provides it with a significant competitive advantage. As of September 30, 1997, the Company employed 11 customer support personnel. For an annual fee, a customer will receive toll-free telephone and email support, as well as new releases of the Company's products. The Company offers two support packages to its customers: 8 hours a day, 5 days a week support or 24 hours a day, 7 days a week support. While support personnel generally answer the technical support calls and resolve most problems over the phone, Micromuse will deploy any one of its more than 30 technical support personnel in the event that an on-site visit is necessary. RESEARCH AND DEVELOPMENT The Company believes that its future success depends in large part on its ability to continue to enhance existing products and develop new products that maintain technological competitiveness and deliver rapid ROI to its customers. The Company has historically developed and expects to continue to develop its products in conjunction with its existing and potential customers. Extensive product development input is obtained through customers, through the Company's monitoring of end-user needs and changes in the marketplace and through partnerships with leading research institutes such as Cambridge University Centre for Communication Systems Research. The Company's research and development organization is composed of two related engineering groups. The core technology group is responsible for the enhancement of Netcool/OMNIbus, including its real-time technologies and the exploration of new directions and applications of the Company's core ObjectServer, Probe, Gateway, and Desktop technologies. The application development group is responsible for designing and developing off-the-shelf products which leverage the technologies developed by the core technology group. While both groups work closely with customers, the application development group depends on customer contact and partnerships for the rapid development of new SLM products. Both research and development groups work closely with the Company's technical services organization and its marketing organization to incorporate customer feedback and market requirements into their product development agendas. The Company has made and intends to continue to make substantial investments in research and development. The Company's total expenses for research and development for fiscal 1995, 1996 and 1997 were $708,000, $1.6 million and $2.0 million, respectively. Since the Company anticipates that it will continue to commit substantial resources to research and development in the future, product development expenses are expected to increase in absolute dollars in future periods. To date, the Company's development efforts have not resulted in any capitalized software development costs. As of September 30, 1997, the Company's research and development organization consisted of 29 people. The market for the Company's products is characterized by rapidly changing technologies, evolving industry standards, changing regulatory environments, frequent new product introductions and rapid changes in customer requirements. The introduction or announcement of products by the Company or its competitors embodying new technologies and the emergence of new industry standards and practices can render existing products obsolete and unmarketable. As a result, the life cycles of the Company's products are difficult to estimate. The Company's future success will depend on its ability to enhance its existing products and to develop and introduce, on a timely and cost-effective basis, new products and product features that keep pace with technological developments and emerging industry standards and address the increasingly sophis- 43 45 ticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing new products or product features that respond to technological change or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products and features, or that its new products or product features will adequately meet the requirements of the marketplace and achieve market acceptance. In particular, the widespread adoption of the TMN architecture for managing telecommunications networks would force the Company to adapt its products to such standard, and there can be no assurance that this could be done on a timely or cost-effective basis, if at all. In addition, to the extent that any product upgrade or enhancement requires extensive installation and configuration, current customers may postpone or forgo the purchase of new versions of the Company's products. If the Company is unable, for technological or other reasons, to develop and introduce enhancements of existing products or new products in a timely manner, the Company's business, operating results and financial condition will be materially adversely affected. See "Risk Factors -- New Products and Rapid Technological Change; Need to Manage Product Transitions; Dependence on Third-Party Software Platforms." In addition, software products as complex as those offered by the Company may contain defects or failures when introduced or when new versions or enhancements are released. See "Risk Factors -- Risk of Product Defects; Product Liability." COMPETITION The Company's products are designed for use in the evolving SLM and enterprise network management markets. Competition in these markets is intense and is characterized by rapidly changing technologies, new and evolving industry standards, frequent new product introductions and rapid changes in customer requirements. The Company's current and prospective competitors offer a variety of solutions to address the SLM and enterprise network management markets and generally fall within the following five categories: (i) customer's internal design and development organizations that produce SLM and network management applications for their particular needs, in some cases using multiple instances of products from hardware and software vendors such as Sun, HP and Cabletron; (ii) vendors of network and systems management frameworks including Computer Associates and IBM; (iii) vendors of network and systems management applications including HP, Sun and IBM; (iv) providers of specific market applications including Boole and Babbage and several smaller software vendors; and (v) systems integrators who primarily provide programming services to develop customer specific applications including TCSI and OSI. In the future, as the Company enters new markets, the Company expects that such markets will have additional, market-specific competitors. In addition, because there are relatively low barriers to entry in the software market, the Company expects additional competition from other established and emerging companies. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results or financial condition. Many of the Company's existing and potential customers continuously evaluate whether to design and develop their own network operations support and management applications or purchase them from outside vendors. These customers internally design and develop their own software solutions for their particular needs and therefore may be reluctant to purchase products offered by independent vendors such as the Company. As a result, the Company must continuously educate existing and prospective customers as to the advantages of the Company's products versus internally developed network operations support and management applications. Many of the Company's current and potential competitors have longer operating histories and have significantly greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base, than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, sale and support of 44 46 their products than the Company. Existing competitors could also increase their market share by bundling products having management functionality offered by the Company's products with their current applications. Moreover, the Company's current and potential competitors may increase their share of the SLM market by strategic alliances and/or the acquisition of competing companies. In addition, network operating system vendors could introduce new or upgrade and extend existing operating systems or environments that include management functionality offered by the Company's products, which could render the Company's products obsolete and unmarketable. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results or financial condition. See "Risk Factors -- Competition." The principal competitive factors affecting the market for the Company's software are price/performance, functionality and speed of implementation. The Company currently believes it presently competes favorably with respect to each of these factors. However, the Company's market is still evolving, and there can be no assurance that the Company will be able to compete successfully against current and future competitors and the failure to do so successfully will have a material adverse effect upon the Company's business operating results and financial condition. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company's success and ability to compete is dependent in significant part upon its proprietary software technology. The Company relies on a combination of trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect its proprietary rights. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the steps taken by the Company to protect its proprietary technology will prevent misappropriation of such technology, and such protections may not preclude competitors from developing products with functionality or features similar to the Company's products. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. While the Company believes that its products and trademarks do not infringe upon the proprietary rights of third parties, there can be no assurance that the Company will not receive future communications from third parties asserting that the Company's products infringe, or may infringe, the proprietary rights of third parties. The Company expects that software product developers will be increasingly subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, cause product shipment delays or require the Company to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. In the event of a successful claim of product infringement against the Company and failure or inability of the Company to develop non-infringing technology or license the infringed or similar technology, the Company's business, operating results or financial condition could be materially adversely affected. The Company relies on certain software that it licenses from third parties, including software that is integrated with internally developed software and used in the Company's products to perform key functions. There can be no assurance that these third-party software licenses will continue to be available to the Company on commercially reasonable terms or at all. Although the Company believes that alternative software is available from other third-party suppliers, the loss of or inability to maintain any of these software licenses or the inability of the third parties to enhance in a timely and cost-effective manner their products in response to changing customer needs, industry standards or technological developments could result in delays or reductions in product 45 47 shipments by the Company until equivalent software could be developed internally or identified, licensed and integrated, which would have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors -- Dependence upon Proprietary Technology; Risk of Third-Party Claims of Infringement." EMPLOYEES As of September 30, 1997, the Company had 135 employees, including 29 engaged in research and development activities, 37 in sales and marketing, 32 in technical services, 26 in administration and finance and 11 in customer support. None of the Company's employees is represented by a collective bargaining agreement, nor has the Company experienced work stoppages. The Company believes that its relations with its employees are good. The Company believes that its future success will depend in large part on its ability to attract and retain highly-skilled managerial, sales, technical services, customer support and product development personnel. The Company has at times experienced and continues to experience difficulty in recruiting qualified personnel, including without limitation a Chief Financial Officer and a controller for U.S. operations. Competition for qualified personnel in the software industry is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. Failure to attract and retain key personnel could materially adversely affect on the Company's business, operating results or financial condition. See "Risk Factors -- Management of Growth; Need to Improve Financial Systems and Controls," "-- Need to Expand and Improve Productivity of Sales Force, Technical Services and Customer Support Organization" and "-- Dependence on Key Personnel." FACILITIES The Company's headquarters are located in 11,235 square feet of office space in San Francisco, under a lease that expires on April 2002. The Company's principal product development operations are located in approximately 16,085 square feet of office space in London. Approximately 7,210 square feet of this office space is leased pursuant to a lease that expires on December 2002. The remaining 8,875 square feet of office space is leased pursuant to a lease that expires on March 2007. The Company also maintains offices in New York City, Dallas and Sydney. The Company believes that its current facilities are adequate for its needs through the next twelve months, and that, should it be needed, suitable additional space will be available to accommodate expansion of the Company's operations on commercially reasonable terms, although there can be no assurance in this regard. LITIGATION The Company is not a party to any material legal proceeding. 46 48 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the executive officers and directors of the Company as of September 30, 1997:
NAME AGE POSITION - ---------------------------- --- ------------------------------------------------------ Christopher J. Dawes........ 38 President, Chief Executive Officer and Chairman of the Board of Directors Stephen A. Allott........... 39 Senior Vice President, Finance Charles M. Silvey........... 33 Senior Vice President, Marketing David N. Dorrance........... 36 Senior Vice President, Sales Timothy J. Tokarsky......... 34 Vice President, Application Development Mark J. Peach............... 38 Vice President, Core Technology Peter Shearan............... 33 Vice President, Technical Services Helen M. Fairclough......... 36 Vice President, Operations Angela Dawes................ 35 Director of Sales, Western Region; Director Jeffrey M. Drazan(1)(2)..... 39 Director David C. Schwab(1)(2)....... 40 Director
- --------------- (1) Member of Audit Committee (2) Member of Compensation Committee CHRISTOPHER J. DAWES. Mr. Dawes has served as President, Chief Executive Officer and Chairman of the Board of Directors of the Company since its inception. Prior to co-founding the Company, Mr. Dawes served as Sales Manager at Computer Associates International, Inc. ("Computer Associates") from June 1988 to September 1989. Mr. Dawes is a graduate of Electrical and Electronic Engineering from the University of Adelaide, South Australia. STEPHEN A. ALLOTT. Mr. Allott has served as the Company's Senior Vice President, Finance since September 1997. From June 1997 to September 1997, Mr. Allott served as Vice President, Global Telco Industry. From April 1996 to September 1997, Mr. Allott served as Managing Director, Micromuse Europe. From September 1995 to April 1996 he served as the Company's Business Development Director. Prior to joining the Company, Mr. Allott served as a strategy consultant with McKinsey & Company from September 1990 to September 1995. From May 1988 to September 1990, Mr. Allott served as United Kingdom legal counsel for Sun Microsystems, UK. Mr. Allott received his M.A., Law from Trinity College, Cambridge and was called to the English Bar at Gray's Inn. CHARLES M. SILVEY. Mr. Silvey has served as the Company's Senior Vice President, Marketing since July 1997. From June 1994 to July 1997, Mr. Silvey served as Vice President, Marketing. From January 1991 to June 1994, Mr. Silvey served as Technical Marketing Manager. Prior to joining the Company, Mr. Silvey served as Technical Marketing Executive for the European SunNet Manager program for Sun Microsystems, UK from October 1989 to January 1991. Mr. Silvey received his degree in Electronic and Electrical Engineering from City of Bath University. DAVID N. DORRANCE. Mr. Dorrance has served as the Company's Senior Vice President, Sales since June 1997. Prior to joining the Company, Mr. Dorrance served as Head of United Kingdom Oracle Applications Group for Deloitte & Touche Consulting Group from March 1996 to June 1997. From September 1993 to May 1995, Mr. Dorrance served as a sales manager at Sybase, Inc. ("Sybase"). From November 1989 to September 1993, Mr. Dorrance served as Director N.A. Sales and as a director of SQL Solutions following its acquisition by Sybase. Mr. Dorrance received his B.S. in Computer Science from the University of California at Santa Barbara and an M.S. in Economics from the University of Oxford. 47 49 TIMOTHY J. TOKARSKY. Mr. Tokarsky has served as the Company's Vice President, Application Development since February 1997. Prior to joining the Company, Mr. Tokarsky served as Vice President Distributed Systems Management for Merrill Lynch & Co., Inc. from June 1995 to February 1997. From January 1994 to June 1995, Mr. Tokarsky served as Architect, Global Distributed Systems Monitoring for Goldman Sachs & Co. From May 1993 to January 1994, Mr. Tokarsky served as a system administrator for Standard and Poor's Rating Services. From October 1992 to May 1993, Mr. Tokarsky served as a system administrator for First Boston Corp. Mr. Tokarsky received his B.Sc. in Geophysics from McGill University. MARK J. PEACH. Mr. Peach has served as the Company's Vice President, Core Technology since December 1996. From June 1994 to December 1996, Mr. Peach served as an original architect and developer of Netcool/OMNIbus. Prior to joining the Company, Mr. Peach served as Principal PreSales Engineer for Sun Microsystems, Inc. and SunConnect from December 1989 to May 1994. Mr. Peach received his B.Sc. in Mathematical Engineering Mathematics from Loughborough University. PETER SHEARAN. Mr. Shearan has served as the Company's Vice President, Technical Services since February 1996. From November 1995 to February 1996, Mr. Shearan served as Senior Consultant in the Company's Netcool Business Development department. Prior to joining the Company, Mr. Shearan served as a systems manager for British Telecommunications from June 1984 to November 1995. Mr. Shearan received his Qualifications in Computer Science from Southbank University, London. HELEN M. FAIRCLOUGH. Ms. Fairclough has served as the Company's Vice President, Operations since November 1995. From June 1994 to November 1995, Ms. Fairclough served as the Company's Manager, Operations. Prior to joining the Company, Ms. Fairclough served as Business Operations Manager for Cap Gemini, PLC from October 1991 to June 1994. Ms. Fairclough received her B.Sc. in Resource Sciences/Geology from Kingston University and is a Member of The Chartered Institute of Secretaries and Administrators. ANGELA DAWES. Mrs. Dawes has been a director of the Company since September 1997. Mrs. Dawes has also served as Director of Sales, Western Region since January 1997. Since the Company's inception to January 1997, Mrs. Dawes served in various capacities, most recently as Eastern Region Director of Sales. Prior to joining the Company, Mrs. Dawes served at Computer Associates in various capacities. JEFFREY M. DRAZAN. Mr. Drazan has been a director of the Company since December 1996. Mr. Drazan has been a general partner of Sierra Ventures, a venture capital firm ("Sierra Ventures"), since 1984. Mr. Drazan also serves as a director of FaxSav, Inc., an Internet messaging company; Retix, a telecommunications equipment company; and Digital Generation Systems Inc., a multimedia network services company. Mr. Drazan received his B.S.E. in Management Systems from Princeton University and an MBA from New York University's Graduate School of Business Administration. DAVID C. SCHWAB. Mr. Schwab has been a director of the Company since December 1996. Mr. Schwab has been a general partner of Sierra Ventures since June 1996. Prior to joining Sierra Ventures, Mr. Schwab co-founded Scopus Technology, Inc., a client-server software systems company, and served in various capacities from August 1991 to June 1996, most recently as Vice President of Sales. Mr. Schwab received his B.A. in Systems Engineering from University of California San Diego, an M.S. and ENG. in Aerospace Engineering from Stanford University, and an MBA from Harvard Business School. BOARD COMPOSITION The Board of Directors is currently comprised of four directors. Upon the completion of this Offering, the terms of office of the Board of Directors will be divided into two classes: Class I, 48 50 whose term will expire at the next annual meeting of stockholders, and Class II, whose term will expire at the subsequent annual meeting of stockholders. The Class I directors are Angela Dawes and Jeffrey M. Drazan and the Class II directors are Christopher J. Dawes and David C. Schwab. At each annual meeting of stockholders after the initial classification, the successors to directors whose term will then expire will be elected to serve from the time of election and qualification until the second annual meeting following election. This classification of the Board of Directors may have the effect of delaying or preventing changes in control or management of the Company. Each officer is elected by and serves at the discretion of the Board of Directors. Each of the Company's officers and directors, other than non-employee directors, devotes substantially full time to the affairs of the Company. The Company's non-employee directors devote such time to the affairs of the Company as is necessary to discharge their duties. Christopher J. Dawes and Angela Dawes, each a director and officer of the Company, are married. There are no other family relationships among any of the directors, officers or key employees of the Company. COMMITTEES OF THE BOARD OF DIRECTORS The Audit Committee reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the selection of the Company's independent accountants, the scope of the annual audits, fees to be paid to the independent accountants, the performance of the Company's independent accountants and the accounting practices of the Company. The Compensation Committee (effective upon the closing of this Offering) establishes salaries, incentives and other forms of compensation for officers and other employees of the Company and administers the incentive compensation and benefit plans of the Company. DIRECTOR COMPENSATION Directors receive no cash remuneration for serving on the Board of Directors but are reimbursed for reasonable expenses incurred by them in attending meetings of the Board of Directors and Audit Committee. On July 15, 1997, the Company issued to each of Jeffrey M. Drazan and David C. Schwab 60,000 shares of Common Stock pursuant to the Company's 1997 Stock Option/Stock Issuance Plan. Non-employee directors will also receive periodic option grants under the Company's 1997 Stock Option/Stock Issuance Plan. See "-- 1997 Stock Option/Stock Issuance Plan." See Note 6 of Notes to Consolidated Financial Statements. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Restated Certificate of Incorporation limits the liability of its directors for monetary damages arising from a breach of their fiduciary duty as directors, except to the extent otherwise required by the Delaware General Corporation Law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has also entered into indemnification agreements with its officers and directors containing provisions that may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. The 49 51 Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee (effective upon the closing of this Offering) is an officer or employee of the Company. No interlocking relationship exists between the Company's Board or Compensation Committee and the board of directors or compensation committee of any other company, nor has such an interlocking relationship existed in the past. EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth the compensation earned by the Company's Chief Executive Officer and the four other most highly compensated officers whose salary and bonus for the fiscal year ended September 30, 1997 exceeded $100,000 (collectively, the "Named Executive Officers"), for services rendered in all capacities to the Company and its subsidiaries for the fiscal year ended September 30, 1997. 50 52 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------------------ ANNUAL COMPENSATION AWARDS -------------------------------------- ------------------------ OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($) - ------------------------------- -------- -------- ---------------- ------------------------ ---------------- Christopher J. Dawes........... $187,500 $157,495 $ 33,667(1) 0 $8,093(2) President and Chief Executive Officer Stephen A. Allott.............. 161,581 -- -- 19,033 -- Senior Vice President, Finance Mark J. Peach.................. 108,614 -- 10,541(3) 15,320 -- Vice President, Core Technology Peter Shearan.................. 110,597 -- 12,123(4) 44,440 -- Vice President, Technical Services Timothy J. Tokarsky............ 108,814 -- -- 77,000 -- Vice President, Application Development
- --------------- (1) Includes $14,162 car allowance, $6,530 payment for a golf club membership and $8,720 payment for accounting fees. (2) Company's contributions made to the Company's pension plan which is a defined contribution plan. These contributions were paid in British pounds sterling and have been translated into United States dollars solely for the convenience of the reader at L1.00=$1.6185, based on the New York foreign exchange selling rate at 4:00 p.m. Eastern time on September 30, 1997 as reported in the Wall Street Journal. (3) Includes $8,694 car allowance. (4) Includes $9,919 car allowance. 51 53 OPTION GRANTS The following table contains information concerning the stock option grants made to each of the Named Executive Officers in the fiscal year ended September 30, 1997. No stock appreciation rights were granted to these individuals during such year.
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF INDIVIDUAL GRANT ANNUAL RATES OF SECURITIES ---------------------------------------- STOCK UNDERLYING % OF TOTAL PRICE APPRECIATION OPTIONS OPTIONS GRANTED EXERCISE FOR OPTION TERM(3) GRANTED TO EMPLOYEES IN PRICE EXPIRATION ------------------ NAME (#) 1997(1) ($/SH)(2) DATE 5%($) 10%($) - ----------------------- ---------- --------------- --------- ---------- ------- -------- Christopher J. Dawes... 0 -- -- -- -- -- Stephen A. Allott...... 18,033(4) 1.98% $2.50 03/09/04 $18,353 $ 42,771 500(4) .05 2.50 05/18/04 509 1,186 500(4) .05 2.50 06/30/04 509 1,186 Mark J. Peach.......... 14,820(4) 1.63 2.50 05/18/04 15,083 35,150 500(4) .05 2.50 06/30/04 509 1,186 Peter Shearan.......... 43,940(4) 4.82 2.50 05/18/04 44,720 104,217 500(4) .05 2.50 06/30/04 509 1,186 Timothy J. Tokarsky.... 77,000(4) 8.45 2.50 03/09/04 78,367 182,628
- --------------- (1) Based on an aggregate of 911,196 options granted in fiscal 1997. (2) The exercise price per share of options granted represented the fair market value of the underlying shares of Common Stock on the dates the respective options were granted as determined by the Company's Board of Directors. The Company's Common Stock was not traded publicly at the time of the option grants to the Named Executive Officers. The exercise price may be paid in cash, in shares of the Company's Common Stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. The Company may also finance the option exercise by loaning the optionee sufficient funds to pay the exercise price for the purchased shares. (3) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission. There can be no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the 7-year option term will be at the assumed 5% or 10% levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the executive officers. (4) Each of the options is immediately exercisable, but any shares purchased under the options are subject to vesting requirements and may be repurchased by the Company at the original exercise price paid per share upon the optionee's cessation of service prior to vesting in such shares. The repurchase right lapses with respect to 25% of the option shares upon completion of one year of service from the vesting commencement date and the balance in a series of equal monthly installments over the next 36 months of service thereafter. The holder of purchased shares, whether or not subject to the Company's repurchase right, is entitled to vote all such shares. The option shares will vest immediately upon an acquisition of the Company by merger or asset sale, unless the Company's repurchase right with respect to the unvested option shares is assigned to the acquiring entity. Each option has a maximum term of seven years, subject to earlier termination in the event of the optionee's cessation of employment with the Company. 52 54 OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table sets forth information concerning the year-end number and value of unexercised options with respect to each of the Named Executive Officers. No options and no stock appreciation rights were exercised by the Named Executive Officers in fiscal year 1997, and no stock appreciation rights were outstanding at the end of that year.
NUMBER OF VALUE OF SECURITIES UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT FY-END(#)(1) AT FY-END($)(2) ------------------- ----------------------- NAME VESTED UNVESTED VESTED UNVESTED - ------------------------------------------------- ------ ------ -------- -------- Christopher J. Dawes............................. 0 0 -- -- Stephen A. Allott................................ 65,604 19,033 $320,804 $ 74,800 Mark J. Peach.................................... 67,700 15,320 306,024 60,208 Peter Shearan.................................... 9,769 62,715 52,104 249,942 Timothy J. Tokarsky.............................. 0 77,000 -- 302,610
- --------------- (1) Each of the options listed in the table is immediately exercisable, but any shares purchased under the options will be subject to vesting requirements and may be repurchased at the original exercise price per share upon the optionee's cessation of service prior to vesting in such shares. (2) Based on the fair market value of the Company's Common Stock at fiscal year end (September 30, 1997) ($6.43 per share), as determined by the Company's Board of Directors less the exercise price payable for such shares. EMPLOYEE BENEFIT PLANS 1997 Stock Option/Stock Issuance Plan In March 1997, the Company's Board of Directors adopted the Company's 1997 Stock Option/Stock Issuance Plan (the "Stock Option Plan"). The Stock Option Plan was approved by the Company's stockholders in March 1997. The number of shares of Common Stock that are reserved for issuance under the Stock Option Plan pursuant to the direct award or sale of shares or the exercise of options is equal to shares. If any options granted under the Stock Option Plan are forfeited or terminate for any other reason without having been exercised in full, then the unpurchased shares subject to those options will become available for additional grants under the Stock Option Plan. If shares granted or purchased under the Stock Option Plan are forfeited, then those shares will also become available for additional grants under the Stock Option Plan. The number of shares reserved for issuance under the Stock Option Plan will be increased automatically on October 1 of each fiscal year, starting with October 1, 1999, by a number equal to the lesser of (a) shares or (b) % of the shares of Common Stock outstanding at that time. Under the Stock Option Plan, all employees (including officers) and directors of the Company or any subsidiary and any independent contractor or advisor who performs services for the Company or a subsidiary are eligible to purchase shares of Common Stock and to receive awards of shares or grants of nonstatutory options. Employees are also eligible to receive grants of incentive stock options ("ISOs") intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The Stock Option Plan is administered by the Board of Directors, which selects the persons to whom shares will be sold or awarded or options will be granted, determines the number of shares to be made subject to each sale, award or grant, and prescribes the other terms and conditions of each sale, award or grant, including the type of consideration to be paid to the Company upon sale or exercise and the vesting schedule. The exercise price under any nonstatutory options generally must be at least 85% of the fair market value of the Common Stock on the date of grant. The exercise price under ISOs cannot be lower than 100% of the fair market value of the Common Stock on the date of grant and, in the 53 55 case of ISOs granted to holders of more than 10% of the voting power of the Company, not less than 110% of such fair market value. The term of an ISO cannot exceed 10 years, and the term of an ISO granted to a holder of more than 10% of the voting power of the Company cannot exceed five years. Each new nonemployee director who is elected to the Company's Board of Directors after this Offering will automatically be granted as of the date of election an option to purchase shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. The shares subject to these options will vest in four equal annual installments, commencing on the date of grant. In addition, each non-employee director who has completed at least six months of service, and who will continue to serve following any annual meeting of stockholders, will automatically be granted an option as of the date of such meeting to purchase shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. The shares subject to these options will vest on the first anniversary of grant. As of September 30, 1997, options to purchase an aggregate of 1,312,086 shares of Common Stock were outstanding under the Stock Option Plan at a weighted average exercise price of $2.19. As of September 30, 1997, a total of 100,000 shares of Common Stock are available for future issuance under the Stock Option Plan. 1997 Employee Stock Purchase Plan In December 1997, the Board of Directors adopted the Company's Employee Stock Purchase Plan (the "ESPP") to provide employees of the Company with an opportunity to purchase Common Stock through payroll deductions. The ESPP was approved by the stockholders of the Company in December 1997. Under the ESPP shares of Common Stock have been reserved for issuance. The ESPP is expected to become effective at the time of this Offering. All full-time regular employees who are employed by the Company on the effective date of this Offering will be eligible to participate in the ESPP after completing a three-month waiting period. Eligible employees may contribute up to 15% of their total cash compensation to the ESPP. Amounts withheld are applied at the end of every six-month accumulation period to purchase shares of Common Stock, but not more than shares per accumulation period. The value of the Common Stock (determined as of the beginning of the offering period) that may be purchased by any participant in a calendar year is limited to $25,000. Participants may withdraw their contributions at any time before stock is purchased. The purchase price is equal to 85% of the lower of (a) the market price of Common Stock immediately before the beginning of the applicable offering period or (b) the market price of Common Stock at the time of the purchase. In general, each offering period is 24 months long, but a new offering period begins every six months. Thus up to four overlapping offering periods may be in effect at the same time. An offering period continues to apply to a participant for the full 24 months, unless the market price of Common Stock is lower when a subsequent offering period begins. In that event, the subsequent offering period automatically becomes the applicable period for purposes of determining the purchase price. The first accumulation and offering periods are expected to commence on the effective date of this Offering and will end on , 199 and , 199 , respectively. CHANGE OF CONTROL ARRANGEMENTS Upon a Change in Control, an award of an option, stock appreciation rights, stock units or restricted shares will become fully exercisable as to all shares subject to such award if such award is not assumed by the surviving corporation or its parent and the surviving corporation or its parent does not substitute such award with another award of substantially the same terms. A Change in Control includes a merger or consolidation of the Company after which the Company's then current 54 56 stockholders own less than 50% of the surviving corporation, sale of all or substantially all of the assets of the Company, a proxy contest that results in replacement of more than one-third of the directors over a 24-month period or acquisition of 50% or more of the Company's outstanding stock by a person other than a trustee of any of the Company's employee benefit plans or a corporation owned by the stockholders of the Company in substantially the same proportions as their stock ownership in the Company. In the event of a merger or other reorganization, outstanding options, stock appreciation rights, restricted shares and stock units will be subject to the agreement of merger or reorganization, which may provide for the assumption of outstanding awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting and accelerated expiration or for settlement in cash. 55 57 CERTAIN TRANSACTIONS Since October 1, 1994, the Company has issued and sold securities to the following persons who are principal stockholders, executive officers or directors of the Company.
SERIES A SERIES B SERIES C TOTAL SHARES PREFERRED PREFERRED PREFERRED COMMON AS IF INVESTOR(1) STOCK(2) STOCK(3) STOCK(4) STOCK CONVERTED(5) - --------------------------- --------- --------- --------- ------ ------------ Sierra Ventures V, L.P.(6).................. 1,500,000 2,000,000 295,490 -- 3,795,490 CITICORP(7)................ -- -- 777,605 -- 777,605 Jeffrey M. Drazan(8)....... -- -- 15,552 60,000 75,552 David C. Schwab............ -- -- 15,552 60,000 75,552
- --------------- (1) See "Principal Stockholders" for more detail on shares held by these purchasers. (2) Reflects shares purchaseable upon exercise of a warrant to purchase shares of Series A Preferred Stock at a per share exercise price of $2.00. (3) The per share purchase price for the Series B Preferred Stock was $2.50. (4) The per share purchase price for the Series C Preferred Stock was $6.43. (5) Reflects a one-to-one conversion to Common Stock ratio for each share of Series A, Series B and Series C Preferred Stock. (6) Each of Jeffrey M. Drazan and David C. Schwab, each a general partner of SV Associates V, LP, the general partner of Sierra Ventures V, L.P., is a director of the Company. (7) In connection with this purchase, CITICORP and the Company entered into an agreement whereby CITICORP agreed not to vote in any election for the directors of the Company any shares it holds in excess of 4.99% of the outstanding capital stock of the Company entitled to vote on such matters, assuming for the purposes of such calculation the exercise or conversion of any securities exercisable or convertible into shares of Common Stock. (8) Includes 7,776 shares of Series C Preferred Stock registered in the name of the Sandra Drazan Living Trust and 7,776 shares of Series C Preferred Stock registered in the name of ZD. Air, Inc. In addition, the Company has granted options to certain of its executive officers. See "Management -- Option Grants." MARCH 1997 FINANCING On March 6, 1997, the Company entered into the following transactions with Sierra Ventures V, L.P.: (i) the Company issued 2,000,000 shares of Series B Preferred Stock at a per share purchase price of $2.50; (ii) the Company issued a warrant to purchase 1,500,000 shares of Series A Preferred Stock at a per share exercise price of $2.00; and (iii) the Company and Sierra Ventures V, L.P. entered into a Credit Agreement (the "Credit Agreement") whereby Sierra Ventures V, L.P. agreed to make revolving loans to the Company in an aggregate amount of up to $3.0 million for a period of five years. The Company had borrowed and repaid an aggregate of $1.0 million under the Credit Agreement and as of September 30, 1997 there was no outstanding balance under the Credit Agreement. The Credit Agreement will terminate upon the Offering. SEPTEMBER 1997 FINANCING On September 8, 1997, the Company issued an aggregate of 2,488,336 shares of Series C Preferred Stock at a per share purchase price of $6.43 to 18 investors, including 295,490 shares to Sierra Ventures V, L.P., 777,605 shares to CITICORP, 15,552 shares to David C. Schwab, 7,776 shares to the Sandra Drazan Living Trust and 7,776 shares to ZD. Air, Inc. STOCK PURCHASES BY DIRECTORS On July 15, 1997, the Company issued to each of Jeffrey M. Drazan and David C. Schwab 60,000 shares of Common Stock at a per share purchase price of $2.50 pursuant to the Company's 1997 Stock Option/Stock Issuance Plan. See "Management -- Employee Benefit Plans." 56 58 REPURCHASES OF STOCK FROM CERTAIN OFFICERS On July 15, 1997, the Company repurchased 120,000 shares of Common Stock at a per share purchase price of $2.50 from Christopher J. Dawes, President and Chief Executive of the Company. On November 13, 1997, the Company repurchased 777,605 shares of Common Stock at a per share purchase price of $6.43 from Mr. Dawes. LOANS TO CERTAIN OFFICERS The Company has loaned funds to Christopher J. Dawes pursuant to interest free loans. These loans have had fluctuating balances equaling in the aggregate $158,613 at September 30, 1996 and $1.2 million at September 30, 1997. The outstanding loan balance as of September 30, 1996 has been translated from British pounds sterling into United States dollars solely for the convenience of the reader at L1.00 = $1.6185, based on the New York foreign exchange selling rate at 4:00 p.m. Eastern time as reported in the Wall Street Journal. All future transactions, including loans between the Company and its officers, directors, principal stockholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors on the Board of Directors. 57 59 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's outstanding Common Stock as of September 30, 1997 and as adjusted to reflect the sale of the Common Stock offered hereby for: (i) each of the directors and Named Executive Officers of the Company; (ii) all directors and executive officers of the Company as a group; and (iii) each other person known by the Company to own beneficially more than 5% of the Company's Common Stock. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners have sole voting and investment power with respect to such shares.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEFORE THE OFFERING SHARES OWNED AFTER THE OFFERING -------------------------- BEING --------------------------- NUMBER PERCENT(1)(2) OFFERED NUMBER PERCENT(1)(2) ---------- ------------- ------------ ------------ ------------- NAMED EXECUTIVE OFFICERS AND DIRECTORS Christopher J. Dawes......... 3,609,231 28.7 Mark J. Peach(3)............. 83,020 Stephen A. Allott(4)......... 84,637 * Timothy J. Tokarsky(5)....... 77,000 * Peter Shearan(6)............. 72,484 * Angela Dawes................. 1,830,236 14.6 Jeffrey M. Drazan(7)......... 3,863,266 30.7 3000 Sand Hill Road Building 4, Suite 210 Menlo Park, CA 94025 David C. Schwab(8)........... 4,031,042 32.1 3000 Sand Hill Road Building 4, Suite 210 Menlo Park, CA 94025 OTHER 5% STOCKHOLDERS Sierra Ventures V, L.P.(9)... 3,795,490 30.2 3000 Sand Hill Road Building 4, Suite 210 Menlo Park, CA 94025 CITICORP(10)................. 777,605 6.2 155 East 53rd Street 1 CITICORP Center New York, NY 10043 ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (11 PERSONS)(11)............... 10,037,810 76.9
- --------------- * Less than 1% (1) Assumes no exercise of the Underwriters' over-allotment option. (2) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Common Stock subject to options currently exercisable or exercisable within 60 days of September 30, 1997 are deemed outstanding for purposes of computing the percentage ownership of the person holding such option but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Except where indicated, and subject to community property laws where applicable, the persons in the table above have sole voting and investment power with respect to all Common Stock shown as beneficially owned by them. Unless otherwise indicated, the address of each of the individuals listed in the table is c/o Micromuse Inc., 139 Townsend Street, San Francisco, CA 94107. (3) Includes 83,020 shares subject to options which are exercisable within 60 days of September 30, 1997. (4) Includes 84,637 shares subject to options which are exercisable within 60 days of September 30, 1997. (5) Includes 77,000 shares subject to options which are exercisable within 60 days of September 30, 1997. (6) Includes 72,484 shares subject to options which are exercisable within 60 days of September 30, 1997. 58 60 (7) Includes 3,795,490 shares held by Sierra Ventures V, L.P., including 1,500,000 shares issuable upon the exercise of a warrant for Series A Preferred Stock of the Company at $2.00 per share issued to Sierra Ventures V, L.P. and the conversion of such shares into Common Stock, and 7,776 shares held by ZD. Air, Inc., a corporation. Mr. Drazan, a director of the Company, is a general partner of SV Associates V, LP, which is the general partner of Sierra Ventures V, L.P. Mr. Drazan disclaims beneficial ownership of the shares held by Sierra Ventures V, L.P. except to the extent of his pecuniary interest therein arising from his general partnership interest in SV Associates V, LP. (8) Includes 3,795,490 shares held by Sierra Ventures V, L.P., including 1,500,000 shares issuable upon the exercise of a warrant for Series A Preferred Stock of the Company at $2.00 per share issued to Sierra Ventures V, L.P. and the conversion of such shares into Common Stock. Mr. Schwab, a director of the Company, is a general partner of SV Associates V, LP, which is the general partner of Sierra Ventures V, L.P. Mr. Schwab disclaims beneficial ownership of the shares held by Sierra Ventures V, L.P. except to the extent of his pecuniary interest therein arising from his general partnership interest in SV Associates V, LP. (9) Includes 1,500,000 shares issuable upon the exercise of a warrant for Series A Preferred Stock of the Company issued to Sierra Ventures V, L.P. and the conversion of such shares into Common Stock. Messrs. Drazan and Schwab, each a director of the Company, are general partners of SV Associates V, LP, which is the general partner of Sierra Ventures V, L.P. Each of Messrs. Drazan and Schwab disclaim beneficial ownership of the shares held by Sierra Ventures V, L.P. except to the extent of his pecuniary interest therein arising from his general partnership interest in SV Associates V, LP. (10) Pursuant to the terms of an Agreement between the Company and CITICORP, dated as of September 8, 1997, CITICORP may vote in an election of the Company's directors a number of its shares up to but not exceeding 4.99% of the Company's outstanding Common Stock, including shares of Common Stock issuable upon the exercise of outstanding options and shares of Common Stock reserved for issuance under the Company's stock plans. The terms of such agreement do not affect the rights of CITICORP to vote on any other matter. (11) Includes 479,525 shares of Common Stock issuable upon exercise of immediately exercisable options held by certain officers and 3,803,266 shares held by entities affiliated with Messrs. Drazan and Schwab. 59 61 DESCRIPTION OF CAPITAL STOCK Upon the closing of this Offering, the authorized capital stock of the Company will consist of 60,000,000 shares of Common Stock, $0.01 par value, and 5,000,000 shares of Preferred Stock, $0.01 par value. COMMON STOCK As of September 30, 1997, there were 12,574,189 shares of Common Stock outstanding that were held of record by 32 stockholders (assuming the conversion of all outstanding shares of Preferred Stock into 5,988,336 shares of Common Stock, which includes the issuance of 1,500,000 shares of Common Stock as converted upon the anticipated exercise of an outstanding warrant). There will be shares of Common Stock outstanding (assuming no exercise of the Underwriters' over-allotment option and assuming no exercise after September 30, 1997 of outstanding options) after giving effect to the sale of the shares of Common Stock to the public offered hereby and the conversion of the Company's Preferred Stock into Common Stock at a one-to-one ratio. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable, and the shares of Common Stock to be issued upon completion of this Offering will be fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. At present, the Company has no plans to issue any of the Preferred Stock. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW Certificate of Incorporation and Bylaws The Company's Restated Certificate of Incorporation provides that, upon the closing of this Offering, the Board of Directors will be divided into two classes of directors, with each class serving a staggered two-year term. The classification of the Board of Directors has the effect of generally requiring at least two annual stockholder meetings, instead of one, to replace a majority of the Board members. The Restated Certificate of Incorporation also provides that, effective upon the closing of this Offering, all stockholder actions must be effected at a duly called meeting and not by consent in writing. Provisions of the Bylaws and the Restated Certificate of Incorporation provide that the stockholders may amend the Bylaws or certain provisions of the Restated 60 62 Certificate of Incorporation only with the affirmative vote of 75% of the Company's capital stock. Further, the Bylaws (i) provide that only the Board of Directors may call special meetings of the stockholders and (ii) establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders of the Company, including proposed nominations of persons for election to the Board of Directors. These provisions of the Restated Certificate of Incorporation and Bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened change of control of the Company. These provisions are designed to reduce the vulnerability of the Company to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for the Company's shares and, as a consequence, they also may inhibit fluctuations in the market price of the Company's shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in the management of the Company. See "Risk Factors -- Anti-takeover Effects of Certificate of Incorporation, Bylaws and Delaware Law." Delaware Takeover Statute The Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder unless: (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combinations to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. REGISTRATION RIGHTS After this Offering, the holders of 12,274,189 shares of Common Stock will be entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the 61 63 terms of the agreement between the Company and the holders of such registrable securities, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein. Additionally, such holders are also entitled to certain demand registration rights pursuant to which they may require the Company to file a registration statement under the Securities Act at its expense with respect to their shares of Common Stock, and the Company is required to use its best efforts to effect such registration. Further, holders may require the Company to file additional registration statements on Form S-3 at the Company's expense. All of these registration rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration and the right of the Company not to effect a requested registration within six months following an offering of the Company's securities, including the Offering made hereby. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is ChaseMellon Shareholder Services and its telephone number is (415) 743-1444. 62 64 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have approximately shares of Common Stock outstanding (assuming no exercise of options or issuance of Common Stock subsequent to September 30, 1997 other than the issuance of 1,500,000 shares of Common Stock as converted upon the anticipated exercise of an outstanding warrant). All of the shares sold in this Offering are freely tradeable without restriction or further registration under the Securities Act, except for any shares purchased by affiliates of the Company, as that term is defined in Rule 144 under the Securities Act ("Affiliates"), which may generally be sold only in compliance with certain of the limitations of Rule 144 described below. The remaining 12,988,333 shares of Common Stock are deemed "restricted securities" under Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. As a result of the contractual restrictions described below and the provisions of Rules 144, 144(k) and 701, no shares will be available for immediate sale in the public market on the date of this Prospectus. Beginning 180 days after the date of this Prospectus, upon the expiration of transfer restrictions specified in preexisting agreements or in lock-up agreements with Deutsche Morgan Grenfell Inc., (i) no shares will be available for immediate sale in the public market in accordance with Rule 144(k) and (ii) approximately 9,945,371 shares will be available for sale in the public market in accordance with Rule 144 or Rule 701, subject to the volume and other resale limitations of Rule 144, other than the one year holding period. The remaining 2,568,818 shares are eligible for sale in the public market more than 180 days after the date of this Prospectus. All officers and directors and certain stockholders and certain option holders of the Company have agreed not to offer, pledge, sell, contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly (or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of), any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a period of 180 days after the date of this Prospectus, without the prior written consent of Deutsche Morgan Grenfell Inc. In general, under Rule 144, beginning approximately 90 days after the effective date of the Registration Statement of which this Prospectus is a part, a stockholder, including an Affiliate, who has beneficially owned his or her restricted securities (as that term is defined in Rule 144) for at least one year from the later of the date such securities were acquired from the Company or (if applicable) the date they were acquired from an Affiliate, is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately shares immediately after this Offering) or the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule 144, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted securities were acquired from the Company, a stockholder who is not an Affiliate of the Company at the time of sale and has not been an Affiliate of the Company for at least three months prior to the sale is entitled to sell the shares immediately without compliance with the foregoing requirements of Rule 144. Securities issued in reliance on Rule 701 (such as shares of Common Stock that may be acquired pursuant to the exercise of certain options granted prior to this Offering) are also restricted securities and, beginning 90 days after the date of this Prospectus, may be sold by stockholders other than Affiliates of the Company subject only to the manner of sale provisions of Rule 144 and by an Affiliate under Rule 144 without compliance with its one-year holding period requirement. As of September 30, 1997, the holders of options exercisable into approximately 63 65 1,312,086 shares of Common Stock will be eligible to sell their shares upon the expiration of transfer restrictions specified in the Stock Option Plan 180 days after the date of this Prospectus, subject in certain cases to vesting of such options. Prior to this Offering, there has been no public market for the Common Stock. No prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. The Company is unable to estimate the number of shares that may be sold in the public market pursuant to Rule 144, since this will depend on the market price of the Common Stock, the personal circumstances of the sellers and other factors. Nevertheless, sales of significant amounts of the Common Stock of the Company in the public market could adversely affect the market price of the Common Stock and could impair the Company's ability to raise capital through an offering of its equity securities. The Company intends to file after the effective date of this Offering a Registration Statement on Form S-8 to register approximately shares of Common Stock reserved for issuance pursuant to the Stock Option Plan and the ESPP. Such Registration Statement will become effective automatically upon filing. Shares issued under the foregoing plan, after the filing of a Registration statement on Form S-8, may be sold in the open market, subject, in the case of certain holders, to the Rule 144 limitations applicable to affiliates, the above-referenced preexisting transfer restrictions and vesting restrictions imposed by the Company. In addition, following this Offering, the holders of 12,274,189 shares of outstanding Common Stock will, under certain circumstances, have rights to require the Company to register their shares for future sale. See "Description of Capital Stock -- Registration Rights." 64 66 UNDERWRITING The Underwriters named below, for whom Deutsche Morgan Grenfell Inc., NationsBanc Montgomery Securities, Inc. and Smith Barney Inc. are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement (the form of which will be filed as an exhibit to the Company's Registration Statement, of which this Prospectus is a part), to purchase from the Company and the Selling Stockholders the respective number of shares of Common Stock indicated below opposite their respective names. The Underwriters are committed to purchase all of the shares, if they purchase any.
NUMBER NAME OF SHARES - --------------------------------------------------------------------------------- --------- Deutsche Morgan Grenfell Inc..................................................... NationsBanc Montgomery Securities, Inc........................................... Smith Barney Inc................................................................. ------- Total.................................................................. =======
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The Representatives have advised the Company that the Underwriters propose initially to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers (who may include the Underwriters) a concession of not more than $ per share. The selected dealers may reallow a concession of not more than $ per share to certain other dealers. After the initial public offering, the price and concessions and re-allowances to dealers and other selling terms may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. The Underwriters do not intend to sell any of the shares of Common Stock offered hereby to accounts for which they exercise discretionary authority. The Company and certain Selling Stockholders have granted an option to the Underwriters to purchase up to maximum of additional shares of Common Stock to cover over-allotments, if any, at the public offering price, less the underwriting discount set forth on the cover page of this Prospectus. Such option may be exercised at any time until 30 days after the date of the Underwriting Agreement. To the extent the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover overallotments made in connection with this offering. In connection with this offering, the Company and the directors, executive officers, Selling Stockholders and certain other stockholders have agreed not to offer or sell any Common Stock until the expiration of 180 days following the date of the final Prospectus without the prior written consent of Deutsche Morgan Grenfell Inc. The Underwriting Agreement provides that the Company and the Selling Stockholders will indemnify the several Underwriters against certain liabilities, including civil liabilities under the Securities Act, as amended, or will contribute to payments the Underwriters may be required to make in respect thereof. In September 1997, the Company issued 155,521 shares of the Company's Series C Preferred Stock at a per share purchase price of $6.43 to DMG Technology Ventures L.L.C. ("DMG Technology"), an affiliate of Deutsche Morgan Grenfell Inc. The shares owned by DMG Technology represent less than 2% of the outstanding capital stock of the Company before the Offering. All of such shares were acquired from the Company as a part of an equity financing on the 65 67 same terms pursuant to which all other participants in the financing purchased their shares. See "Certain Transactions -- September 1997 Financing." In December 1996, Deutsche Bank AG ("Deutsche Bank"), an affiliate of Deutsche Morgan Grenfell Inc., paid approximately $164,000 to the Company for a license of the Company's software and a service and maintenance agreement in connection therewith. In addition, the Company and Deutsche Bank entered into a Software License Agreement dated September 19, 1997 whereby the Company granted Deutsche Bank a non-exclusive irrevocable license to the Company's Netcool products. Both transactions were consummated on terms established by arms-length negotiations and on terms substantially similar to terms agreed upon by the Company in other similar transactions entered into with its other customers at approximately the same time. Smith Barney, Inc. ("Smith Barney") paid approximately $160,000 to the Company for a license of the Company's software and a service and maintenance agreement in connection therewith. Smith Barney obtained such license and service and maintenance agreement through arms-length negotiations on terms substantially similar to terms obtained by other customers of the Company at approximately the same time. In May 1996, Smith Barney, Inc. ("Smith Barney") paid approximately $160,000 to the Company for a license of the Company's software and a service and maintenance agreement in connection therewith. Smith Barney obtained such license and service and maintenance agreement through arms-length negotiations on terms substantially similar to terms obtained by other customers of the Company at approximately the same time. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price will be determined by negotiation between the Company and the Representatives. The principal factors to be considered in determining the public offering price include the information set forth in this Prospectus and otherwise available to the Representatives; the history and the prospects for the industry in which the Company will compete; the ability of the Company's management; the prospects for future earnings of the Company; the present state of the Company's development and its current financial condition; the general condition of the securities markets at the time of this offering; and the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. Each of the Representatives has informed the Company that it currently intends to make a market in the shares subsequent to the effectiveness of this offering, but there can be no assurance that the Representatives will take any action to make a market in any securities of the Company. Certain persons participating in this offering may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with this offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling concession from a syndicate member in connection with this offering when shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company and the Selling Stockholders by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. As of September 30, 1997, an investment partnership comprised of 66 68 members of that firm beneficially owned 7,776 shares of the Company's Series C Preferred Stock. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The financial statements of Micromuse Inc. as of September 30, 1996 and 1997, and for each of the years in the three-year period ended September 30, 1997, have been included in this Prospectus and Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing in the Registration Statement. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (of which this Prospectus is a part and which term shall encompass any amendments thereto) on Form S-1 pursuant to the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions of which are omitted as permitted by the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to any such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference. Upon completion of the Offering, the Company will be subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will file reports and other information with the Commission. The Registration Statement, the exhibits and schedules forming a part thereof and the report and other information filed by the Company with the Commission in accordance with the Exchange Act may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. The Company intends to furnish to its stockholders annual reports containing audited consolidated financial statements examined by an independent accounting firm and quarterly reports for the first three quarters of each fiscal year containing interim unaudited consolidated financial information. 67 69 MICROMUSE INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report......................................................... F-2 Consolidated Balance Sheets as of September 30, 1996 and 1997........................ F-3 Consolidated Statements of Operations for the Years Ended September 30, 1995, 1996, and 1997........................................................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended September 30, 1995, 1996, and 1997................................................. F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 1995, 1996, and 1997........................................................................... F-6 Notes to Consolidated Financial Statements........................................... F-7
F-1 70 INDEPENDENT AUDITORS' REPORT The Board of Directors Micromuse Inc.: We have audited the accompanying consolidated balance sheets of Micromuse Inc. and subsidiaries as of September 30, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended September 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Micromuse Inc. and subsidiaries as of September 30, 1996, and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Palo Alto, California December 10, 1997 F-2 71 MICROMUSE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
SEPTEMBER 30, ------------------ 1996 1997 ------ ------- Current assets: Cash and cash equivalents........................................... $ 594 $13,741 Accounts receivable................................................. 5,682 4,461 Inventories......................................................... 399 -- Prepaid expenses and other current assets........................... 1,250 935 Related party loan.................................................. 159 1,153 ------ ------ Total current assets........................................ 8,084 20,290 Property and equipment, net........................................... 1,023 2,450 ------ ------ $9,107 $22,740 ====== ====== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.................................................... $4,048 $ 2,654 Bank overdraft...................................................... 1,351 -- Current portion of capital lease obligations........................ 114 -- Accrued expenses.................................................... 971 3,133 Short-term notes.................................................... 1,275 -- Deferred revenue.................................................... 1,172 1,322 ------ ------ Total current liabilities................................... 8,931 7,109 Long-term liabilities: Long-term portion of capital lease obligations...................... 130 -- Long-term notes..................................................... 268 -- Commitments and contingencies Redeemable convertible preferred stock: Series A, B, and C redeemable convertible preferred stock; $0.01 par value; 1,500,000, 2,000,000, and 2,488,336 shares authorized, respectively in 1997; none, 2,000,000, and 2,488,336 shares issued and outstanding, respectively in 1997 (aggregate liquidation value of $21,000,000)................................ -- 22,865 Stockholders' deficit: Common stock, $0.01 par value; 18,500,000 shares authorized; 6,099,753 and 6,705,853 shares issued and outstanding in 1996 and 1997............................................................. 61 366 Additional paid-in capital.......................................... 264 2,091 Treasury stock, at cost: 120,000 shares............................. -- (300) Deferred compensation............................................... -- (215) Cumulative translation adjustment................................... 50 52 Accumulated deficit................................................. (597) (9,228) ------ ------ Total stockholders' deficit................................. (222) (7,234) ------ ------ $9,107 $22,740 ====== ======
See accompanying notes to consolidated financial statements. F-3 72 MICROMUSE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, ----------------------------- 1995 1996 1997 ------ ------ ------- Revenues: License................................................... $1,077 $3,374 $ 6,968 Maintenance and services.................................. 369 1,141 2,324 ------ ------ ------- Total revenues.................................... 1,446 4,515 9,292 ------ ------ ------- Cost of revenues: License................................................... 163 311 523 Maintenance and services.................................. 102 384 1,042 ------ ------ ------- Total cost of revenues............................ 265 695 1,565 ------ ------ ------- Gross profit...................................... 1,181 3,820 7,727 ------ ------ ------- Operating expenses: Sales and marketing....................................... 728 1,768 8,970 Research and development.................................. 708 1,582 2,042 General and administrative................................ 584 996 4,244 ------ ------ ------- Total operating expenses.......................... 2,020 4,346 15,256 ------ ------ ------- Loss from operations.............................. (839) (526) (7,529) Interest expense............................................ (106) (179) (1,404) ------ ------ ------- Loss before income taxes.......................... (945) (705) (8,933) Income taxes................................................ -- 100 -- ------ ------ ------- Loss from continuing operations................... (945) (805) (8,933) Discontinued operations: Income (loss) from discontinued operations, net of taxes.................................................. 711 569 (104) Gain on disposal of discontinued operations, net of taxes.................................................. -- -- 1,161 ------ ------ ------- Net loss.......................................... (234) (236) (7,876) Accretion on redeemable convertible preferred stock......... -- -- (755) ------ ------ ------- Net loss applicable to holders of common stock.... $ (234) $ (236) $(8,631) ====== ====== ======= Per share of common stock: Pro forma loss from continuing operations................. $ (0.83) Pro forma loss from discontinued operations............... $ (0.01) Pro forma gain on disposal of discontinued operations..... $ 0.11 Pro forma net loss applicable to holders of common stock..................................................... $ (0.80) ======= Shares used in per share calculation........................ 10,817 =======
See accompanying notes to consolidated financial statements. F-4 73 MICROMUSE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
TOTAL COMMON STOCK ADDITIONAL TREASURY STOCK DEFERRED CUMULATIVE STOCKHOLDERS' --------------- PAID-IN --------------- STOCK TRANSLATION ACCUMULATED EQUITY SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION ADJUSTMENT DEFICIT (DEFICIT) ------ ------ ---------- ------ ------ ------------ ----------- ----------- ------------- Balances as of September 30, 1994................ 2,969 $ 30 $ 47 -- $ -- $ -- $-- $ 13 $ 90 Issuance of common stock............... 2,968 29 48 -- -- -- -- (77) -- Foreign currency translation adjustment.......... -- -- -- -- -- -- 4 -- 4 Net loss.............. -- -- -- -- -- -- -- (234) (234) Dividend.............. -- -- -- -- -- -- -- (63) (63) ----- ---- ------ ---- ------ ------ -------- -------- ------- Balances as of September 30, 1995................ 5,937 59 95 -- -- -- 4 (361) (203) Issuance of common stock............... 163 2 2 -- -- -- -- -- 4 Deferred compensation related to grants of stock options....... -- -- 167 -- -- (167) -- -- -- Amortization of deferred employee compensation........ -- -- -- -- -- 167 -- -- 167 Foreign currency translation adjustment.......... -- -- -- -- -- -- 46 -- 46 Net loss.............. -- -- -- -- -- -- -- (236) (236) ----- ---- ------ ---- ------ ------ -------- -------- ------- Balances as of September 30, 1996................ 6,100 61 264 -- -- -- 50 (597) (222) Bonus shares issued... 450 5 1,138 -- -- -- -- -- 1,143 Stock options exercised........... 36 -- 130 -- -- -- -- -- 130 Compensation expense related to stock transfers........... -- -- 210 -- -- -- -- -- 210 Treasury stock purchased........... -- -- -- (120) (300) -- -- -- (300) Issuance of common stock............... 120 300 120 -- -- -- -- -- 420 Deferred compensation related to grants of stock options....... -- -- 229 -- -- (229) -- -- -- Amortization of deferred employee compensation........ -- -- -- -- -- 14 -- -- 14 Foreign currency translation adjustment.......... -- -- -- -- -- -- 2 -- 2 Net loss.............. -- -- -- -- -- -- -- (7,876) (7,876) Accretion on redeemable convertible preferred stock..... -- -- -- -- -- -- -- (755) (755) ----- ---- ------ ---- ------ ------ -------- -------- ------- Balances as of September 30, 1997................ 6,706 $366 $2,091 (120) $(300) $ (215) $52 $(9,228) $(7,234) ===== ==== ====== ==== ====== ====== ======== ======== =======
See accompanying notes to consolidated financial statements. F-5 74 MICROMUSE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ---------------------------------- 1995 1996 1997 -------- -------- -------- Cash flows from operating activities: Net loss..................................................... $ (234) $ (236) $ (7,876) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization.............................. 489 603 669 Loss on disposal of assets................................. 484 242 51 Debt issuance costs........................................ -- -- 1,289 Amortization of deferred employee compensation............. -- 167 14 Compensation expense related to stock transfers............ -- -- 330 Compensation expense relating to bonus shares issued....... -- -- 1,143 Changes in operating assets and liabilities: Accounts receivable...................................... (1,372) (2,495) 1,221 Inventories.............................................. 747 (53) 399 Prepaid expenses and other current assets................ (618) (294) 315 Related party loan....................................... (25) (127) (994) Accounts payable......................................... 85 1,806 (1,394) Accrued expenses......................................... 255 149 2,162 Deferred revenue......................................... 111 548 150 Long-term taxes payable.................................. 17 (22) -- -------- -------- -------- Net cash provided by (used in) operating activities... (61) 288 (2,521) -------- -------- -------- Cash flows used in investing activities - capital expenditures................................................. (397) (602) (2,147) -------- -------- -------- Cash flows from financing activities: Bank overdraft............................................... 309 677 (1,351) Proceeds from short-term notes............................... 324 951 -- Payment of short-term notes.................................. -- -- (1,275) Proceeds from long-term notes payable........................ 414 -- -- Payments on long-term notes payable.......................... (204) (205) (268) Payments on capital lease obligations........................ (332) (577) (244) Proceeds from issuance of common stock....................... -- 4 430 Purchase of treasury stock................................... -- -- (300) Proceeds from issuance of redeemable convertible preferred stock...................................................... -- -- 20,821 Payment of dividends......................................... (63) -- -- -------- -------- -------- Net cash provided by financing activities............. 448 850 17,813 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents... 4 46 2 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........... (6) 582 13,147 Cash and cash equivalents at beginning of year................. 18 12 594 -------- -------- -------- Cash and cash equivalents at end of year....................... $ 12 $ 594 $ 13,741 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year - interest......................... $ 79 $ 159 $ 154 ======== ======== ======== Noncash financing activities - accretion on redeemable convertible preferred stock................................ $ -- $ -- $ 755 ======== ======== ========
See accompanying notes to consolidated financial statements. F-6 75 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1995, 1996, AND 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Micromuse Inc. and subsidiaries (the Company) develops, markets, and supports a family of scaleable, highly configurable, rapidly deployable, software solutions for the effective monitoring and management of multiple elements underlying an enterprise's information technology infrastructure. The Company maintains its U.S. headquarters in California and its European headquarters in London, England. Micromuse plc was incorporated in England in 1989 and operated in the United States through its subsidiary, Micromuse (USA) Inc., a Texas corporation. In 1997, Micromuse plc became a subsidiary of Micromuse Inc., a Delaware corporation. The Company entered into a stock exchange agreement with the stockholders of the English corporation in March 1997. The Company's Board of Directors approved an exchange of one share in the English corporation for 5.9365 shares in the Delaware corporation. The Certificate of Incorporation of the Delaware corporation authorizes 18,500,000 shares of common stock at $0.01 par value per share and 5,988,336 shares of preferred stock at $0.01 par value per share. The accompanying consolidated financial statements have been retroactively restated to give effect to the reorganization and exchange of common stock. Registration Statement In December 1997, the Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission (SEC) permitting the Company to sell shares of the Company's common stock in connection with a proposed initial public offering (IPO). If the offering is consummated under the terms presently anticipated, all the currently outstanding shares of Series B preferred stock will automatically convert into 2,000,000 shares of common stock upon the closing of the proposed IPO. All of the outstanding shares of Series C preferred stock will convert into 2,488,336 shares of common stock upon the written consent or agreement of the holders of two-thirds of the outstanding shares of Series A, B, and C voting together as a single class. The conversion of the preferred stock has been reflected in the pro forma stockholders' equity as of September 30, 1997. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash Equivalents The Company considers all highly liquid instruments with a purchased maturity of 90 days or less to be cash equivalents. F-7 76 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997 Concentration of Credit Risk Financial instruments consist of cash and trade receivables. Trade receivables potentially subject the Company to concentrations of credit risk. The Company closely monitors extensions of credit and has not experienced significant credit losses in the past. Credit losses have been provided for in the consolidated financial statements and have been within management's expectations. Fair Value of Financial Instruments The fair value of the Company's cash and cash equivalents, accounts receivable, accounts payable and the redeemable convertible preferred stock approximate their respective carrying amounts defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. Property and Equipment Property and equipment are recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally three years. During 1996, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of. The adoption of SFAS No. 121 did not have a material effect on the Company's consolidated financial position or results of operations. Revenue Recognition Revenues from software licenses are generally recognized upon shipment, provided that no significant obligations remain and collection of the resulting receivable is probable. Maintenance revenues for customer support are deferred and recognized ratably over the term of the maintenance period, generally one year. Consulting revenue is recognized when services are performed. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, Software Revenue Recognition (SOP 97-2). SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, postcontract customer support, installation and training to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence which is specific to the vendor. The revenue allocated to software products, including specified upgrades or enhancements generally is recognized upon delivery of the products. The revenue allocated to postcontract customer support generally is recognized ratably over the term of the support, and revenue allocated to service elements generally is recognized as the services are performed. If evidence of the fair value for all element arrangement does not exist, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. The SOP is effective for fiscal years beginning after December 15, 1997. The Company does not expect a material change to its accounting for revenue as a result of adoption of SOP 97-2. Research and Development Costs In accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, development costs related to software products are expensed as incurred until the technological feasibility of the product has been established. Technological F-8 77 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997 feasibility in the Company's circumstances occurs when a working model is completed. After technological feasibility is established, additional costs would be capitalized. The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility, and, accordingly, no research and development costs have been capitalized to date. Income Taxes The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. Stock-Based Compensation The Company accounts for its stock-based compensation arrangements using the intrinsic value method. As such, compensation expense is recorded when on the date of grant the fair value of the underlying common stock exceeds the exercise price for stock options or the purchase price for issuance or sales of common stock. Foreign Currency Translation The functional currency of the Company's foreign subsidiaries is the local foreign currency. The Company translates the assets and liabilities of its foreign subsidiaries to U.S. dollars at the rates of exchange in effect at the end of the year. Revenues and expenses are translated at the average rates of exchange for the year. Translation adjustments are included in stockholders' deficit in the consolidated balance sheets. Gains and losses resulting from foreign currency transactions denominated in a currency other than the functional currency are included in income and have not been significant to the Company's consolidated operating results in any period. Pro Forma Net Loss Per Share Pro forma net loss per share data is based on the weighted-average number of shares of common stock and, when dilutive, common equivalent shares from stock options and warrants outstanding, using the treasury stock method, and convertible preferred stock on an "as if converted" basis. Pursuant to certain SEC Staff Accounting Bulletins, common stock and convertible preferred stock issued for consideration below the assumed IPO price, and stock options granted and warrants issued with exercise prices below the assumed IPO price during the 12-month period prior to the date of the initial filing of the registration statement, even when antidilutive, have been included in the calculation of pro forma net loss per share, using the treasury stock method based on the assumed IPO price, as if they were outstanding for all periods presented prior to their issuance or grant. The Financial Accounting Standards Board (FASB) recently issued SFAS No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of basic earnings per share (EPS) and, for companies with complex capital structures, diluted EPS. SFAS No. 128 is effective for annual and interim periods ending after December 15, 1997, and requires restatement of all prior period F-9 78 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997 earnings per share data presented. The Company expects that for profitable periods basic EPS will be higher than earnings per share as presented in the accompanying consolidated financial statements, and diluted EPS will not differ materially from earnings per share as presented in the accompanying consolidated financial statements. Computations for loss periods should not change significantly. The Company will adopt SFAS No. 128 in the first quarter of fiscal 1998. Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. It does not, however, require a specific format for the statement, but requires the Company to display an amount representing total comprehensive income for the period in that financial statement. The Company is in the process of determining its preferred format. This statement is effective for fiscal years beginning after December 15, 1997. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. SFAS No. 131 is effective for financial statements for periods beginning after December 31, 1997. The Company has not yet determined whether it has any separately reportable business segments. F-10 79 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997 2. DISCONTINUED OPERATIONS In July 1997, the Company adopted a formal plan to discontinue its Systems Integration division based in England. In September the Company sold the division for approximately $400,000 in cash, net of fees. The disposition of the division in September 1997 has been accounted for as a discontinued operation in accordance with APB Opinion No. 30 and prior period consolidated financial statements have been restated to reflect the discontinuation of the Systems Integration business. Revenue from discontinued operations was $16.6 million, $14.0 million and $15.7 million, respectively in fiscal 1995, 1996 and 1997. The income (loss) from discontinued operations of $711,000, $569,000, and ($104,000) in fiscal 1995, 1996, and 1997, respectively, represents the operation's operating income, net of taxes. The gain on disposal of discontinued operations of $1.2 million in fiscal 1997 represents the gain on disposal of the operation including net income from operations of $256,000 from the measurement date to the disposal date. The following assets and liabilities are included in the consolidated balance sheet as of September 30, 1996 (in thousands):
1996 ------- Cash and cash equivalents........................................ $ 162 Accounts receivable.............................................. 4,137 Inventory........................................................ 399 Prepaid expenses and other current assets........................ 692 Property and equipment........................................... 710 ------- Total assets..................................................... 6,100 Deferred revenue................................................. (1,049) Other liabilities................................................ (6,131) ------- Net liabilities.................................................. $(1,080) =======
If the revenues of the Systems Integration business and purchaser combined exceed $22.9 million in the first year following the disposal date, additional consideration of $250,000 is payable to the Company. At the end of the option period, which expires at December 16, 1997, the purchaser has the option to pay the Company further consideration of $250,000. If the purchaser decides not to pay this amount, the Company is released from all obligations to perform any services for the purchaser except as explicitly specified by the contract. As of September 30, 1997, the Company has not recorded either of these amounts. 3. BALANCE SHEET COMPONENTS Property and equipment
1996 1997 ------- ------ In thousands: Computer equipment.................................... $ 1,583 $2,819 Furniture and fixtures................................ 196 959 Other................................................. 591 597 ------ ------ 2,370 4,375 Less accumulated depreciation......................... (1,347) (1,925) ------ ------ $ 1,023 $2,450 ====== ======
F-11 80 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997 Accrued expenses In thousands: Payroll and commission related........................ $ 125 $ 996 Other................................................. 846 2,137 ---- ------ $ 971 $3,133 ==== ======
4. RELATED PARTY TRANSACTIONS In November 1997, the interest free loan to a stockholder who is an officer and director of the Company was repaid through the Company's repurchase of common stock. See Note 11 for subsequent event discussion. 5. NOTES PAYABLE In February 1995, the Company entered into a $597,000 loan agreement with a bank, bearing interest at 10% per annum, expiring in December 2000. The note was repaid in full by the Company in 1997. 6. STOCKHOLDERS' EQUITY Redeemable Convertible Preferred Stock Redeemable convertible preferred stock as of September 30, 1997, was comprised of the following:
SHARES ISSUED AND CARRYING OUTSTANDING VALUE ----------- ----------- Series A..................................... -- $ 1,468,000 Series B..................................... 2,000,000 5,333,000 Series C..................................... 2,488,336 16,064,000 ---------- ----------- 4,488,336 $22,865,000 ========== ===========
Holders of Series A, B, and C preferred stock may convert all or part of their shares at any time after the date of issuance into such number of common stock as is determined by dividing $2.00, $2.50 and $6.43, respectively, by the conversion price in effect at the time. Conversion is automatic upon the closing of an IPO of the Company's common stock, with respect to Series A and B, at a price of not less than $6.86 per share and with aggregate proceeds of not less than $10 million and with respect to Series C, at a price not less than $9.65 per share if such public offering occurs on or before September 8, 1998, and $12.86 per share thereafter, and with aggregate proceeds of not less than $10 million or by written consent or agreement of the holders of two-thirds of the outstanding shares of Series A, B, and C voting together as a single class. The holders of the Series A, B, and C preferred stock shall be entitled to receive noncumulative dividends of $0.20, $0.25, and $0.643 per share per annum, respectively, when, and if, declared by the Board of Directors. Upon the occurrence of a liquidation event, such as a dissolution of the Company or a merger or sale of assets, the holders of Series A, B, and C preferred stock shall be entitled to receive in preference to holders of common stock an amount equal to the original issuance price and an F-12 81 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997 amount equal to declared but unpaid dividends, and thereafter, share any remaining proceeds on a pro rata basis with the holders of common stock based on the number of shares of common stock held by each, assuming full conversion of Series A, B, and C preferred stock. The Company shall redeem the Series A, B, and C preferred stock at the option of the holders of preferred stock after March 6, 2002, subject to reasonable financial stability considerations, payable quarterly thereafter until satisfied. The holders of preferred stock shall be entitled to a redemption price per share equal to the original issuance price, plus an annually compounded 15% cumulative rate of return thereon. A $3.0 million line of credit was made available to the Company in March 1997. Interest under the line of credit was at no more than prime plus 2% and funds drawn were to be used to finance an acquisition or other vehicle of growth as approved by the Board of Directors. The $3.0 million line of credit was available as of September 30, 1997. If exercised, the line of credit will become due and payable upon the earliest of a qualified public offering, a qualified acquisition, or expiration of the Series A warrant issued in conjunction with the line of credit. During fiscal 1997, the Company drew down $1.0 million which was repaid as of September 30, 1997. The warrant expires on the earlier of March 2002, or the closing date of a public offering, merger, or acquisition of the Company. The warrant issued in conjunction with the line of credit allows the holder to purchase 1,500,000 shares of the Series A preferred stock at an exercise price of $2.00 per share. The warrant was initially recorded at fair value and treated as a debt issuance cost. These costs are being amortized to interest expense over the period from the date of issuance to the anticipated date of the initial public offering, which resulted in a noncash interest charge of $989,000 in fiscal 1997. Common Stock In March 1997, approximately 450,000 shares of common stock were issued to stockholders as bonuses. The Company recorded compensation expense of $1,138,000 for the fair market value of such shares. During fiscal 1997, the principal stockholders transferred shares of common stock to certain employees. The Company recorded compensation expense of $210,000 for the difference between the fair market value and the transfer price of the common stock. Under the Company's 1997 Stock Option/Stock Issuance Plan (the Plan), options to purchase up to an aggregate of approximately 1,532,000 shares of common stock may be granted to employees, officers, directors, and consultants. If the warrant to purchase 1,500,000 shares of Series A is exercised upon an IPO, options to purchase an additional 166,666 shares of common stock will be reserved under the Plan. The Plan provides for the issuance of incentive options to employees that must be granted at an exercise price not less than 100% (110% if the person to whom the option is granted is a 10% stockholder) of the fair market value of the common stock on the date of grant. Options generally vest over four years from the date of grant. The options expire between 5 and 10 years from the grant date, and any vested options must normally be exercised within three months after termination of employment. The Plan is administered by the Company's Board of Directors. F-13 82 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997 A summary of the status of the Company's options under the plan is as follows:
OUTSTANDING OPTIONS ------------------------------------ WEIGHTED- WEIGHTED- NUMBER AVERAGE AVERAGE OF EXERCISE FAIR SHARES PRICE VALUE -------- --------- --------- Balances as of September 30, 1994...... 444,875 $2.41 -- Granted at market value................ 31,208 2.40 -- Balances as of September 30, 1995...... 476,083 2.41 -- Granted at greater than market value... 212,266 3.21 0.10 Granted at market value................ 70,765 2.31 0.36 Granted at less than market value...... 133,915 1.06 1.43 Canceled............................... (317,650) 2.31 -- Balances as of September 30, 1996...... 575,379 2.43 -- Granted at greater than market value... 269,992 2.50 1.25 Granted at market value................ 640,856 2.55 0.43 Exercised.............................. (36,320) 3.50 -- Canceled............................... (137,821) 3.31 -- Balances as of September 30, 1997...... 1,312,086 2.38 -- ========= ======= ====
As of September 30, 1996 and 1997, 338,083 and 267,687 shares, with weighted-average exercise prices of $2.43 and $1.97, were fully vested and exercisable, respectively. As of September 30, 1997, 100,000 shares are available for grant. The following table summarizes information concerning outstanding and exercisable options under the plans outstanding as of September 30, 1997:
OPTIONS OUTSTANDING --------------------------------------- OPTIONS EXERCISABLE WEIGHTED- ---------------------- AVERAGE WEIGHTED- WEIGHTED- RANGE OF REMAINING AVERAGE AVERAGE EXERCISE LIFE (IN EXERCISE EXERCISE PRICES SHARES YEARS) PRICE SHARES PRICE - ------------- --------- ---------- ---------- ------- ---------- $0.03 - 2.50 1,237,984 9.13 $ 2.29 202,825 $ 1.43 $6.43 74,102 6.34 3.99 64,862 3.64 ---- ----- --------- ----- 1,312,086 8.97 $ 2.38 267,687 $ 1.97 ==== ===== ========= =====
The Company uses the intrinsic value-based method to account for all of its employee stock-based compensation plans. Accordingly, no compensation cost has been recognized for its stock options in the accompanying consolidated financial statements because the fair value of the underlying common stock equals or exceeds the exercise price of the stock options at the date of grant, except with respect to certain options issued in 1996 and during fiscal 1997. The Company has recorded deferred stock compensation expense of $167,000 and $229,000 for the difference at the grant date between the exercise price and the fair value of the common stock underlying the options issued in September 1996 and fiscal 1997, respectively. The $167,000 was amortized in fiscal 1996 as the options were fully vested upon issuance and $14,000 of the $229,000 was amortized in fiscal 1997 as the options vest over four years. Had compensation cost for the Company's stock options been determined in a manner consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net loss F-14 83 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997 and loss per share would not have been materially different from that disclosed in the Consolidated Statements of Operations. The per share weighted-average fair value of stock options granted during 1996 and 1997 was $0.57 and $0.67, respectively, on the date of grant using the minimum value method with the following weighted assumptions: 1996 -- expected dividend yield 0.0%, risk-free interest rate of 6.06%, and expected life of 3 years; 1997 -- expected dividend yield of 0.0%, risk-free interest rate of 6.28%, and expected life of 3 years. In July 1997, 120,000 shares were issued to two directors at $2.50 per share, under the Plan. The Company has recorded stock compensation expense of $120,000, for the difference between the issuance price and the fair market value of the common stock. Preferred Stock In 1997, the Board of Directors approved an amendment to the Certificate of Incorporation to allow, upon completion of the IPO, the issuance of up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, and privileges, including voting and redemption rights of those shares without further vote or action by the stockholders. 7. INCOME TAXES The provision for income taxes attributable to continuing operations in fiscal 1996 was primarily for current federal income taxes. As of September 30, 1997, the Company had approximately $2.4 million and $1.4 million of net operating loss carryforwards for federal and state purposes, respectively. The federal net operating loss carryforwards expire in 2012. The state net operating loss carryforwards expire primarily in 2002. The difference between the federal and state net operating loss carryforwards is due primarily to a 50% limitation on net operating loss carryforwards for California purposes. As of September 30, 1997, the Company also had approximately $1.8 million and $200,000 of loss carryforwards in England and Australia, respectively. The loss carryforwards of the English company can be carried forward indefinitely. The Australian loss carryforwards can also be carried forward indefinitely, subject to certain restrictions. The tax effects of temporary differences that give rise to significant portions of deferred tax assets as of September 30, 1996 and 1997, are presented below (in thousands):
1996 1997 ------- ------- Various accruals and reserves not deductible for tax purposes.................................................. $ -- $ 498 Net operating loss carryforwards............................ 28 1,525 Property and equipment...................................... 56 124 Other....................................................... -- 25 ------- ------- Total deferred tax assets......................... 84 2,172 Valuation allowance......................................... (84) (2,172) ------- ------- Net deferred tax assets........................... $ -- $ -- ======= =======
The valuation allowance increased by $2.1 million for the year ended September 30, 1997. Income (loss) before income taxes is comprised as follows (in thousands): F-15 84 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997
1995 1996 1997 ----- ------- ------- United States.................................... $ (5) $ 851 $(4,931) Europe........................................... (940) (1,556) (4,002) ------- ------- ------- Total....................................... $(945) $ (705) $(8,933) ======= ======= =======
Federal and state tax laws impose substantial restrictions on the utilization of net operating loss carryforwards in the event of an "ownership change" as defined in Section 382 of the Internal Revenue Code. The Company has not yet determined whether an ownership change occurred due to significant stock transactions in each of the reporting years disclosed. If an ownership change has occurred, utilization of the net operating loss carryforwards could be significantly reduced. Additionally, loss carryforwards of either Micromuse Inc. or Micromuse USA Inc. cannot be utilized against future profits generated by the other company. Total income tax expense from continuing operations differs from expected income tax expense (computed by applying the U.S. federal corporate income tax rate of 34% to profit (loss) before taxes, as follows (in thousands):
1995 1996 1997 ----- ----- ------- Income tax expense (benefit) at federal statutory rate............................................... $(321) $(240) $(2,532) State income taxes, net of federal income tax benefit............................................ -- 10 -- Unutilized losses.................................... 321 345 2,514 Change in beginning of year valuation allowance...... -- (16) -- Other................................................ -- 1 18 ----- ----- ------- $ -- $ 100 $ -- ====== ====== =======
8. GEOGRAPHIC INFORMATION The Company markets its products primarily from its operations in the United States. Direct sales in Europe are primarily to customers in France, Germany, and the United Kingdom. Information regarding operations in different geographic regions is as follows (in thousands):
1995 1996 1997 ------ ------ ------- Revenues: United States.................................... $ 349 $2,030 $ 4,810 Europe........................................... 1,097 2,485 4,482 ------ ------ ------- Total.................................... $1,446 $4,515 $ 9,292 ====== ====== ======= Income (loss) from continuing operations: United States.................................... $ (5) $ 725 $(4,931) Europe........................................... (940) (1,530) (4,002) ------ ------ ------- Total.................................... $ (945) $ (805) $(8,933) ====== ====== ======= Identifiable assets: United States.................................... $ 164 $1,467 $15,398 Europe........................................... 5,603 7,640 7,342 ------ ------ ------- Total.................................... $5,767 $9,107 $22,740 ====== ====== =======
Intercompany transfers between geographic areas are accounted for using the transfer prices in effect for subsidiaries. F-16 85 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997 9. MAJOR CUSTOMERS A summary of the net sales to major customers that exceed 10% of total revenues during each of the years in the three-year period ended September 30, 1997, and the amount due from these customers as of September 30, 1997, follows (accounts receivable in thousands):
ACCOUNTS 1995 1996 1997 RECEIVABLE ---- ---- ---- ---------- Customer 1................................ -- -- 19% $311 Customer 2................................ 53% 14% 11% 898
10. COMMITMENTS The Company leases its facilities and certain equipment under noncancelable operating leases. The lease agreements expire at various dates during the next 11 years. Rent expense was approximately $80,000, $215,000 and $538,000 for the years ended September 30, 1995, 1996, and 1997, respectively. Future minimum lease payments under noncancelable operating leases will be approximately $890,000, $822,000, $764,000, $667,000, $325,000 and $825,000 for each of the years in the five-year period and thereafter, respectively. In August 1997, the Company obtained a lease facility of $300,000 for equipment. The term of the lease facility is 42 months. As of September 30, 1997, the lease facility remained unused. 11. SUBSEQUENT EVENT In November 1997, the Company repurchased, from a stockholder who is an officer and a director, 777,605 shares of common stock at $6.43 per share for a total price of $5.0 million. F-17 86 MICROMUSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995, 1996, AND 1997 12. PRO FORMA INFORMATION (UNAUDITED) The following table reflects the conversion of the redeemable convertible preferred stock into 4,488,336 shares of common stock in the accompanying consolidated balance sheet (in thousands):
SEPTEMBER 30, 1997 -------------------------------------- HISTORICAL ADJUSTMENTS PRO FORMA ------- ----------- ---------- (UNAUDITED) (UNAUDITED) Current assets: Cash..................................... $13,741 $ 3,000 $ 16,741 Other current assets..................... 6,549 -- 6,549 ------- ------- ------ Total current assets............. 20,290 -- 23,290 Other noncurrent assets.................... 2,450 -- 2,450 ------- ------- ------ Total assets..................... $22,740 $ 3,000 $ 25,740 ======= ======= ====== Total liabilities.......................... $ 7,109 $ -- $ 7,109 Redeemable convertible preferred stock..... 22,865 (22,865) -- Stockholders' equity (deficit) Common stock............................. 366 60 426 Additional paid-in capital............... 2,091 25,805 27,896 Treasury stock, at cost: 120,000 shares........................ (300) -- (300) Deferred stock compensation.............. (215) -- (215) Cumulative translation adjustment........ 52 -- 52 Accumulated deficit...................... (9,228) -- (9,228) ------- ------- ------ Total stockholders' equity (deficit)........................... (7,234) 25,865 18,631 ------- ------- ------ Total liabilities and stockholders' equity (deficit)...................... $22,740 $ 3,000 $ 25,740 ======= ======= ======
F-18 87 Netcool(R), Micro Muse M(R) and the Micromuse logo are registered trademarks of the Company and Micromuse(TM) NETCOOL/OMNIbus(TM) and Netcool/Reporter(TM) are trademarks of the Company. All other trademarks or service marks appearing in this Prospectus are trademarks or service marks of the respective companies that utilize them. 88 APPENDIX Page 36: Graphical illustration of the architecture of the Company's Netcool product suite. 89 NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 The Company........................... 4 Risk Factors.......................... 5 Use of Proceeds....................... 16 Dividend Policy....................... 16 Capitalization........................ 17 Dilution.............................. 18 Selected Consolidated Financial Data................................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 31 Management............................ 47 Certain Transactions.................. 56 Principal and Selling Stockholders.... 58 Description of Capital Stock.......... 60 Shares Eligible for Future Sale....... 63 Underwriting.......................... 65 Legal Matters......................... 66 Experts............................... 67 Additional Information................ 67 Index to Financial Statements......... F-1
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - --------------------------------------------------------- LOGO SHARES COMMON STOCK DEUTSCHE MORGAN GRENFELL NATIONSBANC MONTGOMERY SECURITIES SALOMON SMITH BARNEY PROSPECTUS , 1998 90 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fees. SEC Registration fee................................................... $ 9,160 NASD fee............................................................... 3,605 Nasdaq National Market listing fee..................................... 1,000 Printing and engraving expenses........................................ * Legal fees and expenses................................................ * Accounting fees and expenses........................................... * Blue sky fees and expenses............................................. * Transfer agent fees.................................................... * Miscellaneous fees and expenses........................................ * -------- Total........................................................ $ * ========
- --------------- * To be disclosed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's Board of Directors to grant indemnification to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article IX, Section 1, of the Registrant's Bylaws provides for mandatory indemnification of its directors and officers and permissible indemnification of employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. The Registrant's Restated Certificate of Incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty as directors to the Company and its stockholders. This provision in the Restated Certificate of Incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into Indemnification Agreements with its officers and directors, a form of which is attached as Exhibit 10.1 hereto and incorporated herein by reference. The Indemnification Agreements provide the Registrant's officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is made to Section 6 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant against certain liabilities. II-1 91 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since September 30, 1994, the Registrant has sold and issued the following unregistered securities: 1. The Registrant issued and sold 120,000 shares of its Common Stock to certain directors pursuant to direct issuances under its 1997 Stock Option/Stock Issuance Plan (Exhibit 10.3). 2. On April 18, 1996, the Registrant issued and sold notes convertible to Series A Preferred Stock in the aggregate principal amount of $1,000,000 to M.D. Strategic, L.P., Seedling Fund, L.P. and P.V. II, L.P. The notes were repaid without conversion to Series A Preferred Stock. 3. On March 6, 1997, the Registrant issued and sold a warrant exercisable for 1,500,000 shares of Series A Preferred Stock at $2.00 per share in consideration for the execution and delivery of a Credit Agreement whereby Sierra Ventures V, L.P. agreed to make revolving loans to the Registrant in an aggregate amount of up to $3,000,000 for a period of five years and 2,000,000 shares of Series B Preferred Stock for an aggregate purchase price of $5,000,000 to Sierra Ventures V, L.P. 4. On September 8, 1997, the Registrant issued and sold 2,488,336 shares of Series C Preferred Stock for an aggregate purchase price of $16,000,000.48 to a group of eighteen investors. The issuances described in Item 15(a)(1) were deemed exempt from registration under the Act in reliance upon Rule 701 promulgated under the Act. The issuance of the securities described in items 15(a)(2), (3) and (4) were deemed to be exempt from registration under the act in reliance on Section 4(2) of the Act as transactions by an issuer not involving any public offering. In addition, the recipients of the above-described securities represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through employment or other relationships with the Registrant, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement (preliminary form). 2.1 Agreement for the sale of the systems integration business of Micromuse plc by and among Micromuse plc, Horizon Open Systems (UK) Limited and Horizon Computer Services Limited, dated as of September 16, 1997. 3.1 Restated Certificate of Incorporation of the Registrant, as amended to date. 3.2* Form of Restated Certificate of Incorporation to be filed upon the closing of the offering made pursuant to this Registration Statement. 3.3 Bylaws of the Registrant. 3.4* Form of Amended and Restated Bylaws to be effective upon the effectiveness of this Registration Statement. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4. and 10.4. 4.2* Specimen Common Stock certificate. 5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP.
II-2 92
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------ 10.1 Form of Indemnity Agreement to be entered into between the Registrant and its directors and officers prior to the effectiveness of this Registration Statement. 10.2* 1997 Stock Option/Stock Issuance Plan and forms of agreements thereunder. 10.3* 1997 Employee Stock Purchase Plan. 10.4* Amended and Restated Investors' Rights Agreement by and among the Registrant and certain stockholders of the Registrant, dated as of September 8, 1997. 10.5 Office lease, dated as of March 25, 1997, by and between the Registrant and SOMA Partners, L.P. 10.6 Office lease, dated as of March 3, 1997, by and between Micromuse plc, Marldown Limited and Christopher J. Dawes. 10.7 Office lease, dated as of March 3, 1993, by and between Micromuse plc, Guildquote Limited and Christopher J. Dawes. 10.8 Agreement for the sale of the systems integration business of Micromuse plc dated as of September 16, 1997. Reference is made to Exhibit 2.1. 11 Computation of weighted average shares outstanding. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors. 23.2* Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. Reference is made to Exhibit 5.1. 24.1 Power of Attorney (see page II-5). 27 Financial Data Schedule.
- --------------- * To be filed by amendment (B) FINANCIAL STATEMENT SCHEDULES ITEM 17. UNDERTAKINGS The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the Delaware General Corporation Law, the Restated Certificate of Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance II-3 93 upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 94 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on this 12th day of December, 1997. MICROMUSE INC. By: /s/ CHRISTOPHER J. DAWES ------------------------------------ Christopher J. Dawes President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Christopher J. Dawes and Stephen A. Allott, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE - --------------------------------------------- ----------------------- -------------------- /s/ CHRISTOPHER J. DAWES President, Chief December 12, 1997 - --------------------------------------------- Executive Officer and Christopher J. Dawes Director (Principal Executive Officer) /s/ STEPHEN A. ALLOTT Senior Vice President, December 12, 1997 - --------------------------------------------- Finance (Principal Stephen A. Allott Financial and Accounting Officer) /s/ ANGELA DAWES Director of Sales, December 12, 1997 - --------------------------------------------- Western Region and Angela Dawes Director /s/ JEFFREY M. DRAZAN Director December 12, 1997 - --------------------------------------------- Jeffrey M. Drazan /s/ DAVID C. SCHWAB Director December 12, 1997 - --------------------------------------------- David C. Schwab
II-5 95 EXHIBIT INDEX (a) EXHIBITS
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement (preliminary form). 2.1 Agreement for the sale of the systems integration business of Micromuse plc by and among Micromuse plc, Horizon Open Systems (UK) Limited and Horizon Computer Services Limited, dated as of September 16, 1997. 3.1 Restated Certificate of Incorporation of the Registrant, as amended to date. 3.2* Form of Restated Certificate of Incorporation to be filed upon the closing of the offering made pursuant to this Registration Statement. 3.3 Bylaws of the Registrant. 3.4* Form of Amended and Restated Bylaws to be effective upon the effectiveness of this Registration Statement. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, and 10.4. 4.2* Specimen Common Stock certificate. 5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. 10.1 Form of Indemnity agreement to be entered into between the Registrant and its directors and officers prior to the effectiveness of this Registration Statement. 10.2* 1997 Stock Option/Stock Issuance Plan and forms of agreements thereunder. 10.3* 1997 Employee Stock Purchase Plan. 10.4* Amended and Restated Investors' Rights Agreement by and among the Registrant and certain stockholders of the Registrant, dated as of September 8, 1997. 10.5 Office lease, dated as of March 25, 1997, by and between the Registrant and SOMA Partners, L.P. 10.6 Office lease, dated as of March 3, 1997, by and between Micromuse plc, Marldown Limited and Christopher J. Dawes. 10.7 Office lease dated as of March 3, 1997, by and between Micromuse plc, Guildquote Limited and Christopher J. Dawes. 10.8 Agreement for the sale of the systems integration business of Micromuse plc dated as of September 16, 1997. Reference is made to Exhibit 2.1. 11 Computation of weighted average shares outstanding. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors. 23.2* Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. Reference is made to Exhibit 5.1. 24.1 Power of Attorney (see page II-5). 27 Financial Data Schedule.
- --------------- * To be filed by amendment EX-1.1 2 FORM OF UNDERWRITING AGREEMENT (PRELIMINARY FORM) 1 EXHIBIT 1.1 DEUTSCHE MORGAN GRENFELL INC. EQUITY CAPITAL MARKETS Dated _________, 1998 MICROMUSE INC. ________ Shares Common Stock UNDERWRITING AGREEMENT -1- 2 Micromuse Inc. ________ Shares Plus an option to purchase up to ___ additional shares to cover over-allotments Common Stock UNDERWRITING AGREEMENT ____________, 1997 DEUTSCHE MORGAN GRENFELL INC. NATIONSBANC MONTGOMERY SECURITIES, INC. SMITH BARNEY INC. As Representatives of the several Underwriters c/o Deutsche Morgan Grenfell Inc. 31 West 52nd Street New York, New York 10019 Dear Sirs: Micromuse Inc., a Delaware corporation (the "Company"), and the persons named in Schedule 2 hereto (the "Selling Stockholders") hereby confirm their agreement with the several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you have been duly authorized to act as representatives (the one or more firms acting in such capacities, the "Representatives"), as set forth below. If you are the only Underwriters, all references herein to the Representatives shall be deemed to be references to the Underwriters. Section 1. Underwriting. Subject to the terms and conditions contained herein: (a) The Company proposes to issue and sell ________ shares of common stock, par value $0.01 per share (the "Common Stock"), of the Company, and the Selling Stockholders propose to sell ________ shares of Common Stock (said shares to be issued and sold by the Company and shares to be sold by the Selling Stockholders collectively, the "Firm Shares") to the several Underwriters. The Company also proposes to issue and sell not more than ________ additional shares of Common Stock and the Selling Stockholders also propose to sell not more than ________ additional shares of Common Stock (collectively, the "Option Shares" and, together with the Firm Shares, the "Shares") to the several Underwriters if requested by the Representatives as provided in Section 2(b) hereof. (b) Upon your authorization of the release of the Firm Shares, the Underwriters propose to make a public offering (the "Offering") of the Firm Shares upon the terms set forth in the Prospectus (as defined below) as soon after the Registration Statement (as defined below) and this Agreement have become effective as in the Representativeso sole judgment is advisable. As used in this Agreement, the term "Original Registration Statement" means the registration statement (File No. 333-____) initially filed with the Securities and Exchange Commission (the "Commission") relating to the Shares, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Securities Act of 1933, as amended (the "Securities Act"), and included in the 3 Prospectus; the term "Rule 462(b) Registration Statement" means any registration statement filed with the Commission pursuant to Rule 462(b) under the Securities Act (including the Registration Statement and any Preliminary Prospectus (as defined below) or Prospectus incorporated therein at the time such Registration Statement becomes effective); the term "Registration Statement" includes both the Original Registration Statement and any Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means each prospectus subject to completion filed with the Original Registration Statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Original Registration Statement or any amendment thereto at the time it was or is declared effective); the term "Prospectus" means: (i) if the Company relies on Rule 434 under the Securities Act, the Term Sheet (as defined below) relating to the Shares that is first filed pursuant to Rule 424(b)(7) under the Securities Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; (ii) if the Company does not rely on Rule 434 under the Securities Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Securities Act; (iii) if the Company does not rely on Rule 434 under the Securities Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Securities Act, the prospectus included in the Registration Statement; or (iv) for purposes of the representations and warranties contained in Section 5 hereof, if the prospectus is not in existence, the most recent Preliminary Prospectus; and the term "Term Sheet" means any term sheet that satisfies the requirements of Rule 434 under the Securities Act. Any reference herein to the "date" of a Prospectus that includes a Term Sheet shall mean the date of such Term Sheet. Section 2. Purchase and Closing. (a) On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell, and the Selling Stockholders propose to sell, to each of the Underwriters, and each of the Underwriters, severally and not jointly, agrees to purchase from the Company and the Selling Stockholders, at a purchase price of $___ per Share (the "Purchase Price"), the number of Firm Shares set forth opposite the name of such Underwriter in Schedule 1 hereto. Firm Shares shall be registered by ________ in the name of the nominee of the Depository Trust Company ("DTC"), Cede & Co. ("Cede & Co."), and credited to the accounts of such of its participants as the Representatives shall request, upon notice to the Company and the Selling Stockholders at least 48 hours prior to the First Closing Date (as defined below), with any transfer taxes payable in connection with the transfer of the Firm Shares to the Underwriters duly paid, against payment by or on behalf of the Underwriters to the account of the Company and the Selling Stockholders of the aggregate Purchase Price therefor by wire transfer in immediately available funds. The Company and the Selling Stockholders will make the certificate or certificates for the Firm Shares available for checking and packaging by the Representatives at the offices in New York, New York of the Companyos transfer agent or registrar or of the Representatives at least 24 hours prior to the First Closing Date. Delivery or registry of and payment for the Firm Shares shall be made at the offices of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park, California 94025, at 9:30 A.M., New York City time, on _________, 1998, or at such other place, time or date as the Representatives, the Company and the Selling Stockholders may agree upon. Such time and date of delivery against payment are herein referred to as the "First Closing Date", and the implementation of all the actions described in this Section 2(a) is herein referred to as the "First Closing." (b) For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Shares as contemplated by the Prospectus, the Company and the Selling Stockholders hereby grant to 4 the several Underwriters an option to purchase, severally and not jointly, the Option Shares. The purchase price to be paid for any Option Shares shall be the same as the Purchase Price for the Firm Shares set forth above in paragraph (a) of this Section 2. The option granted hereby may be exercised as to all or any part of the Option Shares from time to time within thirty days after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange and the Nasdaq Stock Marketos National Market (the "Nasdaq National Market") is open for trading). The Underwriters shall not be under any obligation to purchase any of the Option Shares prior to the exercise of such option. The Representatives may from time to time exercise the option granted hereby by giving notice in writing or by telephone (confirmed in writing) to the Company and the Selling Stockholders setting forth the aggregate number of Option Shares as to which the several Underwriters are then exercising the option and the date and time for delivery or registry of and payment for such Option Shares. Any such date of delivery or registry shall be determined by the Representatives but shall not be earlier than two business days or later than five business days after such exercise of the option and, in any event, shall not be earlier than the First Closing Date. The time and date set forth in such notice, or such other time or date as the Representatives, the Company and the Selling Stockholders may agree upon or as the Representatives may determine pursuant to Section 2(a) hereof, is herein called an "Option Closing Date" with respect to such Option Shares, and the implementation of all the actions described in this Section 2(b) is herein referred to as the "Option Closing". As used in this Agreement, the term "Closing Date" means either the First Closing Date or any Option Closing Date, as applicable, and the term "Closing" means either the First Closing or any Option Closing, as applicable. If the option is exercised as to all or any portion of the Option Shares, then either one or more certificates in definitive form for such Option Shares shall be delivered or, if such Option Shares are to be held through DTC, such Option Shares shall be registered and credited, on the related Option Closing Date in the same manner, and upon the same terms and conditions, set forth in paragraph (a) of this Section 2, except that reference therein to the Firm Shares and the First Closing Date shall be deemed, for purposes of this paragraph (b), to refer to such Option Shares and Option Closing Date, respectively. Upon exercise of the option as provided herein, the Company and the Selling Stockholders shall become obligated to sell to each of the several Underwriters, and, on the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, each of the Underwriters (severally and not jointly) shall become obligated to purchase from the Company and the Selling Stockholders, the same percentage of the total number of the Option Shares as to which the several Underwriters are then exercising the option as such Underwriter is obligated to purchase of the aggregate number of Firm Shares, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. In the event that the option is exercised in part, the number of Option Shares to be sold by each of the Selling Stockholders shall be, as nearly as practicable, in the same proportion to each other as are the number of Option Shares to be sold by each Selling Stockholder listed opposite their names on Schedule 2 hereto. (c) The Company and the Selling Stockholders hereby acknowledge that the payment of monies pursuant to Section 2(a) hereof (a "Payment") by or on behalf of the Underwriters of the aggregate Purchase Price for any Shares does not constitute closing of a purchase and sale of the Shares. Only execution and delivery, by facsimile or otherwise, of a receipt for Shares by the Underwriters indicates completion of the closing of a purchase of the Shares from the Company and the Selling Stockholders. Furthermore, in the event that the Underwriters make a Payment to the Company and the Selling Stockholders prior to the completion of the closing of a purchase of Shares, the Company and the Selling Stockholders hereby acknowledge that until the Underwriters execute and deliver such receipt for the Shares, the Company and the Selling Stockholders will not be entitled to the Payment and shall return the Payment to the Underwriters as soon as practicable (by wire transfer of same-day funds) upon demand. In the event that the closing of a purchase of Shares is not completed and the Payment is not returned by the Company and the Selling Stockholders to the Underwriters on the same day the Payment was received by the Company and the Selling Stockholders, the Company and the Selling Stockholders agree to pay to the Underwriters in respect of each day the Payment is not returned by them, in same-day funds, interest on the amount of such Payment in an amount representing the Underwriterso cost of 5 financing as reasonably determined by the Representatives, pro rata in proportion to the percentage of such Payment received by each. It is understood that any of you, individually and not as one of the Representatives, may (but shall not be obligated to) make Payment on behalf of any Underwriter or Underwriters for any of the Shares to be purchased by such Underwriter or Underwriters. No such Payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. Section 3. Covenants. (a) The Company covenants and agrees with the several Underwriters that: (i) The Company will: (x) use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto to become effective as promptly as possible. If required, the Company will file the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Securities Act. During any time when a prospectus relating to the Shares is required to be delivered under the Securities Act, the Company (I) will comply with all requirements imposed upon it by the Securities Act and the rules and regulations of the Commission thereunder to the extent necessary to permit the continuance of sales of or dealings in the Shares in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (II) will not file with the Commission the Prospectus, Term Sheet, any amendment or supplement to such Prospectus or Term Sheet, any amendment to the Registration Statement (including the amendment referred to in the second sentence of Section 5(a)(i) hereof) or any Rule 462(b) Registration Statement unless the Representatives previously have been advised of, and furnished with a copy within a reasonable period of time prior to, the proposed filing and the Representatives shall have given their consent to such filing. The Company will prepare and file with the Commission, in accordance with the rules and regulations of the Commission, promptly upon request by the Representatives or counsel for the Underwriters, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Shares by the several Underwriters. The Company will advise the Representatives, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or Term Sheet or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Representatives of each such filing or effectiveness. (y) without charge, provide (I) to the Representatives and to counsel for the Underwriters, an executed and a conformed copy of the Original Registration Statement and each amendment thereto or any Rule 462(b) Registration Statement (in each case including exhibits thereto), (II) to each other Underwriter, a conformed copy of the Original Registration Statement and each amendment thereto or any Rule 462(b) Registration Statement (in each case without exhibits thereto), and (III) so long as a prospectus relating to the Shares is required to be delivered under the Securities Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request. Without limiting the application of clause (III) of the preceding sentence, the Company, not later than (A) 9:00 A.M., New York City time, on the business day following the date of 6 determination of the public offering price, if such determination occurred at or prior to 12:00 noon, New York City time, on such date or (B) 6:00 P.M., New York City time, on the business day following the date of determination of the public offering price, if such determination occurred after 12:00 noon, New York City time, on such date, will deliver to the Underwriters, without charge, as many copies of the Prospectus and any amendment or supplement thereto as the Representatives may reasonably request for purposes of confirming orders that are expected to settle on the First Closing Date. (z) advise the Representatives, promptly after receiving notice or obtaining knowledge thereof, of (I) the issuance by the Commission of any stop order suspending the effectiveness of the Original Registration Statement or any amendment thereto or any Rule 462(b) Registration Statement or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (II) the suspension of the qualification of the Shares for offering or sale in any jurisdiction, (III) the institution, threatening or contemplation of any proceeding for any purpose identified in the preceding clause (I) or (II), or (IV) any request made by the Commission for amending the Original Registration Statement or any Rule 462(b) Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued, to obtain the withdrawal thereof as promptly as possible. (ii) The Company will arrange for the qualification of the Shares for offering and sale in each jurisdiction as the Representatives shall designate including, but not limited to, pursuant to applicable state securities ("Blue Sky") laws of certain states of the United States of America or other U.S. jurisdictions, and the Company shall maintain such qualifications in effect for so long as may be necessary in order to complete the placement of the Shares; provided, however, that the Company shall not be obliged to file any general consent to service of process or to qualify as a foreign corporation or as a securities dealer in any jurisdiction or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. (iii) If, at any time prior to the final date when a prospectus relating to the Shares is required to be delivered under the Securities Act, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any other reason it shall be necessary at any time to amend the Registration Statement or amend or supplement the Prospectus to comply with the Securities Act or the rules or regulations of the Commission thereunder or applicable law, the Company will promptly notify the Representatives thereof and will promptly, at its own expense, but subject to the second sentence of Section 3(a)(i)(x) hereof: (x) prepare and file with the Commission an amendment to the Registration Statement or amendment or supplement to the Prospectus which will correct such statement or omission or effect such compliance; and (y) supply any amended Registration Statement or amended or supplemented Prospectus to the Underwriters in such quantities as the Underwriters may reasonably request. (iv) The Company will make generally available to the Companyos securityholders and to the Representatives as soon as practicable an earnings statement that satisfies the provisions of Section 11(a) of the Securities Act, including Rule 158 thereunder. (v) The Company will apply the net proceeds from the sale of the Shares as set forth under "Use of Proceeds" in the Prospectus. 7 (vi) The Company will not, and will not allow any subsidiary to, publicly announce any intention to, and will not itself, and will not allow any subsidiary to, without the prior written consent of Deutsche Morgan Grenfell Inc., on behalf of the Underwriters, (x) offer, pledge, sell, offer to sell, contract to sell, sell any option or contract to purchase, purchase any option to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, Common Stock, or (y) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the shares of Common Stock or securities convertible into, or exercisable or exchangeable for, shares of Common Stock (whether any such transaction described in clause (x) or (y) above is to be settled by delivery of shares of Common Stock (or securities convertible into, exercisable or exchangeable for Common Stock), in cash or otherwise), for a period beginning from the date hereof and continuing to and including the date 180 days after the date hereof, except pursuant to this Agreement and other than with respect to (x) shares of Common Stock to be issued upon the exercise of warrants to purchase shares of Common Stock, or upon conversion or exchange of securities convertible or exchangeable into shares of Common Stock, in each case, which are outstanding on the date hereof and disclosed in the Prospectus, and (y) shares of Common Stock (or any securities convertible into or exchangeable for shares of Common Stock) issued pursuant to any employee benefit plans, qualified stock option plans or other employee compensation plans which are disclosed in the Prospectus. (vii) Neither the Company nor any of its affiliates, nor any person acting on behalf of any of them will, directly or indirectly, (x) take any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares or (y) (I) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Shares or (II) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (viii) The Company will obtain the agreements described in Section 7(h) hereof prior to the First Closing Date. (ix) If at any time during the 25-day period after the Registration Statement becomes effective or during the period prior to any Closing Date, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in the Representativeso sole judgment the market price of the Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after notice from the Representatives advising the Company to the effect set forth above, forthwith prepare, consult with the Representatives concerning the substance of, and disseminate a press release or other public statement reasonably satisfactory to the Representatives, responding to or commenting on such rumor, publication or event. (x) If the Company elects to rely on Rule 462(b), the Company shall both file the Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the Securities Act by the earlier of (x) 10:00 P.M. New York City time on the date of this Agreement and (y) the time confirmations are sent or given, as specified by Rule 462(b)(2) under the Securities Act. 8 (xi) The Company will cause the Shares to be duly included for quotation on the Nasdaq National Market prior to the First Closing Date. The Company will ensure that the Shares remain included for quotation on the Nasdaq National Market following the First Closing Date. (xii) Prior to issuing any press release regarding the operating results or financial condition with respect to any of the Company's first three fiscal quarters in any of fiscal years 1998, 1999 or 2000, and prior to filing a Quarterly Report on Form 10-Q relating to any of such fiscal quarters, to retain KPMG Peat Marwick LLP or other independent public accountants of recognized national standing who shall review, in accordance with AICPA Statement on Auditing Standards No. 71, the Company's unaudited consolidated financial statements at the end of each such fiscal quarter; provided, however, that the Company's obligations under this covenant may terminate after the second quarter of fiscal year 1999 at the discretion of the Company's Board of Directors if the Company's Board of Directors determines in good faith that adequate financial controls are in place. (b) Each Selling Stockholder agrees that: (i) It will not, and no person acting on behalf of such Selling Stockholder will, directly or indirectly, (x) take any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares or (y) (I) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Shares or (II) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Shares by the Selling Stockholders under this Agreement). (ii) It will not, and will not allow any subsidiary to, publicly announce any intention to, and will not itself, and will not allow any subsidiary to, without the prior written consent of Deutsche Morgan Grenfell Inc. on behalf of the Underwriters, (x) offer, pledge, sell, offer to sell, contract to sell, sell any option or contract to purchase, purchase any option to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any of the shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, Common Stock, or (y) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, shares of Common Stock (whether any such transaction described in clause (x) or (y) above is to be settled by delivery of shares of Common Stock (or other securities convertible into, exercisable or exchangeable for Common Stock), in cash or otherwise), in each case, beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) or otherwise controlled by such person on the date hereof or hereafter acquired, for a period beginning from the date hereof and continuing to and including the date 180 days after the date hereof; provided, however, that such Selling Stockholder may, without the prior written consent of Deutsche Morgan Grenfell Inc. on behalf of the Underwriters, transfer shares of Common Stock or such other securities to members of such Selling Stockholderos immediate family or to trusts for the benefit of members of such Selling Stockholderos immediate family or in connection with bona fide gifts, provided that any transferee agrees to the transfer restrictions described above. Section 4. Expenses. (a) The Company shall bear and pay all costs and expenses incurred incident to the performance of its obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 9 hereof, including: (i) fees and expenses of preparation, issuance and delivery of this Agreement to the Underwriters; (ii) the fees and expenses of its counsel, accountants 9 and any other experts or advisors retained by the Company; (iii) the costs of delivering and distributing the Powers of Attorney (as defined below) and the Custody Agreements (as defined below) and the fees and expenses of the Custodian (as defined below) (and any other Attorney-in-Fact (as defined below)); (iv) fees and expenses incurred in connection with the registration of the Shares under the Securities Act and the preparation and filing of the Registration Statement, the Prospectus and all amendments and supplements thereto; (v) the printing and distribution of the Prospectus and any Preliminary Prospectus and the printing and production of all other documents connected with the Offering (including this Agreement and any other related agreements); (vi) expenses related to the qualification of the Shares under the state securities or Blue Sky laws, including filing fees and the fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of any Blue Sky memoranda; (vii) the filing fees and expenses, if any, incurred with respect to any filing with the National Association of Securities Dealers, Inc., including the fees and disbursements of counsel for the Underwriters in connection therewith; (viii) fees and expenses of any independent underwriter required in connection with the Offering; (ix) all expenses arising from the quoting of the Shares on the Nasdaq National Market; (x) all arrangements relating to the preparation, issuance and delivery to the Underwriters of any certificates evidencing the Shares, including transfer agentos and registraros fees; (xi) the costs and expenses of the "roadshow" and any other meetings with prospective investors in the Shares (other than as shall have been specifically approved by the Representatives to be paid for by the Underwriters); and (xii) the costs and expenses of advertising relating to the Offering (other than as shall have been specifically approved by the Representatives to be paid for by the Underwriters). (b) The Selling Stockholders shall bear and pay all costs and expenses incurred incident to the performance of their respective obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 9 hereof, including: (i) any stamp duties, capital duties and stock transfer taxes, if any, payable upon the sale of the Shares of such Selling Stockholders to the Underwriters and (ii) the fees and disbursements of their respective counsel, accountants and other advisors. Section 5. Representations and Warranties. (a) As a condition of the obligation of the Underwriters to underwrite and pay for the Shares, the Company and the Selling Stockholders jointly and severally represent and warrant to, and agree with, each of the several Underwriters as follows: Registration Statement and Prospectus (i) The Original Registration Statement, including the Preliminary Prospectus, has been filed by the Company with the Commission under the Securities Act, and one or more amendments to such Registration Statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (x) if such Registration Statement, as it may have been amended, has been declared by the Commission to be effective under the Securities Act, either (I) if the Company relies on Rule 434 under the Securities Act, a Term Sheet relating to the Shares that shall identify the Preliminary Prospectus that it supplements containing such information as is required or permitted by Rules 434, 430A and 424(b) under the Securities Act or (II) if the Company does not rely on Rule 434 under the Securities Act, a prospectus in the form most recently included in an amendment to such Registration Statement (or, if no such amendment shall have been filed, in such Registration Statement), with such changes or insertions as are required by Rule 430A under the Securities Act or permitted by Rule 424(b) under the Securities Act, and in the case of either clause (I) or (II) of this sentence, as have been provided to and approved by the Representatives prior to the execution of this Agreement, or (y) if such Registration Statement, as it may have been amended, has not been declared by the Commission to be effective under the Securities Act, an amendment to such Registration 10 Statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. The Company may also file a Rule 462(b) Registration Statement with the Commission for the purpose of registering certain additional Shares, which registration shall be effective upon filing with the Commission. (ii) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. When any Preliminary Prospectus was filed with the Commission, it (x) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Securities Act and the rules and regulations of the Commission thereunder and (y) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, it (I) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Securities Act and the rules and regulations of the Commission thereunder and (II) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. When the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing the Prospectus or such amendment or supplement to the Prospectus was or is declared effective) and on the Closing Date, the Prospectus, as amended or supplemented at any such time, (A) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Securities Act and the rules and regulations of the Commission thereunder and (B) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (ii) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. (iii) If the Company has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement is not effective, (x) the Company will file a Rule 462(b) Registration Statement in compliance with, and that is effective upon filing pursuant to, Rule 462(b) and (y) the Company has given irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 under the Securities Act, or the Commission has received payment of such filing fee. (iv) If the Company has elected to rely on Rule 434 under the Securities Act, the Prospectus is not "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time of its effectiveness or an effective post-effective amendment thereto (including such information that is permitted to be omitted pursuant to Rule 430A under the Securities Act); (v) The Company and the Selling Stockholders have not distributed and, prior to the later of (x) any Closing Date and (y) the completion of the distribution of the Shares, will not distribute any offering material in connection with the Offering other than the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto. 11 (vi) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (x) the Company and its subsidiaries, taken as a whole, have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (y) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (z) there has not been any material change in the capital stock, short-term or long-term debt of the Company and its subsidiaries, taken as a whole, except in each case as described in or contemplated by the Prospectus. The Shares (vii) The Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase such securities. The Shares have been duly authorized by all necessary corporate action of the Company and, after payment therefor in accordance herewith, will be validly issued, fully paid and nonassessable at the Closing Date. No holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Shares, and no holder of securities of the Company has any right which has not been fully exercised or waived to require the Company to register the offer or sale of any securities owned by such holder under the Securities Act in the Offering contemplated by this Agreement. (viii) Except as disclosed in the Prospectus, there are no outstanding (x) securities or obligations of the Company or any of its subsidiaries convertible into or exchangeable for any capital stock of the Company or any such subsidiary, (y) warrants, rights or options to subscribe for or purchase from the Company or any such subsidiary any such capital stock or any such convertible or exchangeable securities or obligations, or (z) obligations of the Company or any such subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (ix) Except for the shares of capital stock of each of the subsidiaries owned by the Company and such subsidiaries, neither the Company nor any such subsidiary owns any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity, except as described in or contemplated by the Prospectus. Listing (x) All of the Shares have been duly authorized and accepted for quotation on the Nasdaq National Market, subject to official notice of issuance. Market Manipulation (xi) Neither the Company nor any of its affiliates, nor any person acting on behalf of any of them has, directly or indirectly, (x) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares, or (y) since the filing of the Original Registration Statement (I) sold, bid for, purchased, or paid anyone any compensation for 12 soliciting purchases of, the Shares or (II) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company. Corporate Power and Authority (xii) The Company has been duly incorporated and is validly existing as a corporation in good standing under the law of its jurisdiction of incorporation with full power and authority to own, lease and operate its properties and assets and conduct its business as described in the Prospectus, is duly qualified to transact business and is in good standing in each jurisdiction in which its ownership, leasing or operation of its properties or assets or the conduct of its business requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries, taken as a whole, and has full power and authority to execute and perform its obligations under this Agreement; each subsidiary of the Company is a corporation duly incorporated and validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and is duly qualified to transact business and is in good standing in each jurisdiction in which its ownership, leasing or operation of its properties or assets or the conduct of its business requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries, taken as a whole, and each has full power and authority to own, lease and operate its properties and assets and conduct its business as described in the Registration Statement and the Prospectus; all of the issued and outstanding shares of capital stock of each of the Companyos subsidiaries have been duly authorized and are fully paid and nonassessable and are owned beneficially by the Company free and clear of any security interests, liens, encumbrances, equities or claims. (xiii) The execution and delivery of this Agreement and the issuance and sale of the Shares have been duly authorized by all necessary corporate action of the Company, and this Agreement has been duly executed and delivered by the Company and is the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. (xiv) The issuance, offering and sale of the Shares to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (x) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained or made or such as may be required by the state securities or Blue Sky laws of the various states of the United States of America or other U.S. jurisdictions in connection with the offer and sale of the Shares by the Underwriters, or (y) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties are bound, or the charter documents or by-laws of the Company or any of its subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company or any of its subsidiaries. (xv) The Company is not, and will conduct its operations in a manner so that it continues not to be, an "investment company" and, after giving effect to the Offering and the application of the proceeds therefrom, will not be an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "1940 Act"). Title, Licenses and Consents 13 (xvi) The Company and each of its subsidiaries have good and marketable title in fee simple to all items of real property and marketable title to all personal property owned by each of them, in each case free and clear of any security interests, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not interfere with the use made or proposed to be made of such property by the Company or such subsidiary, and any real property and buildings held under lease by the Company or any such subsidiary are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or such subsidiary, in each case except as described in or contemplated by the Prospectus. (xvii) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent applications, trademarks, service marks, trade names, licenses, know-how, copyrights, trade secrets and proprietary or other confidential information necessary to operate the business now operated by them, and neither the Company nor any such subsidiary has received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a materially adverse effect on or constitute a materially adverse change in, or constitute a development involving a prospective materially adverse effect on or change in, the condition (financial or otherwise), earnings, properties, business affairs or business prospects, stockholderso equity, net worth or results of operations of the Company or any of its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. (xviii)The Company and its subsidiaries possess all consents, licenses, certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a materially adverse effect on or constitute a materially adverse change in, or constitute a development involving a prospective materially adverse effect on or change in, the condition (financial or otherwise), earnings, properties, business affairs or business prospects, net worth or results of operations of the Company or any of its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. Financial statements (xix) KPMG Peat Marwick LLP, who have certified certain financial statements of the Company and its consolidated subsidiaries and delivered their report with respect to the audited consolidated financial statements and schedules included in the Registration Statement and the Prospectus, are independent public accountants as required by the Securities Act and the applicable rules and regulations thereunder. (xx) The consolidated financial statements and schedules of the Company and its consolidated subsidiaries included in the Registration Statement and the Prospectus were prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied throughout the periods involved (except as otherwise noted therein) and they present fairly the financial condition of the Company as at the dates at which they were prepared and the results of operations of the Company in respect of the periods for which they were prepared. Internal Accounting Controls 14 (xxi) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (w) transactions are executed in accordance with managementos general or specific authorizations; (x) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (y) access to assets is permitted only in accordance with managementos general or specific authorization; and (z) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Litigation (xxii) No legal or governmental proceedings are pending or threatened to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein; and no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described therein or filed as required. Dividends and Distributions (xxiii)No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, making any other distribution on such subsidiaryos capital stock, repaying to the Company any loans or advances to such subsidiary from the Company or transferring any of such subsidiaryos property or assets to the Company or any other subsidiary of the Company, and the Company is not currently prohibited, directly or indirectly, from paying any dividends or making any other distribution on its capital stock, in each case except as described in or contemplated by the Prospectus. Taxes (xxiv) The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a materially adverse effect on the Company and its subsidiaries, taken as a whole) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as described in or contemplated by the Prospectus. Insurance (xxv) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, properties, business affairs or business prospects, net worth or results of operations of the Company or any of its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. Pension and Labor 15 (xxvi) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (x) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (y) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (xxvii)No labor dispute with the employees of the Company or any of its subsidiaries exists or is threatened or imminent that could have a materially adverse effect on or constitute a materially adverse change in, or constitute a development involving a prospective materially adverse effect on or change in, the condition (financial or otherwise), properties, management, earnings, business affairs or business prospects, net worth or results of operations of the Company or any of its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. Environmental (xxviii) Neither the Company nor any of its subsidiaries is in violation of any federal or state law or regulation relating to occupational safety and health or to the storage, handling or transportation of hazardous or toxic materials and the Company and its subsidiaries have received all permits, licenses or other approvals required of them under applicable federal and state occupational safety and health and environmental laws and regulations to conduct their respective businesses, and the Company and each such subsidiary is in compliance with all terms and conditions of any such permit, license or approval, except any such violation of law or regulation, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals which would not, singly or in the aggregate, have a materially adverse effect on or constitute a materially adverse change in, or constitute a development involving a prospective materially adverse effect on or change in, the condition (financial or otherwise), earnings, properties, business affairs or business prospects, net worth or results of operations of the Company or any of its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. Other Agreements (xxix) No default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties is bound. Absence of Materially Adverse Change (xxx) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or 16 governmental proceeding, and there has been no materially adverse change (including, without limitation, a change in management or control), or development involving a prospective materially adverse change, in the condition (financial or otherwise), management, earnings, property, business affairs or business prospects, stockholderso equity, net worth or results of operations of the Company or any of its subsidiaries, taken as a whole, other than as described in or contemplated by the Prospectus (exclusive of any amendments or supplements thereto). (xxxi) No receiver or liquidator (or similar person) has been appointed in respect of the Company or any subsidiary of the Company or in respect of any part of the assets of the Company or any subsidiary of the Company; no resolution, order of any court, regulatory body, governmental body or otherwise, or petition or application for an order, has been passed, made or presented for the winding up of the Company or any subsidiary of the Company or for the protection of the Company or any such subsidiary from its creditors; and the Company has not, and no subsidiary of the Company has, stopped or suspended payments of its debts, become unable to pay its debts or otherwise become insolvent. Reorganization (xxxii) The execution and delivery of each of the Exchange Agreement and the Option Exchange Agreement (the "Reorganization Documents") was duly authorized by all necessary corporate action on the part of each of the parties thereto. Each of the parties to the Reorganization Documents had all corporate power and authority to execute and deliver the Reorganization Documents and to consummate the transactions contemplated therein and the Reorganization Documents constituted valid and binding obligations of each of the parties thereto. (b) As a further condition of the obligation of the Underwriters to underwrite and pay for the Shares, each Selling Stockholder represents and warrants to, and agrees with, each of the several Underwriters that: (i) Such Selling Stockholder has full power (corporate and other) to enter into this Agreement and to sell, assign, transfer and deliver to the Underwriters the Shares to be sold by such Selling Stockholder hereunder in accordance with the terms of this Agreement; the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of such Selling Stockholder; and this Agreement has been duly executed and delivered by such Selling Stockholder. (ii) Such Selling Stockholder has duly executed and delivered a power of attorney and custody agreement (with respect to such Selling Stockholder, the "Power-of-Attorney" and the "Custody Agreement", respectively), each in the form heretofore delivered to the Representatives, appointing certain individuals as such Selling Stockholderos attorney-in-fact (the "Attorney-in-Fact") with authority to execute, deliver and perform this Agreement on behalf of such Selling Stockholder and appointing ________, as custodian thereunder (the "Custodian"). Certificates in negotiable form, endorsed in blank or accompanied by blank stock powers duly executed, with signatures appropriately guaranteed, representing the Shares to be sold by such Selling Stockholder hereunder have been deposited with the Custodian pursuant to the Custody Agreement for the purpose of delivery pursuant to this Agreement. Such Selling Stockholder has full power (corporate and other) to enter into the Custody Agreement and the Power-of-Attorney and to perform its obligations under the Custody Agreement. The execution and delivery of the Custody Agreement and the Power-of-Attorney have been duly authorized by all necessary corporate action of such Selling Stockholder; the Custody Agreement and the Power-of-Attorney have been duly executed and delivered by such Selling Stockholder and, assuming due authorization, execution and delivery by the Custodian, are the legal, valid, binding and enforceable instruments of such Selling Stockholder. Such Selling Stockholder agrees that each of the Shares represented by the certificates on deposit with the Custodian is subject to the interests of the 17 Underwriters hereunder, that the arrangements made for such custody, the appointment of the Attorney-in-Fact and the right, power and authority of the Attorney-in-Fact to execute and deliver this Agreement, to agree on the price at which the Shares (including such Selling Stockholder's Shares) are to be sold to the Underwriters, and to carry out the terms of this Agreement, are to that extent irrevocable and that the obligations of such Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or the Custody Agreement, by any act of such Selling Stockholder, by operation of law or otherwise, whether in the case of any individual Selling Stockholder by the death or incapacity of such Selling Stockholder, in the case of a trust or estate by the death of the trustee or trustees or the executor or executors or the termination of such trust or estate, or in the case of a corporate or partnership Selling Stockholder by its liquidation or dissolution or by the occurrence of any other event. If any individual Selling Stockholder, trustee or executor should die or become incapacitated or any such trust should be terminated, or if any corporate or partnership Selling Stockholder shall liquidate or dissolve, or if any other event should occur, before the delivery of such Shares hereunder, the certificates for such Shares deposited with the Custodian shall be delivered by the Custodian in accordance with the respective terms and conditions of this Agreement as if such death, incapacity, termination, liquidation or dissolution or other event had not occurred, regardless of whether or not the Custodian or the Attorney-in-Fact shall have received notice thereof. (iii) Such Selling Stockholder is the lawful owner of the Shares to be sold by such Selling Stockholder hereunder and upon sale and delivery of, and payment for, such Shares, as provided herein, such Selling Stockholder will convey good and marketable title to such Shares, free and clear of any security interests, liens, encumbrances, equities, claims or other defects. (iv) Neither such Selling Stockholder nor any person acting on behalf of it has, directly or indirectly, (x) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares or (y) since the filing of the Original Registration Statement (I) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Shares or (II) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Shares by the Selling Stockholders under this Agreement). (v) Such Selling Stockholder has reviewed the Prospectus and the Registration Statement, and the information regarding such Selling Stockholder set forth therein is complete and accurate. (vi) The sale by such Selling Stockholder of Shares pursuant hereto is not prompted by any adverse information concerning the Company or its subsidiaries that is not set forth in the Registration Statement or the Prospectus. (vii) The sale of the Shares to the Underwriters by such Selling Stockholder pursuant to this Agreement, the compliance by such Selling Stockholder with the other provisions of this Agreement, the Custody Agreement and the consummation of the other transactions herein contemplated do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, such as may be required under state securities or blue sky laws and, if the registration statement filed with respect to the Shares (as amended) is not effective under the Securities Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Securities Act, or (ii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under any indenture, mortgage, deed of trust, lease or other agreement or instrument to which such Selling Stockholder or any of its subsidiaries is a party or by which such Selling Stockholder or any of its subsidiaries or any of their 18 respective properties are bound, or the charter documents or by-laws of such Selling Stockholder or any of its subsidiaries or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to such Selling Stockholder or any of its subsidiaries. (c) The above representations and warranties shall be deemed to be repeated at each Closing, and all references therein to the Shares and the Closing Date shall be deemed to refer to the Firm Shares or the Option Shares and the First Closing Date or the applicable Option Closing Date, each as applicable. Section 6. Indemnity. (a) The Company and each Selling Stockholder jointly and severally agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any and all losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company or such Selling Stockholder in Section 5 hereof, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or (iii) the omission or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse, as incurred, each Underwriter and each such controlling person for any legal or other costs or expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company and such Selling Stockholder will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein. The indemnity provided for in this Section 6 shall be in addition to any liability which the Company and such Selling Stockholder may otherwise have. Neither the Company nor any Selling Stockholder will, without the prior written consent of the Representatives, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any such Representatives or any person who controls any such Representatives is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all of the Underwriters and such controlling persons from all liability arising out of such claim, action, suit or proceeding. (b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, each Selling Stockholder and each person, if any, who controls the Company or such Selling Stockholder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which 19 the Company or any such director or officer of the Company, such Selling Stockholder or any such controlling person of the Company or such Selling Stockholder may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or (ii) the omission or the alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person or such Selling Stockholder or controlling person of such Selling Stockholder in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or any action in respect thereof. The remedies provided for in this Section 6 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to paragraph (a) or (b) of this Section 6, such person (for purposes of this paragraph (c), the "indemnified party") shall, promptly after receipt by such party of notice of the commencement of such action, notify the person against whom such indemnity may be sought (for purposes of this paragraph (c), the "indemnifying party"), but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 6. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense of any such action and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 6 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated in writing by the Representatives in the case of paragraph (a) of this Section 6, representing the indemnified parties under such paragraph (a) who are parties to such action or actions), or (ii) the indemnifying party does not promptly retain counsel satisfactory to the indemnified party, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. All fees and expenses reimbursed pursuant to this paragraph (c) shall be reimbursed as they are incurred. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party. 20 (d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 6 is unavailable or insufficient, for any reason, to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the Offering or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the Offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the Underwriters, the partieso relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company, the Selling Stockholders and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this paragraph (d). Notwithstanding any other provision of this paragraph (d), no Underwriter shall be obligated to make contributions hereunder that in the aggregate exceed the total public offering price of the Shares purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriterso obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint, and contributions among Underwriters shall be governed by the provisions of the Deutsche Morgan Grenfell Inc. Master Agreement Among Underwriters. For purposes of this paragraph (d), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company or any Selling Stockholder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company or such Selling Stockholder, as the case may be. Section 7. Conditions Precedent. The obligations of the several Underwriters to purchase and pay for the Shares shall be subject, in the Representativeso sole discretion, to the accuracy of the representations and warranties of the Company and the Selling Stockholders contained herein as of the date hereof and as of each Closing Date, as if made on and as of each Closing Date, to the accuracy of the statements of the Companyos officers and the Selling Stockholders made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their respective covenants and agreements hereunder and to the following additional conditions: (a) (i) If the Original Registration Statement or any amendment thereto filed prior to the First Closing Date has not been declared effective as of the time of execution hereof, the Original Registration 21 Statement or such amendment shall have been declared effective not later than 6:00 P.M. New York City time on the date of determination of the public offering price, if such determination occurred at or prior to 4:30 P.M. New York City time on such date, or 12:00 Noon New York City time on the business day following the day on which the public offering price was determined, if such determination occurred after 4:30 P.M. New York City time on such date, and (ii) if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have been declared effective not later than the time confirmations are sent or given as specified by Rule 462(b)(2), or such later time and date as shall have been consented to by the Representatives; if required, the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Securities Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission; and the Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise). (b) The Representatives shall have received a legal opinion from Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the Company, dated the Closing Date, to the effect that: (i) the Registration Statement is effective under the Securities Act; any required filing of the Prospectus, or any Term Sheet that constitutes a part thereof, pursuant to Rules 434 and 424(b) has been made in the manner and within the time period required by Rules 434 and 424(b); and no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued and, to the best knowledge of such counsel, no proceedings for that purpose are pending or threatened by the Commission; (ii) the Original Registration Statement and each amendment thereto, any Rule 462(b) Registration Statement and the Prospectus (in each case, other than the financial statements and other financial information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the Commission thereunder; (iii) such counsel has no reason to believe that (in each case, other than the financial statements and other financial information contained therein, as to which such counsel need express no opinion) (x) the Registration Statement, as of its effective date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (y) the Prospectus, as of its date or the date of such opinion, included or includes any untrue statement of a material fact or omitted or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (iv) if the Company elects to rely on Rule 434 under the Securities Act, the Prospectus is not "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time of its effectiveness or an effective post-effective amendment thereto (including such information that is permitted to be omitted pursuant to Rule 430A under the Securities Act); (v) the Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus; all of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities; the Shares have been duly authorized by all 22 necessary corporate action of the Company and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be validly issued, fully paid and nonassessable; (vi) no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Shares; and no holder of securities of the Company has any right which has not been fully exercised or waived to require the Company to register the offer or sale of any securities owned by such holder under the Securities Act in the Offering contemplated by this Agreement; (vii) all of the Shares have been duly authorized and accepted for quotation on the Nasdaq National Market, subject to official notice of issuance; (viii) the Company and each of its consolidated subsidiaries have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership, leasing or operation of their respective properties or assets or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries, taken as a whole; the Company and each of its subsidiaries have full power and authority to own, lease and operate their respective properties and assets and conduct their respective businesses as described in the Registration Statement and the Prospectus, and the Company has corporate power to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it; all of the issued and outstanding shares of capital stock of each of the Companyos subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of any perfected security interests or, to the best knowledge of such counsel, any other security interests, liens, encumbrances, equities or claims; (ix) the statements set forth (x) in the Prospectus under the headings "Management--Director Compensation," "Management--Employee Benefit Plans," "Management--Change of Control Arrangements," "Certain Transactions," "Description of Capital Stock," and "Shares Eligible for Future Sale" and (y) in the Registration Statement in Items 14 and 15, in each case, insofar as such statements constitute a summary of documents or matters of law or proceedings referred to therein, have been reviewed by such counsel and fairly present the information called for with respect to such documents and matters in all material respects as required by the Securities Act and the rules and regulations thereunder; (x) the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of the Company and this Agreement has been duly executed and delivered by the Company; the issuance, offering and sale of the Shares to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (x) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained or made (and specified in such opinion) or such as may be required by the securities or Blue Sky laws of the various states of the United States of America and other U.S. jurisdictions in connection with the offer and sale of the Shares by the Underwriters, or (y) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument, known to such counsel, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties are bound, or the charter documents or by-laws of the Company or any of its subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other 23 governmental authority or any arbitrator known to such counsel and applicable to the Company or its subsidiaries; (xi) the Company is not an "investment company" and, after giving effect to the Offering and the application of the proceeds therefrom, will not be an "investment company", as such term is defined in the 1940 Act; (xii) there are no persons with registration or other similar rights to have any securities registered by the Company under the Securities Act, except as disclosed in the Registration Statement and the Prospectus; (xiii) the execution and delivery of the Reorganization Documents effecting the reorganization of the Company under the laws of the State of Delaware, was duly authorized by all necessary corporate (or other) action on the part of each of the parties thereto; (xiv) each of the parties to the Reorganization Documents had all corporate power and authority to execute and deliver the Reorganization Documents, to consummate the transactions contemplated therein and the Reorganization Documents constituted a valid and binding obligation of each of the parties thereto; and (xv) such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described therein or filed as required. In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials and, as to matters involving the application of laws of any jurisdiction other than the States of California and Delaware or the United States, to the extent satisfactory in form and scope to counsel for the Underwriters, upon the opinion(s) of other counsel. The foregoing opinion shall also state that the Underwriters are justified in relying upon such opinion(s) of other counsel, and copies of such opinion(s) shall be delivered to the Representatives and counsel for the Underwriters. References to the Registration Statement and the Prospectus in this paragraph (b) shall include any amendment or supplement thereto at the date of such opinion. The opinions of issueros counsel described herein shall be rendered to the Underwriters at the request of the Company and shall so state therein. (c) The Representatives shall have received a legal opinion from Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the Selling Stockholders, dated the Closing Date, to the effect that: (i) each such Selling Stockholder has full power (corporate and other) to enter into this Agreement, the Custody Agreement and the Power-of-Attorney and to sell, assign, transfer and deliver the Shares being sold by such Selling Stockholder hereunder in the manner provided in this Agreement and to perform its obligations under the Custody Agreement; this Agreement, the Custody Agreement and the 24 Power-of-Attorney have been duly executed and delivered by each Selling Stockholder; assuming due authorization, execution and delivery by the Custodian, the Custody Agreement and the Power-of-Attorney are the legal, valid, binding and enforceable instruments of such Selling Stockholder, subject to applicable bankruptcy, insolvency and similar laws affecting creditorso rights generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (ii) the delivery by each Selling Stockholder to the several Underwriters of certificates for the Shares being sold hereunder by such Selling Stockholder against payment therefor as provided herein, will convey good and marketable title to such Shares to the several Underwriters, free and clear of all security interests, liens, encumbrances, equities, claims or other defects; (iii) the sale of the Shares to the Underwriters by such Selling Stockholder pursuant to this Agreement, the compliance by such Selling Stockholder with the other provisions of this Agreement and the Custody Agreement and the consummation of the other transactions herein contemplated do not (x) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under state securities or blue sky laws, or (y) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under any indenture, mortgage, deed of trust, lease or other agreement or instrument to which such Selling Stockholder or any of its subsidiaries is a party or by which such Selling Stockholder or any of its subsidiaries or any of their respective properties are bound, or the charter documents or by-laws of such Selling Stockholder or any of its subsidiaries or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to such Selling Stockholder or any of its subsidiaries. In rendering such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Selling Stockholders and public officials and, as to matters involving the application of laws of any jurisdiction other than the States of California and Delaware or the United States, to the extent satisfactory in form and scope to counsel for the Underwriters, upon the opinion(s) of other counsel. The foregoing opinion shall also state that the Underwriters are justified in relying upon such opinion(s) of other counsel, and copies of such opinion(s) shall be delivered to the Representatives and counsel for the Underwriters. References to the Registration Statement and the Prospectus in this paragraph (c) shall include any amendment or supplement thereto at the date of such opinion. (d) The Representatives shall have received a legal opinion from Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters, dated the Closing Date, covering the issuance and sale of the Shares, the Registration Statement and the Prospectus, and such other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (e) The Representatives shall have received from KPMG Peat Marwick LLP, a letter or letters dated, respectively, the date hereof and the Closing Date, in form and substance satisfactory to the Representatives, to the effect that: (i) they are independent accountants with respect to the Company and its consolidated subsidiaries within the meaning of the Securities Act and the applicable rules and regulations thereunder; (ii) in their opinion, the audited consolidated financial statements and schedules and pro forma financial statements examined by them and included in the Registration Statement and the Prospectus comply in form in all material respects with the applicable accounting requirements of the 25 Securities Act and the related published rules and regulations and Staff Accounting Bulletins with respect to registration statements on Form S-1; (iii) on the basis of a reading of the latest available interim unaudited consolidated condensed financial statements of the Company and its consolidated subsidiaries, carrying out certain specified procedures (which do not constitute an examination made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph (iii), a reading of the minute books of the shareholders, the board of directors and any committees thereof of the Company and each of its consolidated subsidiaries, and inquiries of certain officials of the Company and its consolidated subsidiaries who have responsibility for financial and accounting matters, nothing came to their attention that caused them to believe that: (x) the unaudited consolidated condensed financial statements of the Company and its consolidated subsidiaries included in the Registration Statement and the Prospectus do not comply in form in all material respects with the applicable accounting requirements of the Securities Act and the related published rules and regulations thereunder or are not in conformity with GAAP applied on a basis substantially consistent with that of the audited consolidated financial statements included in the Registration Statement and the Prospectus; (y) the unaudited amounts for sales, net revenues and total and per share amounts of net income included in the Registration Statement and the Prospectus do not agree with the amounts set forth in any unaudited consolidated financial statements for those same periods or are not in conformity with GAAP accounting principles applied; and (z) at a specific date not more than three business days prior to the date of such letter, there were any changes in the capital stock or long-term debt of the Company and its consolidated subsidiaries or any decreases in net current assets or stockholderso equity of the Company and its consolidated subsidiaries, in each case compared with amounts shown on the December 31, 1998 unaudited consolidated balance sheet included in the Registration Statement and the Prospectus, or for the period from January 1, 1998 to ________ __, 1998 there were any decreases, as compared with January 1, 1997 to ________ __, 1997, and as compared with October 1, 1997 to December 31, 1997, in sales, net revenues, net income before income taxes or total or per share amounts of net income of the Company and its consolidated subsidiaries, except in all instances for changes, decreases or increases set forth in such letter. (iv) they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are derived from the general accounting records of the Company and its consolidated subsidiaries and are included in the Registration Statement and the Prospectus and in Exhibit 11 to the Registration Statement, and have compared such amounts, percentages and financial information with such records of the Company and its consolidated subsidiaries and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation; and (v) on the basis of a reading of the unaudited pro forma consolidated condensed financial statements included in the Registration Statement and the Prospectus, carrying out certain specified procedures that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph (v), inquiries of certain officials of the Company and its consolidated subsidiaries who have responsibility for financial and accounting matters and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the unaudited pro forma consolidated condensed financial statements, nothing came to their attention that caused them to believe 26 that the unaudited pro forma consolidated condensed financial statements do not comply in form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements. In the event that the letters referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that (I) such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Representatives deem such explanation unnecessary, and (II) such changes, decreases or increases do not, in the sole judgment of the Representatives, make it impractical or inadvisable to proceed with the purchase and delivery of the Shares as contemplated by the Registration Statement, as amended as of the date hereof. References to the Registration Statement and the Prospectus in this paragraph (e) with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. (f) The Company shall have furnished or caused to be furnished to the Underwriters at the Closing a certificate of its Chairman of the Board, its President or its Chief Executive Officer and its Chief Financial Officer satisfactory to the Underwriters to the effect that: (vi) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Closing Date; the Registration Statement, as amended as of the Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date; (vii) no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best of the Companyos knowledge, are contemplated by the Commission; and (viii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any materially adverse change (including, without limitation, a change in management or control), or development involving a prospective materially adverse change, in the condition (financial or otherwise), management, earnings, properties, business affairs or business prospects, stockholderso equity, net worth or results of operations of the Company or any of its subsidiaries, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto). (g) The Representatives shall have received from each Selling Stockholder a certificate, signed by such Selling Stockholder, dated the Closing Date, to the effect that: (ix) the representations and warranties of such Selling Stockholder in this Agreement are true and correct as if made on and as of the Closing Date; 27 (x) the Registration Statement, as amended as of the Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (xi) such Selling Stockholder has performed all covenants and agreements on its part to be performed or satisfied at or prior to the Closing Date. (h) The Representatives shall have received from each person who is a director or officer of the Company and substantially all holders of the outstanding shares of Common Stock an agreement dated on or before the date of this Agreement to the effect that such person will not publicly announce any intention to and will not, without the prior written consent of Deutsche Morgan Grenfell Inc. on behalf of the Underwriters, (i) offer, pledge, sell, offer to sell, contract to sell, sell any option or contract to purchase, purchase any option to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any of the shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, Common Stock, or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, shares of Common Stock (whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of shares of Common Stock (or securities convertible into, exercisable or exchangeable for Common Stock), in cash or otherwise), in each case, beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) or otherwise controlled by such person on the date hereof or hereafter acquired, for a period beginning from the date hereof and continuing to and including the date 180 days after the date hereof; provided, however, that such person may, without the prior written consent of Deutsche Morgan Grenfell Inc. on behalf of the Underwriters, transfer shares of Common Stock or such other securities to members of such personos immediate family or to trusts for the benefit of members of such personos immediate family or in connection with bona fide gifts, provided that any transferee agrees to the transfer restrictions described above. (i) Prior to the commencement of the Offering, the Company shall have made an application for the quotation of the Shares on the Nasdaq National Market and the Shares shall have been included for trading on the Nasdaq National Market, subject to official notice of issuance. (j) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Companyos securities by any "nationally recognized statistical rating organization", as such term is defined for purposes of Rule 436(g)(2) under the Securities Act. (k) On or before the Closing Date, the Representatives and counsel for the Underwriters shall have received such further certificates, documents or other information as they may have reasonably requested from the Company and the Selling Stockholders. (l) All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are satisfactory in all material respects to the Representatives and counsel for the Underwriters. The Company and the Selling Stockholders shall furnish to the Representatives such conformed copies of such opinions, certificates, letters and documents in such quantities as the Representatives and counsel for the Underwriters shall reasonably request. 28 The respective obligations of the several Underwriters to purchase and pay for any Shares shall be subject, in their discretion, to each of the foregoing conditions to purchase the Shares, except that all references therein to the Shares and the Closing Date shall be deemed to refer to the Firm Shares or the Option Shares and the First Closing Date or the related Option Closing Date, each as applicable. Section 8. Default of Underwriters. If, at the First Closing, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is ten percent or less of the aggregate number of the Shares to be purchased on such date, the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Shares by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the First Closing Date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule 1 hereto bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as the Representatives may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, at the First Closing, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than ten per cent of the aggregate number of Firm Shares to be purchased, and arrangements satisfactory to the Representatives, the Company and the Selling Stockholders for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or any Selling Stockholder. In any such case either the Representatives or the Company shall have the right to postpone the Closing, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, at any Option Closing, any Underwriter or Underwriters shall fail or refuse to purchase Option Shares, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Option Shares or (ii) purchase not less than the number of Option Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 8. Any action taken under this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. Section 9. Termination. This Agreement shall be subject to termination in the sole discretion of the Representatives by notice to the Company and the Selling Stockholders given prior to any Closing Date in the event that the Company or any Selling Stockholder shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to any Closing Date, (a) trading in securities generally on the New York Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited or minimum or maximum prices shall have been established by or on, as the case may be, the Commission or the New York Stock Exchange or the Nasdaq National Market; (b) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market; (c) a general moratorium on commercial banking activities shall have been declared by either Federal or New York State authorities; (d) there shall have occurred (i) an outbreak or escalation of hostilities between the United States and any foreign power, (ii) an outbreak or escalation of any other insurrection or armed conflict involving the United States, or (iii) any other calamity or crisis or materially adverse change in general economic, political or financial conditions having an effect on the U.S. financial markets that, in the sole judgment of the Representatives, makes it impractical or inadvisable to proceed with the public offering or the delivery of the Shares as contemplated by the Registration Statement, as amended as of the date hereof; or (e) the 29 Company or any of its subsidiaries shall have, in the sole judgment of the Representatives, sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, or there shall have been any materially adverse change (including, without limitation, a change in management or control), or constitute a development involving a prospective materially adverse change, in the condition (financial or otherwise), management, earnings, properties, business affairs or business prospects, stockholderso equity, net worth or results of operations of the Company or any of its subsidiaries, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto). Termination of this Agreement pursuant to this Section 9 shall be without liability of any party to any other party except for the liability of the Company in relation to expenses as provided in Sections 4 and 10 hereof, the liability of the Selling Stockholders in relation to expenses as provided in Sections 4 and 10 hereof, the indemnity provided in Section 6 hereof and any liability arising before or in relation to such termination. Section 10. Reimbursement of Expenses. If the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 hereof is not satisfied or because of any termination pursuant to Section 9 hereof (other than by reason of a default by any of the Underwriters), the Company shall reimburse the Underwriters, severally upon demand, for all out-of-pocket expenses (including fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Shares. If the Company is required to make any payments to the Underwriters under this Section 10 because of any Selling Stockholderos refusal, inability or failure to satisfy any condition to the obligations of the Underwriters set forth in Section 7 hereof, such defaulting Selling Stockholder, pro rata in proportion to the percentage of Shares to be sold by each, shall reimburse the Company on demand for all amounts so paid. Section 11. Information Supplied by Underwriters. The statements set forth under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent such statements relate to the Underwriters) constitute the only information furnished by any Underwriter through the Representatives to the Company for the purposes of Section 5(a)(ii) and Section 6 hereof. The Underwriters confirm that such statements (to such extent) are correct. Section 12. Notices. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by the Representatives. Any notice or notification in any form to be given under this Agreement may be delivered in person or sent by telex, facsimile or telephone (subject in the case of a communication by telephone to confirmation by telex or facsimile) addressed to: in the case of the Company: Micromuse Inc. 139 Townsend Street San Francisco, California 94107 Facsimile: 415/538-9091 Telephone: 415/538-9090 Attention: Christopher J. Dawes in the case of the Underwriters: 30 Deutsche Morgan Grenfell Inc. 31 West 52nd Street New York, New York 10019 Facsimile: 650/614-5030 Telephone: 650/614-5000 Attention: William J. Brady In the case of the Selling Stockholders, any such notice shall be addressed to the Selling Stockholders at the addresses set forth in Schedule 2 hereto. Any notice under this Section 12 shall take effect, in the case of delivery, at the time of delivery and, in the case of facsimile, at the time of dispatch. Section 13. Miscellaneous. (a) Time shall be of the essence of this Agreement. (b) The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect, the meaning or interpretation of this Agreement. (c) For purposes of this Agreement, (a) "business day" means any day on which the New York Stock Exchange is open for trading, and (b) "subsidiary" has the meaning set forth in Rule 405 under the Securities Act. (d) This Agreement may be executed in any number of counterparts, all of which, taken together, shall constitute one and the same Agreement and any party may enter into this Agreement by executing a counterpart. (e) This Agreement shall inure to the benefit of and shall be binding upon the several Underwriters, the Company, the Selling Stockholders and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person, except that (i) the indemnities of the Company and the Selling Stockholders contained in Section 6 hereof shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 6 hereof shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement, each Selling Stockholder and any person or persons who control the Company or such Selling Stockholder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act. No purchaser of Shares from any Underwriter shall be deemed a successor because of such purchase. (f) The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers, the Selling Stockholders and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, the Selling Stockholders, any Underwriter or any controlling person referred to in Section 6 hereof and (ii) delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 4, 6 and 10 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. Section 14. Severability. 31 It is the desire and intent of the parties that the provisions of this Agreement be enforced to the fullest extent permissible under the law and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, in the event that any provision of this Agreement would be held in any jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Section 15. Governing Law. The validity and interpretation of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any provisions relating to conflicts of laws. If the foregoing is in accordance with your understanding, please sign and return to us eight (8) counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in the Deutsche Morgan Grenfell Inc. Master Agreement Among Underwriters, the form of which shall be submitted to the Company for examination upon request, but without warranty on your part as to the authority of the signers thereof. 32 Very truly yours, MICROMUSE INC. By: -------------------------------------------- Christopher J. Dawes President and Chief Executive Officer The Selling Stockholders named in Schedule 2 hereto, acting severally By: -------------------------------------------- Name: ------------------------------------------ Attorney-in-Fact The foregoing Agreement is hereby confirmed and accepted as of the date first above written. DEUTSCHE MORGAN GRENFELL INC. NATIONSBANC MONTGOMERY SECURITIES, INC. SMITH BARNEY INC. Acting severally on behalf of themselves and the several Underwriters named in Schedule 1 hereto. By: DEUTSCHE MORGAN GRENFELL INC. By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- 33 SIGNATURE PAGE TO UNDERWRITING AGREEMENT SCHEDULE 1 Underwriters Underwriter Number of Firm Shares To Be Purchased Deutsche Morgan Grenfell Inc. NationsBanc Montgomery Securities, Inc. Smith Barney Inc. Total ------------------------ 34 SCHEDULE 1 35 SCHEDULE 2 Selling Stockholders Name and Address of Number of Firm Shares Number of Option Shares Selling Stockholders To Be Sold To Be Sold
Total ------------------ ------------------------ SCHEDULE 2 EX-2.1 3 AGREEMENT DATED SEPTEMBER 16, 1997 1 EXHIBIT 2.1 DATED 16TH SEPTEMBER 1997 (1) Micromuse plc - and - (2) Horizon Open Systems (UK) Limited - and - (3) Horizon Computer Services Limited - --------------------------------------------------- AGREEMENT for the sale of the systems integration business of Micromuse plc - --------------------------------------------------- Teacher Stern Selby 37-41 Bedford Row London WC1R 4JH Tel: 0171 242 3191 Fax: 0171 242 1156 Ref: (alpha) HOR.SOB.DOC 2 DATED: 16TH SEPTEMBER 1997. PARTIES: (1) "Vendor": Micromuse plc (registered no. 2228951) whose registered office is at Disraeli House 90 Putney Bridge Road London SW18 IDA (2) "Purchaser": Horizon Open Systems (UK) Limited (registered no. 3084069) whose registered office is at Unit 1 Wallbrook Business Centre Green Lane Hounslow Middlesex TW4 6NW (3) "Guarantor": Horizon Computer Services Limited (registered no. 133211) whose registered office is at Lower Glanmire Road Cork Eire OPERATIVE PROVISIONS: 1. Definitions 1.1 In this Agreement including the Schedules and the Appendices the following words and expressions have the following meanings unless they are inconsistent with the context;- "Agreed Bundle" the bundle of documents attached hereto in the Agreed Form "Agreed Form" the form agreed between the Vendor and the Purchaser on or prior to the Effective Date and initialled for the purposes of identification by their respective duly authorised representatives "Assets" the property assets and rights of the Business to be purchased by the Purchaser as described in clause 2.1 "Auditors' Statement" the statement to be prepared by the Purchaser's auditors in accordance with clause 8.2 "Book Debts" the trade debts owed to the Vendor at the Effective Date in connection with the Business in respect of which invoices have been validly issued and submitted by the Vendor prior to the Effective Date "Business" the systems integration business as carried on by the Vendor at the Effective Date including without limitation the sale and supply of the products from the companies listed in Appendix 6 and all related and ancillary products consultancy and other services and training other than the Netcool products and services sold and supplied by the Vendor as at the Effective Date 3 "Business Day" a day on which banks in London are open for the transaction of all classes of business (not being Saturday or Sunday) "Completion" completion of the sale and purchase of the Business in accordance with the provisions of clause 7 "Consideration" the total consideration payable pursuant to this Agreement as referred to in clause 3.1 "Contracts" the Customer Contracts the Maintenance Contracts the Multi Year Maintenance Contracts and the Supply Contracts "Creditors" all and any amounts owed by the Vendor in connection with the Business to or in respect of trade creditors and accrued charges trade bills payable and other creditors in connection with the Business at the Effective Date but not including liabilities for VAT or taxation on profits or chargeable gains "Customer Contracts" all the current contracts agreements and arrangements of and orders placed with the Vendor for the supply of goods and/or services to customers of the Business as listed in Appendix I "Customer Lists" the lists of customers and agents of the Business at any time during the period from 1st October 1995 to the Effective Date being print outs (in paper or electronic form) from the Vendor's accounts NOTES Contact and Helpdesk databases and such other files and records of customers agents and suppliers relating to the Business and all information relating to the marketing of the Business but excluding books and records of the Vendor relating exclusively to the Excluded Assets in each case as are in the possession of the Vendor or are capable of being called for by the Vendor "Deferred Consideration" the sum of $250,000 (two hundred and fifty thousand US dollars) "Disclosures" the disclosures set out in a disclosure letter of today's date from the Vendor to the Purchaser relating to the Warranties "Effective Date" the close of business on the date of this Agreement 4 "Excluded Assets" all assets relating to the Business (or otherwise) not specified in the Assets such exclusion including without limitation: (a) (subject to the provisions of clause 5) cash in hand or at the bank (b) (subject to the provisions of clause 5) the Book Debts (c) the Property (d) all stock and fixed assets belonging to the Vendor and whether or not previously utilized in relation to the Business (e) the Vendor's customer magazine "Complexity" and all and any rights therein (f) all and any rights in or to the Company's Help Desk and NOTES Contact database software (g) all intellectual property rights (of whatsoever nature) in or relating to Netcool "Excluded Employees" the employees of the Vendor employed in the Business named in part 2 of Appendix 4 and all other employees of the Vendor whether employed in the Business or otherwise including without limitation all former existing and future employees of the Vendor but excluding the Transferring Employees "Further Consideration" the sum of $250,000 (two hundred and fifty thousand US dollars) "Goodwill" the goodwill of the Vendor in relation to the Business together with the exclusive right for the Purchaser or its assignee to represent itself as carrying on the Business in succession to the Vendor but for the avoidance of doubt excluding the right to use the name "Micromuse" or any derivative thereof other than pursuant to the rights granted by clause 14 "Initial Consideration" the sum of $500,000 (five hundred thousand US dollars) "Liabilities" all and any liabilities of the Business and/or the Vendor in relation to the Business (other than the Creditors) outstanding at the Effective Date "LSE Contract" the contract made between the Vendor and the London Stock Exchange (pursuant to invoice number 5569 and customer purchase order RO25431) being one of the Maintenance Contracts 5 "Maintenance Contracts" all the current contracts agreements and arrangements (other than the Multi Year Maintenance Contracts) of the Vendor for the supply of maintenance services to customers of the Business as listed in Appendix 3 "Multi Year Maintenance Contracts" all the current contracts agreements and arrangements of the Vendor for the supply of maintenance services in excess of one year to customers of the Business as listed in part A of Appendix 3 "Option Period" the period of three months following the Effective Date "Property" the third floor mezzanine area of the Vendor's place of business at 90 Putney Bridge Road London SW2 1DA "Purchaser's Solicitors" Teacher Stern Selby 37/41 Bedford Row London WC1R 4JH "Regulations" the Transfer of Undertakings (Protection of Employment) Regulations 1981 "Supply Contracts" all the current contracts agreements and arrangements of or orders placed by the Vendor for the supply of goods and/or services from suppliers to the Business as listed in Appendix 2 "Trade Names" Micromuse Systems Integration and such other name or names as may be agreed by the Vendor and the Purchaser in writing from time to time "Transferring Employees" the employees of the Vendor employed in the Business named in part 1 of Appendix 4 "Turnover" the gross sales turnover of the Purchaser and (if applicable) any wholly owned subsidiary that is registered in England (including for the avoidance of doubt the gross sales turnover of the Business) for the twelve month period immediately following the Effective Date as certified determined or agreed in accordance with clauses 2,1 or 2,3 "VAT" value added tax "Vendors Account" National Westminster Bank plc 153 Putney High Street London SW15 1RX sort code: 60-17-11 Swift NWBKGB2L dollar account: 140/04005414 6 "Vendor's Solicitors" Cameron McKenna Mitre House 160 Aldersgate London EC1A 4DD "Warranties" the warranties of the Vendor contained in Schedule 4 "Warranty Claim" any valid claim made by the Purchaser for breach of any of the Warranties in accordance with the provisions of clause 13 1.2 Unless the context otherwise requires any reference to any statutory provision shall be interpreted as including a reference to:- 1.2.1 any statutory amendment modification consolidation or re-enactment (whether before or after the date of this Agreement) for the time being in force; 1.2.2 all statutory instruments or subordinate legislation or orders made pursuant to a statutory provision; 1.2.3 all statutory provisions of which the statutory provision is an amendment modification consolidation or re-enactment; but shall not include any substituted provision. 1.3 Words denoting the singular include the plural and vice versa; words denoting any gender include all genders; words denoting persons include corporations and vice versa. 1.4 Unless otherwise stated a reference to a clause sub-clause or Schedule is a reference to a clause or a sub-clause of or a schedule to this Agreement. 1.5 Clause headings are for ease of reference only and do not affect the construction of this Agreement. 1.6 The Appendices shall form part of this Agreement. 2. Agreement for sale 2.1 Subject to the terms and conditions of this Agreement the Vendor with full title guarantee shall sell and transfer to the Purchaser which shall purchase and take over as at the Effective Date:- 2.1.1 the Business as a going concern; and 2.1.2 all of the following property assets and rights of the Vendor used in the conduct of the Business:- (a) the Goodwill; (b) the Customer Lists; and (c) the benefit of the Contracts but excluding the Excluded Assets. 2.2 Save as expressly provided for in this Agreement the Purchaser shall not assume or be deemed to assume or be responsible for any debt obligation or liability 7 whatsoever incurred or suffered by or on behalf of the Vendor in relation to the Business or the Assets. 3. Purchase consideration 3.1 The maximum consideration for the sale by the Vendor of the Business and the Assets shall be a sum equal to the aggregate of the Initial Consideration and (if payable in accordance with the provisions of this Agreement) the Deferred Consideration and the Further Consideration and the values attributable to the Goodwill the Customer Lists and the Contracts shall be apportioned as stated in Schedule 1. 3.2 The consideration shall be paid as follows: 3.2.1 as to the Initial Consideration in cash at the Effective Date; 3.2.2 as to the Deferred Consideration (if payable) in cash in accordance with clause 8; 3.2.3 as to the Further Consideration (if payable) in cash in accordance with clause 9. 3.3 The Consideration shall be exclusive of any applicable VAT. 4. Debtors Where any debtor included in the Book Debts which belongs to the Vendor is a continuing debtor of the Business following the Effective Date the Vendor shall consult with the Purchaser at least 21 days before instituting any legal proceedings for the recovery of the same. 5. Book Debts Receivables Creditors and Liabilities 5.1.1 As regards Customer Contracts relating to the supply of products the Vendor shall be entitled to all revenues in relation to such Customer Contracts in respect of which the "ship date" falls on or prior to the Effective Date and the Purchaser shall be entitled to all revenues under such Customer Contracts in respect of which the "ship date" falls after the Effective Date for the avoidance of doubt in each case irrespective of the date upon which any related invoice is issued or submitted. 5.1.2 As regards Customer Contracts relating to the provision of consultancy services and in respect of which an invoice has not been issued or submitted on or prior to the Effective Date all revenues in relation to such Customer Contracts shall be for the sole account of the Purchaser. 5.1.3 As regards Customer Contracts relating to the provision of training services all revenues in relation to such Customer Contracts where the services thereunder have commenced on or prior to the Effective Date shall be retained by or belong to the Vendor and where training services in relation to such Customer Contracts commence following the Effective Date all revenues shall belong to the Purchaser. 5.2 If the Vendor has issued or submitted any invoices in respect of the provision of consultancy services under any contract on or prior to the Effective Date all revenues in relation to such contracts shall be for the sole account of the Vendor 8 but to the extent that the services thereunder are to be performed after the Effective Date the Vendor shall sub-contract the provision of such services to the Purchaser (which the Purchaser hereby agrees to provide) on so far as possible the same terms (including daily charge out rates). 5.3 Entitlement to proceeds in relation to the Maintenance Contracts and the Multi Year Maintenance Contracts shall be dealt with in accordance with the provisions of Appendix 3. 5.4 All costs relating to Supply Contracts and any other contracts required to be entered into for the supply of products and/or services in relation to the Customer Contracts the Maintenance Contracts and the Multi Year Maintenance Contracts (for which purposes the costs of any supply of consultancy services sourced in-house shall be treated as a third party supply at a cost of Pound Sterling 500 per day) shall be borne by and in proportion to the entitlement of the Purchaser and/or the Vendor (as appropriate) to revenues in relation to such Customer Contracts Maintenance Contracts and Multi Year Maintenance Contracts and in addition the Purchaser shall be responsible for carrying out all telephone support services pursuant to the Maintenance Contracts and the Multi Year Maintenance Contracts and in addition the costs of performing all warranties and/or guarantees relating to the Customer Contracts in relation to the supply of product or as disclosed in the Agreed Bundle. 5.5 To the extent that any payment is made to or received by the Vendor or the Purchaser in respect of a Book Debt an invoice or other monies belonging to or for the account of the other (as appropriate having regard to the provisions of this clause 5) such party shall receive such payment as trustee for and on behalf of the party entitled to such payment and shall account to the other for the same on the Effective Date or if received thereafter within 7 Business Days of receipt by the relevant party. 5.6 Save in relation to the costs which the Purchaser shall be responsible for pursuant to clause 5.4 the Vendor shall promptly discharge the Creditors and Liabilities and shall indemnify the Purchaser fully and effectively at all times from and against all and any claims proceedings demands liabilities and related costs and expenses on a full indemnity basis in connection with any claim that the Liabilities and Creditors are payable by the Purchaser. 6. Contracts --------- 6.1 The Purchaser shall as from the Effective Date perform the obligations of the Vendor under the Contracts insofar as such obligations relate exclusively to the Business in a proper and workmanlike manner and shall indemnify and keep indemnified the Vendor against all claims liabilities demands proceedings and related costs and expenses on a full indemnity basis arising out of the performance 9 or non-performance or as a consequence of such obligations under the Contracts but the Purchaser shall not indemnify the Vendor in respect of anything arising out of the performance or non-performance or as a consequence of a breach on the part of the Vendor its employees agents or sub-contractors prior to the Effective Date. 6.2 The Vendor shall continue to perform the obligations under the Contracts insofar as such obligations relate to the remaining businesses of the Vendor as carried on at the Effective Date in a proper and workmanlike manner and shall indemnify and keep indemnified the Purchaser against all claims liabilities demands proceedings and related costs and expenses on a full indemnity basis arising out of the performance or non-performance or as a consequence of such obligations under the Contracts. 6.3.1 Save in relation to the costs which the Purchaser shall be responsible for pursuant to clause 5.4 the Vendor shall remain liable for and shall indemnify the Purchaser fully and effectively at all times from and against all and any claims losses actions proceedings demands liabilities costs and expenses on a full indemnity basis in respect of any goods and services (or parts thereof) sold or supplied by the Vendor its employees agents or sub-contractors which relate to the Business arising on or prior to the Effective Date. 6.3.2 Upon becoming aware of any such claim pursuant to clause 6.3.1 insofar as the Vendor has conduct of such claim the Vendor will promptly give notice of it to the Purchaser and shall not take any steps which might reasonably be expected to damage the commercial interests of the Purchaser without prior consultation with the Purchaser. 6.4 Insofar as any of the Contracts cannot effectively be assigned to the Purchaser without the consent of a third party or except by an agreement of novation:- 6.4.1 the Vendor and the Purchaser shall use all reasonable endeavors to obtain consent or to procure a novation; 6.4.2 unless and until consent is obtained or such Contracts are novated the Vendor shall hold the same on trust for the Purchaser and the Purchaser shall for its own benefit and to the extent that such Contracts permit perform on behalf of the Vendor (but at the Purchaser's expense) the obligations of the Vendor arising after the Effective Date in relation to such Contracts in accordance with the provisions of clause 6.1. 6.5 If consent or novation is not obtained within a reasonable time period the Vendor will co-operate with the Purchaser in any reasonable arrangements designed to provide for the Purchaser the benefits under such Contracts including by way of the Vendor holding such Contracts on trust for the Purchaser and to the extent that any such arrangements cannot be made the Purchaser shall have no further obligation to the Vendor in respect of any such Contracts from such date. 10 6.6 In addition to the foregoing but acknowledging that this clause 6.6 shall not have any legal or binding effect of whatsoever nature on the Purchaser the Purchaser hereby agrees to take reasonable steps to deal with the customer queries or problems arising out of contracts or arrangements entered into by the Vendor in relation to the Business prior to the Effective Date (and other than the Contracts) in good faith with a view to dealing with the queries or problems raised by such customers (if any) to their satisfaction. 6.7 Notwithstanding anything else contained in this Agreement the Vendor hereby agrees to continue to perform and be responsible for carrying out all telephone support services pursuant to the LSE Contract until (and including) 12th December 1997 and with effect from 13th December 1997 the Purchaser shall perform and be responsible for such telephone support services and the foregoing provisions shall then apply. 7. Completion 7.1 The sale and purchase shall be completed at the offices of the Vendor's Solicitors immediately upon the exchange of this Agreement when all the matters set out in this clause 7 shall be affected. 7.2 The Vendor shall deliver to the Purchaser at the Property such of the Assets as are capable of being transferred by delivery. 7.3 The Vendor shall cause to be delivered or (if so requested by the Purchaser) made available to the Purchaser or the Purchaser's Solicitors:- 7.3.1 such documents as are required by the Purchaser's Solicitors to complete the sale and purchase of the Assets and vest title to the Assets in the Purchaser including (but without limitation) an assignment of the Goodwill Customer Lists and Contracts in the Agreed Form; 7.3.2 all its books of account payroll records and information relating to customers and suppliers (including without limitation the Customer Lists a list of purchasers to which outstanding quotations have been given and a list of unfulfilled orders as at the Effective Date) and other books and documents in each case as are in the possession of the Vendor or capable of being called for by the Vendor which relate exclusively to the Business and copies thereof where such books records or information also relate to the remaining business of the Vendor or where the Vendor is required to retain such records by law; 7.3.3 all its instructional and promotional material sales publications advertising materials terms and conditions of sale which relate exclusively to the Business and copies thereof where the same also relate to the remaining business of the Vendor; 11 7.3.4 a list of sales distributors identifying sales by units and the territory served during the last twelve months and copies of all the current agreements with the distributors; 7.3.5 all records of National Insurance and PAYE relating to all the Transferring Employees duly completed up to the Effective Date and copies thereof where such records also relate to the Excluded Employees; 7.3.6 a letter from the Vendor's bankers consenting to the sale of the Assets and releasing such Assets from any security held (in the Agreed Form) there being no other charges or encumbrances affecting the same; 7.4 In addition to the above on the Effective Date (and by entering into this Agreement) the Vendor and the Purchaser hereby agree to enter into a consultancy agreement (on the terms and conditions set out in Schedule 3). 7.5 Upon completion of the matters referred to above the Purchaser shall pay to the Vendor by way of bankers draft or telegraphic transfer to the Vendor's Account the Initial Consideration. 7.6 The Purchaser shall not be obliged to complete the purchase of the Business or any of the Assets unless the Vendor shall have complied with all of its obligations pursuant to this clause 7. 7.7 The Purchaser may in its absolute discretion waive any requirement contained in clauses 7.2 or 7.3 or may waive any such requirement subject (if agreed at the time) to a condition that the Vendor gives at the Effective Date a written undertaking to the Purchaser executed by the Vendor or on behalf of the Vendor by the Vendor's Solicitors in form and substance as the Purchaser requires. The Vendor shall duly and punctually comply with any such undertaking. 8. Deferred Consideration 8.1 If (and only if) the Turnover exceeds Pound Sterling 14,000,000 (fourteen million pounds sterling) (the "Condition") then the Vendor shall within five Business Days of the certification agreement or determination of the Turnover in accordance with the following provisions of this clause 8 pay the Deferred Consideration to the Vendor by way of telegraphic transfer to the Vendor's Account. The parties shall establish whether the Condition has been satisfied and accordingly the Deferred Consideration is payable in accordance with the following provisions of this clause 8. 8.2 On the first anniversary of the Effective Date the Purchaser shall instruct its auditors for the time being to prepare as soon as practicable (but in any event no later than 21 days following the first anniversary of the Effective Date) a written statement certifying the Turnover and to deliver a copy of such statement to the Vendor and the Purchaser together with a breakdown of the Turnover on a quarterly basis. 12 8.3 Within 21 days of the receipt by the Purchaser and the Vendor ("Notice Period") of the Auditors' Statement (time being of the essence for the purposes of this subclause) the Purchaser and the Vendor shall have the opportunity to serve a notice on the other of them stating that such party disagrees with the contents of the Auditors Statement and (by reference to the available information at such time) detailing the nature of such disagreement. Failing service of a notice as aforesaid the Auditors Statement shall be deemed to have been accepted by and (save in the case of manifest error) binding upon the parties hereto. 8.4 If notice is served during the Notice Period by the Vendor or the Purchaser in accordance with clause 8.3 the disputing party shall be entitled to a further period of 21 days ("Further Period") in which to inspect (which inspection in the case of the Vendor may be carried out by accountants instructed by it) such of the Purchaser's books and records as were used in the preparation of the Auditors' Statement provided that access to such books and records shall be subject to the same confidentiality obligations as contained in 15.1.2 of this Agreement. 8.5 The Vendor and the Purchaser shall acting in good faith use all reasonable endeavours to agree within the Further Period the Turnover. If the Vendor and the Purchaser are unable to agree the Turnover within the Further Period such dispute shall be referred for final determination to a firm of chartered accountants nominated jointly by the Vendor and the Purchaser or failing such nomination within 14 days after request by either the Vendor or the Purchaser nominated at the request of either of them by the President for the time being of the Institute of Chartered Accountants in England and Wales. Such accountants shall be entitled to call for and inspect the working papers of the Purchaser's auditors and such other documents as they may reasonably consider necessary. In making their determination the accountants shall act as experts and not as arbitrators their decision shall (in the absence of manifest error) be final and binding on the parties and their fees shall be borne and paid by the Vendor and the Purchaser in such proportions as the accountants shall determine. 8.6 The Purchaser hereby undertakes and agrees that unless otherwise agreed in writing by the Vendor (such agreement not to be unreasonably withheld or delayed but if being acknowledged that any step or proposed action that has a detrimental effect on the Turnover constitutes reasonable grounds to object) the Purchaser will ensure that until the first anniversary of the Effective Date:- 8.6.1 no material change in the nature of the Purchaser's business or of the Business occurs; 8.6.2 the Purchaser does not transfer all or any material part of its assets or undertaking to any other person company or entity; 13 8.6.3 the Purchaser will carry on its business as constituted at the Effective Date and the Business in good faith and will not act with the intention of running down the business of the Purchaser or the Business in order to deprive the Vendor the Deferred Consideration; 8.6.4 it shall procure that all future business of a kind currently carried on by the Purchaser as at the Effective Date and by the Vendor in relation to the Business as at the Effective Date shall be channelled through and only through the Purchaser. 8.7 In order that the Vendor may monitor the Turnover the Purchaser shall provide the Vendor within 28 days following the end of each three month period with a copy of the Purchaser's sales reports detailing the turnover of the Purchaser during the relevant period. 8.8 For the avoidance of doubt the Purchaser shall not be entitled to set off or deduct all or any part of the Deferred Consideration on account of any claim purported claim or action by the Purchaser against the Vendor pursuant to this Agreement. 9. Further Consideration 9.1 The parties acknowledge that the Consideration hereunder has been structured in such a way so as to reflect the level of Warranties as well as the timetable within which the purchase hereunder has been made and in addition by reference to the anticipated future relationship between the parties and in particular the goodwill and co-operation which (subject to the provisions set out below) the Purchaser expects the Vendor to extend to the Purchaser in relation to the Business following the sale hereunder. 9.2 Having regard to the above the Purchaser shall be entitled (but not in any way obliged) at the expiry of the Option Period to pay the Vendor the Further Consideration by telegraphic transfer to the Vendor's Account. 9.3 Whilst the Purchaser shall not be obliged to pay the Further Consideration any failure to pay the Further Consideration to the Vendor at the expiry of the Option Period in accordance with clause 9.2 shall (automatically and without the need to serve any notice) and notwithstanding anything else contained in this Agreement release the Vendor from all and any obligations to perform any services or to assist or co-operate with the Purchaser in any way following expiry of the Option Period save for the provision of consultancy services in accordance with Schedule 3 and except insofar as required in order for the Vendor to comply with its obligations undertakings and restrictions contained this Agreement or with any statutory requirement. 14 10 Transferring Employees and Excluded Employees 10.1 The Regulations shall govern the transfer of the contracts of employment of the Transferring Employees and the Vendor warrants that it has complied with the provisions of Regulation 10 of the Regulations applicable to it. 10.2 The Vendor shall indemnify the Purchaser fully and effectively at all times against all and any claims losses actions proceedings damages compensation tribunal awards fines demands liabilities costs and expenses on a full indemnity basis which relate to or arise from any act or omission of the Vendor or any event occurrence or circumstance prior to or on the Effective Date and which the Purchaser may incur or suffer in relation to the Transferring Employees and the Excluded Employees pursuant to the Regulations or otherwise including without limitation in connection with any claim for unfair dismissal redundancy sex race or disability discrimination or in connection with any share options (vested or otherwise) granted by the Vendor to the Transferring Employees or the Excluded Employees (whether lapsing or otherwise before or after the Effective Date). 10.3 It is acknowledged by the parties that the employment of the Excluded Employees named in part 2 of Appendix 4 employed in relation to the Business will transfer to the Purchaser by virtue of the Regulations and the Vendor shall indemnify the Purchaser fully and effectively at all times against all and any claims losses actions proceedings damages compensation tribunal awards fines demands liabilities costs and expenses on a full indemnity basis which the Purchaser may suffer or incur whether by virtue of the Regulation or otherwise and which relate to arise from or are as a consequence of the termination of such Excluded Employee's employment by the Vendor or the Purchaser following the Effective Date by way of the Purchaser giving such persons full contractual notice or pay in lieu of notice without deduction of any kind including without limitation in connection with any contractual or statutory claim whether for unfair dismissal redundancy sex race or disability discrimination or otherwise and in connection with any share options (vested or otherwise) granted by the Vendor to the Excluded Employees (whether lapsing or otherwise before or after the Effective Date). If and to the extent that a claim is made against the Purchaser and such claim is covered by the indemnity contained in this clause 10.3 the Vendor shall be entitled by way of service of notice on the Purchaser to call for conduct of such claim in the name of the Purchaser (but subject to consulting with the Purchaser within a reasonable period before any steps are to be taken) and subject further to the Vendor bearing the cost of disputing or (as appropriate) settling any such dispute or claim in addition to the indemnity contained in this clause 10.3. 15 10.4 The Vendor shall continue to employ Ms Debbie Brown in the remaining business of the Vendor and the Vendor shall indemnify and keep indemnified the Purchaser against all and any claims losses actions proceedings damages compensation tribunal awards fines demands liabilities costs and expenses on a full indemnity basis which the Purchaser may suffer or incur in relation to her employment or its termination at any time whether by virtue of the Regulations or otherwise. 10.5 All salaries and other emoluments including holiday pay tax and national insurance payments relating to the Transferring Employees shall be borne by the Vendor up to and including the Effective Date and by the Purchaser following the Effective Date and all necessary apportionment's shall be made accordingly. 10.6 The Purchaser shall indemnify the Vendor and keep the Vendor indemnified from and against all demands actions proceedings damages compensation tribunal awards fines costs expenses and all other liabilities on a full indemnity basis whatsoever arising out of or connected with any claim by any of the Transferring Employees against the Vendor which relates to any act or omission of the Purchaser (or any other event or occurrence) following the Effective Date. 10.7 The Purchaser shall (at the Vendor's expense) provide to the Vendor as soon as reasonably practicable such information in writing as the Vendor reasonably requires to carry out its duties under Regulation 10 of the Regulations. 11. VAT 11.1 The Vendor and the Purchaser shall use all reasonable endeavours to procure that the sale of the Business and the Assets hereunder is treated by HM Customs and Excise as a transfer of a business as a going concern for the purposes of the Value Added Tax Act 1994 section 49(1) and article 5 of the Value Added Tax (Special Provisions) Order 1995. 11.2 The Vendor and the Purchaser shall agree a form of letter to be sent by the Vendor to HM Customs and Excise seeking confirmation that the Vendor be permitted to keep and preserve the records referred to in section 49 of the Value Added Tax Act 1994 relating to the period prior to the Effective Date for such period as may be required by law. 11.3 The Vendor shall on reasonable notice during normal business hours make the records referred to in clause 11.2 available to the Purchaser or its agents for inspection and copying at the Purchaser's cost. 12 Title apportionments and facilities 12.1 The Vendor shall at the Purchaser's cost take all necessary steps and co-operate fully with the Purchaser to ensure that it obtains the full benefit of the Business and Assets and shall execute such documents and take such other steps (or procure other necessary parties so to do) as are necessary for vesting in the Purchaser all its 16 rights and interests in the Assets. The Vendor shall in the meantime hold the legal estate in the Assets as nominee for the Purchaser. 12.2 The Vendor shall promptly give to the Purchaser and the Purchaser's Solicitors on request all such evidence of ownership to the Assets as the Purchaser may reasonably require. 12.3 The Purchaser shall at the Vendor's cost on reasonable notice during the Purchaser's hours of business give to the Vendor such access to the books and records relating to the Business which are handed over to the Purchaser on the Effective Date as the Vendor may reasonably require in connection with the collection of any Book Debts which belong to it pursuant to the provisions of clause 5 or otherwise required in order to comply with any statutory obligation. 12.4 The provisions of Schedule 2 shall apply to the licence of the Property in favour of the Purchaser. 12.5 Subject to other provisions of this Agreement all outgoings relating to or payable in respect of the Business up to the Effective Date shall be borne by the Vendor and as from the Effective Date shall be borne by the Purchaser and all royalties and other periodical payments receivable in respect of the Business up to that time shall belong to and be payable to the Vendor and as from that time shall belong to and be payable to the Purchaser and such outgoings and payments receivable shall be apportioned accordingly. 12.6 Where any amounts fall to be apportioned under this Agreement the Vendor or the Purchaser (as the case may be) shall provide the other of them with full details of the apportionments together with supporting vouchers or similar documentation and in the absence of dispute the appropriate payment shall be made by or to the relevant party forthwith. If the amount of any apportionment is in dispute the provisions of clause 8.5 shall apply for resolving the dispute and the amount determined in accordance with that clause shall be paid within 14 days of the determination together with interest calculated on a daily basis from the Effective Date until the date of actual payment at the rate of 2 per cent. per annum above the base rate from time to time of National Westminster Bank plc. 13. Warranties by the Vendor ------------------------ 13.1 The Vendor warrants to the Purchaser that save as set out in the Disclosures the Warranties are true and accurate in all material respects at the date of this Agreement. 13.2 The rights and remedies of the Purchaser in respect of any breach of the Warranties shall not be affected by completion of this Agreement by any investigation made by or on behalf of the Purchaser into the affairs of the Vendor by the Purchaser 17 rescinding or failing to rescind this Agreement or by any other event or matter whatsoever except a specific and duly authorised written waiver or release. 13.3 The Purchaser confirms that it has not already formulated and does not as at the Effective Date contemplate making any Warranty Claim. 13.4 Where any Warranty refers to the knowledge information and belief of the Vendor or is made so far as the Vendor is aware or other similar qualification it undertakes that it has made all reasonable enquiry into the subject matter of the Warranty. 13.5 Each of the Warranties shall continue in full force and effect notwithstanding completion of this Agreement. 13.6 No failure to exercise and no delay in exercising on the part of the Purchaser any right or remedy in respect of any Warranty shall operate as a waiver of the right or remedy or the Warranty and a single or partial exercise of any right or remedy shall not preclude any other or further exercise of the right or remedy or the exercise of any other right or remedy. 13.7 No liability shall attach to the Vendor in respect of any Warrant Claim unless such Warranty Claim is (when aggregated with all other Warranty Claim or Warranty Claims previously made if any) in excess of Pound Sterling 25,000 and if the result of making any such Warranty Claim (aggregated with any other such Warranty Claim or Warranty Claims) would be that such sum is exceeded the Vendor shall (subject to the other provisions hereof) be liable for the whole of such Warranty Claim or Warranty Claims and not merely for the excess. 13.8 Claims against the Vendor shall be wholly barred and unenforceable unless notice thereof shall have been made in writing setting out the amount and brief particulars thereof prior to the expiry of eighteen months from the Effective Date. 13.9 Nothing in this Agreement shall in any way restrict or limit the general obligation of the Purchaser to mitigate any loss or damage which it may suffer in consequence of any breach of Warranty by the Vendor. 13.10 The Purchaser acknowledges and declares that in entering into this Agreement it has not relied and is not relying on any warranties representations covenants undertakings indemnities or other statements whatsoever whether written or oral (and whether implied or otherwise) (collectively "Representations") other than those expressly set out or referred to in this Agreement and the Purchaser hereby irrevocably and unconditionally waives any right it may have to claim damages for or to rescind this Agreement by reason of any Representation not expressly set out in this Agreement unless such Representation was made fraudulently. 13.11 The total liability of the Vendor in respect of any claims under the Warranties shall be limited to the amount of Consideration actually received by the Vendor pursuant to this Agreement. 18 13.12 The Vendor shall have no liability in respect of any Warranty Claim to the extent that such Warranty Claim or the subject matter thereof:- (a) occurs or arises as a result of or is otherwise attributable to an act or omission after the Effective Date by the Purchaser otherwise in the ordinary course of business which could have been reasonably avoided; or (b) occurs or arises as a result of any legislation not in force at the Effective Date or as a result of any change in legislation made after the Effective Date which has a retrospective effect. 14. Trade Names 14.1 Subject to clause 14.3 the Purchaser shall have the exclusive right to use the Trade Names in connection with the Business for a period of 6 months following the Effective Date provided always that the Purchaser at all times draws clear attention to the fact that the Business is owned by the Purchaser. 14.2 The Purchaser shall not use the name "Micromuse" or any derivative or variation thereto in connection with the Business in any manner which may be confused with the remaining business of the Vendor carried on by it immediately following the Effective Date and if the Vendor reasonably considers that the Purchaser is in breach of this sub-clause it shall notify the Purchaser of the same and may require the Purchaser to refrain from using the name "Micromuse" in such manner. 14.3 If the Purchaser does not take steps to comply with the Vendor's notice referred to in clause 14.2 within seven days of the receipt of the same the Purchaser shall automatically and without the need to serve any further notice cease to have the right referred to in clause 14.1 to use the Trade Names. 14.4 Notwithstanding the provisions of this clause the Vendor shall not at any time following the Effective Date use the Trade Names or any derivative or variation thereto in any manner or in any combination of words or phrases so as to infringe directly or indirectly upon the Goodwill or the Business. 14.5 The Vendor shall not and shall not permit or enable any other third party to use the Trade Name or any variation thereto for such time as the Purchaser is entitled to use the Trade Name in accordance with clause 14.1 in the United Kingdom. 15. Future activities 15.1 The Vendor covenants and undertakes with the Purchaser that:- 15.1.1 it shall during the Option Period and at its own expense co-operate with assist and participate in the Purchaser's public relations and marketing activities in relation to the transfer of the Business and the Vendor shall use all reasonable endeavors to ensure the maximum possible benefit of the Business to the Purchaser including without limitation maintaining the level of sales turnover of the Business as at the 19 Effective Date and by referring business where possible in addition to the foregoing matters; 15.1.2 it shall not at any time following the Effective Date disclose to any person firm association or company (except as required by law or disclosure to its professional advisers) any information as to the practice dealings management finances clients customers suppliers and affairs of the Business and the Assets or any business of the Purchaser carried on as at the Effective Date; 15.1.3 it shall not for a period of 2 years following the Effective Date either on its own account or through any other person directly or indirectly;- (a) make any announcements of any kind do or omit to do anything with the intention of in any way impeding or harming the development and profitability of the Business or the Purchaser or otherwise in bad faith; (b) solicit entice or procure any of the Transferring Employees to leave the employment of the Purchaser (whether or not such Transferring Employee would be in breach of his contract of employment); (c) solicit interfere with entice or procure any supplier in connection with the Business to cease or restrict any supplies to the Purchaser; (d) solicit interfere with or endeavour to entice away from the Purchaser any person firm association or company who is or has during the two years preceding the Effective Date been a client or customer of the Vendor in relation to the Business; (e) directly or indirectly engage in the United Kingdom and such other countries as the Vendor carries on the Business as at the Effective Date in any activity which competes directly or indirectly the Business or any material part of it. 15.2 The Purchaser covenants and undertakes with the Vendor that:- 15.2.1 it shall during the Option Period refer business where possible to the Vendor in relation to its Netcool business as carried on as at the Effective Date; 15.2.2 it shall not at any time following the Effective Date disclose to any person firm association or company (except as required by law or disclosure to its professional advisors) any information as to the practice dealings management finances clients customers suppliers and affairs of the business of the Vendor carried on as at the Effective Date; 15.2.3 it shall not for a period of 2 years following the Effective Date either on its own account or through any other person directly or indirectly solicit entice or procure any of the Excluded Employees to leave the employment of the Vendor (whether or not such Excluded Employee would be in breach of his contract of employment); 15.4 Subject to the provisions of clause 15.1 for the avoidance of doubt a number of customers clients or contacts of the Vendor in relation to the Business are also 20 customers clients or contacts of the Vendor in relation to the Vendor's other business carried on as at the Effective Date and following the Effective Date the Vendor may continue to supply software developed by the Vendor and/or perform any other services other than in relation to or competing with the Business to and/or for such customers clients or contacts. 15.5 The Vendor and the Purchaser agree that the covenants and undertakings contained in clauses 15.1 15.2 and 15.8 are reasonable and are entered into for the purpose of protecting the respective goodwill and businesses of the Vendor and the Purchaser. 15.6 Each covenant and undertaking contained in clauses 15.1 15.2 and 15.8 shall be construed as a separate covenant and undertaking and if one or more of them is or are held to be against the public interest or unlawful or in any way an unreasonable restraint of trade the remaining covenants and undertakings shall continue to bind the relevant party. 15.7 If any covenant or undertaking contained in clauses 15.1 15.2 and 15.8 were void but would be valid if the period of application were reduced or if some part of the covenant or undertaking were deleted it shall apply with such modification as may be necessary to make it valid. 15.8 The Vendor shall promptly refer to the Purchaser all enquiries relating to the Business received during the Option Period including enquiries relating to orders for any stocks spare parts accessories other equipment and services sold or supplied in connection with the Business. 15.9 The parties shall procure that all of its holding companies and subsidiaries and all subsidiaries of such holding companies (as such terms are defined in section 736 of the Companies Act 1985) and all of their respective associated companies (as such term is defined in section 416(1) of the Income and Corporation Taxes Act 1988) from time to time shall comply with the covenants and undertakings contained in this clause 15 (other than in relation to clauses 15.1.1 and 15.2.1). 16. Copyright and Information 16.1 The Vendor acknowledges that it owns certain copyright in software written for customers of the Business and in written documents produced by employees employed in the Business (together "Copyright"). The Vendor hereby assigns such right title and interest, in the Copyright as it has to the Purchaser and the Copyright shall form part of the Assets. 16.2 The Vendor shall preserve all information records and other documents insofar as they relate to the Excluded Assets for a period of not less than 3 years following the Effective Date and upon reasonable notice by the Purchaser make such information records and documents available for inspection and copying by the Purchaser or its 21 authorised agents at reasonable times during normal business hours at the Purchaser's cost. 17. Announcements No announcement of any kind shall be made in respect of the subject matter of this Agreement except as specifically agreed in writing between the Vendor and the Purchaser. 18. Costs All expenses incurred by or on behalf of the parties including all fees of agents representatives solicitors and accountants employed or engaged by either of the parties in connection with the negotiation preparation and execution of this Agreement shall be borne solely by the party which incurred them. 19. Guarantee In further consideration of the obligations of the Vendor hereunder the Guarantor hereby guarantees and undertakes to the Vendor in respect of the Purchaser that the Purchaser will pay the Deferred Consideration (if payable) in accordance with the terms of this Agreement in the event that the Purchaser fails to pay the same when due. 20. Communications 20.1 All communications between the parties with respect to this Agreement shall be delivered by hand or sent by first class post to the address of the addressee as set out in this Agreement or to such other address as the addressee may from time to time have notified for the purpose of this clause or sent by facsimile transmission (with confirmation sent by first class post within 24 hours). 20.2 Communications shall be deemed to have been received:- 20.2.1 if sent by first class post--3 business days after posting exclusive of the day of posting; 20.2.2 if delivered by hand--on the day of delivery; 20.2.3 if sent by facsimile transmission--at the time of transmission. 20.3 Communications addressed to the Vendor shall be marked for the attention of Mr Stephen Allott. Communications addressed to the Purchaser shall be marked for the attention of Mr Charles Garvey. 20.4 In proving service:- 20.4.1 by delivery by hand--it shall be necessary only to produce a receipt for the communication signed by or on behalf of the addressee; 20.4.2 by post or facsimile transmission--it shall be necessary only to prove that the communication or letter of confirmation was contained in an envelope which was duly addressed and posted in accordance with this clause. 22 21. Entire agreement and Schedules ------------------------------ 21.1 This Agreement and the Schedules shall constitute the entire agreement and understanding between the parties with respect to all matters which are referred to herein. 21.2 All the Schedules form part of this Agreement. 21.3 This Agreement shall be binding upon each party's successors and assigns 22. Invalidity ---------- If any term or provision in this Agreement shall in whole or in part be held to any extent to be illegal or unenforceable under any enactment or rule of law that term or provision or part shall to that extent be deemed not to form part of this Agreement and the enforceability of the remainder of this Agreement shall not be affected. 23. Proper law ---------- The construction validity and performance of this Agreement shall be governed by the laws of England and the parties submit to the non-exclusive jurisdiction of the High Court in London. 24. Non-Assignment -------------- The benefits rights covenants undertaking and obligations of the parties under this Agreement shall not be assigned charged or mortgaged in whole or in part without the prior written consent of the other of them. IN WITNESS whereof the parties have duly executed this Agreement as a deed the day and year first above written. List of Schedules List of Appendices - ----------------- ------------------ 1. Consideration/Apportionment 1. Customer Contracts 2. Licence of Property Terms 2. Supply Contracts 3. Terms of consultancy 3. Maintenance Contracts and Multi 4. Warranties Year Maintenance Contracts 4. Transferring Employees (part 1) and Excluded Employees (part 2) 5. Letter from Mr. Beken 6. List of companies 23 SCHEDULE 1 Consideration/apportionment
Item (if payable pursuant (if payable pursuant - ---- to clause 8) to clause 9) -------------------- -------------------- $ $ $ Goodwill: 499,998 250,000 250,000 Customer Lists: 1 -- -- Contracts: 1 -- -- ------- ------- ------- Sub totals: 500,000 250,000 250,000 ------- ------- ------- Total: $1,000,000
24 SCHEDULE 2 Provisions relating to the licence of the Property 1. The provisions of this Schedule 2 shall apply with respect to the Purchaser's rights as licensee to occupy the Property during the Option Period:- 1.1 the Vendor hereby grants a licence to the Purchaser to enter the Property and to exclusively occupy the same as the licensee of the Vendor in consideration of the licence fee set out below; 1.2 the Purchaser may carry on the Business from the Property for its own account and the Vendor shall permit all of the Transferring Employees and up to three other employees of the Purchaser to continue to operate the Business from the Property free from interruption and hindrance; 1.3 the Vendor shall make available to the Purchaser all normal and usual office and reception facilities and services including telephones and fax lines office and computer furniture equipment hardware and software used in the Business but other than fax and photocopying machines; 1.4 subject to paragraph 1.5 below the Vendor shall continue to be responsible for and shall indemnify and keep indemnified the Purchaser against all rent rates service charges water rates insurance premiums gas electricity telephone and other outgoings of whatsoever nature; 1.5 during its occupation of the Property the Purchaser shall pay the Vendor a licence fee of pound sterling 3,333 per month inclusive of all contributions towards all outgoings of any nature including without limitation all telephone charges and all the facilities referred to in paragraph 1.3 above but exclusive of VAT and which shall be payable monthly in advance commencing from the Effective Date. 2. The Vendor shall retain and use the telephone number 0181 875 9500 (the "Original Telephone Number") but the Vendor shall at its cost install tie lines at the Property to enable all telephone calls the Vendor receives on the Original Telephone Number relating to the Business to be transferred to employees of the Purchaser located at the Property and the Purchaser's other place of business at Hounslow. 3. The Purchaser hereby acknowledges that the licence granted to the Purchaser pursuant to this Agreement to occupy the Property constitutes a technical breach of the terms of lease relating to the Property. In the event that the Vendor receives a written notification from the landlord during the Option Period requiring the Purchaser or the Vendor to vacate the Property:- 3.1 the Vendor shall promptly provide the Purchaser with a copy of such notification; 3.2 the Vendor shall at its cost use all reasonable endeavours and negotiate in good faith with the landlord to allow the Purchaser to continue in occupation of the Property upon the 25 terms contained in this Schedule 2 and shall inform the Purchaser at all times of the progress of and allow the Purchaser (if it so desires) to participate in such negotiations; 3.3 if the landlord refuses permission for the Purchaser to continue to occupy the Property during the Option Period the Purchaser shall be obliged to vacate the Property within any time limit set by the landlord provided that the Vendor promptly re-imburses the Purchaser;- (a) such part of the licence fee as relates to the period during which the Purchaser does not occupy the Property; and (b) one half of all and any costs exceeding pound sterling 3,333 per month which the Purchaser is required to pay by way of rental or licence fee (as appropriate) during the remainder of the Option Period which costs for the avoidance of doubt shall include the costs of the facilities referred to paragraph 1.3 above. 3.4 The Purchaser having due regard to the above agrees during the licence period not to erect any signs bearing the "Horizon" name nor to take any steps that are likely to draw attention to the licencing arrangements hereby agreed. 26 SCHEDULE 3 Terms of consultancy of Mr Beken 1. The Vendor shall provide general consultancy services to the Purchaser upon the terms of this Schedule 3 for a period of 6 months commencing on the Effective Date ("consultancy period") for the purposes of ensuring the smooth and uninterrupted transfer of the Business to the Purchaser such services to include but not limited to liaising with customers and such other general consultancy services as the Purchaser may reasonably require from time to time. 2. The Vendor shall procure that Mr Beken (and only Mr Beken) shall provide the consultancy services and that he sign and deliver to the Purchaser on the Effective Date a letter in the form contained in Appendix 5. 3. Mr Beken shall continue to be an employee of the Vendor at all times during the consultancy period and his salary benefits and other emoluments shall be paid by the Vendor both during and following the expiry or termination of the consultancy period. 4. The Vendor agrees with the Purchaser that it will not terminate Mr Beken's employment during the consultancy period save in circumstances which justify his summary dismissal and in such an event the Vendor shall notify the Purchaser at least 24 hours before it summarily dismisses Mr Beken and provide details of the reasons for such dismissal. 5. The Purchaser may terminate the consultancy period immediately if Mr Beken commits any act or makes any omission which would justify his dismissal if he were employed by the Purchaser on its standard terms and conditions of employment. 6. If Mr Beken ceases to be employed by the Vendor for any reason the Purchaser may immediately terminate the consultancy period. 7. The consultancy period may be terminated by the Purchaser at any time upon giving the Vendor not less than 1 week's prior notice. 8. During the consultancy period the Purchaser shall pay the Vendor a fee of Pound Sterling 7,500 per month (pro rata where the consultancy period commences expires or terminates other than at the end of a month) exclusive of VAT payable monthly in arrears on the last day of each month upon receipt of valid VAT invoices therefor. Such fee shall be inclusive of all expenses incurred by the Vendor in connection with the consultancy arrangement hereunder save for expenses incurred by Mr Beken in the proper performance of the consultancy services hereunder which expenses have been previously approved by the Purchaser in writing. 27 SCHEDULE 4 Warranties 1. ASSETS 1.1 Ownership of Assets 1.1.1 The Vendor has good title to all the Assets and owns absolutely all the Assets with full title guarantee free from all encumbrances. 1.1.2 The Vendor has not disposed of or agreed to dispose of or granted or agreed to grant any security or other encumbrance in respect of any of the Assets that remains outstanding at the Effective Date. 1.1.3 None of the Assets is subject to and there is no agreement or commitment to give or create any option lien or encumbrance. 1.1.4 None of the Assets has been purchased on terms that property does not pass to the Vendor until full payment is made by it to the supplier. 1.1.5 There has been no exercise purported exercise or claim for any charge lien encumbrance or equity over any of the Assets and there is no dispute directly or indirectly relating to any of the Assets. 2. TRADING 2.1 Litigation 2.1.1 The Vendor is not relation to the Business engaged in any litigation or arbitration proceedings as plaintiff or defendant except for debt collection of sums not exceeding an aggregate of pound sterling 1,000 and there are no such proceedings pending or so far as the Vendor is aware threatened either by or against the Vendor affecting the Business and so far as the Vendor is aware there are no facts which are likely to give rise to any litigation arbitration or customer disputes. 2.1.2 No threat or claim of default under any of the Contracts or any other agreement obligation or arrangement to which the Vendor is a party relating to the Business or the Assets has been made and is outstanding against the Vendor and the Vendor is not aware of any circumstances whereby any of the Contracts may be terminated or rescinded by any other party or the terms may be worsened as against the Vendor or the Purchaser of the Business or the Assets may be prejudiced. 2.2 Vendor's activities 2.2.1 The Vendor is entitled to enter into and carry out the provisions of this Agreement and has full power and authority to sell the Assets to the Purchaser without obtaining the consent of any third party. 2.2.2 Compliance with the terms of this Agreement and any document entered into by the Vendor in accordance with it does not and will not conflict with or result in a breach of any of the provisions of the Vendor's Memorandum or Articles of Association. 28 2.2.3 The Vendor has at all times carried on the Business in accordance with its Memorandum and Articles of Association for the time being in force and so far as the Vendor is aware all other documents to which it is currently has been a party and which relate to the Business. 2.2.4 Compliance with the terms of this Agreement does not conflict with result in the breach of or constitute a default under the terms conditions or provisions of any agreement or instrument to which the Vendor is now a party relating to the Business save as regards any Contract incorporating any prohibition or restriction on assignment which has been disclosed in the Disclosures. 3. CONTRACTS Disclosure of Contracts Save as disclosed in the Disclosures the Contracts constitute all the contracts and other engagements whether written or oral referable to the Business to which the Vendor is now a party. 4. EMPLOYMENT 4.1 Transferring Employees 4.1.1 The Transferring Employees and the Excluded Employees listed in part 2 of Appendix 4 comprise all the persons now employed by the Vendor in relation to the Business. 4.1.2 No Transferring Employee has given or received notice terminating his employment and no Transferring Employee will be entitled to give notice as a result of this Agreement other than as a consequence of the Regulations. 4.1.3 The Vendor has not offered a contract of employment or services to any person in connection with the Business which is to commence on or after the Effective Date. 4.2 Terms of employment 4.2.1 True and accurate particulars of the terms and conditions of employment of all the Transferring Employees including without limitation ages length of service rates of remuneration notice periods accrued holiday pay bonus profit sharing commission and discretionary bonus arrangements are set out in Appendix 4 and/or the Disclosures. 4.2.2 Save as disclosed in the Disclosures there are no schemes in operation by or in relation to the Vendor whereunder any Transferring Employee is entitled to any shares or a commission or remuneration of any other sort calculated by reference to the whole or part of the turnover profits or sales of the Business. 4.2.3 The Vendor has properly operated the Pay As You Earn system and deducted income tax as required by law from all payments to or treated as made to any Transferring Employee and accounted to the Inland Revenue for all tax so deducted and all tax chargeable on any benefits provided to the Transferring Employees at any time by the Vendor in accordance with applicable legislation. 29 4.2.4 The Vendor has deducted and paid all National Insurance contributions for which it is liable in respect of the Transferring Employees. 4.2.5 There are no Transferring Employees to whom the Vendor has issued credit cards or charge cards or provided similar facilities. 4.3 Industrial disputes and agreements 4.3.1 None of the Transferring Employees is involved in any industrial dispute and to the best of the Vendor's knowledge information and belief there are no circumstances which may result in any industrial dispute involving any Transferring Employees and none of the provisions of this Agreement including the identity of the Purchaser may lead to any industrial dispute. 4.3.2 No liability has been incurred by the Vendor and not yet discharged for breach of any contract of service or employment or for redundancy payments (including without limitation protective awards) or for damages or compensation for wrongful or unfair dismissal or otherwise or for failure to comply with any order for reinstatement or re-engagement of any employee engaged in connection with the Business or for the actual or proposed termination or suspension of employment or variation of any contract of employment or in each cash any Transferring Employee or any Excluded Employee listed in part 2 of Appendix 4. 4.3.3 The Vendor has in relation to each Transferring Employee complied in all material respects with all obligations imposed on it by all statutes regulations and codes of conduct and practice relevant to relations between it and each Employee (including without limitation any obligations under any health and safety legislation or any legislation relating to the environment). 4.3.4 The Vendor has not entered into any recognition agreement with a trade union and has not done anything which might be construed as recognition. 4.4 Pensions The Vendor is not under any legal or moral liability or obligation or ex-gratis arrangement or promise to pay pensions gratuities superannuation allowances or the like to any of the Transferring Employees. 5. GENERAL Material information All written information contained in the Agreed Bundle was when given and remains true and accurate in all material respects and the Vendor has not withheld any information from the Purchaser of which it has actual or constructive knowledge of which is material in the context of the acquisition hereunder. 30 Executed as a deed by Micromuse plc ) acting by two directors/director ) and secretary:- ) /s/ Stephen A. Allott ------------------------------ Director /s/ Anthony Beken ------------------------------ Director/Secretary Executed as a deed by Horizon Open ) Systems (UK) Limited acting by two ) directors/director and secretary:- ) /s/ Charles Garvey ------------------------------ Director /s/ [sig] ------------------------------ Director/Secretary Executed as a deed by Horizon Computer ) Services Limited acting by two directors/ ) director and secretary:- ) /s/ Charles Garvey ------------------------------ Director /s/ [sig] ------------------------------ Director/Secretary 31 APPENDIX 1 Customer Contracts This appendix consists of copies of purchase orders, order acknowledgments and Horizon warranty listings covered under the agreement. APPENDIX 2 Supply Contracts This appendix consists of a listing of supply contracts covered under the agreement. APPENDIX 3 Maintenance Contracts and Multi Year Maintenance Contracts This appendix consists of a listing of maintenance and multi-year maintenance contracts to determine which invoices are payable to the purchaser. APPENDIX 4 This appendix lists which employees are to be transferred and which employees are to be excluded under the agreement. APPENDIX 5 Terms of the provision of consultancy services to Horizon Open Systems (UK) Limited This appendix lists the terms under which Micromuse is to provide consultancy services to Horizon Open Systems. APPENDIX 6 This appendix lists the names of companies. Micromuse Inc. hereby agrees to furnish supplementally a copy of any omitted Schedule to the Commission upon request. MICROMUSE INC. By: ------------------------------- Name: Stephen A. Allott Title: Chief Financial Officer EX-3.1 4 RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF MICROMUSE INC. MICROMUSE INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY as follows: The Corporation filed its original Certificate of Incorporation with the Secretary of State of the State of Delaware on May 1, 1996. A Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on March 7, 1997. The Board of Directors of the Corporation, by written consent of the Board of Directors dated as of September 7, 1997, duly adopted resolutions setting forth the Second Amended and Restated Certificate of Incorporation herein contained (the "Second Restated Certificate of Incorporation"), declaring its advisability and directing that such Second Restated Certificate of Incorporation be submitted to the holders of the issued and outstanding Common Stock, $0.01 par value, and Preferred Stock, $0.01 par value, of the Corporation, for approval in accordance with the applicable provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware and the Corporation's Restated Certificate of Incorporation, as currently in effect. The Second Restated Certificate of Incorporation was duly adopted, after having been declared advisable by the Board of Directors of the Corporation, by written consent, dated as of September 7, 1997, of the holders of greater than a majority of the Common Stock, $0.01 par value, and the holders of greater than a majority of the Preferred Stock, $0.01 par value, of the Corporation, voting as a class and separately as a single class, all in accordance with the applicable provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware and the Corporation's Restated Certificate of Incorporation, as currently in effect, and written notice of the written consent of the holders of a majority of Common Stock has been given to those stockholders who have not consented in writing as provided in Section 228(d) of the General Corporation Law of the State of Delaware. The text of the Second Restated Certificate of Incorporation of the Corporation, as restated and amended hereby, shall read in its entirety as follows: 2 FIRST: The name of the Corporation shall be: MICROMUSE INC. SECOND: The address of its registered office in the State of Delaware is 1013 Centre Road, Wilmington, Delaware 19805. The name of its registered agent at such address is Corporation Service Company. THIRD: The purpose or purposes of the Corporation shall be: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: A. Classes of Stock. This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is Twenty-Four Million Four Hundred Eighty-Eight Thousand Three Hundred Thirty-Six (24,488,336) shares. Eighteen Million Five Hundred Thousand (18,500,000) shares shall be Common Stock and Five Million Nine Hundred Eighty-Eight Thousand Three Hundred Thirty-Six (5,988,336) shares shall be Preferred Stock. The Common Stock shall have a par value of $0.01 and the Preferred Stock shall have a par value of $0.01. B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock authorized by this Restated Certificate of Incorporation may be issued from time to time in one or more series. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Convertible Preferred Stock, which series shall consist of One Million Five Hundred Thousand (1,500,000) shares (the "Series A Preferred Stock"), and Series B Convertible Preferred Stock, which series shall consist of Two Million (2,000,000) shares (the "Series B Preferred Stock"), and the Series C Convertible Preferred Stock, which series shall consist of Two Million Four Hundred Eighty-Eight Thousand Three Hundred Thirty-Six (2,488,336) shares (the "Series C Preferred Stock"), are as set forth below in this Article IV(B). The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or of any of them. Subject to compliance with applicable protective voting rights which have been or may be granted to the Preferred Stock or series thereof in Certificates of Designation or the Corporation's Certificate of Incorporation ("Protective Provisions"), but notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent), or senior to any of those of any present or future class or series of 2 3 Preferred or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series (other than the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock), prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 1. Dividend Provisions. Subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be entitled to receive dividends, on a pari passu basis, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation) on the Common Stock of this Corporation, at the rate of $0.20 per share of Series A Preferred Stock per annum, $0.25 per share of Series B Preferred Stock per annum and $0.643 per share of Series C Preferred Stock per annum or, if greater (as determined on a per annum basis and an as converted basis for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock), an amount equal to that paid on any other outstanding shares of this Corporation, payable quarterly when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock that may from time to time come into existence, the holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this Corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to (i) $2.00 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price"), $2.50 for each outstanding share of Series B Preferred Stock (the "Original Series B Issue Price") and $6.43 per share for each outstanding share of Series C Preferred Stock (the "Original Series C Issue Price"), respectively, plus (ii) an amount equal to declared but unpaid dividends on each such share (such amount of declared but unpaid dividends being referred to herein as the "Premium"). If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock that may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred 3 4 Stock in proportion to the aggregate full aforesaid preferential amounts to which each such holder would otherwise have been entitled to receive. (b) After the distributions described in subsection (a) above have been paid, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (assuming for the purposes of such calculations full conversion of all such Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock regardless of whether such shares are converted). (c) For purposes of this Section 2, a liquidation, dissolution or winding up of this Corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but, excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation), unless the Corporation's shareholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition (by virtue of securities issued as consideration for the Corporation's acquisition) hold at least 50% of the voting power of the surviving or acquiring entity; or (B) a sale of all or substantially all of the assets of the Corporation. Notwithstanding anything to the contrary set forth in this Section 2(c), no liquidation, dissolution or winding up of this Corporation shall be deemed to have occurred under subsection (A) or (B) hereof with respect to the Series A Preferred Stock and Series B Preferred Stock, if the consideration to be paid for each share of Series A Preferred Stock and Series B Preferred Stock is greater than $6.86 per share, and, with respect to the Series C Preferred Stock, if the consideration to be paid for each share of Series C Preferred Stock is greater than $9.65 per share (such per share prices subject in each case to adjustment for stock splits, combinations, dividends or recapitalizations) and is payable in cash or publicly-traded securities of a company with a capitalization exceeding $250,000,000 prior to the consummation of the events contemplated by subsection (A) or (B) hereof. In the event of any transaction referred to in the preceding sentence, the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, respectively, shall be entitled to receive the greater of (i) the amount per share specified with respect to such series in the preceding sentence and (ii) the amount the holders of such series would be entitled to receive had they converted the shares of such series of Preferred Stock to Common Stock. (i) In any of such events, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value, which shall be valued as follows: (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below: 4 5 (1) If traded on a securities exchange or through NASDAQ-NMS, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty-day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty-day period ending three (3) days prior to the closing; and (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock. (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A) (1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (ii) In the event the requirements of this subsection 2(c) are not complied with, this Corporation shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with; or (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(c)(iii) hereof. (iii) The Corporation shall give each holder of record of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the shareholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than ten (10) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such 5 6 notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. 3. Redemption. (a) Subject to the rights of series of Preferred Stock which may from time to time come into existence, at any time after March 6, 2002, the holders of the then outstanding Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, shall have the right, but not the obligation, to require that all of such holders' shares be redeemed and upon written notice to the Company from all of the holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (the "Redemption Notice") and surrender by such holders of the certificates representing such shares, this Corporation shall, to the extent it may lawfully do so and subject to Section 3(b) below, within thirty (30) days of the receipt of the Redemption Notice (the "Redemption Date"), redeem the shares specified in such request by paying in cash therefor a sum per share equal to the Original Series A Issue Price, the Original Series B Issue Price and the Original Series C Issue Price (in each case as adjusted for any stock dividends, combinations or splits with respect to such shares), as the case may be, plus an amount per share equal to the cumulative return on the Original Series A Issue Price, the Original Series B Issue Price and the Original Series C Issue Price, as the case may be, at a compound annual rate of fifteen percent (15%) from the respective issue date of each such share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock until the date such shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock are redeemed by the Company (the "Series A Redemption Price," the "Series B Redemption Price" and the "Series C Redemption Price," as appropriate). Any redemption effected pursuant to this subsection 3(a) shall be made on a pro rata basis among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock in proportion to the number of shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock then held by such holders. (b)The obligation to redeem shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock pursuant to this Section 3 shall be subject to a maximum quarterly payment (the "Maximum Redemption Payment") equal to twenty-five percent (25%) of this Corporation's working capital (as determined in accordance with generally accepted accounting principles ("GAAP") as of the end of the fiscal quarter immediately preceding the Redemption Date. To the extent shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock surrendered for redemption are not redeemed by operation of Section 3(b) hereto, then such shares shall remain outstanding and entitled to all the rights and preferences provided herein. Subject to the rights of Preferred Stock which may from time to time come into existence, commencing after the end of the first fiscal quarter following such Redemption Date and for each fiscal quarter thereafter until such time as all of the shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock have been fully redeemed, any unredeemed shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be 6 7 redeemed on a pro rata basis in an amount equal to the Maximum Redemption Payment (as determined as of the end of such fiscal quarter) within thirty (30) days of the end of such fiscal quarter. (c) After redemption of shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, all rights of the holders of shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, as the case may be (except the right to receive the Series A Redemption Price, Series B Redemption Price or and the Series C Redemption Price upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this Corporation or be deemed to be outstanding for any purpose whatsoever. Subject to the rights of series of Preferred Stock which may from time to time come into existence and the terms of Section 3(b) hereof, if the funds of the Corporation legally available for redemption of shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, are insufficient to redeem the total number of shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon their holdings of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. The shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. Subject to the rights of series of Preferred Stock which may from time to time come into existence and the terms of Section 3(b) hereof, at any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the Corporation has become obliged to redeem but which it has not redeemed. 4. Conversion. The holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of this Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price, the Original Series B Issue Price or the Original Series C Issue Price, as the case may be, by the conversion price applicable to such share (the "Conversion Price"), determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share for shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be the Original Series A Issue Price, the Original Series B Issue Price and the Original Series C Issue Price, as the case may be; provided, however, 7 8 that the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be subject to adjustment as set forth in subsection 4(d). (b) Automatic Conversion. Each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock immediately upon the earlier of (i) except as provided below in subsection 4(c), the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, where such shares of Common Stock are listed on either the Nasdaq National Market System, the American Stock Exchange or the New York Stock Exchange, the public offering price of which (x) with respect to the Series A Preferred Stock and Series B Preferred Stock, is not less than $6.86 per share (adjusted to reflect subsequent stock dividends, combinations, splits or recapitalization) and with aggregate gross proceeds of not less than $10,000,000 or (y) with respect to the Series C Preferred Stock, is not less than $9.65 per share for a public offering consummated before September 8, 1998, and $12.86 per share thereafter (in each case, such per share price shall be adjusted to reflect subsequent stock dividends, combinations, splits or recapitalization) and with aggregate gross proceeds of not less than $10,000,000 or (in each case with respect to (y) above, a "Qualified Public Offering") (ii) the date specified by written consent or agreement of the holders of two-thirds of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, voting together as a single class. (c) Mechanics of Conversion. Before any holder of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of this Corporation or of any transfer agent for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, and shall give written notice to this Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the 8 9 person(s) entitled to receive the Common Stock upon conversion of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall not be deemed to have converted such Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock until immediately prior to the closing of such sale of securities. (d) Conversion Price Adjustments of Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) If the Corporation shall issue, after the date upon which any shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock were first issued (the "Purchase Date" with respect to such series), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price equal to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (assuming the conversion of all then outstanding shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock) plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance assuming the conversion of all then outstanding shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock plus the number of shares of such Additional Stock. For the purpose of computing the foregoing calculation, the shares of Series A Preferred Stock issuable upon exercise of the Series A Preferred Stock Warrant dated as of March 7, 1997 (the "Series A Warrant") shall be deemed to be outstanding. (B) No adjustment of the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to 3 years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of 3 years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this 9 10 Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 4(d)(i) and subsection 4(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (to the extent then exercisable) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (to the extent then convertible or exchangeable) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the 10 11 Conversion Price of the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 4(d)(i)(E)(3) or (4). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E)) by this Corporation after the Purchase Date other than the following: (A) Common Stock issued pursuant to a transaction described in subsection 4(d)(iii) hereof, (B) Shares of Common Stock issuable or issued to employees, consultants, directors or vendors (if in transactions with primarily non-financing purposes) of this Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of this Corporation up to a maximum of [1,286,666] shares. (C) Up to 1,500,000 Shares of Series A Preferred Stock issuable or issued pursuant to the Series A Warrant, and up to 1,500,000 shares of Common Stock (as adjusted for any adjustments pursuant to Section 4(d) hereto) issuable or issued upon conversion of the Series A Preferred Stock issuable or issued pursuant to the Series A Warrant, and 11 12 (D) Up to 2,000,000 Shares of Common Stock (as adjusted for any adjustments pursuant to Section 4(d) hereto) issuable or issued upon conversion of the Series B Preferred Stock sold pursuant to the Series B Convertible Preferred Stock Purchase and Series A Convertible Preferred Stock Warrant Agreement, dated December 6, 1996. (E) Up to 2,488,336 shares of Common Stock (as adjusted for any adjustments pursuant to Section 4(d) hereto) issuable or issued upon conversion of the Series C Preferred Stock sold pursuant to the Series C Preferred Stock Purchase Agreement, dated September 8, 1997. (iii) In the event the Corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subsection 4(d)(i)(E). (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) Other Distributions. In the event this Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(d)(iii), then, in each such case for the purpose of this subsection 4(e), the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into 12 13 which their shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. This Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock against impairment. (h) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock pursuant to this Section 4, this Corporation, at its expense, shall promptly 13 14 compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock. (i) Notices of Record Date. In the event of any taking by this Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this Corporation shall mail to each holder of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) Reservation of Stock Issuable Upon Conversion. This Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to these articles. (k) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this Corporation. 14 15 5. Voting Rights. (a) Except as set forth below in Article Fourth, Sections C.4(b) and C.5, the holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which such share of Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote, except as otherwise provided by law. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). (b) Voting for the Election of Directors. The holders of Series A Preferred Stock and Series B Preferred Stock, voting together as a single class, shall be entitled to elect two (2) directors of this Corporation at each annual election of directors. In the case of any vacancy (other than a vacancy caused by removal) in the office of a director occurring among the directors elected by the holders of a class or series of stock pursuant to this Section 5(b), the remaining directors so elected by that class or series may by affirmative vote of a majority thereof (or the remaining director so elected if there be but one, if there are no such directors remaining, by the affirmative vote of the holders of a majority of the shares of that class or series), elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be vacant. Any director who shall have been elected by the holders of a class or series of stock or by any directors so elected as provided in the immediately preceding sentence hereof may be removed during the aforesaid term of office, either with or without cause, by, and only by, the affirmative vote of the holders of the shares of the class or series of stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purposed or pursuant to a written consent of stockholders, and any vacancy thereby created may be filled by the holders of that class or series of stock represented at the meeting or pursuant to unanimous written consent. 6. Protective Provisions. Subject to the rights of series of Preferred Stock which may from time to time come into existence, (A) so long as any shares of Series A Preferred Stock or Series B Preferred Stock are outstanding, this Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock and Series B Preferred Stock, voting together as a single class: 15 16 (i) alter or change the rights, preferences, privileges or increase or decrease the authorized number of the shares of Series A Preferred Stock or Series B Preferred Stock, respectively, so as to affect adversely the shares; (ii) authorize or issue any other equity security, or security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series A Preferred Stock or Series B Preferred Stock with respect to voting, dividends, liquidation or redemption; (iii) increase the authorized number of shares of Preferred Stock; or (iv) increase the number of directors of the Corporation. (B) So long as the shares of Series C Preferred Stock are outstanding, this Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series C Preferred Stock to (i) alter or change the rights, preferences, privileges or increase or decrease the authorized number of the shares of Series C Preferred Stock so as to affect adversely the shares; (ii) authorize or issue any other equity security, or security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series C Preferred Stock with respect to voting, dividends, liquidation or redemption; (C) So long as any shares of Preferred Stock are outstanding, this Corporation shall not without first obtaining the approval of (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Preferred Stock, voting together a single class; (i) increase the authorized number of shares of Preferred Stock; or (ii) sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of unless the net proceeds paid to each holder of Preferred Stock is not less than $9.65 per share if such transaction is consummated on or before September 8, 1998, or $12.86 per share 16 17 thereafter (such per share price subject, in each case, to adjustment for splits, dividends, combinations or recapitalization of such shares), and if such consideration is for other than cash, its value shall be determined in accordance with Section 2(c)(i)); and 7. Status of Converted or Redeemed Stock. In the event any shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by the Corporation. The Certificate of Incorporation of this Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. B. Common Stock. 1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation Rights. Upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be distributed as provided in Section 2 of Division (B) of this Article III hereof. 3. Redemption. The Common Stock shall not have redemption rights. 4. Voting Rights. (a) The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any shareholders' meeting in accordance with the bylaws of this Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. (b) Voting for the Election of Directors. Until a Qualified Public Offering, the holders of outstanding Common Stock (excluding any votes with respect to then outstanding Preferred Stock which could be converted into Common Stock) shall be entitled to elect two (2) directors of this Corporation at each annual election of directors. In the case of any vacancy (other than a vacancy caused by removal) in the office of a director occurring among the directors elected by the holders of a class or series of stock pursuant to this Section 4(b), the remaining directors so elected by that class or series may by affirmative vote of a majority thereof (or the remaining director so elected if there be but one, if there are no such directors remaining, by the affirmative vote of the holders of a majority of the shares of that class or series), elect a successor or successors to hold office for the unexpired term of the director or directors whose place or places shall be 17 18 vacant. Any director who shall have been elected by the holders of a class or series of stock or by any directors so elected as provided in the immediately preceding sentence hereof may be removed during the aforesaid term of office, either with or without cause, by, and only by, the affirmative vote of the holders of the shares of the class or series of stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purposed or pursuant to a written consent of stockholders, and any vacancy thereby created may be filled by the holders of that class or series of stock represented at the meeting or pursuant to unanimous written consent. 5. Protective Provisions. Until a Qualified Public Offering, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least the majority of the then outstanding shares of Common Stock (excluding any votes with respect to then outstanding Preferred Stock which could be converted into Common Stock): (a) alter or change the rights set forth in Article Fourth, Section C.4 or C.5 hereto; (b) alter or change Article Fifth of this Second Restated Certificate; or (c) amend the by-laws of the Corporation. FIFTH: Until a Qualified Public Offering (as defined in Article Fourth) occurs: A. Board of Directors. The number of directors shall be four (4). Each director shall hold office until his successor is elected and qualified or until his earlier death or resignation or removal in the manner herein provided and in the by-laws of this Corporation C. Quorum Required. All of the directors then in office shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting. In the absence of a quorum for any such meeting, a majority of the directors then present thereat may adjourn such meeting from time to time until a quorum shall be present. D. Voting by Directors. The vote of a majority of those directors present at any such meeting at which a quorum is present shall be necessary for the passage of any resolution or act of the Board, except as otherwise expressly required by law or herein; provided, however, that with respect to any matter, contract or transaction relating to an interested director (within the meaning of Section of 144(a) of the Delaware Code) the passage of any resolution or act by the Board of Directors shall require the affirmative vote of (i) the majority of the directors elected pursuant to Article Fourth, Section B.5(b) and (ii) the majority of the directors elected pursuant to Article Fourth, Section C.4(b), each such class of directors voting separately. 18 19 SIXTH: In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, subject to any Protective Provisions set forth herein with respect to Preferred Stock or Common Stock. A. The board of directors of the Corporation is expressly authorized to adopt, amend, or repeal the by-laws of the Corporation. B. Elections of directors need not be by written ballot unless the by-laws of the Corporation shall so provide. C. The books of the Corporation may be kept at such place within or without the State of Delaware as the by-laws of the Corporation may provide or as may be designated from time to time by the board of directors of the Corporation. SEVENTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. EIGHTH: The Corporation hereby elects in this Second Restated Certificate of Incorporation not to be governed by Section 203 of the General Corporation Law of Delaware. NINTH: Except as stated in Article Fourth of this Second Restated Certificate of Incorporation, the Corporation reserves the right to amend or repeal any provision contained in this Second Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this reservation. 19 20 TENTH: A director of this Corporation shall to the fullest extent permitted by the General Corporation Law of Delaware as it now exists or as it may hereafter be amended, not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability; provided, however, that, to the extent provided by applicable law, this provision shall not eliminate the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. ELEVENTH: To the fullest extent permitted by applicable law, this Corporation is authorized to provide indemnification of (and advancement of expenses to) such agents of this Corporation (and any other persons to which Delaware law permits this Corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to this Corporation, its stockholders, and others. TWELFTH: The Corporation is to have perpetual existence. THIRTEENTH: That thereafter said amendment and restatement was duly adopted in accordance with the provisions of Section 242 and Section 245 of the General Corporation Law by obtaining a majority vote of the Common Stock, in favor of said amendment and restatement in the manner set forth in Section 222 of the General Corporation Law. 20 21 IN WITNESS WHEREOF, the undersigned has executed, signed, and acknowledged this Second Restated Certificate of Incorporation this 8th day of September, 1997. MICROMUSE INC. By: /s/ Christopher Dawes --------------------------------- Christopher Dawes 21 EX-3.3 5 BYLAWS OF THE REGISTRANT 1 EXHIBIT 3.3 MICROMUSE INC. Incorporated under the laws of the State of Delaware --------------------------- AMENDED AND RESTATED BYLAWS --------------------------- As adopted on September 8, 1997 2 MICROMUSE INC. AMENDED AND RESTATED BYLAWS TABLE OF CONTENTS
Page ---- ARTICLE I OFFICES..........................................................................1 1.1 Registered Office..................................................................1 1.2 Other Offices......................................................................1 ARTICLE II MEETING OF STOCKHOLDERS; STOCKHOLDERS' CONSENT IN LIEU OF MEETING................1 2.1 Annual Meetings....................................................................1 2.2 Special Meetings...................................................................1 2.3 Notice of Meetings.................................................................2 2.4 Quorum.............................................................................2 2.5 Organization.......................................................................2 2.6 Order of Business..................................................................3 2.7 Voting.............................................................................3 2.8 Inspection.........................................................................4 2.9 List of Stockholders...............................................................4 2.10 Stockholders' Consent in Lieu of Meeting...........................................4 ARTICLE III BOARD OF DIRECTORS...............................................................5 3.1 General Powers.....................................................................5 3.2 Number and Term of Office..........................................................5 3.3 Election of Directors..............................................................5 3.4 Resignation, Removal and Vacancies.................................................5 3.5 Meetings...........................................................................6 3.6 Directors' Consent in Lieu of Meeting..............................................7 3.7 Action by Means of Conference Telephone or Similar Communications Equipment........7 3.8 Committees.........................................................................7 ARTICLE IV OFFICERS.........................................................................7 4.1 Executive Officers.................................................................7 4.2 Authority and Duties...............................................................8 4.3 Other Officers.....................................................................8 4.4 Term of Office Resignation and Removal.............................................8 4.5 Vacancies..........................................................................8 4.6 The Chairman.......................................................................8 4.7 The President......................................................................9 4.8 The Secretary......................................................................9
i 3 4.9 The Treasurer......................................................................9 ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC....................................9 5.1 Execution of Documents............................................................10 5.2 Deposits..........................................................................10 5.3 Proxies with Respect to Stock or Other Securities of Other Corporations...........10 ARTICLE VI SHARES AND THEIR TRANSFER, FIXING RECORD DATE...................................10 6.1 Certificates for Shares...........................................................10 6.2 Record............................................................................11 6.3 Transfer and Registration of Stock................................................11 6.4 Addresses of Stockholders.........................................................11 6.5 Lost, Destroyed and Mutilated Certificates........................................11 6.6 Regulations.......................................................................12 6.7. Fixing Date for Determination of Stockholders of Record...........................12 ARTICLE VII SEAL............................................................................13 ARTICLE VIII FISCAL YEAR.....................................................................13 ARTICLE IX INDEMNIFICATION AND INSURANCE...................................................13 9.1 Indemnification...................................................................13 9.2 Insurance.........................................................................15 ARTICLE X AMENDMENT.......................................................................15
ii 4 AMENDED AND RESTATED BYLAWS OF MICROMUSE INC. ARTICLE I OFFICES 1.1 Registered Office. The registered office of MICROMUSE INC. (the "Corporation"), in the State of Delaware shall be at 9 East Lookerman Street, Dover, DE 19901, and the registered agent in charge thereof shall be National Registered Agents, Inc., or such other office or agent as the Board of Directors of the Corporation (the "Board") shall from time to time select. 1.2 Other Offices. The Corporation may also have an office or offices, and keep the books and records of the Corporation, at any other place or places within or outside the State of Delaware, as the board may from time to time determine. ARTICLE II MEETING OF STOCKHOLDERS: STOCKHOLDERS' CONSENT IN LIEU OF MEETING 2.1 Annual Meetings. The annual meeting of the stockholders for the election of directors, and for the transaction of such other business as may properly come before the meeting, shall be held at such place, date and hour as shall be fixed by the Board and designated in the notice or waiver of notice thereof, except that no annual meeting need be held if all actions, including the election of directors, required by the General Corporation Law of the State of Delaware (the "General Corporation Law") to be taken at a stockholders' annual meeting are taken by written consent in lieu of meeting pursuant to Section 2.10. 2.2 Special Meetings. A special meeting of the stockholders for any purpose or purposes may be called by the Board, the Chairman, the President or the record holders of at least a majority of the issued and outstanding shares of Common Stock of the Corporation, to be held at such place, date and hour as shall be designated in the notice or waiver of notice thereof. 5 2.3 Notice of Meetings. Except as otherwise required by statute, the Certificate of Incorporation of the Corporation (the "Certificate") or these Bylaws, notice of each annual or special meeting of the stockholders shall be given to each stockholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the day on which the meeting is to be held, by delivering written notice thereof to him personally, or by mailing a copy of such notice, postage prepaid, directly to him at his address as it appears in the records of the Corporation, or by transmitting such notice thereof to him at such address by telegraph, cable or other telephonic transmission. Every such notice shall state the place, the date and hour of the meeting, and, in case of a special meeting, the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy, or who shall, in person or by attorney thereunto authorized, waive such notice in writing, either before or after such meeting. Except as otherwise provided in these Bylaws, neither the business to be transacted at, nor the purpose of, any meeting of the stockholders need be specified in any such notice or waiver of notice. Notice of any adjourned meeting of stockholders shall not be required to be given, except when expressly required by law. 2.4 Quorum. At each meeting of the stockholders, except where otherwise provided by the Certificate or these Bylaws, the holders of a majority of the issued and outstanding shares of Common Stock of the Corporation entitled to vote at such meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. In the absence of a quorum, a majority in interest of the stockholders present in person or represented by proxy and entitled to vote, or, in the absence of all the stockholders entitled to vote, any officer entitled to preside at, or act as secretary of, such meeting, shall have the power to adjourn the meeting from time to time, until stockholders holding the requisite amount of stock to constitute a quorum shall be present or represented. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. 2.5 Organization. a. Unless otherwise determined by the Board, at each meeting of the stockholders, one of the following shall act as chairman of the meeting and preside thereat, in the following order of precedence: (i) the Chairman; (ii) the President; (iii) any director, officer or stockholder of the Corporation designated by the Board to act as chairman of such meeting and to preside thereat if the Chairman or the President shall be absent from such meeting; or 2 6 (iv) a stockholder of record who shall be chosen chairman of such meeting by a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat. b. The Secretary or, if he shall be presiding over such meeting in accordance with the provisions of this Section 5 or if he shall be absent from such meeting, the person (who shall be an Assistant Secretary, if an Assistant Secretary has been appointed and is present) whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. 2.6 Order of Business. The order of business at each meeting of the stockholders shall be determined by the chairman of such meeting, but such order of business may be changed by a majority in voting interest of those present in person or by proxy at such meeting and entitled to vote thereat. 2.7 Voting. Except as otherwise provided by law, the Certificate or these Bylaws, at each meeting of the stockholders, every stockholder of the Corporation shall be entitled to one vote in person or by proxy for each share of Common Stock of the Corporation held by him and registered in his name on the books of the Corporation on the date fixed pursuant to Section 7 of Article VI as the record date for the determination of stockholders entitled to vote at such meeting. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. A person whose stock is pledged shall be entitled to vote, unless, in the transfer by the pledgor on the books of the Corporation, he has expressly empowered the pledgee to vote thereon, in which case only the pledgee or his proxy may represent such stock and vote thereon. If shares or other securities having voting power stand in the record of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary shall be given written notice to the contrary and furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: a. if only one votes, his act binds all; b. if more than one votes, the act of the majority so voting binds all; and c. if more than one votes, but the vote is evenly split on any particular matter, such shares shall be voted in the manner provided by law. If the instrument so filed shows that any such tenancy is held in unequal interests, a majority or (even-split or the purposes of this Section 7 shall be a majority or even-split in interest. The Corporation shall not vote directly or indirectly any share of its own capital stock. Any vote of stock may be given by the stockholder entitled thereto in person or by his proxy 3 7 appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized, delivered to the secretary of the meeting; provided, however, that no proxy shall be voted after three years from its date, unless said proxy provides for a longer period. At all meetings of the stockholders, all matters (except where other provision is made by law, the Certificate or these Bylaws) shall be decided by the vote of a majority in interest of the stockholders present in person or by proxy at such meeting and entitled to vote thereon, a quorum being present. Unless demanded by a stockholder present in person or by proxy at any meeting and entitled to vote thereon, the vote on any question need not be by ballot. Upon a demand by any such stockholder for a vote by ballot upon any question, such vote by ballot shall be taken. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. 2.8 Inspection. The chairman of the meeting may at any time appoint one or more inspectors to serve at any meeting of the stockholders. Any inspector may be removed, and a new inspector or inspectors appointed, by the Board at any time. Such inspectors shall decide upon the qualifications of voters, accept and count votes, declare the results of such vote, and subscribe and deliver to the secretary of the meeting a certificate stating the number of shares of stock issued and outstanding and entitled to vote thereon and the number of shares voted for and against the question, respectively. The inspectors need not be stockholders of the Corporation, and any director or officer of the Corporation may be an inspector on any question other than a vote for or against his election to any position with the Corporation or on any other matter in which he may be directly interested. Before acting as herein provided, each inspector shall subscribe an oath faithfully to execute the duties of an inspector with strict impartiality and according to the best of his ability. 2.9 List of Stockholders. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of its stock ledger to prepare and make, at least 10 days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to any such meeting, during ordinary business hours, for a period of at least 10 days prior to such meeting, either at a place within the city where such meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. Such list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 2.10 Stockholders' Consent in Lieu of Meeting. Any action required by the General Corporation Law to be taken at any annual or special meeting of the stockholders of the Corporation, or any action which may be taken at any 4 8 annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, by a consent in writing, as permitted by the General Corporation Law. ARTICLE III BOARD OF DIRECTORS 3.1 General Powers. The business, property and affairs of the Corporation shall be managed by or under the direction of the Board, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate directed or required to be exercised or done by the stockholders. 3.2 Number and Term of Office. Except as otherwise required by the Certificate, the number of directors shall be fixed from time to time by the Board. Directors need not be stockholders. Each director shall hold office until his successor is elected and qualified, or until his earlier death or resignation or removal in the manner hereinafter provided. 3.3 Election of Directors. Except as otherwise required by the Certificate, at each meeting of the stockholders for the election of directors at which a quorum is present, the persons receiving the greatest number of votes, up to the number of directors to be elected, of the stockholders present in person or by proxy and entitled to vote thereon shall be the directors; provided, however, that for purposes of such vote no stockholder shall be allowed to cumulate his votes. Unless an election by ballot shall be demanded as provided in Section 2.7, election of directors may be conducted in any manner approved at such meeting. 3.4 Resignation, Removal and Vacancies. a. Any director may resign at any time by giving written notice to the Board, the Chairman, the President or the Secretary. Such resignation shall take effect at the time specified therein or, if the time be not specified, upon receipt thereof; unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. b. Except as otherwise required by the Certificate, any director or the entire Board may be removed, with or without cause, at any time by vote of the holders of a majority of the shares then entitled to vote at an election of directors or by written consent of the stockholders pursuant to Section 2.10. c. Except as otherwise required by the Certificate, vacancies occurring on the Board for any reason may be filled by vote of the stockholders or by the stockholders' written consent pursuant to Section 2.10, or by vote of the Board or by the 5 9 directors' written consent pursuant to Section 3.6. If the number of directors then in office is less than a quorum, such vacancies may be filled by a vote of a majority of the directors then in office. 3.5 Meetings. a. Annual Meetings. As soon as practicable after each annual election of directors, the Board shall meet for the purpose of organization and the transaction of other business, unless it shall have transacted all such business by written consent pursuant to Section 6 of this Article III. b. Other Meetings. Other meetings of the Board shall be held at such times and places as the Board, the Chairman, the President or any director shall from time to time determine. c. Notice of Meetings. Notice shall be given to each director of each meeting, including the time, place and purpose of such meeting. Notice of each such meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least three days before the date on which such meeting is to be held, or shall be sent to him at such place by telegraph, cable, wireless or other form of recorded communication, or be delivered personally or by telephone not later than two days before the day on which such meeting is to be held, but notice need not be given to any director who shall attend such meeting. A written waiver of notice, signed by the person entitled thereto, whether before or after the time of the meeting stated therein, shall be deemed equivalent to notice. d. Place of Meetings. The Board may hold its meetings at such place or places within or outside the State of Delaware as the Board may from time to time determine, or as shall be designated in the respective notices or waivers of notice thereof. e. Quorum and Manner of Acting. Except as otherwise required by the Certificate, a majority of the total number of directors then in office shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and the vote of a majority of those directors present at any such meeting at which a quorum is present shall be necessary for the passage of any resolution or act of the Board, except as otherwise expressly required by law or these Bylaws. In the absence of a quorum for any such meeting, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present. f. Organization. At each meeting of the Board, one of the following shall act as chairman of the meeting and preside thereat, in the following order of precedence: (i) the Chairman; (ii) the President (if a director); or 6 10 (iii) any director designated by a majority of the directors present. The Secretary or, in the case of his absence, an Assistant Secretary, if an Assistant Secretary has been appointed and is present, or any person whom the chairman of the meeting shall appoint shall act as secretary of such meeting and keep the minutes thereof. 3.6 Directors' Consent in Lieu of Meeting. Any action required or permitted to be taken at any meeting of the Board may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by all the directors then in office and such consent is filed with the minutes of the proceedings of the Board. 3.7 Action by Means of Conference Telephone or Similar Communications Equipment. Any one or more members of the Board may participate in a meeting of the Board by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. 3.8 Committees. The Board may, by resolution or resolutions passed by a majority of the whole Board, designate one or more committees, each such committee to consist of one or more directors of the Corporation, which to the extent provided in said resolution or resolutions shall have and may exercise the powers of the Board in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it, such committee or committees to have such name or names as may be determined from time to time by resolution adopted by the Board. A majority of all the members of any such committee may determine its action and fix the time and place of its meetings, unless the Board shall otherwise provide. The Board shall have power to change the members of any such committee at any time, to fill vacancies and to discharge any such committee, either with or without cause, at any time. ARTICLE IV OFFICERS 4.1 Executive Officers. The principal officers of the Corporation shall be a Chairman, if one is appointed (and any references to the Chairman shall not apply if a Chairman has not been appointed), a President, a Secretary, and a Treasurer, and may include such other officers as the Board may appoint pursuant to Section 4.3. Any two or more offices may be held by the same person. 7 11 4.2 Authority and Duties. All officers, as between themselves and the Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided in these Bylaws or, to the extent so provided, by the Board. 4.3 Other Officers. The Corporation may have such other officers, agents and employees as the Board may deem necessary, including one or more Assistant Secretaries, one or more Assistant Treasurers and one or more Vice Presidents, each of whom shall hold office for such period, have such authority, and perform such duties as the Board, the Chairman, or the President may from time to time determine. The Board may delegate to any principal officer the power to appoint and define the authority and duties of, or remove, any such officers, agents, or employees. 4.4 Term of Office. Resignation and Removal. a. All officers shall be elected or appointed by the Board and shall hold office for such term as may be prescribed by the Board. Each officer shall hold office until his successor has been elected or appointed and qualified or until his earlier death or resignation or removal in the manner hereinafter provided. The Board may require any officer to give security for the faithful performance of his duties. b. Any officer may resign at any time by giving written notice to the Board, the Chairman, the President or the Secretary. Such resignation shall take effect at the time specified therein or, if the time be not specified, at the time it is accepted by action of the Board. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective. c. Except as otherwise required by the Certificate, all officers and agents elected or appointed by the Board shall be subject to removal at any time by the Board with or without cause. 4.5 Vacancies. If the office of Chairman, President, Secretary or Treasurer becomes vacant for any reason, the Board shall fill such vacancy, and if any other office becomes vacant, the Board may fill such vacancy. Any officer so appointed or elected by the Board shall serve only until such time as the unexpired term of his predecessor shall have expired, unless re-elected or reappointed by the Board. 4.6 The Chairman. The Chairman shall give counsel and advice to the Board and the officers of the Corporation on all subjects concerning the welfare of the Corporation and the conduct of its 8 12 business and shall perform such other duties as the Board may from time to time determine. Unless otherwise determined by the Board, he shall preside at meetings of the Board and of the Stockholders at which he is present. 4.7 The President. The President shall be the chief executive officer of the Corporation. The President shall have general and active management and control of the business and affairs of the Corporation subject to the control of the Board and shall see that all orders and resolutions of the Board are carried into effect. The President shall from time to time make such reports of the affairs of the Corporation as the Board of Directors may require and shall perform such other duties as the Board may from time to time determine. 4.8 The Secretary. The Secretary shall, to the extent practicable, attend all meetings of the Board and all meetings of the stockholders and shall record all votes and the minutes of all proceedings in a book to be kept for that purpose. He may give, or cause to be given, notice of all meetings of the stockholders and of the Board, and shall perform such other duties as may be prescribed by the Board, the Chairman or the President, under whose supervision he shall act. He shall keep in safe custody the seal of the Corporation and affix the same to any duly authorized instrument requiring it and, when so affixed, it shall be attested by his signature or by the signature of the Treasurer or, if appointed, an Assistant Secretary or an Assistant Treasurer. He shall keep in safe custody the certificate books and stockholder records and such other books and records as the Board may direct, and shall perform all other duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board, the Chairman or the President. 4.9 The Treasurer. The Treasurer shall have the care and custody of the corporate funds and other valuable effects, including securities, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, shall render to the Chairman, President and directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation and shall perform all other duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board, the Chairman or the President. ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. 9 13 5.1 Execution of Documents. The Board shall designate, by either specific or general resolution, the officers, employees and agents of the Corporation who shall have the power to execute and deliver deeds, contracts, mortgages, bonds, debentures, checks, drafts and other orders for the payment of money and other documents for and in the name of the Corporation, and may authorize such officers, employees and agents to delegate such power (including authority to redelegate) by written instrument to other officers, employees or agents of the Corporation; unless so designated or expressly authorized by these Bylaws, no officer, employee or agent shall have any power or authority to bind the Corporation by any contract or engagement, to pledge its credit or to render it liable pecuniarily for any purpose or amount. 5.2 Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board or Treasurer, or any other officer of the Corporation to whom power in this respect shall have been given by the Board, shall select. 5.3 Proxies with Respect to Stock or Other Securities of Other Corporations. The Board shall designate the officers of the Corporation who shall have authority from time to time to appoint an agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation, and to vote or consent with respect to such stock or securities. Such designated officers may instruct the person or persons so appointed as to the manner of exercising such powers and rights, and such designated officers may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, such written proxies, powers of attorney or other instruments as they may deem necessary or proper in order that the Corporation may exercise its powers and rights. ARTICLE VI SHARES AND THEIR TRANSFER; FIXING RECORD DATE 6.1 Certificates for Shares. Every owner of stock of the Corporation shall be entitled to have a certificate certifying the number and class of shares owned by him in the Corporation, which shall be in such form as shall be prescribed by the Board. Certificates shall be numbered and issued in consecutive order and shall be signed by, or in the name of, the Corporation by the Chairman, the President or any Vice President, and by the Treasurer (or an Assistant Treasurer, if appointed) or the Secretary (or an Assistant Secretary, if appointed). In case any officer or officers who shall have signed any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or 10 14 certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate had not ceased to be such officer or officers of the Corporation. 6.2 Record. A record in one or more counterparts shall be kept of the name of the person, firm or corporation owning the shares represented by each certificate for stock of the Corporation issued, the number of shares represented by each such certificate, the date thereof and, in the case of cancellation, the date of cancellation. Except as otherwise expressly required by law, the person in whose name shares of stock stand on the stock record of the Corporation shall be deemed the owner thereof for all purposes regarding the Corporation. 6.3 Transfer and Registration of Stock. a. The transfer of stock and certificates which represent the stock of the Corporation shall be governed by Article 8 of Subtitle 1 of Title 6 of the Delaware Code (the Uniform Commercial Code), as amended from time to time. b. Registration of transfers of shares of the Corporation shall be made only on the books of the Corporation upon request of the registered holder thereof, or of his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, and upon the surrender of the certificate or certificates for such shares properly endorsed or accompanied by a stock power duly executed. 6.4 Addresses of Stockholders. Each stockholder shall designate to the Secretary an address at which notices of meetings and all other corporate notices may be served or mailed to him, and, if any stockholder shall fail to designate such address, corporate notices may be served upon him by mail directed to him at his post office address, if any, as the same appears on the share record books of the Corporation or at his last known post office address. 6.5 Lost, Destroyed and Mutilated Certificates. The holder of any shares of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Board may, in its discretion, cause to be issued to him a new certificate or certificates for such shares, upon the surrender of the mutilated certificates or, in the case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction, and the Board may, in its discretion, require the owner of the lost or destroyed certificate or his legal representative to give the Corporation a bond in such sum and with such surety or sureties as it may direct to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate. 11 15 6.6 Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these Bylaws, concerning the issue, transfer and registration of certificates for stock of the Corporation. 6.7 Fixing Date for Determination of Stockholders of Record. a. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall be not more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. b. In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which date shall be not more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board. If no record date has been fixed by the Board, the record date for determining stockholders entitled to consent to corporate action. In writing without a meeting, when no prior action by the Board is required by the General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board and prior action by the Board is required by the General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board adopts the resolution taking such prior action. c. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. 12 16 ARTICLE VII SEAL The Board may provide a corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation, the year of incorporation of the Corporation and the words and figures "Corporate Seal - Delaware." ARTICLE VIII FISCAL YEAR The fiscal year of the Corporation shall be the calendar year unless otherwise determined by the Board. ARTICLE IX INDEMNIFICATION AND INSURANCE 9.1 Indemnification. a. As provided in the Charter, to the fullest extent permitted by the General Corporation Law as the same exists or may hereafter be amended, a director of this Corporation shall not be liable to the Corporation or its stockholders for breach of fiduciary duty as a director. b. Without limitation of any right conferred by paragraph (a) of this Section 9, each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity while serving as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes or amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer or employee and shall inure to the benefit of the indemnitee's heirs, testators, intestates, executors and administrators; provided, however, that such person acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and with respect to a criminal action or 13 17 proceeding, had no reasonable cause to believe his conduct was unlawful; provided further, however, that no indemnification shall be made in the case of an action, suit or proceeding by or in the right of the Corporation in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such director, officer, employee or agent is liable to the Corporation, unless a court having jurisdiction shall determine that, despite such adjudication, such person is fairly and reasonably entitled to indemnification; provided further, however, that, except as provided in Section l(c) of this Article IX with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof initiated by such indemnitee only if such proceeding (or part thereof) initiated by such indemnitee was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Article IX shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. c. If a claim under Section 9.1(b) is not paid in full by the Corporation with 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of any undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the General Corporation Law. Neither the failure of the Corporation (including the Board, independent legal counsel, or the stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the General Corporation Law, nor an actual determination by the Corporation (including the Board, independent legal counsel, or the stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of 14 18 proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section or otherwise shall be on the Corporation. d. The rights to indemnification and to the advancement of expenses conferred in this Article IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Charter, agreement, vote of stockholders or disinterested directors or otherwise. 9.2 Insurance. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the Corporation or any person who is or was serving at the request of the Corporation as a director, officer, employer or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law. ARTICLE X AMENDMENT Except as required by the Certificate, any bylaw (including these Bylaws) may be adopted, amended or repealed by the vote of the holders of a majority of the shares then entitled to vote or by the stockholders' written consent pursuant to Section 2.10, or by the vote of the Board or by the directors' written consent pursuant to Section 3.6. 15 EX-10.1 6 FORM OF INDEMNITY AGREEMENT 1 EXHIBIT 10.1 AMENDED AND RESTATED INDEMNIFICATION AGREEMENT THIS AGREEMENT (the "Agreement") is made and entered into as of December __, 1997 between Micromuse Inc., a Delaware corporation ("the Company"), and _____________________ ("Indemnitee"). WITNESSETH THAT: WHEREAS, Indemnitee performs a valuable service for the Company; and WHEREAS, the Board of Directors of the Company has adopted Bylaws (the "Bylaws") providing for the indemnification of the officers and directors of the Company to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended ("Law"); and WHEREAS, the Bylaws and the Law, by their nonexclusive nature, permit contracts between the Company and the officers or directors of the Company with respect to indemnification of such officers or directors; and WHEREAS, in accordance with the authorization as provided by the Law, the Company may purchase and maintain a policy or policies of directors' and officers' liability insurance ("D & O Insurance"), covering certain liabilities which may be incurred by its officers or directors in the performance of their obligations to the Company; and WHEREAS, in order to induce Indemnitee to continue to serve as an officer or director of the Company, the Company has determined and agreed to enter into this contract with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's service as an officer or director after the date hereof, the parties hereto agree as follows: 1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to hold harmless and indemnify Indemnitee to the full extent authorized or permitted by the provisions of the Law, as such may be amended from time to time, and Article VII, Section 6 of the Bylaws, as such may be amended. In furtherance of the foregoing indemnification, and without limiting the generality thereof: (a) PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. Indemnitee shall be entitled to the rights of indemnification provided in this Section l(a) if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and 2 amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. (b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made. (c) INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY SUCCESSFUL. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified to the maximum extent permitted by law against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 2. ADDITIONAL INDEMNITY. In addition to, and without regard to any limitations on, the indemnification provided for in Section 1, the Company shall and hereby does indemnify and hold harmless Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the Company's obligations pursuant to this Agreement shall be that the Company shall not be obligated to make any payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 6 and 7 hereof) to be unlawful under Delaware law. 2 3 3. CONTRIBUTION IN THE EVENT OF JOINT LIABILITY. (a) Whether or not the indemnification provided in Sections 1 and 2 hereof is available, in respect of any threatened, pending or completed action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. Company shall not enter into any settlement of any action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee. (b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction from which such action, suit or proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the law may require to be considered. The relative fault of Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary, and the degree to which their conduct is active or passive. (c) Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by officers, directors or employees of the Company other than Indemnitee who may be jointly liable with Indemnitee. 4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. 3 4 5. ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's Corporate Status within ten (10) days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 5 shall be subject to the condition that, if, when and to the extent that the Company determines that Indemnitee would not be permitted to be indemnified under applicable law, the Company shall be entitled to be reimbursed, within thirty (30) days of such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Company that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). 6. PROCEDURES AND PRESUMPTIONS FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the law and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement: (a) To obtain indemnification (including, but not limited to, the advancement of Expenses and contribution by the Company) under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case by one of the following three methods, which shall be at the election of Indemnitee: (1) by a majority vote of the disinterested directors, even though less than a quorum, or (2) by independent legal counsel in a written opinion, or (3) by the stockholders. 4 5 (c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). The Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors). Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 13 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed. (d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. (e) Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 6(e) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests 5 6 of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. (f) If the person, persons or entity empowered or selected under Section 6 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within thirty (30) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 30 day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 6(g) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board of Directors or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat. (g) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board of Directors, or stockholder of the Company shall act reasonably and in good faith in making a determination under the Agreement of the Indemnitee's entitlement to indemnification. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (h) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to 6 7 overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. 7. REMEDIES OF INDEMNITEE. (a) In the event that (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 6(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification. Indemnitee shall commence such proceeding seeking an adjudication within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 7(a). The Company shall not oppose Indemnitee's right to seek any such adjudication. (b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 7 shall be conducted in all respects as a de novo trial, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination under Section 6(b). (c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 7, absent a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 7, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors' and officers' liability insurance policies maintained by the Company the Company shall pay on his behalf, in advance, any and all expenses (of the types described in the definition of Expenses in Section 13 of this Agreement) actually and reasonably incurred by him in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery. (e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. 7 8 8. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION. (a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation of the Company, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the Law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. 9. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors of the Company or (b) such Proceeding is being brought by the Indemnitee to assert, interpret or enforce his rights under this Agreement. 10. DURATION OF AGREEMENT. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer or director of the 8 9 Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 7 hereof) by reason of his Corporate Status, whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Company or any other Enterprise at the Company's request. 11. SECURITY. To the extent requested by the Indemnitee and approved by the Board of Directors of the Company, the Company may at any time and from time to time provide security to the Indemnitee for the Company's obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee. 12. ENFORCEMENT. (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer or director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer or director of the Company. (b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof. 13. DEFINITIONS. For purposes of this Agreement: (a) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the express written request of the Company. (b) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (c) "Enterprise" shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is 9 10 or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary. (d) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. (e) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (f) "Proceeding" includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director of the Company, by reason of any action taken by him or of any inaction on his part while acting as an officer or director of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement; and excluding one initiated by an Indemnitee pursuant to Section 7 of this Agreement to enforce his rights under this Agreement. 14. SEVERABILITY. If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent 10 11 possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 15. MODIFICATION AND WAIVER. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 16. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company. 17. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to the address set forth below Indemnitee signature hereto. (b) If to the Company, to: Micromuse Inc. 139 Townsend Street San Francisco, California Attention: Chief Financial Officer or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. 18. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 11 12 19. HEADINGS. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 20. GOVERNING LAW. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware without application of the conflict of laws principles thereof. 21. GENDER. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. 22. TERMINATION OF PRIOR INDEMNIFICATION AGREEMENTS. Upon the effectiveness of this Agreement, any prior Indemnification Agreements between the parties hereto shall terminate and be of no further force and effect, and shall be superseded and replaced in its entirety by this Agreement. 12 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. MICROMUSE INC. By: -------------------------------- Name: Christopher Dawes Title: Chief Executive Officer AGREED TO AND ACCEPTED INDEMNITEE ----------------------------------- Name: ---------------------------- Address: ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- Signature Page to Micromuse Inc. Amended and Restated Indemnification Agreement EX-10.5 7 OFFICE LEASE DATED AS OF MARCH 25, 1997 1 EXHIBIT 10.5 139 TOWNSEND STREET OFFICE LEASE THIS LEASE is dated for reference purposes only as of March 25, 1997, between SOMA PARTNERS, L.P., a California limited partnership ("Landlord"), and MICROMUSE INC., a Delaware corporation ("Tenant"). W I T N E S S E T H: Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises described in Paragraph 1(g) below, for the term and subject to the terms, covenants, agreements and conditions hereinafter set forth. 1. DEFINITIONS. In addition to terms that are defined elsewhere in this Lease, unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified: (a) The term "Base Expense Year" shall mean the calendar year set forth in Paragraph G of the Summary of Lease Terms. (b) The term "Base Tax Year" shall mean the calendar year set forth in Paragraph H of the Summary of Lease Terms. (c) The term "Building" shall mean the office building located at 139 Townsend Street in San Francisco, California. (d) The term "Building Standard Improvements" shall mean those improvements installed in the Premises at Landlord's expense. (e) The term "Land" means the parcels) of land on which the Building and the connected underground garage are located. (f) The term "Operating Expenses" shall mean the total costs and expenses incurred by Landlord in connection with the management, operation, maintenance, repair and ownership of the Real Property (as defined in Paragraph 1(h) hereof), including, without limitation, the following costs: (1) salaries, wages, bonuses and other compensation (including hospitalization, medical, surgical, retirement plan, pension plan, union dues, life insurance, including group life insurance, welfare and other fringe benefits, and vacation, holidays and other paid absence benefits) relating to employees of Landlord or its agents engaged in the management, operation, 2 repair, or maintenance of the Real Property and costs of training such employees; (2) payroll, social security, workers, compensation, unemployment and similar taxes with respect to such employees of Landlord or its agents, and the cost of providing disability or other benefits imposed by law or otherwise, with respect to such employees; (3) uniforms (including the cleaning, replacement and pressing thereof) provided to such employees; (4) premiums and other charges incurred by Landlord with respect to fire, other casualty, boiler and machinery, theft, rent interruption liability insurance, any other insurance as is deemed necessary or advisable in the reasonable judgment of Landlord, or any insurance required by the holder of any Superior Interest (as defined in Paragraph 15), all in such amounts as Landlord determines to be appropriate, and, after the Base Year, costs of repairing an insured casualty to the extent of the deductible amount under the applicable insurance policy; (5) water charges and sewer rents or fees; (6) license, permit and inspection fees and charges; (7) sales, use and excise taxes on goods and services purchased by Landlord in connection with the operation, maintenance or repair of the Real Property and building systems and equipment; (8) telephone, telegraph, postage, stationery supplies and other expenses incurred in connection with the operation, maintenance, or repair of the Real Property; (9) management fees (subject to the limitation set forth in clause (xi) below) and expenses (including fees and expenses for accounting, financial management, data processing and information services) and costs of tenant service programs; (10) repairs to and physical maintenance of the Real Property, including building systems and appurtenances thereto and normal repair and replacement of worn-out equipment, facilities and installations, but excluding the replacement of major building systems (except to the extent otherwise included as an Operating Expense pursuant to this Paragraph 1(f)); (11) janitorial, window cleaning, guard, extermination, water treatment, rubbish removal, plumbing and other services and inspection or service contracts for elevator, electrical, mechanical, sanitary, heating, ventilation and air conditioning, and other building equipment and systems or as may otherwise be necessary or proper for the operation or maintenance of the Real Property; (12) supplies, tools, materials and equipment used in connection with the operation, maintenance or repair of the Real Property; (13) accounting, legal and other professional, consulting or service fees and expenses; (14) painting the exterior or the public or common areas of the Building and the cost of maintaining the sidewalks, landscaping and other common areas of the Real Property; (15) all costs and expenses for electricity, chilled water, air conditioning, water for heating, gas, fuel, steam, heat, lights, sewer service, communications service, power and other energy related utilities required in connection with the operation, maintenance and repair of the Real Property; (16) the cost of any capital improvements made by Landlord to the Real Property or capital assets acquired by Landlord after the Base Year required under any governmental law, regulation or 2. 3 insurance requirement with which Real Property was not required to comply during the Base Year, such cost or allocable portion to be amortized over the useful life thereof, together with interest on the unamortized balance at a rate per annum equal to the Reference Rate (as defined in Paragraph 3(d) hereof) charged at the time such capital improvements or capital assets are constructed or acquired or such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing or acquiring such capital improvements or capital assets, but in either case not more than the maximum rate permitted by law at the time such capital improvements or capital assets are constructed or acquired; (17) the cost of any capital improvements made by Landlord to the Building or capital assets acquired by Landlord after the Base Year for the protection of the health and safety of the occupants of the Real Property or that are designed to reduce other Operating Expenses, such cost or allocable portion thereof to be amortized over the useful life thereof (except that Landlord may include as an Operating Expense in any calendar year a portion of the cost of such a capital improvement or capital asset equal to Landlord's estimate of the amount of the reduction of other Operating Expenses in such year resulting from such capital improvement or capital asset), together with interest on the unamortized balance at a rate per annum equal to the Reference Rate charged at the time such capital improvements or capital assets are constructed or acquired or such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing or acquiring such capital improvements or capital assets, but in either case not more than the maximum rate permitted by law at the time such capital improvements or capital assets are constructed or acquired; (18) the cost of furniture, window coverings, carpeting, decorations, landscaping and other customary and ordinary items of personal property provided by Landlord for use in common areas of the Real Property or in the Building office (to the extent that such Building office is dedicated to the operation and management of the Real Property), such costs to be amortized over the useful life thereof; (19) the cost of any capital improvements made by Landlord to the Real Property or capital assets acquired by Landlord after the Base Year to the extent that the cost of any such improvement or asset is less than ten thousand dollars ($10,300); (20) the cost of any capital improvements made by Landlord to the Real Property or capital assets acquired by Landlord after the Base Year which have a useful life of five (5) years or less (and the cost of which is not otherwise included in Operating Costs pursuant to this Paragraph 1(f)), such cost to be amortized over the useful life thereof, together with interest on the unamortized balance at a rate per annum equal to the Reference Rate charged at the time such capital improvements or capital assets are constructed or acquired or such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing or acquiring such capital improvements or capital assets, but in either case not more than the maximum rate permitted by law at the time such 3. 4 capital improvements or capital assets are constructed or acquired; (21) any such expenses and costs resulting from substitution of work, labor, material or services in lieu of any of the above itemizations, or for any such additional work, labor services or material resulting from compliance with any governmental laws, rules, regulations or orders applicable to the Real Property or any part thereof; (22) property management office rent or rental value; and (23) cost of operation, repair and maintenance of the parking facility serving the Building, including resurfacing, restriping and cleaning. To the extent costs and expenses described above relate to both the Real Property and other property, such costs and expenses shall, in determining the amount of Operating Expenses, be equitably allocated as Landlord may determine in good faith to be appropriate. Operating Expenses shall not include the following: (i) depreciation on the Building; (ii) debt service; (iii) rental under any ground or underlying lease; (iv) interest (except as expressly provided in this Paragraph 1(f)); (v) Real Property Taxes; (vi) attorneys' fees and expenses incurred in connection with lease negotiations with prospective Building tenants or in connection with disputes with tenants or other occupants of the Building or enforcement of any leases or defense of Landlord's title to or interest in the Building; (vii) the cost of any improvements or equipment which would be properly classified as capital expenditures (except for any capital expenditures expressly included in Operating Expenses pursuant to this Paragraph 1(f)); (viii) the cost of decorating, improving for tenant occupancy, painting or redecorating portions of the Building to be demised to tenants; (ix) advertising expenses relating to vacant space; (x) real estate brokers' or other leasing commissions; (xi) property management fees to the extent in excess of two and one-quarter percent (2.25%) of aggregate annual base rent for the Real Property in any year; (xii) cost of repairing casualty damage to the extent of insurance proceeds received by Landlord; (xiii) executive salaries and general overhead expenses not related to the Building; (xiv) interest, penalties or other costs arising out of Landlord's failure to make timely payment of its obligations; (xv) the cost of any service provided to Tenant or other occupants of the Building to the extent Landlord is reimbursed for such costs; (xvi) amounts paid to subsidiaries or affiliates of Landlord for management or other services or for supplies or other materials to the extent in excess of the amounts which would have been paid for the same services, supplies or materials to an unaffiliated third party on arms'-length terms under then-existing market conditions; and (xvii) costs incurred to cleanup, abate, remove or otherwise remedy hazardous substances (as defined in Paragraph 7(b)) from the Land to the extent such hazardous substances either (A) were spilled or released in or on the Land prior to the Commencement Date, or (B) were spilled or released in or on the Land by Landlord. 4. 5 (g) The term "Premises" shall mean the space in the Building designated by cross-hatching on the floor plan(s) attached hereto as Exhibit A (exclusive of the areas, if any, shown by shading) and situated on the floor(s) of the Building specified in Paragraph D of the Summary of Lease Terms, together with the appurtenant right to the use, in common with others, of lobbies, entrances, stairs, elevators and other public portions of the Building. The Premises shall include the space on the Mezzanine Level of the Building as shown on Exhibit A (the "Mezzanine Space") and the space on the 5th Floor of the Building as shown on Exhibit A (the "5th Floor Space"). Landlord and Tenant agree that the premises contain the number of square feet of rentable area specified in Paragraph E of the Summary of Lease Terms. All the outside walls and windows of the Premises and any space in the premises used for shafts, stacks, pipes, conduits, ducts, electric or other utilities, sinks or other Building facilities, and the use thereof and access thereto through the Premises for the purposes of operation, maintenance and repairs, are reserved to Landlord. (h) The term "Real Property" shall mean, collectively, the Land, the Building, the connected parking garage, and the other improvements on the Land. (i) The term "Real Property Taxes" shall mean all taxes, Assessments (whether general or special), excises, transit charges, housing fund assessments or other housing charges, levies or fees, ordinary or extraordinary, unforeseen as well as foreseen, of any kind, which are assessed, levied, charged, confirmed or imposed on the Real Property or any part thereof, on the Landlord with respect to the Real Property, on the act of entering into this Lease or any other lease of space in the Real Property, on the use or occupancy of the Real Property or any part thereof, with respect to services or utilities consumed in the use, occupancy or operation of the Real Property, or on or measured by the rent payable under this Lease or in connection with THE business of renting space in the Real Property, including, without limitation, any gross income tax or excise tax levied with respect to the receipt of such rent, by the United States of America, the State of California, the City and County of San Francisco, any political subdivision, public corporation, district or other political or public entity or public authority, and shall also include any other tax, fee or other excise, however described, which may be levied or assessed in lieu of, as a substitute (in whole or in part) for, or as an addition to, any other Real Property Taxes. Real Property Taxes shall include reasonable attorneys' fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce Real Property Taxes. Real Property Taxes shall not include income, franchise, transfer, inheritance or capital stock taxes, unless, due to a change in the method of taxation, any of such taxes is levied or assessed against Landlord in lieu of, as a substitute 5. 6 (in whole or in part) for, or as an addition to, any other charge which would otherwise constitute a part of Real Property Taxes. Real Property Taxes shall not include interest or penalties assessed for nonpayment or late payment. Landlord and Tenant acknowledge and agree that certain other buildings exist or encroach upon the Land, that Tenant shall have no liability as to any item of Real Property Taxes attributable or allocable to, or assessed against, buildings other than the Building and that Landlord's good faith determination of the proper allocation of any item of Real Property Taxes allocable to buildings other than the Building shall be binding on Landlord and Tenant. (j) The term "Rental" shall include the Basic Monthly Rental set forth in Paragraph J of the Summary of Lease Terms, all additional rent, and any other charges payable by Tenant to Landlord hereunder. (k) The term "Tenant's Extra Improvements" shall mean those improvements in addition to Building Standard Improvements which are to be installed in the Premises. (1) The term "Tenant's Percentage Share" shall mean the percentage figure specified in Paragraph F of the Summary of Lease Terms (subject to Landlord's right, from time to time, to adjust such percentage to reflect accurate measurements of the Premises or other portions of the Building and/or to reflect changes in Landlord's standard common area load factor). 2. TERM. (a) Subject to Paragraph 2(c) hereof, the term of this Lease shall commence and, unless ended sooner as herein provided, shall expire on the dates respectively specified in Paragraph I of the Summary of Lease Terms (respectively referred to hereinafter as the "Commencement Date" and the "Expiration Date"). (b) Tenant shall accept the Premises "as is" on the Commencement Date or the Early Occupancy Date if applicable. Landlord has no actual knowledge of any material defect in the Building systems as of the date of this Lease. Landlord shall have no obligation to construct or install any improvements in the Premises. Tenant acknowledges that Tenant's possession of the Premises shall constitute Tenant's acknowledgment that the Premises are in all respects in the condition in which Landlord is required to deliver the Premises to Tenant under this Lease and that Tenant has examined the Premises and is fully informed to Tenant's satisfaction of the physical and environmental condition and the utility of the Premises. Tenant acknowledges that Landlord, its agents and employees and other persons acting on behalf of Landlord have made no representation or warranty of any kind in connection with any matter relating to the physical or environmental condition, value, fitness, use or zoning of the 6. 7 Premises upon which Tenant has relied directly or indirectly for any purpose, except as specifically set forth in this Lease. (c) If Landlord for any reason whatsoever cannot deliver possession of the Premises to Tenant on the Commencement Date, this Lease shall not be void or voidable, no obligation of Tenant shall be affected hereby and Landlord shall not be liable to Tenant for any loss or damage resulting therefrom. Landlord agrees to use diligent efforts (including, if necessary in Landlord's reasonable judgment, institution of unlawful detainer proceedings) to recover possession of the 5th Floor Space from the existing tenant thereof as promptly as practicable after the expiration of the existing tenant's lease (April 30, 1997). If Landlord has not delivered possession of the Premises by November 1, 1997, Tenant may terminate this Lease by notice to Landlord. (d) Tenant shall have the right, upon and subject to the terms of this Paragraph 2(d), to occupy all or any part of the Mezzanine Space at any time after this Lease shall have been executed and delivered by Landlord and Tenant, provided that (i) Tenant shall have made the payment required pursuant to Paragraph 3(e) hereof, (ii) Tenant shall have delivered to Landlord, and Landlord shall have approved, the certificates of insurance described in Paragraph 14(d), and (iii) Tenant shall have given Landlord not less than five (5) business days notice of Tenant's intent to take early occupancy. The date on which Tenant takes occupancy pursuant to this Paragraph 2(d) is referred to herein as the "Early Occupancy Date." From and after the Early Occupancy Date, all of the terms of this Lease, to the extent applicable to the Mezzanine Space, shall be in full force and effect and Landlord and Tenant shall observe all such terms, except that Tenant shall not be required to pay Basic Monthly Rental prior to the Commencement Date. 3. RENTAL; SECURITY DEPOSIT. (a) Tenant agrees to pay to Landlord as Basic Monthly Rental for the Premises the sum specified in Paragraph J of the Summary of Lease Terms. Notwithstanding the foregoing, Tenant shall have no obligation to pay the portion of the Basic Monthly Rental allocable to the Mezzanine Space ($6,195 per month) during the period from the Commencement Date through October 31, 1997; during such period, the Basic Monthly Rental shall be $14,802. (b) Basic Monthly Rental shall be paid to Landlord, in advance, on or before the first day of each and every successive calendar month during the term hereof. In the event the term of this Lease commences on a day other than the first day of a calendar month, or ends on a day other than the last day of a calendar month, then the Basic Monthly Rental for the first and/or last fractional months of the term shall be 7. 8 appropriately prorated. All such prorations shall be made on the basis of a 360-day year consisting of twelve 30-day months. (c) (intentionally omitted) (d) Rental shall be paid to Landlord without notice, demand, deduction or offset in lawful money of the United States in immediately available funds or by good check as described below at the office of Landlord at Landlord's address for notices specified in the Summary of Lease Terms, or to such other person or at such other place as Landlord from time to time may designate in writing. Payments made by check must be drawn either on a California financial institution or on a financial institution that is a member of the federal reserve system. All amounts of Rental, if not paid within three (3) days of the date when due, shall bear interest from the due date until paid at an annual rate of interest (the "Interest Rate") equal to the lesser of (i) the maximum annual interest rate allowed by law on such due date for business loans (not primarily for personal, family or household purposes) not exempt from the usury law, or (ii) a rate equal to the sum of five (5) percentage points over the publicly announced reference rate (the "Reference Rate") charged on such due date by the San Francisco Main Office of Bank of America NT & SA (or any successor bank thereto) (or if there is no such publicly announced rate, the rate quoted by such bank in pricing ninety (90) day commercial loans to substantial commercial borrowers). In addition, Tenant acknowledges that late payment by Tenant to Landlord of Rental will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Landlord by the terms of any encumbrance and/or note secured by an encumbrance covering the Premises. Therefore, if any installment of Rental due from Tenant is not received within ten (10) days of when due, Tenant shall pay to Landlord an additional sum of ten percent (10%) of the overdue Rental as a late charge; provided that, if Rental is not paid when due three (3) times during the term of this Lease, then thereafter Tenant shall not be entitled to such ten (10) day grace period, and such late charge shall be assessed on any Rental not paid by 5:00 p.m. on the date due. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment of Rental by Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the overdue amount, or prevent Landlord from exercising any of the other rights and remedies available to Landlord. (e) Upon signing this Lease, Tenant shall pay to Landlord (a) an amount equal to the Basic Monthly Rental for the seventh (7th) full calendar month of the term of this Lease, which amount Landlord shall apply to the Basic Monthly Rental for such seventh (7th) month, and (b) the amount of the security 8. 9 deposit specified in Paragraph L of the Summary of Lease Terms (the "Deposit"). The Deposit shall be held by Landlord as security for the faithful performance by Tenant of all of the provisions of this Lease to be performed or observed by Tenant. If Tenant fails to pay any Rental, or otherwise defaults with respect to any provision of this Lease, Landlord may (but shall not be obligated to) use, apply or retain all or any portion of the Deposit for the payment of any Rental in default or for the payment of any other sum to which Landlord may become obligated by reason of Tenant's default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the Deposit, Tenant shall within ten (10) days after demand therefor deposit cash with Landlord in an amount sufficient to restore the Deposit to the full amount thereof, and Tenant's failure to do so shall, at Landlord's option, be an Event of Default (as defined in Paragraph 18(a)) under this Lease. Landlord shall not be required to keep the Deposit separate from its general accounts. If Tenant performs all of Tenant's obligations hereunder, the Deposit, or so much thereof as has not theretofore been applied by Landlord, shall be returned, without payment of interest or other increment for its use, to Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's interest hereunder) at the expiration of the term hereof and after Tenant has vacated the Premises. Landlord's return of the Deposit or any part thereof shall not be construed as an admission that Tenant has performed all of its obligations under this Lease. No trust relationship is created herein between Landlord and Tenant with respect to the Deposit. 4. TENANT'S SHARE OF OPERATING EXPENSES AND REAL PROPERTY TAXES. (a) in addition to the Basic Monthly Rental payable during the term of this Lease, Tenant shall pay to Landlord, as additional rent, Tenant's Percentage Share of (i) the amount, if any, by which Operating Expenses paid or incurred by Landlord in any calendar year subsequent to the Base Expense Year exceed the amount of operating Expenses paid or incurred by Landlord during the Base Expense Year, and (ii) the amount, if any, by which Real Property Taxes paid or incurred by Landlord in any calendar year subsequent to the Base Tax Year exceed the amount of Real Property Taxes paid or incurred by Landlord during the Base Tax Year. Notwithstanding the foregoing, if the Building is less than 100% occupied in any year during the term of this Lease, Operating Expenses and Real Property Taxes for such year shall be adjusted, for purposes of the foregoing calculation, to the amount which they would have been if the Building had been 100% occupied. If it shall not be lawful for Tenant to reimburse Landlord for any increase in Real Property Taxes as defined herein, the Basic Monthly Rental payable to Landlord prior to the imposition of such increases in Real Property Taxes shall be increased to net Landlord the same net Basic Monthly Rental after imposition of such increases in Real Property Taxes as 9. 10 would have been received by Landlord prior to the imposition of such increases in Real Property Taxes. (b) During December of each calendar year or as soon thereafter as practicable, Landlord shall give Tenant notice of its estimate of the amounts payable pursuant to Paragraph 4(a) above for the succeeding calendar year. On or before the first day of each month during the succeeding calendar year, Tenant shall pay to Landlord, as additional rent, one twelfth (1/12) of such estimated amounts. If Landlord fails to deliver such notice to Tenant in December, Tenant shall continue to pay Tenant's Percentage Share of increases in Operating Expenses and Real Property Taxes on the basis of the prior year's estimate until the first day of the next calendar month after such notice is given, provided that on such date Tenant shall pay to Landlord the amount of such estimated adjustment payable to Landlord for prior months during the year in question, less any portion thereof previously paid by Tenant. If at any time it appears to Landlord that the amounts payable under this paragraph 4(b) for the current calendar year will vary from Landlord's estimate, Landlord may, by giving written notice to Tenant, revise Landlord's estimate for such year, and subsequent payments by Tenant for such year shall be based on such revised estimate. (c) (i) within ninety (90) days after the close of each calendar year or AS soon after such ninety (90) day period as practicable, Landlord shall deliver to Tenant a statement of the amounts payable under subparagraph (a) above for such calendar year (the "annual statement") and such annual statement shall be final and binding upon Landlord and Tenant, subject to the terms of Paragraph 4(c)(ii) below. If on the basis of such statement Tenant owes an amount that is more than the estimated payments for such calendar year previously made by Tenant, Tenant shall pay the deficiency to Landlord within fifteen (15) days after delivery of the statement. If on the basis of such statement Tenant has paid to Landlord an amount in excess of the amounts payable under subparagraph (a) above for the preceding calendar year and Tenant is not in default in the performance of any of its covenants under this Lease, then Landlord, at its option, shall either promptly refund such excess to Tenant or credit the amount thereof to the Basic Monthly Rental next becoming due from Tenant until such credit has been exhausted. (ii) Tenant shall have the right, during the ninety (90) day period following delivery of an annual statement, at Tenant's sole cost to review in Landlord's offices Landlord's records of Operating Expenses and Real Property Taxes for the subject calendar year. Such review shall be carried out only by regular employees of Tenant or by a major national or regional firm of certified public accountants, and not by any other third party. If, as of the ninetieth day after delivery to Tenant of an annual statement, Tenant shall not have delivered to Landlord an objection statement (as defined below), then such annual 10. 11 statement shall be final and binding upon Landlord and Tenant, and Tenant shall have no further right to object to such annual statement. If within such ninety (90) day period, Tenant delivers to Landlord a written statement specifying objections to such annual statement (an "objection statement"), then Tenant and Landlord shall meet to attempt to resolve such objection within thirty (30) days after delivery of the objection statement. If such objection is not resolved within such thirty (30) day period, then Tenant shall have the right, at Tenant's cost, to require that the dispute be submitted to binding determination by an independent certified public accountant ("CPA") approved by Landlord and Tenant. Landlord shall reimburse Tenant for the reasonable charges of the CPA in connection with such binding determination if, but only if, (A) the CPA shall have determined that the aggregate amount of all Operating Expenses and Real Property Taxes payable by Tenant for the subject year in accordance with the annual statement exceeds one hundred five percent (105%) of the aggregate amount of all Operating Expenses and Real Property Taxes payable by Tenant for the subject year in accordance with the CPA's determination, and (B) the discrepancy between such amount as set forth in the annual statement and such amount as set forth in the CPA's determination is a result of the gross negligence or willful misconduct of Landlord. Landlord and Tenant agree that such determination by a CPA shall be the exclusive method of resolving disputes under this Paragraph 4(c). If Tenant does not elect, by notice to Landlord within one hundred fifty (150) days after delivery of the annual statement, to require such binding determination, then the annual statement shall be final and binding. So long as any such dispute remains unresolved, Tenant shall not be obligated to pay Landlord the disputed amount, but shall pay all other amounts payable in accordance with this Paragraph 4(c). (d) If this Lease terminates on a day other than the last day of a calendar year, the amounts payable by Tenant under Paragraph 4(a) above with respect to the calendar year in which such termination occurs shall be prorated on the basis which the number of days from the commencement of such calendar year, to and including such termination date, bears to 360. The termination of this Lease shall not affect the obligations of Landlord and Tenant pursuant to Paragraph 4(c) above to be performed after such termination. (e) It is the intention of Landlord and Tenant that the Basic Monthly Rental paid to Landlord throughout the term of this Lease shall be absolutely net of all increases, respectively, in Real Property Taxes over Real Property Taxes for the Base Tax Year and of Operating Expenses over Operating Expenses for the Base Expense Year, and the foregoing provisions of this Paragraph 4 are intended to so provide. 5. OTHER TAXES PAYABLE BY TENANT. Tenant shall reimburse Landlord upon demand for any and all taxes, but not including 11. 12 Real Property Taxes, payable by Landlord (other than net income taxes) whether or not now customary or within the contemplation of the parties hereto: (a) imposed upon, measured by or reasonably attributable to the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises or by the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, other than Building Standard Improvements made by Landlord, regardless of title to such improvements shall be in Tenant or Landlord; (b) imposed upon or measured by the Basic Monthly Rental payable hereunder, including, without limitation, any gross income tax or excise tax levied by the City and County of San Francisco, the State of California, the federal government or any other governmental body with respect to the receipt of such rental; (c) imposed upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) imposed upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. In the event that it shall not be lawful for Tenant to so reimburse Landlord, the Basic Monthly Rental payable to Landlord under this Lease shall be revised to net Landlord the same income after imposition of any such tax upon Landlord as would have been received by Landlord hereunder prior to the imposition of any such tax. 6. USE. Tenant agrees to use the Premises for general office purposes and agrees not to use nor permit the use of the Premises or any part thereof for any other purpose. Tenant agrees not to do or permit to be done in or about the Premises or the Building, nor to bring or keep or permit to be brought or kept in or about the Premises or the Building, anything which is prohibited by or will in any way conflict with any law, statute or governmental regulation now or hereafter in effect, or which would subject Landlord or Landlord's agents to any liability, or which is prohibited by the standard form of fire insurance policy, or which will in any way increase the existing rate of (or otherwise affect) fire or any other insurance on the Building or any of its contents. If any act or omission of Tenant results in any such increase in premium rates, Tenant shall pay to Landlord, as additional rent, upon demand the amount of such increase. Tenant agrees not to do or permit to be done anything in, on or about the Premises or the Building which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building, or injure or annoy 12. 13 them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose. Tenant agrees not to cause, maintain or permit any nuisance in, on or about the Premises or the Building, nor to use or permit to be used any loudspeaker or other device, system or apparatus which can be heard outside the Premises without the prior written consent of Landlord nor to permit any objectionable odors, bright lights or electrical or radio interference which may annoy or interfere with the rights of other tenants of the Building or the public. Tenant agrees not to commit or suffer to be committed any waste in or upon the Premises. The provisions of this Paragraph 6 are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Building. 7. COMPLIANCE WITH LAWS/ENVIRONMENTAL MATTERS. (a) Tenant agrees at its sole cost and expense to promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter constituted; with any direction or occupancy certificate issued pursuant to law by any public officer; and with the provisions of all recorded documents affecting the Premises, insofar as any thereof relates to or affects the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements, acts or particular use of the Premises. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant (whether Landlord be a party thereto or not) that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant. If Tenant's use or operation of the Premises or any of Tenant's equipment therein requires a governmental permit, license or other authorization or any notice to any governmental agency, Tenant shall promptly provide a copy thereof to Landlord. Notwithstanding anything in this Lease to the contrary, Landlord, and not Tenant, shall be responsible for any action, with respect to the common areas of the Real Property, necessary to cause the Real Property to comply with the Americans with Disabilities Act and other applicable laws relating to access for the handicapped. (b) Tenant shall not bring or keep, or permit to be brought or kept, in the Premises or in or on the Real Property any hazardous substance (as hereinafter defined) other than reasonable quantities of normal office and janitorial supplies provided they are stored, used and disposed of in compliance with all applicable environmental laws (as hereinafter defined) Tenant shall not manufacture, generate, treat, handle, store or dispose of any hazardous substance in the Premises or in or on the Real Property, or use the Premises for any such purpose, or emit, release or discharge any hazardous substance into any air, soil, surface water or groundwater comprising the Premises or the Real Property, or permit any person using or occupying the Premises to do any of the foregoing. Tenant shall comply, and 13. 14 shall cause all persons using or occupying the Premises to comply, with all environmental laws applicable to the Premises, the use or occupancy of the Premises or any operation or activity therein. As used in this Lease, "hazardous substance" shall mean any substance or material that is described as a toxic, hazardous, corrosive, ignitable, flammable or reactive substance, waste or material or a pollutant or contaminant, or words of similar import, in any of the environmental laws, and includes asbestos, petroleum, petroleum products, polychlorinated biphenyls, radon gas, radioactive matter, and chemicals which may cause cancer or reproductive toxicity. As used in this Lease, "environmental laws" shall mean all federal, state and local laws, ordinances, rules and regulations now or hereafter in force, as amended from time to time, in any way relating to or regulating human health or safety, or industrial hygiene or environmental conditions, or protection of the environment, or pollution or contamination of the air, soil, surface water or groundwater. (c) Tenant shall immediately furnish Landlord with any (i) notices received from any insurance company or governmental agency or inspection bureau regarding any unsafe or unlawful conditions within the Premises, and (ii) notices or other communications sent by or on behalf of Tenant to any person relating to environmental laws or hazardous substances. (d) Landlord is not aware of any violation of environmental laws respecting the Real Property and acknowledges that Landlord shall be responsible for correcting any such violation which exists as of the date hereof. (e) The provisions of this Paragraph 7 are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Building. 8. ALTERATIONS; LIENS. (a) Tenant agrees not to make or suffer to be made any alteration, addition or improvement to or of the Premises (hereinafter referred to as "Alterations"), or any part thereof, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Landlord's consent shall not be required for alterations ("Minor Alterations") which (i) do not require a building permit under applicable codes and (i) will not affect the structural components of the Building, will not affect the appearance of the Building or any part thereof outside of the Premises, and will not affect the Building systems, provided however that all other provisions of this Paragraph 8 shall apply to all Alterations, including Minor Alterations. Any such Alterations made by Tenant, including without limitation any nonmovable partitions or carpeting, shall become a part Of the Building and belong to Landlord; provided, however, that equipment, trade fixtures and movable furniture shall remain the 14. 15 property of Tenant. If Landlord consents to the making of any Alterations, the same shall be designed by Tenant or its architect or engineer, and constructed or installed by Landlord or a contractor selected by Landlord at Tenant's expense (including expenses incurred in complying with applicable laws, including laws relating to the handling and disposal of ACM). Landlord shall assure that the cost of the Alterations does not exceed the range of competitive costs then prevailing for such work. Tenant shall use engineers and architects which are on Landlord's approved list of design professionals or are otherwise approved by Landlord in its reasonable discretion. All Alterations shall be made in accordance with plans and specifications approved in writing by Landlord and shall be designed and constructed in compliance with all applicable codes, laws, ordinances, rules and regulations. The design and construction of any Alterations shall be performed in accordance with Landlord's applicable rules, regulations and requirements. Under no circumstances shall Landlord be liable to Tenant for any damage, loss, cost or expense incurred by Tenant on account of Tenant's plans and specifications, the design of any work, construction of any work, or delay in completion of any work. Except with respect to Minor Alterations, Tenant shall pay to Landlord a fee in the amount of seven percent (7%) of the cost of the Alterations for its review of plans and its management and supervision of the progress of the work. All sums due to the contractors and subcontractors performing the construction work, if paid by Landlord due to Tenant's failure to pay such sums when due, shall bear interest payable to Landlord at the Interest Rate until fully paid. Upon the expiration or sooner termination of this Lease, Tenant, at its expense, shall promptly remove any such Alterations made by Tenant and designated by Landlord so to be removed and repair any damage to the Premises caused by such removal; provided, however, that Tenant shall not be required to remove any Alteration as to which Landlord has waived such removal requirement at the time Landlord consented to such Alteration. Tenant shall use the general contractor designated by Landlord for such removal and repair. (b) Tenant agrees to keep the Premises and the Real Property free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Tenant shall promptly and fully pay and discharge all claims on which any such lien could be based. In the event that Tenant does not, within ten (10) days following the recording of notice of any such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant, as additional rent, on demand, together with interest at the Interest Rate from the date such expenses are incurred by 15. 16 Landlord to the date of the payment thereof by Tenant to Landlord. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper for the protection of Landlord, the Premises, the Building, or the Real Property, from mechanic's and materialmen's and like liens. Tenant shall give Landlord at least ten (10) days' prior written notice of the date of commencement of any construction on the Premises in order to permit the posting of such notices. 9. MAINTENANCE AND REPAIR. (a) By taking possession of the Premises, Tenant accepts the Premises as being in the condition in which Landlord is obligated to deliver the Premises. Tenant, at its expense, shall at all times keep the Premises and every part thereof and all equipment, fixtures and improvements therein in good and sanitary order, condition and repair (except insofar as such repair is Landlord's responsibility under Paragraph 9(b), damage thereto by fire, the perils of the extended coverage endorsement, and earthquake excepted, and Tenant waives all rights under, and benefits of, subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law or ordinance now or hereafter in effect. Upon the expiration or sooner termination of this Lease, Tenant shall surrender the Premises and (unless designated by Landlord to be removed in accordance with Paragraph 8 above) all Alterations thereto to Landlord in the same condition as when received, ordinary wear and tear (except such as Tenant is obligated to repair to keep the Premises in good condition and repair) and damage thereto by fire, the perils of the extended coverage endorsement, and earthquake excepted. It is agreed that Landlord has no obligation, and has made no promises, to alter, add to, remodel, improve, repair, decorate or paint the Premises or any part thereof and that no representations respecting the condition of the Premises, the Building or the Real Property have been made by Landlord to Tenant except as may be specifically set forth herein. No representation or warranty, express or implied, is made with respect to (i) the condition of the Premises or the Building, (ii) the fitness of the Premises for Tenant's intended use, (iii) the degree of sound transfer within the Building, (iv) the absence of electrical or radio interference in the Premises or the Building, (v) the condition, capacity or performance of electrical or communications systems or facilities, or (vi) the absence of objectionable odors, bright lights or other conditions which may affect Tenant's use and enjoyment of the Premises or the Building. (b) Landlord agrees, at its expense (subject to Paragraph 4), to make all necessary repairs to the structure, the exterior (including walls, roof structure and roof covering), and the public and common areas of the Building and the building systems therein, and to maintain the same in reasonably good order and condition. Notwithstanding the 16. 17 preceding sentence, any damage arising from the acts of Tenant, its agents, employees, contractors, or invitees shall be repaired by Landlord at Tenant's sole expense. Tenant shall pay Landlord on demand the cost of any such repair. 10. SERVICES. (a) Provided that no Event of Default (as defined in Paragraph 18(a) below) has occurred and is continuing and the Lease has not terminated, Landlord, subject to the terms of this Paragraph 10 and the Building Rules and Regulations attached hereto as Exhibit B and subject to applicable laws, regulations and rules of public utilities, shall furnish, to the Premises water, electrical power and elevator service; heating and air conditioning suitable for the comfortable use and occupation of the Premises (assuming normal office use thereof) during the period ("Business Hours") from 8:00 a.m. to 6:00 p.m. on weekdays (excluding holidays), or during such other period as may be prescribed by any applicable policies or regulations of any utility or governmental agency; and basic janitorial service on weekdays (excluding union holidays). Notwithstanding the foregoing, Tenant shall have access to the Premises and use of the elevator twenty-four (24) hours per day every day of the year. Tenant agrees that at all times it will cooperate fully with Landlord and abide by all regulations and requirements that Landlord may prescribe for the proper functioning and protection of the Building heating, ventilating and air conditioning systems. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of Rental by reason of Landlord's failure to furnish any of the foregoing or any other utilities or services when such failure is caused by accident, breakage, repairs, strikes, lockouts or other labor disturbances or disputes of any character, by the limitation, curtailment, rationing or restrictions on use of electricity, gas or any form of energy, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. No such failure and no interruption of utilities or services from any cause whatsoever shall constitute an eviction of Tenant, constructive or otherwise, or impose upon Landlord any liability whatsoever, including, but not limited to, liability for consequential damage or loss of business by Tenant. Tenant hereby waives the provisions of California Civil Code Section 1932(1) or any other applicable existing or future law, ordinance or governmental regulation permitting the termination of this Lease due to such failure or interruption. Landlord shall not be liable under any circumstances for injury to or death of any person or damage to or destruction of property, however, occurring, through or in connection with or incidential to the furnishing of or the failure to furnish any of the foregoing utilities or services or any other utilities or services. (b) Landlord makes no representation to Tenant regarding the adequacy or fitness of the heating, air conditioning or ventilation equipment in the Building to 17. 18 maintain temperatures that may be required for, or because of, any of Tenant's equipment which uses other than the fractional horsepower normally required for office equipment, and Landlord shall have no liability for loss or damage suffered by Tenant or others in connection therewith. If the temperature otherwise maintained in any portion of the Premises by the heating, air conditioning or ventilation system is affected as a result of (i) any lights, machines or equipment (including without limitation electronic data processing machines) used by Tenant in the Premises, (ii) the occupancy of the Premises by more than one person per two hundred (200) square feet of rentable area therein, (iii) an electrical load for lighting or power in excess of the limits per square foot of rentable area of the Premises specified in Paragraph 10(c) below, or (iv) any rearrangement of partitioning or other improvements, Landlord shall have the right to install supplementary air conditioning units or other equipment Landlord reasonably deems appropriate in the Premises, and the cost thereof, including the cost of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord, as additional rent, upon demand by Landlord. (c) Tenant agrees it will not, without the written consent of Landlord, use any equipment, apparatus or device in the Premises (including, without limitation, electronic data processing machines, computers or machines using current in excess of 110 volts) which will, individually or in the aggregate, in any way cause the amount of electricity, water or heating, ventilation or air conditioning supplied to the Premises to exceed the amount usually furnished or supplied to premises being used as general office space, or connect with electric current (except through existing electrical outlets in the Premises) or with water pipes any equipment, apparatus or device for the purposes of using electric current or water. Landlord and Tenant agree that, for purposes of this Paragraph 10, the amount of electricity normally furnished to premises being used as general office space is .70 kilowatt hours per rentable square foot per month (excluding electric power used in supplying heating, ventilating and air conditioning). If Tenant shall require water or electric current in excess of that usually furnished or supplied to premises being used as general office space, Tenant shall first obtain the written consent of Landlord, which consent shall not be unreasonably withheld or delayed, and Landlord may cause an electric current or water meter to be installed in the Premises in order to measure the amount of electric current or water consumed for any such excess use. The cost of any such meter and of the installation, maintenance and repair thereof; all charges for such excess water and electric current consumed (as shown by such meters and at the rates then charged by the furnishing public utility); and any additional expense reasonably incurred by Landlord in keeping account of electric current or water so consumed shall be paid by Tenant, and Tenant 18. 19 agrees to pay Landlord therefor, as additional rent, promptly upon demand by Landlord. (d) Tenant shall give reasonable notice in making any request for utilities required outside of Business Hours. Tenant agrees to pay, as additional rent, promptly on demand any and all costs reasonably incurred by Landlord in connection with providing any additional utilities and services Landlord may provide. (e) In the event any governmental authority having jurisdiction over the Real Property or the Building promulgates or revises any law, ordinance or regulation or building, fire or other code or imposes mandatory or voluntary controls or guidelines on Landlord or the Real Property or the Building relating to the use or conservation of energy or utilities or the reduction of automobile or other emissions (collectively "Controls") or in the event Landlord is required or elects to make alterations to the Real Property or the Building in order to comply with such mandatory or voluntary Controls, Landlord may, in its sole discretion, comply with such Controls or make such alterations to the Real Property or the Building related thereto. Such compliance and the making of such alterations shall not constitute an eviction of Tenant, constructive or otherwise, or impose upon Landlord any liability whatsoever, including, but not limited to, liability for consequential damages or loss of business by Tenant. 11. ACCESS CONTROL. (a) Landlord shall have the right from time to time to adopt such policies, procedures and programs as it shall, in Landlord's reasonable discretion, deem necessary or appropriate for the security of the Building, and Tenant shall cooperate with Landlord in the enforcement of, and shall comply with, the policies, procedures and programs adopted by Landlord insofar as the same pertain to Tenant, its agents, employees, contractors and invitees. (b) In no event shall Landlord be liable for damages resulting from any error with regard to the admission to or the exclusion from the Building of any person. In the case of invasion, mob, riot, public demonstration or other circumstances rendering such action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building during the continuance of the same by such action as Landlord may deem appropriate, including closing doors. (c) In the event of any picketing, public demonstration or other threat to the security of the Building that is attributable in whole or in part to Tenant, Tenant shall reimburse Landlord for any costs reasonably incurred by Landlord in connection with such picketing, demonstration or other threat in order to protect the security of the Building, and Tenant 19. 20 shall indemnify and hold Landlord harmless from and protect and defend Landlord against any and all claims, demands, suits, liability, damage or loss and against all reasonable costs and expenses, including reasonable attorneys' fees incurred in connection therewith, arising out of or relating to any such picketing, demonstration or other threat. Tenant agrees not to employ any person, entity or contractor for any work in the Premises (including moving Tenant's equipment and furnishings in, our or around the Premises) whose presence may give rise to a labor or other disturbance in the Building and, if necessary to prevent such a disturbance in a particular situation, Landlord may require Tenant to employ union labor for the work. 12. ASSIGNMENT AND SUBLETTING. (a) Restriction on Transfers. Tenant shall not, either voluntarily or by operation of law, (i) assign or transfer this Lease or any interest herein, (ii) sublet the Premises, or any part thereof, or (iii) enter into a license agreement or other arrangement whereby the Premises, or any portion thereof, are held or utilized by another party (each of the foregoing defined herein as a "Transfer"), without the express prior written consent of Landlord, which consent Landlord shall not unreasonably withhold, condition or delay. Any such act (whether voluntary or involuntary, by operation of law or otherwise) without the consent of Landlord pursuant to the provisions of this Paragraph 12 shall, at Landlord's option, be void and/or constitute an Event of Default under this Lease. Consent to any Transfer shall neither relieve Tenant of the necessity of obtaining Landlord's consent to any future Transfer nor relieve Tenant from any liability under this Lease. By way of example and without limitation, the failure to satisfy any of the following conditions or standards shall be deemed to constitute sufficient grounds for Landlord to refuse to grant its consent to the proposed Transfer. (1) The proposed Transferee must expressly assume all of the provisions, covenants and conditions of this Lease on the part of Tenant to be kept and performed. (2) The proposed Transferee must satisfy Landlord's then current credit and other standards for tenants of the Building and, in Landlord's reasonable opinion, have the financial strength and stability to perform all of the obligations of the Tenant under this Lease (as they apply to the transferred space) as and when they fall due. (3) The proposed Transferee must be reasonably satisfactory to Landlord as to character and professional standing and must not, in Landlord's opinion, adversely affect the tenant mix in the Building. 20. 21 (4) The proposed use of the Premises by the proposed Transferee must be, in Landlord's opinion: (a) lawful; (b) appropriate to the location and configuration of the Premises; (c) not in conflict with any exclusive rights in favor of any other tenant or proposed tenant of the Building; (d) unlikely to cause an increase in insurance premiums for insurance policies applicable to the Building; (e) absent any new tenant improvements that Landlord would be entitled to disapprove pursuant to Paragraph V8 hereof; (f) unlikely to cause an increase in services to be provided to the Premises; (g) unlikely to create any increased burden in the operation of the Building, or in the operation of any of its facilities or equipment; and (h) unlikely to impair the dignity, reputation or character of the Building. (5) The proposed use of the Premises must not result in the division of the Premises into more than three (3) parcels or tenant spaces. (6) Tenant must pay to Landlord any security deposit which is consistent with prevailing market conditions for leases to comparable tenants in first-class office buildings in the San Francisco area. (7) At the time of the proposed Transfer, an Event of Default (as defined in paragraph 18(a) below) shall not have occurred and be continuing, and not event may have occurred that with notice, the passage of time, or both, would become an Event of Default. (8) The proposed Transferee shall not be a governmental entity or hold any exemption from the payment of ad valorem or other taxes which would prohibit Landlord from collecting from such Transferee any amounts otherwise payable under this Lease. (9) The proposed Transferee shall not be a then present tenant or affiliate or subsidiary of a then present tenant in the Building unless there is no other space available in the Building. (10) Landlord shall not be negotiating with, and shall not have at any time within the past sixty (60) days negotiated with, the proposed Transferee for space in the Building. (11) Any other conditions reasonably required by Landlord under the circumstances at such time in accordance with good business practices must be complied with. (b) Landlord's Right of First Offer; Termination Right. Except in the event of a proposed Transfer pursuant to Paragraph 12(e) or 12(f) below, Landlord shall have no 21 22 obligation to consent or consider granting its consent to any proposed Transfer unless Tenant has first delivered to Landlord a written offer to enter into such Transfer with Landlord, which offer shall include the base rent and other economic terms of the proposed Transfer, the date upon which Tenant desires to effect such Transfer and all of the other material terms of the proposed Transfer ("Tenant's Offer"). Landlord shall have fifteen (15) days from receipt of Tenant's Offer within which to notify Tenant in writing of its decision to accept or reject such Transfer on the terms set forth in Tenant's Offer. If Landlord does not accept Tenant's Offer within such fifteen (15) day period, Tenant shall deliver to Landlord a second notice of such offer. If Landlord does not accept Tenant's Offer within five (5) days after receipt of such second notice, Tenant may enter into such Transfer with any bona fide independent third-party Transferee (as defined in Paragraph 12(c) below) within one hundred twenty (120) days of the end of such fifteen (15) day period, so long as such Transfer is for base rent not less than ninety-five percent (95%) of that offered to Landlord in Tenant's Offer and such Transfer otherwise contains terms not more than five percent (5%) more favorable economically to the Transferee than the terms stated in Tenant's Offer, taking into account all rent concessions, tenant improvements, and any other terms which have an economic impact on the Transfer; provided, however, that the prior written approval of Landlord for such Transfer must be obtained, and the other provisions of this Paragraph 12 must be complied with, all in accordance with this Paragraph 12. If Landlord accepts Tenant's Offer, Landlord and Tenant shall enter into an agreement for such Transfer within thirty (30) days of the date Landlord makes its election. If Landlord accepts Tenant's Offer, then (i) Landlord may enter into a new lease, sublease or other agreement covering the Premises or any portion thereof with the intended Transferee on such terms as Landlord and such Transferee may agree, or enter into a new lease or agreement covering the Premises or any portion thereof with any other person or entity, and in any such event, Tenant shall not be entitled to any portion of the profit, if any, which Landlord may realize on account of such new lease or agreement, (ii) Landlord may, at Landlord's sole cost, construct improvements in the subject space and, so long as the improvements are suitable for general office purposes, neither Tenant nor Landlord shall have any obligation to restore the subject space to its original condition following the termination of a sublease, and (iii) Landlord shall not have any liability for any real estate brokerage commission(s) or with respect to any of the costs and expenses that Tenant may have incurred in connection with its proposed Transfer, and Tenant agrees to indemnify, defend and hold harmless Landlord from and against any and all claims (including, without limitation, claims for commissions) arising from such proposed Transfer. Except in the event of a proposed Transfer pursuant to paragraph 12(e) or 12(f) below, in the case of a proposed assignment of this Lease or a sublease of substantially the 22. 23 entire Premises for substantially the balance of the term of this Lease, then in addition to the foregoing rights of Landlord. Landlord shall have the right, by notice to Tenant within fifteen (15) days after receipt of Tenant's Offer, to terminate this Lease, which termination shall be effective as of the date on which the intended assignment or sublease would have been effective if Landlord had not exercised such termination right. If Landlord elects to terminate this Lease, then from and after the date of such termination, Landlord and Tenant each shall have no further obligation to the other under this Lease with respect to the Premises except for matters occurring or obligations arising hereunder prior to the date of such termination. Landlord's foregoing rights and options shall continue throughout the entire term of this Lease. (c) Landlord's Approval Process. Tenant shall, in each instance of a proposed Transfer, give written notice to Landlord at least thirty (30) days prior to the effective date of any proposed Transfer, specifying in such notice (i) the nature of the proposed Transfer, (ii) the portion of the Premises to be transferred, (iii) the intended use of the transferred Premises, (iv) all economic terms of the proposed Transfer, (v) the effective date thereof, (vi) the identity of the transferee under the proposed Transfer (the "Transferee"), (vii) current financial statements of the Transferee, and (viii) detailed documentation relating to the business experience of the Transferee (collectively, "Tenant's Notice"). Tenant shall also promptly furnish Landlord with any other information reasonably requested by Landlord relating to the proposed Transfer or the proposed Transferee. Within twenty (20) days after receipt by Landlord of Tenant's Notice and any additional information and data requested by Landlord, Landlord shall notify Tenant of its determination to either (i) consent to the proposed Transfer, or (ii) refuse to consent to such proposed Transfer. (d) Consideration for Transfer. One hundred percent (100%) of all (i) consideration paid or payable by Transferee to Tenant as consideration for any such Transfer, and (ii) rents received in connection with the Transfer by Tenant from Transferee in excess of the Rental payable by Tenant to Landlord under this Lease (net of actual out-of-pocket expenses incurred by Tenant for reasonable legal fees, brokers commissions not in excess of prevailing rates, and costs (amortized over the remaining term of the Lease) of tenant improvements in connection with such Transfer) shall be paid by Tenant to Landlord immediately upon receipt thereof by Tenant. If there is more than one sublease under this Lease, the amounts (if any) to be paid by Tenant to Landlord pursuant to the preceding sentence shall be separately calculated for each sublease and amounts due Landlord with regard to any one sublease may not be offset against rental and other consideration pertaining to or 23. 24 due under any other sublease. Upon Landlord's request, Tenant shall assign to Landlord all amounts to be paid to Tenant by any Transferee and shall direct such Transferee to pay the same directly to Landlord. If this Lease is assigned, whether or not in violation of the terms of this Lease, Landlord may collect rent from the assignee. If the Premises or any part thereof is sublet, Landlord may, upon an Event of Default by Tenant hereunder, collect rent from the subtenant. In either event, Landlord may apply the amount collected from the assignee or subtenant to Tenant's monetary obligations hereunder. Neither Landlord's collection of rent from a Transferee nor any course of dealing between Landlord and any Transferee shall constitute or be deemed to constitute Landlord's consent to any Transfer. (e) Merger or Consolidation of Tenant; Major Changes. Any Transfer to any corporation or entity Controlled (as hereinafter defined) by Tenant and any merger, reorganization, refinancing, sale of all or substantially all of the assets of Tenant or other transaction which does not constitute a Major Change (as hereinafter defined) shall not require Landlord's consent but shall be subject to all of the other terms and conditions of this Paragraph 12. Any Major Change (as hereinafter defined) must be approved by Landlord in accordance with Paragraph 12(c) above and, without such approval, shall at Landlord's election to void and/or constitute an Event of Default. The term "Controlled" as used herein shall mean the ownership of (i) fifty percent (50%) or more of the voting stock of any corporation, or (ii) fifty percent (50%) or more of the ownership interests in any other entity and, if any such entity is a partnership, a general partner's interest in such partnership. The term "Major Change" as used herein shall mean any merger, reorganization, recapitalization, refinancing or other transaction or series of transactions involving Tenant which results in the net worth of Tenant and its consolidated subsidiaries immediately after such transaction(s) being less than fifty percent (50%) of the net worth of Tenant and its consolidated subsidiaries as of the end of the fiscal year immediately preceding the date of such Major Change. (f) Transfer of Partnership Interest or Corporate Stock. Except in the case of a Tenant described in Paragraph 12(e), a sale, transfer or assignment of a general partner's interest or any portion thereof in Tenant, if Tenant is a partnership, or a sale, transfer or assignment of twenty-five percent (25%) or more of the voting stock of Tenant (other than transfers through a major stock exchange) if Tenant is a corporation, whether such sale, transfer or assignment occurs in a single transaction or a series of transactions, shall be deemed a Transfer and require Landlord's consent in accordance with the procedures specified in Paragraph 12(c) above. 24. 25 (g) Documentation. Tenant agrees that any instrument by which Tenant assigns this Lease or any interest therein or sublets or otherwise Transfers all or any portion of the Premises shall expressly provide that the Transferee may not further assign this Lease or any interest therein or sublet the sublet space without Landlord's prior written consent (which consent shall be subject to the provisions of this Paragraph 12), and that the Transferee will comply with all of the provisions of this Lease and that Landlord may enforce the Lease provisions directly against such Transferee. No permitted subletting by Tenant shall be effective until there has been delivered to Landlord a counterpart of the sublease in which the subtenant agrees to be and remain jointly and severally liable with Tenant for the payment of rent pertaining to the sublet space and for the performance of all of the terms and provisions of this Lease; provided, however, that the subtenant shall be liable to Landlord for rent only in the amount set forth in the sublease. No permitted assignment shall be effective unless and until there has been delivered to Landlord a counterpart of the assignment in which the assignee assumes all of Tenant's obligations under this Lease arising on or after the date of the assignment. The failure or refusal of a subtenant or assignee to execute any such instrument shall not release or discharge the subtenant or assignee from its liability as set forth above. (h) Options Personal to Original Tenant. If Landlord consents to a Transfer hereunder and this Lease contains any renewal options, expansion options, rights of first refusal, rights of first negotiation or any other rights or options pertaining to additional space in the Building, such rights and/or options shall not run to the Transferee, it being agreed by the parties hereto that any such rights and options are personal to the original Tenant named herein and may not be transferred. (i) Encumbrance of Lease. Notwithstanding any provision of this Lease to the contrary, Tenant shall not mortgage, encumber or hypothecate this Lease or any interest herein without the prior written consent of Landlord, which consent may be withheld in Landlord's sole and absolute discretion. Any such act without the prior written consent of Landlord (whether voluntary or involuntary, by operation of law or otherwise shall, at Landlord's option, be void and/or constitute an Event of Default under this Lease. (j) No Merger. The voluntary or other surrender of this Lease or of the Premises by Tenant or a mutual cancellation of this Lease shall not work a merger, and at the option of Landlord any existing subleases may be terminated or be deemed assigned to Landlord in which latter event the subleases or subtenants shall become tenants of Landlord. (k) Landlord's Costs. Tenant shall pay to Landlord the amount of Landlord's reasonable cost of processing each 25. 26 proposed Transfer (including, without limitation, attorneys' and other professional fees, and the cost of Landlord's administrative, accounting and clerical time; collectively "Processing Costs"), and the amount of all reasonable direct and indirect expenses incurred by Landlord arising from the assignee or sublessee taking occupancy of the subject space (including, without limitation, costs of freight elevator operation for moving of furnishings and trade fixtures, security service, janitorial and cleaning service, and rubbish removal service). Notwithstanding anything to the contrary herein, Landlord shall not be required to process any request for Landlord's consent to a Transfer until Tenant has paid to Landlord the amount of Landlord's estimate of the Processing Costs and all other reasonable direct and indirect costs and expenses of Landlord and its agents arising from the assignee or subtenant taking occupancy. 13. WAIVER; INDEMNIFICATION. Neither Landlord nor Landlord's agents, nor any shareholder, constituent partner or other owner of Landlord or any agent of Landlord, nor any contractor, officer, director or employee of any thereof shall be liable to Tenant and Tenant waives all claims against Landlord and such other persons for any injury to or death of any person or for loss of use of or damage to or destruction of property in or about the Premises or the Building by or from any cause whatsoever, including without limitation, earthquake or earth movement, gas, fire, oil, electricity or leakage from the roof, walls, basement or other portion of the Premises or the Building, unless caused by the gross negligence or willful misconduct of Landlord, its agents or employees. Tenant agrees to indemnify and hold Landlord, Landlord's agents, the shareholders, constituent partners and/or other owners of Landlord or any agent of Landlord, and all contractors, officers, directors and employees of any thereof (collectively, "Indemnitees"), and each of them, harmless from and to protect and defend each Indemnitee against any and all claims, demands, suits, liability, damage or loss and against all costs and expenses, including reasonable attorneys' fees incurred in connection therewith, (a) arising out of any injury or death of any person or damage to or destruction of property occurring in, on or about the Premises, from any cause whatsoever, unless caused by the gross negligence or willful misconduct of such Indemnitee, or (b) occurring in, on or about any facilities (including without limitation elevators, stairways, passageways or hallways) the use of which Tenant has in common with other tenants, or elsewhere in or about the Building or in the vicinity of the Building, when such claim, injury or damage is caused in whole or in part by the act, neglect, default, or omission of any duty by Tenant, its former or current agents, contractors, employees, invitees, or subtenants or other persons in or about the Building by reason of Tenant's occupancy of the Premises, or otherwise by any conduct of any of said persons in or about the Premises or the Real Property, or (c) arising from any failure of Tenant to observe or perform any of its 26. 27 obligations hereunder. If any action or proceeding is brought against any of the Indemnitees by reason of any such claim or liability, Tenant, upon notice from Landlord, covenants to resist and defend at Tenant's sole expense such action or proceeding by counsel reasonably satisfactory to Landlord. The provisions of this Paragraph shall survive the termination of this Lease with respect to any claims or liability occurring prior to such termination. 14. INSURANCE. (a) At Tenant's expense, Tenant shall procure, carry and maintain in effect throughout the term of this Lease, in a form reasonably acceptable to Landlord and with such insurance companies as are reasonably acceptable to Landlord (which companies shall have a Best's rating of A-X or better), the following insurance coverage: (i) Commercial general liability insurance on an occurrence basis, with limits in an amount not less than $5,000,000 combined single limit per occurrence, for claims or losses arising out of or resulting from personal injury (including bodily injury), death and/or property damage sustained or alleged to have been sustained by any person for any reason on the Premises, for liability arising out of or resulting from Tenant's covenant in Paragraph 13 to indemnify Landlord and all other Indemnities, its agents and employees, and for contractual liability; (ii) All Risk Replacement Cost insurance with an agreed amount endorsement upon property of every description and kind owned by Tenant and located in the Premises and for Tenant's Extra Improvements and Alterations in an amount equal to 100% of the full replacement value thereof; and (iii) Workers' compensation insurance, in accordance with applicable law. (b) Not more often than every year and upon not less than sixty (60) days' prior written notice, Landlord may require Tenant to increase the insurance limits set forth in Paragraphs 14(a)(i) and 14(a)(ii) above to amounts which Landlord reasonably determines to be appropriate. (c) All policies of liability insurance so obtained and maintained shall be carried in the name of Tenant, name Landlord and Landlord's designated agents as additional insureds, and shall provide that the insurance policy so endorsed will be the primary insurance providing coverage for Landlord, and contain a cross-liability endorsement stating that the rights of insureds shall not be prejudiced by one insured making a claim or commencing an action against another insured. Any other liability insurance maintained by Landlord shall be excess and non-contributing. At Landlord's election, such 27. 28 policies shall name the holder of any Superior Interest or any other interested party as an insured party under a standard mortgagee endorsement. (d) All insurance policies required under this Lease shall provide that the insurer shall not cancel, reduce, modify or fail to renew such coverage without thirty (30) days' prior written notice to Landlord. Tenant shall deliver certificates of all insurance required hereunder upon the commencement of the term of this Lease. In the event Tenant does not comply with the requirements of this Paragraph 14, Landlord may, at its option and at Tenant's expense, purchase such insurance coverage to protect Landlord. The cost of such insurance shall be paid to Landlord by Tenant, as additional rent, immediately upon demand therefor, together with interest at the Interest Rate until paid. (e) The parties release each other, and their respective authorized representatives, from any claims for loss or damage that are caused by or result from perils insured under any insurance policies carried by the parties in force at the time of any such damage. Each party shall cause each insurance policy obtained by it to provide that the insurer waives all right of recovery by way of subrogation against either party in connection with any loss or damage covered by the policy. Neither party shall be liable to the other for any loss or damage caused by the insured risks under any insurance policy required by this Lease. (f) Landlord shall maintain in force throughout the term of this Lease commercial general liability insurance and an all-risk policy of casualty insurance and such other insurance coverage as Landlord reasonable elects to maintain, all in such amounts, on such terms and with such companies as Landlord may, from time to time, reasonably determine is appropriate. 15. PROTECTION OF LENDERS. (a) This Lease shall be subject and subordinate at all times to all ground or underlying leases which may now or hereafter exist affecting the Building or the Real Property, or both, and to the lien of any mortgage or deed of trust in any amount or amounts whatsoever now or hereafter placed on or against the Building or the Real Property, or both, or on or against Landlord's interest or estate therein (such mortgages, deeds of trust and leases are referred to herein, collectively, as "Superior Interests"), all without the necessity of any further instrument executed or delivered by or on the part of Tenant for the purpose of effectuating such subordination. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver, upon demand, such further instruments evidencing such subordination of this Lease to any such Superior Interest as may reasonably be required by Landlord, provided 28. 29 that such instruments shall contain the protection referred to in Paragraph 15(b). (b) Notwithstanding the foregoing, in the event of a foreclosure of any such mortgage or deed of trust or of any other action or proceeding for the enforcement thereof, or of any sale thereunder, this Lease shall not be terminated or extinguished, nor shall the rights and possession of Tenant hereunder be disturbed, if no Event of Default then exists under this Lease, and Tenant shall attorn to the person who acquires Landlord's interest hereunder through any such mortgage or deed of trust. Landlord shall use diligent efforts to obtain from any holder of a Superior Interest in existence as of the Commencement Date a written confirmation (in a separate writing or in a subordination agreement) of its concurrence with the provisions of this Paragraph 15(b). (c) Within ten (10) days after Landlord's written request, Tenant shall deliver to Landlord, or to any actual or prospective holder of a Superior Interest ("Holder") that Landlord designates, such financial statements as are reasonably required by such Holder to verify the financial condition of Tenant (or any assignee, subtenant or guarantor of Tenant). Tenant represents and warrants to Landlord and such Holder that each financial statement delivered by Tenant shall be accurate in all material respect as of the date of such statement. All financial statements shall be confidential and used only for the purposes stated herein, and prior to delivering any non-public financial information Tenant shall have the right to receive a written confidentiality agreement imposing reasonable restrictions on the use and disclosure of any such financial information. (d) If Landlord is in default, Tenant will accept cure of any default by any Holder whose name and address shall have been furnished to Tenant in writing. Tenant may not exercise any rights or remedies for Landlord's default unless Tenant gives notice thereof to each such Holder and the default is not cured within thirty (30) days thereafter or such greater time as may be reasonably necessary to cure such default. A default which cannot reasonably be cured within said 30-day period shall be deemed cured within said period if work necessary to cure the default is commenced within such time and proceeds diligently thereafter until the default is cured. (e) If any prospective Holder should require, as a condition of any Superior Interest, a modification of the provisions of this Lease, Tenant shall approve and execute any such modifications promptly after request, provided no such modification shall relate to the Rental payable hereunder or the length of the term hereof or otherwise materially alter the rights or obligations of Landlord or Tenant hereunder. 29. 30 16. ENTRY BY LANDLORD. (a) Landlord reserves, and shall at all reasonable times have, the right to enter the Premises to inspect them; to supply janitorial service and any other service to be provided by Landlord hereunder; upon reasonable notice to submit the Premises to prospective purchasers, mortgagees or tenants; to post notices of nonresponsibility; and upon reasonable notice to alter, improve or repair the Premises and any portion of the Building as permitted or provided hereunder, all without abatement of Rental; and upon reasonable notice may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however, that any such entrance or work shall not reasonably interfere with Tenant's use of the Premises. If such entry is made as aforesaid, Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned by such entry unless caused by the gross negligence or willful misconduct of Landlord. For each of the foregoing purposes, Landlord shall at all times have and retain a key and/or other access device with which to unlock all of the doors in, on and about the Premises (excluding Tenant's vaults, safes and similar areas designated in writing by Tenant in advance and approved by Landlord); and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises, or any portion thereof. (b) Landlord shall also have the right at any time to change the arrangement or location or times of access of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets or other public parts of the Building (provided no such change shall unreasonably interfere in any material respect with Tenant's use of the Premises), and to change the name, number or designation by which the Building is commonly known, and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, nor shall it entitle Tenant to any reduction of Rental hereunder or result in any liability of Landlord to Tenant. 17. ABANDONMENT. Tenant shall not abandon the Premises or any part thereof at any time during the term hereof. Tenant understands that if Tenant leaves the Premises or any part thereof vacant, the risk of fire, other casualty and vandalism to the Premises and the Building will be increased. Accordingly, Tenant's abandonment of the Premises or any part thereof shall constitute an Event of Default hereunder regardless of whether Tenant continues to pay Basic Monthly Rental and other Rental under this Lease. If Tenant abandons or 30. 31 surrenders all or any part of the Premises or is dispossessed of the Premises by process of law, or otherwise, any movable furniture, equipment, trade fixtures, or other personal property belonging to Tenant and left on the Premises shall at the option of Landlord be deemed to be abandoned and, whether or not the property is deemed abandoned, Landlord shall have the right to remove such property from the Premises and charge Tenant for the removal and any restoration of the Premises as provided in Paragraph 8(a). Landlord may charge Tenant for the storage of Tenant's property left on the Premises at such rates as Landlord may from time to time reasonably determine, or, Landlord may, at its option, store Tenant's property in a public warehouse at Tenant's expense. Notwithstanding the foregoing, neither the provisions of this Paragraph 17 nor any other provision of this Lease shall impose upon Landlord any obligation to care for or preserve any of Tenant's property left upon the Premises, and Tenant hereby waives and releases Landlord from any claim or liability in connection with the removal of such property from the Premises and the storage thereof and specifically waives the provisions of California Civil Code Section 1542 with respect to such release. Landlord's action or inaction with regard to the provisions of this Paragraph 17 shall not be construed as a waiver of Landlord's right to require Tenant to remove its property, restore any damage to the Building caused by such removal, an make any restoration required pursuant to Paragraph 8(a) hereof. 18. DEFAULT AND REMEDIES. (a) The occurrence of any one or more of the following events (each an "Event of Default") shall constitute a breach of this Lease by Tenant: (i) Tenant fails to pay any Basic Monthly Rental or additional monthly rent under Paragraph 4(b) hereof as and when such rent becomes due and payable and such failure continues for more than five (5) days after Landlord gives written notice thereof to Tenant; provided, however, that after the second such failure in a calendar year, only the passage of time, but no further notice, shall be required to establish an Event of Default in the same calendar year; or (ii) Tenant fails to pay any additional rent or other amount of money or charge payable by Tenant hereunder as and when such additional rent or amount or charge becomes due and payable and such failure continues for more than twenty (20) days after Landlord gives written notice thereof to Tenant; provided, however, that after the second such failure in a calendar year, only the passage of time, but no further notice, shall be required to establish an Event of Default in the same calendar year; or (iii) Tenant fails to perform or breaches any other agreement or covenant of this Lease to be performed or 31. 32 observed by Tenant as and when performance or observance is due and such failure or breach continues for more than twenty (20) days after Landlord gives written notice thereof to Tenant; provided, however, that if, by the nature of such agreement or covenant, such failure or breach cannot reasonably be cured within such period of twenty (20) days, an Event of Default shall not exist as long as Tenant commences with due diligence and dispatch the curing of such failure or breach within such period of ten (10) days and, having so commenced, thereafter prosecutes with diligence and dispatch and completes the curing of such failure or breach within a reasonable time; or (iv) Tenant (A) is generally not paying its debts as they become due, (B) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy, insolvency or other debtors' relief law of any jurisdiction, (C) makes an assignment for the benefit of its creditors, (D) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers of Tenant or of any substantial part of Tenant's property, or (E) takes action for the purpose of any of the foregoing; or (v) Without consent by Tenant, a court or government authority enters an order, and such order is not vacated within sixty (60) days, (A) appointing a custodian, receiver, trustee or other officer with similar powers with respect to Tenant or with respect to any substantial part of Tenant's property, or (B) constituting an order for relief or approving a petition for relief or reorganization or arrangement or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy, insolvency or other debtors' relief law of any jurisdiction, or (C) ordering the dissolution, winding-up or liquidation of Tenant; or (vi) This Lease or any estate of Tenant hereunder is levied upon under any attachment or execution and such attachment or execution is not vacated within sixty (60) days; or (vii) Tenant abandons the Premises. (b) If an Event of Default occurs, Landlord shall have the right at any time to give a written termination notice to Tenant and, on the date specified in such notice, Tenant's right to possession shall terminate and this Lease shall terminate. Upon such termination, Landlord shall have the right to recover from Tenant: (i) The worth at the time of award of all unpaid rent which had been earned at the time of termination; 32. 33 (ii) The worth at the time of award of the amount by which all unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) The worth at the time of award of the amount by which all unpaid rent for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (iv) All other amounts necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform all of Tenant's obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in clauses (i) and (ii) above shall be computed by allowing interest at the maximum annual interest rate allowed by law for business loans (not primarily for personal, family or household purposes) not exempt from the usury law at the time of termination or, if there is no such maximum annual interest rate, at the rate of eighteen percent (18%) per annum. The "worth at the time of award" of the amount referred to in clause (iii) above shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). For the purpose of determining unpaid rent under clauses (i), (ii) and (iii) above, the rent reserved in this Lease shall be deemed to be the total rent payable by Tenant under Articles 3 and 4 hereof. (c) Even though Tenant has breached this Lease, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord shall have all of its rights and remedies including the right, pursuant to California Civil Code section 1951.4, to recover all rent as it becomes due under this Lease. Acts of maintenance or preservation or efforts to relet the Premises or the appointment of a receiver upon initiative of Landlord to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession unless written notice of termination is given by Landlord to Tenant. (d) The remedies provided for in this Lease are in addition to all other remedies available to Landlord at law or in equity by statute or otherwise. 19. DAMAGE BY FIRE OR OTHER CASUALTY. (a) If the Premises are partially destroyed or damaged by fire or other casualty, Landlord shall, subject to Paragraphs 19(b), 19(c), 19(d) and 19(e) below, promptly repair such damage if, in Landlord's reasonable judgment, such repair 33. 34 can be completed within ninety (90) days under the laws and regulations of the state, federal, county and municipal authorities having jurisdiction, and this Lease shall remain in full force and effect, provided that if there shall be damage to the Premises from any such cause and such damage is not the result of the act, neglect, default or omission of Tenant, its agents, employees, contractors or invitees, Tenant shall be entitled to a reduction of Basic Monthly Rental from the date of the destruction while such repair is being made in the proportion that the area of the Premises rendered untenantable by such damage bears to the total area of the Premises. Tenant's right to a reduction of Basic Monthly Rental under this Paragraph 19 shall be Tenant's sole remedy in connection with any such damage. (b) If such repairs cannot, in Landlord's reasonable judgment, be completed within ninety (90) days, or if such damage occurs during the last six (6) months of the term of this Lease, Landlord shall have the option either (i) to repair such damage, this Lease continuing in full force and effect, but with the Basic Monthly Rental proportionately reduced (subject to the condition set forth in Paragraph 19(a) above), or (ii) to give notice to Tenant at any time within thirty (30) days after the occurrence of such damage terminating this Lease as of a date specified in such notice, which shall not be less than thirty (30) nor more than sixty (60) days after the giving of such notice. If such notice of termination is so given, the Lease and all interest of Tenant in the Premises shall terminate on the date specified in such notice, and the Basic Monthly Rental, reduced (subject to the condition set forth in Paragraph 19(a) above) in proportion to the area of the Premises rendered untenantable by the damage, shall be paid up to the date of such termination, Landlord hereby agreeing to refund to Tenant any Rental theretofore paid for any period of time subsequent to the termination date. (c) If the Building is damaged by fire or other casualty to the extent that the repair cost would exceed twenty percent (20%) or more of its replacement value, or if more than twenty percent (20%) of the rentable area of the Building is affected by fire or other casualty and repairs to the Building cannot, in Landlord's reasonable judgment, be completed within ninety (90) days, or if insurance proceeds sufficient to complete the repairs are not available due to exercise of rights of a Holder to collect such proceeds, then in any such case, whether the Premises are damaged or not, Landlord shall have the right, at its option, to terminate this Lease by giving Tenant notice thereof within thirty (30) days of such casualty specifying the date of termination which shall not be less than thirty (30) nor more than sixty (60) days after the giving of such notice. (d) If the Premises are damaged by fire or other casualty not resulting in whole or in part from the negligence 34. 35 or willful misconduct of Tenant or its employees, agents, contractors or subtenants and the repair to the Premises cannot, in Landlord's reasonable judgment, be completed within one hundred eighty (180) days, assuming the availability of labor and materials, Tenant, at its option, may terminate this Lease. Tenant's notice to Landlord of its election to terminate the Lease must be delivered to Landlord within thirty (30) days after the occurrence of such damage and the termination shall be as of a date specified in such notice which shall be no less than 30 days nor more than sixty (60) days after the giving of such notice. In the event of a termination of the Lease by Tenant under this Paragraph 19(d), the Basic Monthly Rental shall be reduced in the same manner as provided under Paragraph 19(b) above. If Tenant shall notify Landlord as to Tenant's election to terminate this Lease, Landlord shall have the right by giving Tenant notice within twenty (20) days of Tenant's election, to relocate Tenant in substantially similar office space in the Building within thirty (30) days of the date of Tenant's notice to Landlord and the Lease will then not be deemed to have been terminated. If Landlord so elects to relocate Tenant, Landlord shall bear the cost of moving Tenant to such other office space, and Tenant shall continue to pay Basic Monthly Rental and other Rental to Landlord as provided herein and Landlord shall bear the cost of any rental in excess thereof for such other office space. Tenant's occupancy of such other office space shall not exceed one (1) year from the date of Tenant's commencement of occupancy in such other office space, Landlord shall notify Tenant in writing not later than sixty (60) days prior to the expiration of such one-year period and upon expiration of such one-year period, this Lease shall terminate. In the event Landlord can complete such repairs within such one-year period, Landlord shall so notify Tenant in writing and shall move Tenant back into the Premises as soon as practicable after such repairs have been completed. The cost of moving Tenant back into the Premises shall be borne by Landlord. (e) Notwithstanding any of the provisions of this Lease, Landlord shall in no event be required to repair any injury or damage by fire or other cause whatsoever to, or to make any repairs or replacements of, any panelings, decorations, partitions, railings, ceilings, floor coverings, trade or office fixtures or any other property of, or improvements (including Tenant's Extra Improvements and any Alterations) installed on the Premises by or at the election of Tenant. Tenant hereby agrees to promptly repair any damage to Tenant's Extra Improvements and any Alterations at its sole cost and expense in the event that Landlord is required to, or elects to, repair the remainder of the Premises pursuant to Paragraphs 19(a) and 19(b) above. 35. 36 (f) Tenant hereby waives the provisions of subsection 2 of Section 1932, subsection 4 of Section 1933, and Sections 1941 and 1942 of the California Civil Code. 20. EMINENT DOMAIN. (a) If all or part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title or the right to possession vests in the condemnor. (b) If (i) a part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof; and (ii) Tenant is reasonably able to continue the operation of Tenant's business in that portion of the Premises remaining; and (iii) Landlord elects to restore the Premises to an architectural whole, then this Lease shall remain in effect as to said portion of the Premises remaining, and the Basic Monthly Rental payable from the date of the taking shall be reduced in the same proportion as the area of the Premises taken bears to the total area of the Premises. If, after a partial taking, Tenant is not reasonably able to continue the operation of its business in the Premises or Landlord elects not to restore the Premises as hereinabove described, this Lease may be terminated by either Landlord or Tenant by giving written notice to the other party within thirty (30) days of the date of the taking. Such notice shall specify the date of termination which shall be not less than thirty (30) nor more than sixty (60) days after the date of said notice. (c) If a portion of the Building is taken, whether any portion of the Premises is taken or not, and Landlord determines that it is not economically feasible to continue operating the portion of the Building remaining, then Landlord shall have the option for a period of thirty (30) days after such determination to terminate this Lease. If Landlord determines that it is economically feasible to continue operating the portion of the Building remaining after such taking, then this Lease shall remain in effect, with Landlord, at Landlord's cost, restoring the Building to an architectural whole. (d) Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease or for the value of any improvements in or to the Premises. Tenant hereby assigns any such claim to the Landlord. Notwithstanding the foregoing, to the extent that the same shall not diminish Landlord's recovery for such taking, Tenant shall have the right 36. 37 to make a claim directly to the entity expressing the power of eminent domain for moving expenses and for loss or damage to Tenant's trade fixtures, equipment and movable furniture. (e) Tenant hereby waives sections 1265.110 through 1265.160 of the California Code of Civil Procedure. 21. HOLDING OVER. Any holding over after the expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall be construed to be a tenancy from month to month at the Basic Monthly Rental in effect on the date of such expiration or termination (subject to adjustment as provided in Paragraph 3(c) hereof) on the terms, covenants and conditions herein specified so far as applicable. Any holding over after the expiration or other termination of the term of this Lease without the written consent of Landlord shall be construed to be a tenancy at sufferance on all the terms set forth herein, except that the Basic Monthly Rental shall be an amount equal to: for the first thirty (30) days after such expiration or termination, one hundred fifty percent (150%) of the Basic Monthly Rental payable immediately prior to such holding over; and thereafter, two hundred percent (200%) of the Basic Monthly Rental payable by Tenant immediately prior to such holding over. Acceptance by Landlord of Rental after the expiration or termination of this Lease shall not constitute a consent by Landlord to any such tenancy from month to month or result in any other tenancy or any renewal of the term hereof. The provisions of this Paragraph are in addition to, and do not affect, Landlord's right to re-entry or other rights hereunder or provided by law. 22. PARKING. (a) Tenant may lease on a monthly basis permits for parking on an up to six (6) automobiles in the parking lot located at 345 Brannan Street (the "Lot") at the same monthly rates as are established from time to time by the owner or operator for other spaces in the Lot. The use by Tenant, its employees and invitees of the Lot shall be subject to the rules and regulations established from time to time by the owner or operator of the Lot. If Tenant has not rented the number of parking spaces to which it is entitled within three months after the Commencement Date, or if any time thereafter Tenant releases any parking space or spaces, Tenant shall lose its right to rent the number of parking spaces by which its entitlement under this Paragraph 22(a) exceeds the parking spaces actually rented, but Landlord shall use reasonable efforts to make such number of parking spaces available to 37. 38 Tenant within six (6) months after Tenant delivers notice to Landlord of Tenant's desire to rent the same. (b) In addition to the parking rights granted pursuant to Paragraph 22(a), Tenant may lease on a month-to-month basis permits for parking up to an additional four (4) automobiles in the Lot, subject to the above-referenced rules and regulations. Either Landlord or Tenant may terminate any or all of such additional four (4) permits upon thirty (30) days notice to the other. 23. MISCELLANEOUS. (a) Limitation of Landlord's Liability. Any liability of Landlord (including without limitation Landlord's partners, shareholders, affiliates, agents, and employees) to Tenant under this Lease shall be limited to the equity interest of Landlord in the Building and Tenant agrees to look solely to such interest for the recovery of any judgment, it being intended that Landlord and such other persons shall not be personally liable for any deficiency or judgment. Notwithstanding any other provision of this Lease, Landlord shall not be liable for any consequential damages, nor shall Landlord be liable for loss of or damage to artwork, currency, jewelry, bullion, unique or valuable documents, securities or other valuables, or for other property not in the nature of ordinary fixtures, furnishings and equipment used in general administrative and executive office activities and functions. Wherever in this Lease Tenant (a) releases Landlord from any claim or liability, (b) waives or limits any right of Tenant to assert any claim against Landlord or to seek recourse against any property of Landlord or (c) agrees to indemnify Landlord against any matters, the relevant release, waiver, limitation or indemnity shall run in favor of and apply to Landlord, its agents, the constituent shareholders, partners or other owners of Landlord or its agents, and the directors, officers, and employees of Landlord and its agents and each such constituent shareholder, partner or other owner. (b) Sale by Landlord. In the event of a sale or conveyance of the Building by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transferor is concerned, Tenant agrees to look solely to the successor in interest of such transferor in and to the Building and this Lease. Tenant agrees to attorn to the successor in interest of such transferor. If Tenant provides Landlord with any security for Tenant's performance of its obligations hereunder, and Landlord transfers, or provides a credit with respect to, such security to the grantee or transferee of Landlord's interest in the Real Property, Landlord shall be released from any further responsibility or liability for such security. 38. 39 (c) Estoppel Letter. Tenant shall, at any time and from time to time within ten (10) days following request from Landlord, execute, acknowledge and deliver to Landlord a statement in writing, (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified is in full force and effect), (ii) certifying that there are not, to Tenant's knowledge, any uncured defaults on the part of the Landlord hereunder, and that Tenant has no defenses to or offsets against its obligations under this Lease, or specifying such defaults, defenses or offsets if any are claimed, (iii) certifying the date that Tenant entered into occupancy of the Premises, (iv) certifying the amount of the Basic Monthly Rental and the Rental payable under Paragraph 4(b) and the date to which Rental is paid in advance, if any, and certifying that Tenant is entitled to no rent abatement or other economic concessions not specified in the Lease, (v) evidencing the status of this Lease as may be required either by a lender making a loan affecting, or a purchaser of, the Premises, the Building, the Real Property or any interest therein from Landlord, (vi) certifying the amount of the Deposit, if any, (vii) certifying that all Improvements to be constructed in the Premises by Landlord are completed (or specifying any obligations of Landlord respecting Improvements), and (viii) certifying such other matters relating to this Lease and/or the Premises as may reasonably be requested by a lender making a loan to Landlord or a purchaser of the Premises, the Building, the Real Property or any interest therein from Landlord. Any such statement may be relied upon by, and shall upon Landlord's request be addressed to, any prospective purchaser or encumbrancer of all or any portion of the Real Property or any interest therein; provided that, prior to delivering any non-public financial information, Tenant shall have the right to receive a written confidentiality agreement imposing reasonable restrictions on the use and disclosure of any such financial information. Tenant shall, within ten (10) days following request of Landlord, deliver such other documents including Tenant's financial statements as are reasonably requested in connection with the sale of, or loan to be secured by, the Real Property or any part thereof or interest therein. Tenant's failure to deliver said statement in the time required shall be conclusive upon Tenant that: (i) the Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) there are no uncured defaults in Landlord's performance and Tenant has no right of offset, counterclaim or deduction against Rental under the Lease and (iii) no more than one month's Basic Monthly Rental has been paid in advance. (d) Financial Statements. On or before April 1 of each year, Tenant shall deliver to Landlord Tenant's financial statements ("Financial Statements") for the fiscal year of Tenant ended on the previous December 31, which Financial Statements shall include a combined balance sheet of Tenant and 39. 40 its combined subsidiaries as at the end of such fiscal year, a combined statement of operations of Tenant and its combined subsidiaries for such fiscal year, and a certificate of Tenant's auditor (or, if audited Financial Statements are not available, then a certificate of Tenant's Chief Financial Officer) to the effect that such Financial Statements were prepared in accordance with generally accepted accounting principles consistently applied and fairly present the financial condition and operations of Tenant and its combined subsidiaries for and as at the end of such fiscal year. Landlord agrees that Landlord shall not disclose any non-public financial information except to Landlord's agents and advisors (and Landlord shall take reasonable steps to assure that such agents and advisors likewise agree not to disclose such non-public financial information), and that the Financial Statements shall be used solely for purposes related to Landlord's management and operation of, and investment in, the Real Property. (e) Right of Landlord To Perform. All terms and covenants of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's expense and without any reduction of Rental. If Tenant fails to pay any Rental hereunder or fails to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for twenty (20) days (or such shorter period as may be reasonable under emergency circumstances) after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may make any such payment or perform any such other term or covenant on Tenant's part to be performed but shall not be obligated to do so. All sums so paid by Landlord and all necessary costs of such performance by Landlord, together with interest thereon at the Interest Rate from the date of such payment or performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of non-payment thereof by Tenant as in the case of failure by Tenant in the payment of Rental hereunder. (f) Rules and Regulations. Tenant agrees to faithfully observe and to comply with the Building Rules and Regulations attached hereto as Exhibit B and incorporated herein by this reference, and all reasonable modifications of and additions thereto from time to time put into effect by Landlord which are applicable to all tenants of the Building and of which Tenant shall have notice. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Building of any of said Building Rules and Regulations. In the event any of the Building Rules and Regulations conflict with any express provision of this Lease, the provisions of this Lease shall govern. 40. 41 (g) Attorneys' Fees. In case any suit or other proceeding shall be brought for an unlawful detainer of the Premises or for the recovery of any Rental due under the provisions of this Lease or because of the failure of performance or observance of any other term or covenant herein contained on the part of Landlord or Tenant, the unsuccessful party in such suit or proceeding shall pay to the prevailing party therein reasonable attorneys' fees and costs which shall include fees and costs of any appeal, all as fixed by the Court. If Landlord or Tenant should be named as a defendant in any suit brought against the other in connection with Tenant's occupancy of the Premises under this Lease, the party defendant primarily responsible for the bringing of such suit shall pay to the other party its costs and expenses incurred in such suit and reasonable attorneys' fees. (h) Waiver of Jury Trial. If any action or proceeding between Landlord and Tenant to enforce the provisions of this Lease (including an action or proceeding between Landlord and the trustee or debtor in possession while Tenant is a debtor in a proceeding under any bankruptcy law) proceeds to trial, Landlord and Tenant hereby waive their respective rights to a jury in such trial. (i) Waiver. The failure of Landlord to object to or to assert any remedy by reason of Tenant's failure to perform or observe any covenant or term hereof or its failure to assert any rights by reason of the happening or non-happening of any condition hereof shall not be deemed a waiver of its right to assert and enforce any remedy it may have by reason of such failure on the part of Tenant or the happening or non-happening of such condition or a waiver of its rights to enforce any of its rights by reason of any subsequent failure of Tenant to perform or observe the same or any other term or covenant or by reason of the subsequent happening or non-happening of the same or any other condition. No custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of, or in any way affect, the right of Landlord to insist upon performance and observance by Tenant in strict accordance with the terms hereof. The acceptance of Rental hereunder by Landlord shall not be deemed to be a waiver of any preceding failure of Tenant to perform or observe any term or covenant of this Lease, other than the failure of Tenant to pay the particular Rental so accepted, irrespective of any knowledge on the part of Landlord of such preceding failure at the time of acceptance of such Rental. (j) Light, Air and View. Tenant agrees that no diminution or shutting off of light, air or view by any structure which may be erected (whether or not by Landlord) on property adjacent to the Building shall in any way affect this Lease, entitle Tenant to any reduction of Rental hereunder or result in any liability of Landlord to Tenant. 41 42 (k) Notices. All notices, demands, requests, advices or designations ("Notices") which may be or are required to be given by either party to the other hereunder shall be in writing. All Notices by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises, or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant at Tenant's address for notices as set forth in the Summary of Lease Terms. All Notices by Tenant to Landlord shall be sufficiently given, made or delivered if personally served on Landlord, or sent by United States certified or registered mail, postage prepaid, addressed to Tenant at Tenant's address for notices as set forth in the Summary of Lease Terms. All Notices by Tenant to Landlord shall be sufficiently given, made or delivered if personally served on Landlord, or sent by United States certified or registered mail, postage prepaid, addressed to Landlord at Landlord's address for notices specified in Paragraph B of the Summary of Lease Terms. Each Notice shall be deemed received on the date of the personal service or three (3) days after the mailing thereof, in the manner herein provided, as the case may be. (l) Name. Tenant agrees that it shall not, without first obtaining the written consent of Landlord (which consent may be withheld in Landlord's sole and absolute discretion): (i) use the name of the Building for any purpose other than as the address of the business conducted by Tenant in the Premises, or (ii) use for any purpose any image of, rendering of, or design based on, the exterior appearance or profile of the Building. (m) Governing Law; Severability. This Lease shall in all respects be governed by and construed in accordance with the laws of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in effect. (n) Definitions and Paragraph Headings; Successors. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord. The term "Tenant" or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations, and their and each of their respective heirs, executors, administrators, successors and permitted assigns, according to the context hereof. The provisions of this Lease shall inure to the benefit of and bind Landlord and Tenant and their respective heirs, executors, administrators, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include other genders. If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof. 42. 43 (o) Time. Time is of the essence of this Lease with respect to the payment of Rental and the performance of all obligations. (p) Examination of Lease. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. (q) Brokerage. Tenant covenants and represents that it has negotiated this Lease directly with the Tenant's Broker(s) designated on the Summary of Lease Terms and has not acted by implication to authorize, nor has authorized, any other real estate broker or salesman to act for it in these negotiations. Tenant agrees to protect, defend, indemnify and hold Landlord harmless from any and all claims, loss, cost, damage and/or expense (including, without limitation, attorneys' fees and court costs) by any other real estate broker or salesperson or other entity or party for a commission or finder's fee as a result of Tenant's entering into this Lease to the extent Tenant has agreed to pay such commission or fee. Landlord agrees to protect, defend, indemnify and hold Tenant harmless from any and all claims, loss, cost, damage and/or expense (including, without limitation, attorneys' fees and court costs) by any real estate broker or salesperson or other entity or party for a commission or finder's fee as a result of Tenant's entering into this Lease to the extent Landlord has agreed to pay such commission or fee. (r) Directory Board. Landlord agrees to list Tenant's name on the directory board in the lobby of the Building and in the elevator lobbies on the floors on which the Premises are located at Landlord's cost and expense; provided, however, any change to the initial listing or any additional listings shall be at Tenant's cost and expense. Landlord's acceptance of any name for listing on the directory board shall in no event be, or be deemed to be, nor will it substitute for, Landlord's consent, as required by this Lease, to any sublease, assignment, or other occupancy of the Premises. (s) Authority. If Tenant is a corporation (or other business organization), Tenant and each person executing this Lease on behalf of Tenant represents and warrants to Landlord that (a) Tenant is duly incorporated (or organized) and validly existing under the laws of its state of incorporation (or organization), (b) Tenant is qualified to do business in California, (c) Tenant has full right, power and authority to enter into this Lease and to perform all of Tenant's obligations hereunder, and (d) the execution, delivery and performance of this Lease has been duly authorized by Tenant and each person signing this Lease on behalf of the Tenant is duly and validly authorized to do so. Concurrently with signing this Lease, Tenant shall deliver to Landlord a true and correct copy of 43. 44 resolutions duly adopted by the board of directors or constituent partners or members of Tenant, certified by the secretary of Tenant to be true and correct, unmodified and in full force, which authorize and approve this Lease and authorize each person signing this Lease on behalf of Tenant to do so. (t) Amendments. This Lease may not be amended or modified in any respect whatsoever except by an instrument in writing signed by Landlord and Tenant. (u) Exhibits and Addenda; Entire Agreement. The Exhibits and Addenda referenced in the Summary of Lease Terms are a part of this Lease and are incorporated herein by this reference. In the event of any discrepancy between the Lease and any such Exhibit or Addendum, the Exhibit or Addendum shall control. This Lease is the entire and integrated agreement between Landlord and Tenant with respect to the subject matter of this Lease, the Premises and the Building. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, offers, agreements and understandings, oral or written, if any, between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease, the Premises or the Building. There are no representations between Landlord and Tenant or between any real state broker and Tenant other than those expressly set forth in this Lease and all reliance with respect to any representations is solely upon representations expressly set forth in this Lease. 44. 45 IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the day and year first above written. LANDLORD: SOMA PARTNERS, L.P., a California limited partnership By SKS/Rosenberg, LLC, a Delaware limited liability company, general partner By Stein Kingsley Stein, a California corporation, Member By /s/ Paul E. Stein -------------------------- Its President ------------------- TENANT: MICROMUSE INC., a Delaware corporation By: /s/ Christopher J. Dawes -------------------------- Its: President ----------------------- 45. 46 EXHIBIT A FLOOR PLAN 47 EXHIBIT A --------- [MEZZANINE FLOOR PLAN] [HUNTSMAN ASSOCIATES LETTERHEAD] 48 EXHIBIT A (continued) ----------- 49 EXHIBIT B BUILDING RULES AND REGULATIONS 1. Sidewalks, halls, passages, exits, entrances, elevators, escalators and stairways shall not be obstructed by tenants or used by them for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exits, entrances, elevators, escalators and stairways are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the judgment of Landlord, would be prejudicial to the safety, character, reputation and interests of the Building and its tenants. 2. No sign, placard, picture, name, advertisement or notice, visible from the exterior of leased premises shall be inscribed, painted, affixed or otherwise displayed by any tenant either on its premises or any part of the Building without the prior written consent of Landlord, and Landlord shall have the right to remove any such sign, placard, picture, name, advertisement, or notice without notice to and at the expense of the Tenant. If Landlord shall have given such consent to any tenant at any time, whether before or after the execution of the Lease, such consent shall in no way operate as a waiver or release of any of the provisions hereof or of such Lease, and shall be deemed to relate only to the particular sign, placard, picture, name, advertisement or notice so consented to by Landlord and shall not be construed as dispensing with the necessity of obtaining the specific written consent of Landlord with respect to any other such sign, placard, picture, name, advertisement or notice. No signs will be permitted on any entry door unless the door is glass. All glass door signs must be approved by Landlord. Signs or lettering shall be printed, painted, affixed or inscribed at the expense of the Tenant by a person approved by Landlord. 3. The bulletin board or directory of the Building will be provided exclusively for the display of the name and location of tenants only and Landlord reserves the right to exclude any other names therefrom. Landlord reserves the right to restrict the amount of directory space utilized by Tenant. 4. No curtains, draperies, blinds, shutters, shades, screens or other coverings, hangings or decorations shall be attached to, hung or placed in, or used in connection with, any window on any premises without the prior written consent of Landlord. in any event, with the prior written consent of 50 Landlord, all such items shall be installed inside of Landlord's standard draperies and shall in no way be visible from the exterior of the Building. No articles shall be placed or kept on the window sills so as to be visible from the exterior of the Building. 5. Landlord reserves the right to exclude from the Building between the hours of 6 P.M. and 6 A.M. and at all hours on Saturdays, Sundays and holidays all persons who do not present a pass to the Building signed by Landlord. Landlord will furnish passes to persons for whom any tenant requests the same in writing. Each tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. During any invasion, mob, riot, public excitement or other circumstance rendering such action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building by closing the doors, or otherwise, for the safety of tenants and protection of the Building and property in the Building. 6. No tenant shall employ any person or persons other than the janitor of Landlord for the purpose of cleaning the premises unless otherwise agreed to by Landlord in writing. Except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning the same. No tenant shall cause any unnecessary labor by reason of such tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall in no way be responsible to any tenant for any loss of property on the premises, however occurring, or for any damage done to the property of any tenant by the janitor or any other employee or any other person. Janitorial service shall include ordinary dusting and cleaning by the janitor assigned to such work and shall not include beating or cleaning of carpets or rugs or moving of furniture or other special services. Janitorial service will not be furnished on nights when rooms are occupied after 9:30 p.m. Window cleaning shall be done only by Landlord, and at such intervals and such hours as Landlord shall deem appropriate. 7. No tenant shall obtain for use upon its premises ice, drinking water, food, beverage, towel or other similar services, or accept barbering or bootblacking services in its premises, except from persons authorized by Landlord, and at hours and under regulations fixed by Landlord. 2. 51 8. Each tenant shall see that the doors of its premises are closed and securely locked and must observe strict care and caution that all water faucets or water apparatus are entirely shut off before the Tenant or its employees leave such premises, and that all utilities shall likewise be carefully shut off, so as to prevent waste or damage, and for any default or carelessness the Tenant shall make good all injuries sustained by ocher tenants or occupants of the Building or Landlord. On multiple-tenancy floors all tenants shall keep the door or doors to the Building corridors closed at all times except for ingress and egress. 9. No tenant shall alter any lock or install a new or additional lock or any bolt on any door of its premises without the prior written consent of Landlord. If Landlord shall give its consent, the tenant shall in each case furnish Landlord with a key for any such lock. 10. Landlord will furnish Tenant without charge with two (2) keys to each door lock provided in the Premises by Landlord. Landlord may make a reasonable charge for any additional keys. Tenant shall not have any such keys copied or any keys made. Each tenant, upon the termination of the tenancy, shall deliver to Landlord all the keys of or to the Building, offices, rooms and toilet rooms which shall have been furnished to the Tenant or which the Tenant shall have had made. In the event of the loss of any keys so furnished by Landlord, Tenant shall pay Landlord therefor. 11. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein, and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 12. No tenant shall use or keep in its premises or the Building any kerosene, gasoline or inflammable or combustible fluid or material or use any method of heating or air conditioning other than that supplied by Landlord. 13. No tenant shall use, keep or permit to be used or kept in its premises any foul or noxious gas or substance or permit or suffer such premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations or interfere in any way with other tenants or those having business therein, nor shall any animals or birds be brought or kept in or about any premises or the Building. 14. No cooking shall be done or permitted by any tenant on its premises, except that the preparation of coffee, tea, hot 3. 52 chocolate and similar items for tenants and their employees shall be permitted, nor shall such premises be used for lodging. 15. Except with the prior written consent of Landlord, no tenant shall sell, or permit the sale, at retail of newspapers, magazines, periodicals, theater tickets or any other goods or the merchandise in or on any premises, nor shall any tenant carry on, or permit or allow any employee or other person to carry on, the business of stenography, typewriting or any similar business in or from any premises for the service or accommodation of occupants of any other portion of the Building, nor shall the premises of any tenant be used for the storage of merchandise or for manufacturing of any kind, or the business of a public barber shop, beauty parlor, or any business or activity other than that specifically provided for in such tenant's lease. 16. Landlord will direct electricians as to where and how telephone, telegraph and electrical wires are to be introduced or installed. No boring or cutting for wires will be allowed without the prior written consent of Landlord. The location of telephones, call boxes and other office equipment affixed to all premises shall be subject to the written approval of Landlord. All electrical appliances must be grounded and must meet UL Label Standards. 17. No tenant shall install any radio or television antenna, loudspeaker or any other device on the exterior walls of the Building. 18. No tenant shall lay linoleum, tile, carpet or any other floor covering so that the same shall be affixed to the floor of its premises in any manner except as approved in writing by Landlord. The expense of repairing any damage resulting from a violation of this rule or the removal of any floor covering shall be borne by the tenant by whom, or by whose contractors, employees or invitees, the damage shall have been caused. 19. No furniture, freight, equipment, packages or merchandise will be received in the Building or carried up or down the elevators, except between such hours, through such entrances and in such elevators as shall be designated by Landlord. Landlord reserves the right to require that moves be scheduled and carried out during nonbusiness hours of the Building. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy equipment brought into the Building. Safes or other heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as is necessary to properly distribute the weight thereof. Landlord will not be responsible for loss of or damage to any such safe or property from any cause, and all damage done to the Building by moving or maintaining any such safe or other property shall be repaired at the expense of the Tenant. 4. 53 20. No tenant shall overload the floor of its premises or mark, or drive nails, screw or drill into, the partitions, woodwork or plaster or in any way deface such premises or any part thereof. 21. There shall not be used in any space, or in the public areas of the Building, either by any tenant or others any hand trucks except those equipped with rubber tires and side guards. No other vehicles of any kind shall be brought by any tenant into or kept in or about any premises in the Building. 22. Each tenant shall store all its trash and garbage within the interior of its premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature chat it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the City of San Francisco without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entryways and elevators provided for such purposes and at such times as Landlord shall designate. 23. Canvassing, soliciting, distribution of handbills and other written materials and peddling in the Building are prohibited and each tenant shall cooperate to prevent the same. 24. Landlord shall have the right, exercisable without notice and without liability to any tenant, to change the name and address of the Building. 25. The requirements of tenants will be attended to only upon application at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee will admit any person (tenant or otherwise) to any office without specific instructions from Landlord. 26. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all tenants of the Building. 27. These Rules and Regulations may be changed from time to time, as Landlord may deem appropriate, and are in addition to, and shall not be construed to in any way modify, alter or amend, in whole or in part, the terms, covenants and conditions of the Lease. 5. 54 OFFICE LEASE SUMMARY OF LEASE TERMS 139 Townsend Street San Francisco, California A. Date: March 25, 1997 B. Landlord: SOMA PARTNERS, L.P., a California limited partnership Landlord's address for notices: c/o Stein Kingsley Stein [Paragraph 22(j)] 235 Montgomery Street Suite 1810 San Francisco, CA 94104 C. Tenant: MICROMUSE INC., a Delaware corporation Tenant's address for notices: 139 Townsend Street [Paragraph 22(j)] San Francisco, CA 94107 Tenant Contact Person: Mr. Christopher Dawes D. Floor(s) on which Premises situated: 5th and Mezzanine [Paragraph 1(g)] E. Rentable area of Premises: Suite 500: 7,105 rsf [Paragraph 1(g)] Mezzanine: 4,130 rsf Total : 11,235 F. Tenant's Percentage Share: 19.65% [Paragraph l(l)] G. Base Expense Year: 1997 [Paragraph 1(a)] H. Base Tax Year: 1997 [Paragraph 1(b)] I. Term; Commencement and Expiration Dates: [Paragraph 2] five (5) years, commencing on May 1, 1997, and expiring on April 30, 2002. J. Basic Monthly Rental: $20,997.00 ($14,802 for Suite 500 [Paragraph 3(a)] and $6,195 for Mezzanine) Basic Annual Rental: $251,965 ($177,625 for Suite 500 and $74,340 for Mezzanine) i. 55 K. CPI Adjustment Dates: N/A [Paragraph 3(c)] L. Security Deposit: $37,170 [Paragraph 3(e)] M. Landlord's Broker(s): None [Paragraph 23(p)] N. Tenant's Broker(s): None [Paragraph 23(p)] 0. Exhibits and addenda: Exhibit A - Floor Plan [Paragraph 23(t)] Exhibit B - Building Rules and Regulations The provisions of the Lease identified above in brackets are those provisions where references to particular Lease Terms appear. Each such reference shall incorporate the applicable Lease Terms. In the event of any conflict between the Summary of Lease Terms and the Lease, the latter shall control. LANDLORD: SOMA PARTNERS, L.P., a California limited partnership By SKS/Rosenberg, LLC, a Delaware limited liability company, general partner By Stein Kingsley Stein, a California corporation, Member BY [sig] ----------------------------- Its President ------------------------ (Signatures Continued on Next Page) ii. 56 TENANT: MICROMUSE INC., a Delaware Corporation By: [sig] ------------------------------ Its: President ------------------------ 57 TABLE OF CONTENTS 1. DEFINITIONS............................................................ 1 2. TERM................................................................... 6 3. RENTAL; SECURITY DEPOSIT............................................... 7 4. TENANT'S SHARE OF OPERATING EXPENSES AND REAL PROPERTY TAXES........... 9 5. OTHER TAXES PAYABLE BY TENANT..........................................11 6. USE....................................................................12 7. COMPLIANCE WITH LAWS/ENVIRONMENTAL MATTERS.............................13 8. ALTERATIONS; LIENS.....................................................14 9. MAINTENANCE AND REPAIR.................................................16 10. SERVICES...............................................................16 11. ACCESS CONTROL.........................................................19 12. ASSIGNMENT AND SUBLETTING..............................................20 (a) Restriction on Transfers........................................20 (b) Landlord's Right of First Offer; Termination Right...........................................................21 (c) Landlord's Approval Process.....................................23 (d) Consideration for Transfer......................................23 (e) Merger or Consolidation of Tenant: Major Changes................24 (f) Transfer of Partnership Interest or Corporate Stock...........................................................24 (g) Documentation .. . . ...........................................24 (h) Options Personal to Original Tenant.............................25 (i) Encumbrance of Lease............................................25 (j) No Merger.......................................................25 (k) Landlord's Costs................................................25 13. WAIVER; INDEMNIFICATION................................................26 14. INSURANCE..............................................................27 15. PROTECTION OF LENDERS..................................................28 16. ENTRY BY LANDLORD......................................................29 17. ABANDONMENT............................................................30 18. DEFAULT AND REMEDIES...................................................31 iv. 58 19. DAMAGE BY FIRE OR OTHER CASUALTY.......................................33 20. EMINENT DOMAIN.........................................................35 21. HOLDING OVER...........................................................36 22. PARKING................................................................37 23. MISCELLANEOUS..........................................................38 (a) Limitation of Landlord's Liability..............................38 (b) Sale by Landlord................................................38 (c) Estoppel Letter.................................................38 (d) Financial Statements............................................39 (e) Right of Landlord To Perform....................................40 (f) Rules and Regulations...........................................40 (g) Attorneys' Fees.................................................40 (h) Waiver of Jury Trial............................................41 (i) Waiver..........................................................41 (j) Light, Air and View.............................................41 (k) Notices.........................................................41 (1) Name............................................................42 (m) Governing Law; Severability.....................................42 (n) Definitions and Paragraph Headings; Successors..................42 (o) Time............................................................42 (p) Examination of Lease............................................42 (q) Brokerage.......................................................43 (r) Directory Board.................................................43 (s) Authority.......................................................43 (t) Amendments......................................................44 (u) Exhibits and Addenda; Entire Agreement..........................44 EXHIBIT A FLOOR PLAN EXHIBIT B BUILDING RULES AND REGULATIONS v. EX-10.6 8 OFFICE LEASE DATED AS OF MARCH 3, 1997 1 EXHIBIT 10.6 THIS LEASE is made the Third day of March One thousand nine hundred and ninety-seven BETWEEN the Landlord the Tenant and the Surety whose respective names and address are set out in the First Schedule [LONDON STAMP OFFICE 1 STAMP] [BRITISH TAX STAMPS] WITNESSETH: 1. IN this Lease unless the context otherwise requires the various expressions set out below shall have the meaning or bear the interpretation there set out (a) "the Landlord" shall include the reversioner and any other person for the time being immediately expectant on the Term hereby created and for the purpose of entering upon the Demised Premises shall include the Superior Landlord (if any) (b) "the Tenant" shall include the person from time to time entitled to the Term and the personal representatives of the Tenant (c) words importing the masculine gender shall where necessary be construed as importing the feminine gender and words importing the neuter gender shall where necessary be construed as importing the masculine gender or the feminine gender as the case may be (d) words importing the singular number only shall include the plural number and vice versa and where there are two or more persons included in the expression "the Landlord" or "the Tenant" or "the Surety" the covenants expressed to be made by the Landlord or the Tenant or the Surety shall be deemed to be made by such persons jointly and severally 1 2 (e) "the Demised Premises" means all that premises described in the Second Schedule (f) "Conduits" means and includes chimney flues ventilating ducts air conditioning systems cisterns tanks radiators water gas soil and waste water pipes sewers and drains central heating boilers and pipes wires and cables used for the conveyance of electrical current telephone cables valves traps and switches and includes where relevant ancillary equipment and structures (g) "the Development" means the land comprised in Title Number TGL 54450 and more particularly described in Part II of the Second Schedule hereto (h) "the Access Road" means the roadway and the footpath adjacent thereto shown for identification purposes only cross hatched brown on Plan B annexed hereto (i) "the Common Parts of the Development" means those parts of the Development which at the date hereof have not been and are not intended to be let or sold by the Landlord and are capable of benefitting and being used by the Tenant in connection with the use of the Demised Premises and for the purpose of the Sixth Schedule hereof the Common Parts of the Development shall be deemed to include spaces for parking vehicles used by the Tenant and spaces used for parking vehicles by other tenants in the Development (j) "the Second Floor Lease" means a lease of the second floor and gallery area of the Demised Premises dated 8th November 1996 and made between the Landlord (1) and Imagination and Design Limited (2) 2 3 Floor Plans ----------- 4 2. THE LANDLORD demises to the Tenant the Demised Premises together with the rights but subject to the exceptions and reservations mentioned in the Second Schedule subject to and with the benefit of the Second Floor Lease TO HOLD unto the Tenant for the term of years specified in the First Schedule ("the Term") PAYING yearly for the first five years of the Term the RENT of NINETY-SEVEN THOUSAND SIX HUNDRED AND TWENTY-FIVE POUNDS (Pound Sterling 97,625.00) per annum exclusive and for the remainder of the Term such rent as shall be calculated under the provisions of the Ninth Schedule herein such rent to be paid by equal quarterly payments in advance on the usual quarter days in every year or proportionately for any fraction of a year the first of such payments to be made on the Third day of September One thousand nine hundred and ninety-seven and to be a due proportion of the Rent calculated from the Third day of September One thousand nine hundred and ninety-seven until the 29th day of September One thousand nine hundred and ninety-seven 3. THE TENANT covenants with the Landlord to observe and perform the covenants and stipulations set out in the Third Schedule 4. THE LANDLORD covenants with the Tenant to observe and perform the covenants and stipulations set out in the Fourth Schedule 5. THE LANDLORD AND THE TENANT agree the provisions set out in the Fifth Schedule 6. THE SURETY HEREBY COVENANTS with the Landlord to observe and perform the covenants set out in the Seventh Schedule PROVIDED ALWAYS that the Surety will cease to be liable under this clause and shall be released entirely from all subsequent liability hereunder in the event that 3 5 (1) The Tenant shall provide to the Landlord accounts for the most recent three consecutive years audited by a Chartered Accountant and approved by the directors of the Tenant not more than three months before such accounts are provided to the Landlord showing for each such year net profits before tax amounting to not less than three times the annual rent reserved by the Lease under Clause 2 hereof in the year to which the said accounts relate and PROVIDED FURTHER that at the time of production of such accounts no monies shall be due from the Tenant or the Surety to the Landlord or (2) on completion of a lawful assignment of the Lease in accordance with the provisions hereto PROVIDED ALWAYS that there is produced in conjunction with a grant of licence for such assignment a surety reasonably acceptable to the Landlord who will covenant therein in equivalent form to the provisions of the Seventh Schedule hereto or there is provided on the grant of such licence a security deposit in an amount equivalent to one half of the annual rent then payable under the Lease such amount to be placed in a separate designated Deposit Account interest accruing to the Tenant and otherwise upon the terms of the agreed draft deed set out in the Eighth Schedule hereto 7. WE certify that there is no agreement for lease to which this Lease gives effect IN WITNESS whereof the parties hereto have caused this instrument to be executed as a Deed in the presence of the person(s) mentioned below the day and 4 6 year first above written THE FIRST SCHEDULE THE LANDLORD : MARLDOWN LIMITED whose registered office is situated at Barbican House 26/34 Old Street London EC1V 9HL THE TENANT : MICROMUSE plc whose registered office is situated at Disraeli House 90 Putney Bridge Road London SW18 1DA THE SURETY : CHRISTOPHER JOHN DAWES of 11 Tourney Road London SW6 THE TERM : 10 years THE COMMENCEMENT DATE: 3rd March 1997 THE AUTHORISED USER : Use within Class B1 of the Town and Country Planning (Use Classes) Order 1987 THE SECOND SCHEDULE PART I The Demised Premises ALL THAT BUILDING situate at and known as Gladstone House Adelaide Road 90 Putney Bridge Road London SW18 (all of which premises are for the purposes of identification only shown edged red on Plans A and B annexed hereto) and for the purposes of obligation as well as grant include the structure roof and foundations thereof and all conduits which are situate therein TOGETHER WITH:- (a) the Landlord's fixtures and fittings on the Demised Premises 5 7 (b) the free and uninterrupted passage and running of water soil gas and electricity and all other services to and from the Demised Premises in through and along the Conduits which are now or may hereafter during the Term be in on over or under the Development which serve the Demised Premises (c) the right of support shelter and protection for the Demised Premises from the remainder of the Development as enjoyed at the date hereof (d) the right to pass and repass at all times and for all purposes connected with the use and enjoyment of the Demised Premises to and from the Demised Premises from and to the nearest highway maintainable at public expense: (i) with or without vehicles of any description over and along the Access Road (ii) on foot only over and along those parts of the Common Parts of the Development which give access to the Demised Premises (e) a right of access on to any part of the Development for the purpose of carrying out the Tenant's obligations herein to the extent that the Tenant cannot otherwise do so (f) the right to display a sign indicating the Tenant's name and business on the exterior of the Demised Premises in a position approved by the Landlord such approval not to be unreasonably withheld or delayed (g) the exclusive right to park roadworthy vehicles within the car parking area shown edged green on Plan B ("the Car Parking Spaces") subject to the rights reserved in the Second Floor Lease for the tenants therein EXCEPTING AND RESERVING to the Landlord and its lessees tenants servants and licensees and the owners lessees and occupiers for the time being of the Development and any adjoining or neighbouring property and all persons authorised by them and all other persons from time to time having the like right (a) the free and uninterruped passage and running of water soil gas and electricity and all other services to and from the Demised Premises and such adjoining neighbouring property through the Conduits which now are in on over or under the Demised Premises or any part thereof together with a full right of entry to the Demised Premises at all reasonable times on giving no less than two days 6 8 prior written notice (except in emergency) for the purposes of installing adding to inspecting maintaining replacing and repairing the Conduits the person or persons exercising such right making good all damage to the Demised Premises occasioned by such entry or any works consequent thereon to the reasonable satisfaction of the Tenant and provided that the person or persons so entering shall cause as little inconvenience and interference as possible to the Tenant and the business of the Tenant (b) full right and liberty at any time or times to execute works repairs and make erections upon or to erect upon rebuild reconstruct make additions to modify or alter the Development or any part thereof (except the Demised Premises) or the adjoining and neighbouring property and to use the Building and the Development (except the Demised Premises) and the adjoining and neighbouring property in such manner as they may think fit whether or not the access of light and air to the Demised Premises or any part thereof shall thereby be interfered with (c) the right of support shelter and protection for the Development and any adjoining and neighbouring property from the Demised Premises as enjoyed at the date hereof (d) the right to enter the Demised Premises at all reasonable times upon no less than 48 hours prior written notice (except in case of emergency) for the purpose of carrying out any works or doing anything whatsoever comprised within the Landlord's rights and obligations in this Lease Provided that the person or persons so entering the Demised Premises shall cause as little interference and inconvenience as possible to the Tenant and shall not interfere with the Tenant's ability to carry out business from the Demised Premises and shall make good all damage occasioned by such entry or the carrying out of any works to the reasonable satisfaction of the Tenant PART II The Development ALL THAT parcel of land with the buildings erected thereon situate and known as the Adelaide Centre Adelaide Road London SW18 1HR as the same is registered at H M Land Registry under Title Number TGL 54450 7 9 THE THIRD SCHEDULE The Covenants by the Tenant 1. TO pay the reserved rents on the days and in the manner aforesaid without any deduction and if the Landlord so requires to pay the same by Bankers Standing Order direct to the bank account of the Landlord or as it shall direct 2. TO pay and contribute by way of further rent the Interim Charge and the Service Charge (as those expressions are defined in the Sixth Schedule) at the time and in the manner provided in that Schedule 3. (a) TO bear pay and discharge all existing and future rates taxes duties assessments impositions charges liabilities and outgoings whatsoever (whether parliamentary parochial or otherwise and whether or not of a capital or non-recurring nature) which are now or may at any time hereafter be assessed charged or imposed upon or payable in respect of the Demised Premises or any part thereof or on the owner or occupier in respect thereof (excluding any payable by the Landlord in respect of the receipt of rents or other payments made by the Tenant in accordance with the provisions hereof except any Value Added Tax payable on the rents or any other such payments on any disposition or dealing with or the ownership of the reversion to this Lease) (b) To pay all charges for electricity gas and water consumed at the Demised Premises including any connection and hiring charges and meter rents and to perform and observe all present and future regulations and requirements of the electricity gas and water supply companies or boards in respect of the supply and consumption of electricity gas and water to the Demised Premises 4. (a) AT all times during the Term to repair replace (if beyond economic repair) rebuild cleanse and keep the Demised Premises and all additions and improvements thereto and the Landlord's fixtures and fittings and the Conduits therein in good and substantial repair and condition (b) To paint with two coats of best quality paint or otherwise treat in a proper and workmanlike manner all the wood and iron work of the Demised Premises heretofore or usually painted or otherwise treated once in the fifth year as regards the interior and once in every third year as regards the exterior and in each case in the last year of the Term (whether determined by effluxion of time or under 8 10 the provisions for re-entry hereinafter contained or otherwise) provided that the covenants relating to the last year of the Term shall not apply where the Tenant shall have redecorated the Demised Premises less than eighteen months prior to the expiry of the Term and also to grain varnish clean paper and otherwise decorate in a proper and workmanlike manner all such internal parts of the Demised Premises as have been or ought properly to be so treated and so that in the last year of the Term the tints colours and patterns of all such works of interior decoration shall be such as shall be approved by the Landlord (such approval not to be unreasonably withheld or delayed) (c) Without prejudice to the generality of the foregoing to repair maintain upkeep renew (if beyond economic repair) and service the lift in the Demised Premises using the services of such reputable contractor as shall be approved by the Landlord from time to time and to produce to the Landlord evidence of the service agreement and maintenance inspections and repairs carried out provided always that if the Tenant shall not maintain and regularly service the lift the Landlord shall be entitled on not less than 14 days prior written notice to enter upon the Demised Premises with all necessary workmen and execute such necessary maintenance and servicing at the expense of the Tenant in accordance with the covenants herein contained and the proper and reasonable cost thereof shall be a debt due from the Tenant to the Landlord and be forthwith recoverable by action (d) To maintain and keep in a clean and tidy condition at all times the area for Refuse Bins shown on the Plan 5. TO yield up the Demised Premises with the fixtures and additions thereto at the expiration or sooner determination of the Term in good and substantial repair and condition in accordance with the covenants hereinbefore contained 6. TO permit the Landlord and its agent with or without workmen and others authorised by the Landlord at all reasonable times and upon prior written notice (except in emergency) during the Term to enter upon and view the condition of the Demised Premises and if any breach of covenant shall be found upon such inspection for which the Tenant is liable the Tenant shall as soon as is reasonably practicable commence and diligently proceed to execute all repairs and works properly required to be done by written notice given by the Landlord PROVIDED ALWAYS that if the Tenant shall not within two months after service of such notice (or earlier if appropriate) commence and proceed diligently with the execution of the repairs and works mentioned in such notice it shall be lawful for the Landlord to enter upon the Demised Premises with all necessary workmen and execute such repairs and works 9 11 at the expense of the Tenant in accordance with the covenants herein contained and the proper costs thereof shall be a debt due from the Tenant to the Landlord and be forthwith recoverable by action 7. TO permit the Landlord and its agents and workmen and other persons authorised by the Landlord and the tenants or occupiers of other parts of the Development and adjoining properties belonging to the Landlord upon no less than 48 hours prior written notice (except in emergency) to enter upon the Demised Premises to execute repairs or alterations to the Development or such adjoining properties causing as little inconvenience as possible to the Tenant and its business and making good all damage thereby occasioned to the Demised Premises to the reasonable satisfaction of the Tenant 8.1 NOT to make any structural or external alterations to the Demised Premises nor to erect or to permit or suffer to be erected any new building on the Demised Premises or make or permit or suffer to be made any alteration of or addition to or external projection in front of the Demised Premises whatsoever save that telecommunications or satellite equipment may be erected on the exterior of the Demised Premises subject to all relevant planning consents first being obtained and with the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) 8.2 NOT without the previous consent in writing of the Landlord (such consent not to be unreasonably withheld or delayed) (and then only in accordance with plans previously approved by the Landlord and under the supervision of and to the reasonable satisfaction of the Landlord's surveyor) to alter the internal layout or arrangement of the Demised Premises or to make any internal non-structural alterations or add to or alter any new buildings or alterations erected or made in pursuance of the consent of the Landlord given under this clause or to cut injure or permit or suffer to be cut or injured any of the walls or timbers of the Demised Premises or any alterations or additions thereto or to carry out or permit or suffer to be carried out any development within the meaning of the Planning Acts PROVIDED ALWAYS that the Tenant shall be entitled without any consent from the Landlord to effect internal non-structural alterations to the Demised Premises subject to:- (aa) the Tenant giving no less than 14 days prior written notice to the Landlord of the nature of such proposed alterations and a full description of the proposed alterations to satisfy the Landlord prior to commencement that the works proposed are non-structural; and 10 12 (bb) the Tenant delivering to the Landlord in duplicate the drawings specifications and other details of such alterations within 28 days after their completion 9. AT all times during the Term to comply in all respects with the provisions and requirements of the Planning Acts and all regulations or orders made thereunder whether as to the Authorised User or otherwise and to indemnify and keep indemnified the Landlord against all liabilities whatsoever including all actions proceedings costs expenses claims and demands in respect thereof AND within seven days of receipt by the Tenant (or sooner if appropriate) to produce to the Landlord a copy of any notice order or proposal therefor made given or issued to the Tenant or any sub-tenant by a planning authority under or by virtue of the Planning Acts affecting or relating to the Demised Premises and at the request and cost of the Landlord to make or join with the Landlord in making every such objection representation or appeal against the same as the Landlord shall deem expedient 10. NOT to use or suffer to be used the Demised Premises for any purpose other than the Authorised User specified in the First Schedule PROVIDED ALWAYS that the Tenant hereby acknowledges and admits that notwithstanding the foregoing provisions the Landlord does not thereby or in any other way give or make nor has given or made at any other time any representation or warranty that the Authorised User is or will remain a permitted use within the provisions of the Planning Acts nor shall any consent in writing which the Landlord may hereafter give to any change of use be taken as including any such representation or warranty and that notwithstanding that the Authorised User is not a permitted use within such provisions as aforesaid the Tenant shall remain fully bound and liable to the Landlord in respect of the obligations undertaken by the Tenant by virtue of this Lease without any compensation recompense or relief of any kind whatsoever 11. NOT to do or permit or suffer to be done anything whereby the policy or policies of insurance of the Demised Premises against the Insured Risks (as hereinafter defined) may become void or voidable or whereby the rate of premium thereon may be increased and to repay to the Landlord all sums paid by way of increased premiums and all expenses properly incurred by it in or about any renewal of such policy or policies rendered necessary by a breach of this covenant (all of which payments shall be included in the rent herein reserved) and to comply with all recommendations of the insurers as to fire precautions 12. NOT to do or permit or suffer to be done anything in or upon the Demised Premises or any part thereof which may be or become a nuisance annoyance or 11 13 damage to the Landlord or the tenants or occupiers of the remainder of the Development or of other property in the neighbourhood 13. NOT to exhibit or permit or suffer to be exhibited on any part of the exterior of the Development and the Demised Premises or in the windows or on the external walls rails or fences thereof any placard poster signboard fascia board or fascia sign or other advertisement PROVIDED ALWAYS that the Tenant may with the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) erect on the exterior of the Demised Premises a sign of a size approved by the Landlord consistent with the size of other tenants' signs at the Development specifying the name and nature of the Tenant's business 14. TO comply as soon as reasonably practicable at the Tenant's own expense with any nuisance sanitary or other statutory notices lawfully served by any local or public authority upon either the Landlord or the Tenant so far as the same relate to the Tenant's use or occupation of the Demised Premises and to comply with all the requirements of the Office Shops and Railway Premises Act 1963 and the Fire Precautions Act 1971 and any Act or Acts for the time being amending or replacing the same and to keep the Landlord fully indemnified against all actions proceedings costs expenses claims and demands in respect thereof incurred by the Landlord or for which the Landlord is responsible 15. IN connection with the Defective Premises Act 1972 or any legislation modifying amending or replacing the same to:- (a) notify the Landlord in writing immediately of any defect in the Demised Premises of which the Tenant is aware (b) erect and maintain within the Demised Premises prominent notices of warning of relevant defects within the meaning of Section 4 of the said Act in such form as the Landlord may from time to time reasonably require (c) indemnify the Landlord against any actions proceedings costs expenses claims and demands incurred thereunder by reason of the Tenant's failure to erect and display such notices (d) permit the Landlord and its agent with or without workmen and others at any time on reasonable prior written notice (save in case of emergency) to enter upon the Demised Premises erect and exhibit notices thereon giving warning of relevant defects within the meaning of the said Section 4 in the 12 14 Demised Premises and to install lighting or any other reasonable means of warning or protection against such defects 16. NOT to hold or permit or suffer to be held any sale by auction on the Demised Premises 17. (a) NOT to assign charge or part with possession of part only (as distinct from the whole) of the Demised Premises nor share possession or occupation of the whole of the Demised Premises whatsoever nor to create more than a total of three separate underlettings of the Demised Premises at any one time each of which underlettings must consist of the whole of one or more floors of the Demised Premises and so that for the avoidance of doubt there should at no time be more than three separate occupations within the Demised Premises including the occupation of the Tenant and subject in all such cases to compliance with the provisions in this clause (any sublet part of the Demised Premises hereinafter referred to in this clause is hereinafter referred to as "a permitted part") (b) Not to assign underlet or part with possession of the whole of the Demised Premises for all or any part of the said term except by an assignment or underletting permitted under the provisions of this clause nor to assign underlet or permit the occupation of the Demised Premises or any part thereof by or the vesting of any interest or estate therein in any person firm company or other body or entity which has the right to claim diplomatic immunity or exemption in relation to the observance and performance of the covenants and conditions of and contained in this Lease (c) Not to assign the whole of the Demised Premises without first obtaining the prior written consent of the Landlord (which subject to compliance with the provisions of this clause shall not be unreasonably withheld or delayed) and the Landlord and the Tenant hereby agree that for the purposes of section 19(1A) of the Landlord and the Tenant Act 1927 the Landlord may (without prejudice to the right of the Landlord to refuse consent on any other reasonable ground) withhold consent to an assignment: (i) If any of the following circumstances exist at the date of the application for consent: (A) There is in the reasonable opinion of the Landlord a substantial breach of any of the Tenant's covenants in this Lease 13 15 (B) The proposed assignee is not an Acceptable Assignee and for the purposes of this paragraph an Acceptable Assignee shall in the case of an individual or individuals be a person or persons who in the reasonable opinion of the Landlord will be (1) a respectable and responsible tenant (2) of sound financial standing and capable of performing the Tenant's covenants in this Lease throughout the residue of the Term and (3) is demonstrably capable of performing the Tenant's covenants in this Lease throughout the residue of the Term AND in the case of a limited or public liability company shall be a company which in the reasonable opinion of the Landlord will be (1) a respectable and responsible tenant (2) of sound financial standing and capable of performing the Tenant's covenants in this Lease throughout the residue of the Term and (C) In the reasonable opinion of the Landlord the effect of the proposed assignment would be to diminish or adversely affect the value of the Landlord's interest in the Demised Premises on the assumption (whether or not a fact) that the Landlord wished to sell its interest on the day following completion of the proposed assignment (ii) If the Landlord reasonably requires any one of the following conditions to be complied with and which is not satisfied: (A) On or before completion of any assignment the Tenant shall have entered into an authorized guarantee agreement as defined in clause 16 of the Landlord and Tenant (Covenants) Act of 1995 in the form set out in the Tenth Schedule hereto (B) On or before completion of the assignment to it the assignee shall have deposited with the Landlord an amount equal to the yearly rent for six months payable at the date of the assignment as security for the performance of the Tenant's covenants in this Lease and entered into a deed in the form set out in the Eighth Schedule hereto (C) On or before completion of the assignment if the Landlord shall reasonably so require the assignee shall have procured an acceptable guarantor or guarantors who shall execute and deliver to the Landlord a deed containing direct covenants by such guarantor (or if more than one such guarantor joint and several covenants) with the Landlord in the form of those set out in the Seventh Schedule hereto 14 16 (d) Not to underlet the whole or a permitted part of the Demised Premises without:- (i) obtaining the prior written consent of the Landlord (such consent not to be unreasonably delayed or withheld subject as hereinafter provided) (ii) procuring that any underlease to be granted hereunder shall (A) be granted without a fine or premium and at a rent not less than the rent specified herein (including any rent revision as provided for herein) or the then open market value of the Demised Premises or a due proportion thereof in the case of an underletting of a permitted part (whichever shall be the higher) (B) contain provisions for rent review in an upward direction only at such times as to coincide with the rent reviews provided for in this Lease (C) contain a condition for re-entry on breach of any covenant by the undertenant (D) contain a covenant by the undertenant to perform and observe all the Tenant's covenants and the other provision contained in this Lease (other than the payment of the rents reserved in this Lease) or (E) be in a form previously approved by the Landlord such approval not to be unreasonably withheld or delayed and (F) exclude the provisions of sections 24 to 28 of the Landlord & Tenant Act 1954 and a copy of the Court Order provided to the Landlord (iii) obtaining from the underlessee covenants with the Tenant (which covenants the Tenant hereby covenants to enforce) not to assign transfer mortgage or charge the whole of the Demised Premises without the Landlord's consent subject to the provisions of clause 13(b) herein being complied with in relation to any assignment and the Tenant having procured direct covenants from such assignee with the Landlord on the same terms as are contained in paragraph (v) of this clause 15 17 (iv) obtaining from the underlessee a covenant not to further underlet the whole or any part of the Demised Premises or a permitted part or assign mortgage charge or share possession or occupation of any part of the Demised Premises and (v) obtaining a direct covenant by the underlessee with the Landlord to perform and observe all the Tenant's covenants and the other provisions contained in this Lease (other than the payment of the rent reserved in this Lease) and the proposed underlease (vi) if the Landlord shall reasonably so require the Tenant procuring an acceptable guarantor for any person to whom the Demised Premises are to be underlet who shall execute and deliver to the Landlord a deed containing direct covenants by such guarantor (or if more than one such guarantor joint and several covenants) with the Landlord in such terms as the Landlord shall reasonably stipulate PROVIDED THAT the requirement for a guarantor shall only apply in the case of an underletting for a term exceeding three years (e) to enforce the performance and observance by any such undertenant of the covenants provisions and conditions of any underlease and not at anytime knowingly to waive any breach of the same (f) not to vary the terms of any permitted underlease or agree so to do without the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) (g) to procure that the rents reserved by any permitted underlease shall not be commuted or payable more than one quarter in advance and not to permit the reduction of any rents reserved by any such underlease (h) not to agree any rent review under such underlease without first obtaining the written consent of the Landlord (such consent not to be unreasonably withheld or delayed) (i) nothing in this clause 2(17) shall prevent the Tenant from sharing occupation of the whole or any part of the Demised Premises with any company which is in the same group as the Tenant (as defined by the Landlord & Tenant Act 1954) PROVIDED THAT no relationship of landlord and tenant shall be created or be deemed to exist between such company and the Tenant and the right of any company to share possession of the Demised Premises or any part or parts thereof 16 18 as aforesaid shall forthwith determine upon such company ceasing to be part of the same group or upon the Tenant ceasing to be in occupation of the Demised Premises or upon the determination of this Lease (howsoever determined) whichever shall be the earliest (j) within 21 days of the death during the Term of this Lease of any person who has or shall have guaranteed to the Landlord the payment to the Landlord of the rents and the observance and performance of the covenants on the part of the Tenant herein contained or a person or body (as the case may be) who has guaranteed to the Landlord as mention in sub-clause (d)(vi) herein being adjudged a bankrupt or (being a company) going into liquidation (other than a voluntary liquidation for the purposes of amalgamation or reconstruction of a solvent company) in respect of which the Landlord's consent has first been obtained (such consent not to be unreasonably withheld or delayed) or a receiver administrator administrative receiver or other encumbrancer taking possession of or being appointed in respect of the whole or any part of such person's or body's assets at the Demised Premises or such person or body making any arrangement with creditors for the liquidation of his or its debts by composition or otherwise or any voluntary arrangement as defined in the Insolvency Act 1986 or ceasing or threatening to cease to carry on his or its business as a whole or becoming unable to pay its debts within the meaning of Section 123 of the Insolvency Act 1986 THEN in each such case to give notice thereof to the Landlord and if reasonably so required by the Landlord at the expense of the Tenant within a further 6 weeks to procure some other person reasonably acceptable to the Landlord to execute a guarantee in respect of the payment of the rent and the observance and performance of the covenants in such form as the Landlord may reasonably stipulate 18. WITHIN one month after the execution of any assignment assent transfer charge or underlease or assignment of an underlease of or relating to the Demised Premises to give notice thereof in writing with particulars thereof to the solicitors for the time being of the Landlord and to produce to them a certified copy of the deed evidencing such dealing or transmission (and in case of a devolution of the interest of the Tenant not perfected by an assent within six months of the happening thereof to produce to the said solicitors the grant of representation under which such devolution arises) and to pay to them a registration fee of TWENTY-FIVE POUNDS (pound sterling 25.00) together with Value Added Tax thereon (or such other sum as the said solicitors may reasonably require) in respect of each such dealing or transmission together with such fees as may be payable to any Superior Landlord 19. (a) TO permit the Landlord during the three months immediately 17 19 preceding the determination of this Lease to affix and retain without interference upon any suitable part of the Demised Premises (but not so as to materially affect the access of light or air to the Demised premises) a notice for reletting the same and to permit persons with written authority from the Landlord or its agent at all reasonable times in day time and by not less than 48 hours prior written notice to view the Demised Premises (b) In the even of the Landlord wishing to sell or otherwise deal with the reversion at any time during the said term to permit persons with written authority from the Landlord or the Landlord's Agent at reasonable times in day time and by no less than 48 hours prior written notice to view the Demised Premises and to permit the Landlord to affix "For Sale" notices in a similar manner as the notices referred to in the preceding sub-clause (19a) 20. TO pay to the Landlord all reasonable and properly incurred costs charges and expenses (including solicitors counsels and surveyors and other professional costs and fees and bailiffs costs charges expenses and commission) which may be charged or incurred by the Landlord or any Superior Landlord: (a) in any application by the Tenant to any planning authority or any application by the Tenant to the Landlord for any consent pursuant to the covenants herein contained (b) in any proceedings under Section 146 or 147 of the Law of Property Act 1925 or the preparation or service of notice thereunder (notwithstanding forfeiture is avoided otherwise than by relief granted by the Court) or for the preparation and service of and negotiations consequent upon a Schedule of Dilapidations served at any time during or within one month after the expiry of the Term (c) in connection with the recovery of any arrears of rent and monies payable and recoverable as rent hereunder (d) in connection with the enforcement of any of the Tenant's covenants herein contained AND to keep the Landlord fully indemnified against all actions proceedings reasonably taken and reasonable costs expenses claims and demands whatsoever in respect of all or any of the said applications consents notices negotiations and proceedings PROVIDED ALWAYS that whenever in this Lease the consent or 18 20 license of the Landlord is required in any matter then the Landlord shall be entitled to withhold its consent or license unless and until it has obtained the consent of any Superior Landlord 21. NOT knowingly to allow any encroachment to be made or easement acquired on or over the Demised Premises and in particular not to allow the right of access of light from or over the Demised Premises to any neighboring property to be acquired and if any encroachment or easement shall be made or threatened to be made or if any window or opening shall be opened or made or threatened to be opened or made in any neighboring property which if not obstructed might by lapse of time confer the right to such access of light on the owner of any neighboring property to give notice thereof to the Landlord and to permit it and its servants to enter the Demised Premises and to do all such things as may be proper for the purpose of preventing the making of such encroachment or the acquisition of such easement or right to light 22. TO reimburse the Landlord upon demand the cost of periodic valuations or assessments of the cost of reinstatement of the Demised Premises for insurance purposes provided that the Tenant shall be liable to pay such costs no more than once every two years of the Term 23. (a) IN the event that Value Added Tax shall be chargeable on the Landlord in respect of any supplies made to the Tenant the Tenant shall in addition to any amounts otherwise payable pay the Landlord the amount of the Value Added Tax so chargeable payable on the later of the date of supply and the date of delivery to the Tenant of a VAT invoice and further in the event of the Landlord electing at any time during the Term to waive exemption from Value Added Tax in respect of the Demised Premises to pay the amount of Value Added Tax chargeable on the rents hereby reserved and on the Interim Charge and the Service Charge as defined in the Sixth Schedule as a result of such election having been made and all or any of such payments shall be made by way of rent (b) The Tenant shall indemnify and keep indemnified the Landlord against all losses costs claims demands and liabilities which the Landlord may suffer or incur as a result of the Tenant's inability to recover Value Added Tax in full including in particular any liability on the part of the Landlord to repay any sum or sums to HM Customs & Excise or any inability of the Landlord to recover in full as input tax any Value Added Tax paid by it to a third party 19 21 (c) The Tenant shall inform the Landlord at any time where the Tenant becomes an entity which is not a taxable entity for the purposes of the Value Added Tax Act 1994 or if the rate at which the Tenant is able to recover Value Added Tax (in respect of supplies made from the Demised Premises or generally) altering such as to permit or prevent (as the case may be) any election made or which might be made by the Landlord under paragraph 2 of Schedule 10 of the Value Added Tax Act 1995 applying to the grant of this Lease or to the supplies made to the Tenant under this Lease 24. (a) IF the rent hereby reserved or any part thereof or any other sum payable by the Tenant to the Landlord pursuant to the provisions of this Lease shall not have been paid upon the date whereon payment of the same was due then the Tenant shall pay to the Landlord interest upon such rent or other sum at the Prescribed Rate until the said rent or other sum shall have been paid (b) By "Prescribed Rate" is meant Four per centum (4%) over the base rate published from time to time of National Westminster Bank plc or if the same shall cease to exist or publish a base rate during the Term of such other London Clearing Bank as the Landlord may nominate (c) Interest payable by the Tenant pursuant to this sub-clause shall be calculated from day to day (d) Interest payable by the Tenant upon arrears of rent shall not itself be deemed to be rent 25. NOT to use the Car Parking Spaces for any purposes whatsoever other than (i) for loading and unloading or (ii) to park thereon no more than six roadworthy vehicles and to keep the Car Parking Spaces clean and tidy at all times 26. NOT to cause or permit any obstruction of any of the common accessways within the Development 27. TO comply with all the Landlord's covenants in the Second Floor Lease except insofar as such covenants are the responsibility of the Landlord in this Lease and to keep the Landlord indemnified in respect of any claims in respect of any breach of this covenant 20 22 THE FOURTH SCHEDULE The Covenants of the Landlord 1. THAT the Tenant paying the rents hereby reserved and observing and performing the several covenants and stipulations herein on its part contained shall peaceably hold and enjoy the Demised Premises during the Term without any lawful interruption by the Landlord or any person rightfully claiming under or in trust for it 2. TO maintain repair amend renew cleanse repaint and redecorate as and when the Landlord reasonably thinks fit and otherwise keep in good and tenantable condition (a) the boundary walls and fences of and in the curtilage of the Development (b) the Access Road and the Common Parts of the Development (c) the Car Parking Spaces PROVIDED THAT the Landlord shall not be liable to the Tenant for any defect or want of repair hereinbefore mentioned unless the Landlord has had notice thereof nor in respect of any obligations hereunder that is within the ambit of any of the Tenant's covenants hereinbefore contained. 3. TO maintain in good working order and repair all Conduits in under and upon the Development and which shall serve the Demised Premises (excluding nevertheless any which exclusively serve the Demised Premises) 4. SO far as possible and subject always as provided in Clause 7 of the Fifth Schedule to perform the following services: (a) to keep the Common Parts of the Development clean and tidy (b) to supply maintain repair and renew as need be such alarms and firefighting equipment in the Common Parts of the Development as the Landlord may reasonably consider necessary or as may be required to be supplied and maintained by the Landlord by statute or by the fire authority for the district 21 23 (c) to supply provide purchase maintain renew replace repair and keep in good and serviceable order and condition all appurtenances appointments fixtures and fittings bins receptacles tools appliances materials and other things which the Landlord may reasonably in the interests of good estate management deem necessary for the maintenance upkeep or cleanliness of the Development (d) to employ such staff as the Landlord may at its discretion reasonably deem necessary to enable the Landlord to carry out or maintain the said services or any of them and for the general conduct management and security of the Common Parts of the Development. PROVIDED ALWAYS that the Landlord may at the Landlord's discretion add to extend vary or alter the rendering of the said services or any of them from time to time if the Landlord shall reasonably deem it desirable so to do for the more convenient or efficient conduct and management of the Development. 5. TO insure and keep insured in the full reinstatement value the Demised Premises and the Common Parts of the Development and the Landlord's fixtures therein against loss or damage by fire lightning explosion aircraft (or other aerial device) or articles dropped therefrom riot civil commotion malicious person earthquake storm tempest flood bursting and overflowing of water pipes tanks and other apparatus impact by road vehicles and such other risks as the Landlord may deem desirable or expedient including loss of rent hereunder for up to four years and architects' and surveyors' fees and demolition and clearance and similar expenses ("the Insured Risks") in some insurance office or with underwriters of repute in the full rebuilding value thereof or such greater sum as required by the Tenant and upon request by the Tenant the Landlord shall supply the Tenant no more than once in any year with a copy of the then current insurance schedule and shall procure that the interest of the Tenant is noted on the policy and to produce to the Tenant a copy of such policy and of the annual premium receipt and in case of destruction or of damage to the Demised Premises or the Common Parts of the Development or any part thereof from any cause covered by such insurance to lay out all monies received in respect of such insurance (other than monies received for loss of rent and architects' and surveyors' fees and for demolition and clearance expenses) in rebuilding and reinstating the same as soon as reasonably practicable PROVIDED ALWAYS that if such rebuilding or reinstating be prevented or frustrated all such insurance monies (other than as aforesaid) shall be retained by the Landlord and this Lease shall thereupon determine 22 24 6. TO bear pay and discharge all existing and future rates (including water rates) taxes duties assessments charges impositions and outgoings whatsoever assessed charged and imposed upon the Common Parts of the Development THE FIFTH SCHEDULE Proviso Agreements and Declarations 1.1 AT any time after any of the following events shall happen the Landlord may re-enter upon all or any parts of the Demised Premises: 1.1.1 the whole or any part of the rent shall be unpaid for twenty one days after becoming payable whether formally demanded or not or 1.1.2 there shall be any breach of any of the Tenant's covenants or 1.1.3 the Tenant or any surety for the Tenant (being a company) shall enter into liquidation whether compulsory or voluntary (save for the liquidation of a solvent company for the purpose of amalgamation or reconstruction) or suffers an administrative receiver to be appointed or enters into a voluntary arrangement as defined in Section 1 of the Insolvency Act of 1986 or does or suffers anything which would entitle a receiver to take possession of any of its assets or does or suffers anything which would entitle any person to present a petition for winding up or apply for an administration order to cease to exist or is dissolved or 1.1.4 the Tenant or any surety for the Tenant (being an individual) shall be unable to pay a debt or have no reasonable prospect of being able to pay a debt within the meaning of Section 268 of the Insolvency Act 1986 or makes an application to the Court for an interim order under Section 253 of the Insolvency Act 1986 or does anything which would entitle a petition for a bankruptcy order to be made or makes any assignment for the benefit of or enters into any arrangement with his creditors either by composition or otherwise PROVIDED ALWAYS that if any of the events in paragraphs 1.1.3 or 1.1.4 shall occur to a surety of the Tenant rather than the Tenant or if the Surety shall die then the Landlord may not re-enter under paragraph 1.1 for a period of two months thereafter PROVIDED FURTHER that if the Tenant within such period shall provide the Landlord with an alternative 23 25 surety reasonably acceptable to the Landlord or a security deposit for rent equivalent to six months value of the then passing rent such deposit to be in the form of the Ninth Schedule hereto the Landlord shall not be entitled to re-enter the Demised Premises because of such an event having occurred to a surety 1.2 If the Landlord shall re-enter in accordance with Clause 1.1 of this Schedule then this Lease shall thereupon terminate but without prejudice to any right of action or remedy of the Landlord in respect of any breach non-observance or non-performance of any of the Tenant's covenants or the conditions herein contained 2.1 IN case the Demised Premises or any part thereof of any necessary access thereto shall at any time during the Term be so damaged or destroyed by the Insured Risks so as to be unfit for occupation and use then (unless the insurance money shall be wholly or partially irrecoverable by reason solely or in part of any act or default of the Tenant) (or where such loss of insurance proceeds does occur the Tenant promptly on demand makes good that shortfall) the rent hereby reserved including any service rent and insurance rent or a fair proportion thereof according to the nature and extent of the damage sustained shall be suspended for the period for which loss of rent insurance is maintained under Clause 5 of the Fourth Schedule or if earlier until the Demised Premises shall again be rendered fit for occupation and use and any dispute with reference to this proviso shall be determined by the Landlord's Surveyor whose decision shall be final and binding on the parties hereto 2.2 PROVIDED THAT if the Demised Premises shall be destroyed or damaged by any of the Insured Risks so as to become unfit for occupation and use and the damage is not made good within the period in respect of which loss-of-rent insurance cover is effected then the Tenant or the Landlord may on the expiration of such period by written notice given to the other elect to determine this Lease and upon the service of such notice (PROVIDED ALWAYS that in the case of notice given by the Tenant to the Landlord there is no material subsisting breach of the Tenant's covenants hereunder) this Lease shall forthwith determine and the parties hereto shall forthwith be released from all and singular their further duties and obligations hereunder but without prejudice to the rights of either party in respect of any antecedent breach of any of the covenants herein contained 3. IT is hereby agreed between the Landlord and the Tenant that the provisions for compensation contained in Section 37 of the Landlord and Tenant Act of 1954 shall not apply to this Lease except in the events specified in Section 38(2) of that Act 24 26 4. THIS Lease shall incorporate the regulations as to notices contained in Section 196 of the Law of Property Act 1925 as amended by the Recorded Delivery Service Act 1962. 5. THE expression "the Planning Acts" shall in this Lease include any Act or Acts for the time being in force amending or replacing the Town and Country Planning Act 1990 the Planning (Listed Buildings and Conservation Areas) Act 1990 the Listed Buildings Act 1990 and the Planning (Consequential Provisions) Act 1990 and any other legislation of a similar nature and any statutory modification or reenactment thereof for the time being in force and any orders instruments plans rules regulations permissions consents and directives made under or in pursuance of the said Acts or any of them 6. ANY reference to a statute (whether specifically named or not) shall include any amendment or re-enactment of it for the time being in force and all instruments orders notices regulations directions bye-laws permissions and plans for the time being made issued or given under it or deriving validity from it 7. NOTWITHSTANDING anything herein contained the Landlord shall not be liable to the Tenant nor shall the Tenant have any claim against the Landlord in respect of:- (a) any interruption in any of the services hereinbefore mentioned by reason of necessary repair or maintenance of any installations or apparatus or damage thereto or destruction thereof by fire water act of god or other cause beyond the Landlord's control or by reason of mechanical or other defect or breakdown or frost or other inclement conditions or unavoidable shortage of fuel materials water or labour or (b) any act omission or negligence of any porter attendant or other servant of the Landlord in or about the performance or purported performance of any duty relating to the provision of the said services or any of them THE SIXTH SCHEDULE The Service Charge 1. THE Service Charge hereinbefore made payable means 29.48 per centum of 25 27 the Annual Service Cost (as hereinafter defined) in respect of each calendar year running from the 1st day of January and ending on the 31st day of December next following or such other period as the Landlord may determine ("the Accounting Period") SAVE THAT in respect of any part of the Annual Service Cost as under paragraph 3(a) to (g) of this Schedule relates directly to the Access Road and the Car Parking Spaces and the area edged yellow on Plan B the Service Charge means 55.36% of such part of the Annual Service Cost as so relates and further in respect of any part of the Annual Service Cost which relates directly to costs incurred in complying with the Landlord's insurance obligations hereinbefore contained in paragraph 5 of the Fourth Schedule (other than so far as the same relates to the Common Parts of the Development) the Service Charge means 100% PROVIDED ALWAYS that for the period ending on 8th November 1997 the Tenant shall not be required to pay any greater sum for that period than calculated at the rate of pounds sterling 1.25 per square foot for the Demised Premises. 2. THE Interim Charge hereinbefore made payable means such sum to be paid on account of the Service Charge in respect of each Accounting Period as the Landlord shall specify to be a fair and reasonable payment. The first payment of the Interim Charge (on account of the Service Charge for the Accounting Period during which this Lease is executed) shall be made on the execution hereof and thereafter shall be by equal payments in advance on the twenty fourth day of June and the Twenty fifth day of December in each year and in case of default shall be recoverable as rent in arrear 3. THE Annual Service Cost in each Accounting Period shall be the aggregate of the sums actually expended or liabilities incurred by the Landlord in connection with the following matters:- (a) the cost of the observance and performance of the covenants on the part of the Landlord hereinbefore contained in paragraphs 2 3 4 5 and 6 of the Fourth Schedule (b) the reasonable fees charges and expenses payable to any qualified person whom the Landlord may reasonably employ to inspect repair and keep in running order the alarm systems including the Landlord's costs from time to time incurred in entering into a contract or contracts in usual form with any such qualified persons (c) the reasonable costs of taking out and maintaining in force an effective insurance policy or policies against any and every liability of the Landlord 26 28 for injury to or death of any person (including every agent servant and workman of the Landlord) and damage to or destruction of the property of any such person arising out of the management and/or maintenance of the Common Parts of the Development and in particular but without prejudice to the generality of the foregoing the cost of insurance against such injury death damage or destructoin as aforesaid due to the act neglect default or misconduct of any agent servant or workman of the Landlord employed in connection with the management and/or maintenance of the Common Parts of the Development (d) in addition to the wages from time to time payable by the Landlord the employers National Insurance and Industrial Injuries Contributions and any taxes or similar levies from time to time payable by the employer in respect of all agents servants and workmen employed by the Landlord solely in connection with the performance and observance of any of the covenants on its part herein contained (e) the reasonable cost of the carrying out of other work or services of any kind whatsoever which the Landlord may reasonably consider desirable for the purpose of maintaining or improving serves in the Development (f) all reasonable fees and expenses payable to any person firm or company whom the Landlord may from time to time reasonably employ in connection with the management and/or maintenance of the Common Parts of the Development including the cost of preparing statements of the Annual Service Cost and including legal costs incurred relating to the management and maintenance of the Development and in the collection of service charges and rent (g) the cost of complying with all statutory requirements regulations or requirements of any competent local or other authority relating to the Common Parts of the Development 4. THE Landlord shall be entitled to make such reasonable provision for a reserve for anticipated future expenditure to be incurred in the performance of the covenants on the part of the Landlord contained herein as the Landlord may reasonably deem appropriate and the amounts so provided shall form part of the Annual Service Cost 5. THE Landlord will use its best endeavours to maintain the Annual Service 27 29 Cost at the lowest reasonable figure consistent with due performance and observance of its obligations hereunder but the Tenant shall not be entitled to object to any items comprised therein by the reason only that the materials work or service in question might have been provided or performed at a lower cost 6. AS soon as practicable after the end of each Accounting Period the Landlord will submit to the Tenant an itemised statement certified by the Managing Agents for the time being to the Landlord containing the following information:- (a) the amount of the Annual Service Cost (b) the amount of the Interim Charge paid by the Tenant in respect of that Accounting Period together with any surplus carried forward from the previous Accounting Period (c) the amount of the Service Charge in respect of that Accounting Period and of any excess or deficiency of the Service Charge over the Interim Charge 7. THE Tenant shall be entitled within twenty-eight days of the receipt of such statement to inspect the vouchers and receipts for all items included in such statement 8. IF the Interim Charge paid by the Tenant in respect of any Accounting Period exceeds the Service Charge for that period the surplus of the Interim Charge so paid over the above the Service Charge shall be carried forward by the Landlord and credited to the account of the Tenant in computing the Service Charge in succeeding Accounting Periods as hereinbefore provided except in respect of the final year of the Term (howsoever determined) when any such overpayment by the Tenant shall be repaid to the Tenant within 21 days of the issue of the aforementioned statement subject to the right of the Landlord to set off such sum against any sums due by the Tenant under its covenants herein 9. IF the Service Charge in respect of any Accounting Period exceeds the Interim Charge paid by the Tenant in respect of that Accounting Period together with any surplus from previous years carried forward as aforesaid then the Tenant shall pay the excess to the Landlord within twenty-one days of service upon the Tenant of the statement referred to above and in case of default the same shall be recoverable from the Tenant as rent in arrear 28 30 THE SEVENTH SCHEDULE The Covenant of the Surety 1. THE Surety in consideration of the demise hereinbefore contained having been made at his request HEREBY COVENANTS with the Landlord that the Tenant will throughout the Term hereby created or any extension or continuation thereof under Section 24 of the Landlord and Tenant Act 1954 or any statutory modification thereof for the time being in force or otherwise by statute or common law pay the said rents hereby reserved or subsequently increased on the days and in manner aforesaid and will perform and observe all the Tenant's covenants hereinbefore contained and that in case of default in such payment of rents or in the performance or observance of such covenants as aforesaid the Surety will pay and make good to the Landlord on demand all losses damages costs and expenses thereby arising or incurred by the Landlord notwithstanding:- (a) any neglect or forbearance of the Landlord in endeavouring to obtain payment or to enforce performance of the several stipulations herein on the Tenant's part contained (and any time which may be given to the Tenant by the Landlord shall not release or exonerate or in any way affect the liability of the Surety under this covenant) (b) that the terms of this Lease have been varied by agreement between the Landlord and the Tenant where such variation is immaterial and not prejudicial to the Surety (c) any other act or thing whereby but for this provision the Surety would have been released 2. IF a liquidator or trustee in bankruptcy shall disclaim this Lease and if the Landlord shall by notice in writing have to required the Surety will take from the Landlord a lease of the Demised Premises for a term commensurate with the residue of the Term which would have remained had there been no disclaimer at the same rent and subject to substantially the same covenants and conditions as are reserved by and contained in this Lease such lease to take effect from the date of such disclaimer and in such case the surety shall without delay take or join in all acts necessary for the grant of such new lease and will pay all reasonable and proper costs relating to the grant of such new lease and execute and deliver to the Landlord a counterpart thereof 29 31 3. IF the Landlord shall not require the Surety to take a lease of the Demised Premises pursuant to Clause 2 above the Surety shall nevertheless upon demand pay to the Landlord a sum equal to the rent that would have been payable under this Lease but for the disclaimer or other event putting an end to the effect of the Lease in respect of that period from the date of the said disclaimer or the Lease ceasing to have effect as aforesaid until the expiration of three months therefrom or until the Demised Premises shall have been relet by the Landlord whichever shall first occur THE EIGHTH SCHEDULE Form of Rent Deposit Deed THIS DEED is made the day of 199 BETWEEN:- (1) THE Landlord (which expression shall mean only the person for the time being in whom the reversion immediately expectant upon the determination of the Lease is vested) who is currently [ ] (2) THE Tenant (which expression shall mean only the person in whom the benefit of the term of the Lease is vested) who is currently [ ] SUPPLEMENTAL TO - A Lease ("the Lease") date the day of 199 and made between MARLDOWN LIMITED of the first part of the second part and of the third part relating to the premises known as NOW THIS DEED WITNESSETH as follows: 1.1 "The Initial Deposit" shall mean a sum equivalent to one half of the annual rent payable at the date hereof or such greater sum as shall represent one half of the annual rent from time to time reserved under the Lease (excluding any rent-free period) 1.2 "The Deposit Account" means the interest earning deposit account opened by 30 32 the Landlord's Solicitors (as hereinafter defined) at one of the London Clearing Banks ("the Bank") on or before the date of this Deed and in which the Landlord's Solicitors shall place the Initial Deposit 1.3 "The Deposit Balance" means the amount from time to time standing to the credit of the Deposit Account 2. The Landlord and the Tenant irrevocably instruct the Landlord's Solicitors ("the Landlord's Solicitors") by this Deed to act as stakeholders the operation of the Deposit Account in accordance with this Deed and in particular to act in accordance with this Deed in: 2.1 the making of payments into the Deposit Account 2.2 the withdrawal of sums from the Deposit Account and 2.3 accounting to the Landlord and the Tenant for money due to either of them from the Deposit Account 3.1 The Tenant shall on the execution hereof deposit with the Landlord's Solicitors the Initial Deposit as security for the due performance and observance of the covenants on the part of the Tenant contained in the Lease without prejudice to the rights and remedies of the Landlord under the Lease 3.2 The Landlord's Solicitors are instructed to forthwith pay the Initial Deposit into and to keep it in the Deposit Account and the Tenant may with the Landlord's prior agreement (such agreement not to be unreasonably withheld) authorise the Landlord's Solicitors to vary the terms of the Deposit Account 4.1 The interest which shall accrue upon the Deposit Balance shall be added to the Deposit Balance and shall remain in the Deposit Account and shall be dealt with as part of the Deposit Balance 4.2 The Tenant (acting on its own behalf or by its Solicitors) shall after reasonable intervals following the date of this Deed or any payment made to the Tenant pursuant to this Clause be entitled by notice in writing to require the Landlord's Solicitors to draw upon the Deposit Account in payment to the Tenant of an amount equal to the Interest which at the date of such notice has accrued to the Deposit Balance. 31 33 5. The Landlord shall whenever so reasonably requested by the Tenant supply to the Tenant copies of all statements and other information relating to the Deposit Account as the Tenant may from time to time reasonably require 6. The Tenant hereby covenants with the Landlord as follows: 6.1 Until the release of the Deposit Balance or appropriation from the Deposit Balance under Clause 7 hereof to maintain the Deposit held by the Landlord's Solicitors in an amount equal (excluding any interest accrued to the Deposit) to one half of the annual rent from time to time reserved under the Lease, and 6.2 If the rent reserved by the Lease shall be increased pursuant to the provisions for the review of rent therein contained or if any monies shall be appropriated from the Deposit Balance by the Landlord in the manner hereinafter authorised under Clause 7 hereof within twenty-one days of written request from the Landlord so to do to deposit with the Landlord's Solicitors an amount necessary to maintain the Deposit Balance at the appropriate level 7.1 The Landlord shall be entitled at any time to require the Landlord's Solicitors to draw from the Deposit Account in payment to the Landlord of any amount not exceeding any sum then due to the Landlord arising out of default by the Tenant if: 7.1.1 The Landlord shall have previously given to the Tenant not less than fourteen days notice in writing of the Landlord's intention to procure any withdrawal from the Deposit Account and the notice shall have specified the default to which the withdrawal relates, and; 7.1.2 The Tenant shall not have remedied the default complained of or commenced and be diligently proceeding to remedy the default to the reasonable satisfaction of the Landlord by the expiration of the notice. 8. The Deposit Balance (including interest thereon) and unpaid accrued interest thereon will be released to the Tenant by the Landlord following whichever shall be the earlier of: 8.1 The completion of a lawful assignment of the Premises by the Tenant with the consent of the Landlord in accordance with the terms of the Lease to an assignee who shall (if reasonably required by the Landlord) provide an equivalent deposit in the terms of this Deed whereupon the provisions of this Deed shall automatically cease and determine 32 34 8.2 The expiry or sooner determination of the Term created by the Lease subject to the Landlord's prior right of withdrawal under Clause 7.1 hereof in the event of any default by the Tenant whereupon the provisions of this Deed shall automatically cease and determine 8.3 In the event that the Lease becomes vested in a company which is registered in the United Kingdom such company providing the Landlord with its most recent three consecutive years accounts audited by a Chartered Accountant the most recent of which must have been approved by the directors of such company not more than three months before such accounts are provided to the Landlord and each set of such accounts showing net profits amounting to not less than three times the annual rent first reserved by the Lease in the year to which the said accounts relate whereupon the provision of this Deed shall automatically cease and determine 9. DEALINGS WITH REVERSION In the event of the Landlord assigning subletting or otherwise disposing of the reversion expectant upon the termination of the Term created by the Lease it is hereby agreed that the Landlord will procure that such persons entitled to the reversion expectant upon the termination of the Term created by the Lease shall enter into a new Deed of Rent Deposit and that the Tenant will at the Landlord's cost following a written request from the Landlord so to do and upon the monies then standing in the Deposit Account enter into a new Deed of Rent Deposit in the same terms (mutatis mutandis) as this Deed save that the expression "the Initial Deposit" shall mean half the yearly rent then reserved and the term "the Landlord's Solicitors" shall mean the solicitors acting on behalf of the part in whom the term expectant upon the determination of the said term is vested and the Deposit Account shall be held at the Bank or such bank as the Solicitors for the Assignee of the reversion shall reasonably require. 10. The Tenant hereby 10.1 Acknowledges that the Landlord's right of re-entry contained in the Lease shall be exercisable in the event of any breach by the Tenant of any of the terms of this Deed to the intent that all covenants herein shall be deemed to be covenants contained in the Lease 10.2 Hereby agrees to charge the Rent Deposit to the Landlord as security for the performance of its obligations in the Lease and in this Deed 33 35 THE NINTH SCHEDULE Rent and Rent Review 1. DEFINITIONS 1.1 The terms defined in this paragraph shall for all purposes of this Schedule have the meanings specified 1.2 "Review Dates" mean the 3 day of March in the year 2002 and the penultimate day of the Term and "Review Date" means any one of the Review Dates 1.3 "Review Period" means the period between any Review Date and the day prior to next Review Date (inclusive) 1.4 "the Assumptions" means the following assumptions at the relevant Review Date: 1.4.1 that no work has been carried out on the Demised Premises by the Tenant its subtenants or their predecessors in title during the Term which has diminished the rental value of the Demised Premises other than work carried out in compliance with paragraph 14 of the Third Schedule 1.4.2 that if the Demised Premises have been destroyed or damaged they have been fully restored 1.4.3 that the covenants contained in this Lease on the part of the Landlord and the Tenant have been fully performed and observed 1.4.4 that the Demised Premises are available to let by a willing landlord to a willing tenant by one lease without a premium being paid by either party and with vacant possession 1.4.5 that the Demised Premises are ready for and fitted out and equipped for immediate occupation and use for the purpose or purposes required by the willing tenant referred to in paragraph 1.4.4 and that all the services required for such occupation and use are connected to the Demised Premises 34 36 1.4.6 that the Lease referred to in paragraph 1.4.4 contains the same terms at Lease except the amount of the Initial Rent and any rent-free period to which a new tenant may otherwise be entitled but including the provisions for rent review on the Review Dates and at similar intervals after the last Review Date and except as set out in paragraphs 1.4.7 and 1.4.8 1.4.7 that the term of the Lease referred to in paragraph 1.3.4 is equal in length to a term of 10 years and that such term begins on the relevant Review Date and that the rent shall commence to be payable from that date and that the years during which the Tenant covenants to decorate the Demised Premises are at similar intervals after the beginning of the term of such Lease as those specified in this Lease 1.4.8 on the basis that the User is as permitted in this Lease 1.5 "the Disregarded Matters" means: 1.5.1 any effect on rent of the fact that the Tenant its subtenants or their respective predecessors in title have been in occupation of the Demised Premises 1.5.2 any goodwill attached to the Demised Premises by reason of the carrying on at the Demised Premises of the business of the Tenant its subtenants or their predecessors in title or other persons lawfully at the Demised Premises in their respective businesses 1.5.3 any increase in rental value of the Demised Premises attributable to the existence at the relevant Review Date of improvement to the Demised Premises or any part thereof carried out otherwise than in pursuance of an obligation to the Landlord or its predecessors in title under this Lease 1.6 "the President" means the President for the time being of the Royal Institution of Chartered Surveyors the duly appointed deputy of the President or any person authorised by the President to make appointments on his behalf 1.7 "the Surveyor" means a person appointed by agreement between the parties or in the absence of agreement within 14 days of one party giving notice to the other of its nomination or nominations nominated by the President on the application of either party made not earlier than 6 months before the relevant Review Date or at any time afterwards 35 37 2. ASCERTAINING THE RENT 2.1 The Rent shall be: 2.1.1 until the first Review Date the Rent set out in clause 1 hereof and 2.1.2 during each successive Review Period a rent equal to the greater of:- 2.1.2.1 the Rent payable immediately prior to the relevant Review Date or if payment of Rent has been suspended pursuant to the proviso to that effect contained in this Lease the Rent which would have been payable had there been no such suspension or 2.1.2.2 such Rent as may be ascertained in accordance with this Schedule 2.2 Such revised Rent for any Review Period may be agreed in writing at any time between the parties or (in the absence of agreement) will be determined by the Surveyor 2.3 The revised Rent to be determined by the Surveyor shall be such as he shall decide to be the rent at which the Demised Premises might reasonably be expected to be let on the open market at the relevant Review Date making the Assumptions but disregarding the Disregarded Matters 2.4 At the sole discretion of the Landlord the Surveyor shall act either as an expert or as an arbitrator and if the Surveyor nominated pursuant to paragraph 1.6 shall die or decline to act the President may on the application of either party discharge the Surveyor and appoint another in his place 2.5 Whenever the rent shall have been ascertained in accordance with this Schedule memoranda to this effect shall be signed by or on behalf of the parties and annexed to this Lease and its counterpart and the parties shall bear their own costs in this respect 36 38 3. ARRANGEMENTS PENDING ASCERTAINMENT OF REVISED RENT 3.1 If the revised Rent payable during any Review Period has not been ascertained by the relevant Review Date Rent shall continue to be payable at the rate previously payable such payments being on account of the Rent for that Review Period 3.2 If one party shall upon publication of the Surveyor's award pay all the Surveyor's fees and expenses such party shall be entitled to recover (in default of payment within 21 days of a demand to that effect in the case of the Landlord as Rent in arrears or in the case of the Tenant by deduction from Rent) such proportion of them (if any) as the Surveyor shall award against the other party 4. PAYMENT OF REVISED RENT 4.1 If the revised Rent shall be ascertained on or before the relevant Review Date and that date is not a quarter day the Tenant shall on that Review Date pay to the Landlord the amount by which one quarter's Rent at the rate payable on the immediately preceding quarter day is less than one quarter's Rent at the rate of the revised Rent apportioned on a daily basis for that part of the quarter during which the revised Rent is payable. 4.2 If the revised Rent payable during any Review Period has not been ascertained by the relevant Review Date then immediately after the date when the same has been agreed between the parties or the date upon which the Surveyor's award shall be received by one party the Tenant shall pay to the Landlord: 4.2.1 any shortfall between the Rent which would have been paid on the Review Date and on any subsequent quarter days had the revised Rent been ascertained on or before the relevant Review Date and the payments made by the Tenant on account and 4.2.2 interest at the base lending rate of the bank referred to in or nominated pursuant to clause 2(2)(d) prevailing on the day upon which the shortfall is paid in respect of each instalment of Rent due on or after the Review Date on the amount by which the instalment of revised rent which would have been paid on the relevant Review Date or such quarter day exceeds the amount paid on account and such interest shall be payable for the period from the date upon which the instalment was due up to the date of payment of the shortfall 37 39 5. ARRANGEMENTS WHEN INCREASING RENT PREVENTED ETC 5.1 If at any of the Review Dates there shall be in force a statute which shall prevent restrict or modify the Landlord's right to review the Rent in accordance with this Lease and/or to recover any increase in the Rent the Landlord shall when such restriction or modification is removed relaxed or modified be entitled (but without prejudice to its right (if any) to recover any Rent the payment of which has only been deferred by law) on giving not less than one month's nor more than 3 months' notice in writing to the Tenant at any time within 6 months of the restriction or modification being removed relaxed or modified to invoke the provisions of paragraph 5.2 5.2 Upon the service of a notice pursuant to paragraph 5.1 the Landlord shall be entitled: 5.2.1 to proceed with any review of the Rent which may have been prevented or further to review the Rent in respect of any review where the Landlord's right was restricted or modified and the date of expiry of such notice shall be deemed for the purposes of this Lease to be a Review Date (provided that without prejudice to the operation of this paragraph nothing in this paragraph shall be construed as varying any subsequent Review Dates except that the revised Rent shall nevertheless be calculated by reference to rental values at the Review Date subjected to the rent restriction and provided that there shall be no more than one additional rent review between any two Review Dates 5.2.2 to recover any increase in Rent with effect from the earliest date permitted by law 6. Time shall not be of the essence in relation to the machinery for fixing the rent 38 40 THE TENTH SCHEDULE AUTHORIZED GUARANTEE AGREEMENT THIS DEED is made the day of 19 Between ("the Lessor") and of ("the Lessee") INTRODUCTION (A) The term granted by the Lease is vested in the Lessee and the Lessor is entitled to the reversion (B) The Lease contains a covenant against assignment without the written consent of the Lessor and provide that the consent may be given subject to a condition that the Lessee enters into an authorized guarantee agreement (as defined in the Act) (C) The Lessee has requested the Lessor's consent to the assignment of the Lease to the Assignee which the Lessor has agreed to grant subject to the completion of this Deed pursuant to that condition AGREED TERMS 1. In this Deed (including the introduction) the following words and expressions shall have the following meaning: "Act" means the Landlord & Tenant (Covenants) Act 1995 "Assignee" means "Lease" means the lease of the Demised Premises dated made between "Demised Premises" means 39 41 2. The Lessee hereby covenants with the Lessor as a primary obligation (a) that the Assignee shall at all times duly pay the rents reserved by the Lease in the manner and at the time therein specified and shall duly perform and observe all the Lessee's covenants contained in the Lease until such times as the Assignee shall be released from those covenants by virtue of the Act and (b) to indemnify the Lessor against all claims demands losses damages liability costs fees and expenses whatsoever sustained by the Lessor by reason of or arising in any way directly or indirectly out of any act or default by the Assignee in the performance and observance of any of the Lessee's covenants contained in the lease 3. None of the following or any combination thereof shall release determine discharge or in any way lessen or affect the liability of the Lessee as principal debtor under this Deed or otherwise prejudice or affect the right of the Lessor to recover from the Lessee to the full extent of this guarantee:- (a) any neglect delay or forbearance of the Lessor in endeavouring to obtain payment of the rents or other amounts reserved by the lease or in enforcing the performance or observance of any of the obligations of the Assignee under the Lease (b) any refusal by the Lessor to accept rent tended by or on behalf of the Lessee at a time when the Lessor was entitled (or would after the service of a notice under Section 146 of the Law of Property Act 1925 have been entitled) to re-enter the Demised Premises (c) any extension of time given by the Lessor to the Lessee or the Assignee (d) to the extent permitted by the Act any variation of the terms of this Lease or the transfer of the Lessor's reversion (e) any reviews of the rent payable under the Lease (f) any change in the constitution structure or powers of either the lessee any surety or the liquidation administration receivership or bankruptcy (as the case may be) of either the Lessee or the Assignee 40 42 (g) any legal limitation or any immunity, disability or incapacity of the Assignee (whether or not known to the Lessor) or the fact that any dealings with the Lessor by the Lessee may be outside or in excess of the powers of the Assignee, or (h) any other act, omission, matter or thing whatsoever whereby but for this provision the Lessee would be exonerated either wholly or in part (other than a re lease under seal given by the Lessor) 4. The Lessee hereby further covenants with the Lessor that (i) if there should be a disclaimer or surrender of this Lease, whether by a liquidator, trustee in bankruptcy, the Crown, or otherwise, (ii) if this Lease shall be forfeited, or (iii) if the Assignee (being a company) shall be dissolved or if otherwise a corporate Lessee shall cease to exist THEN the Lessee shall, if the Lessor by notice in writing given to the Lessee within 6 months after such disclaimer or other event so requires accept from and execute and deliver to the Lessor a counterpart of a new lease of the Demised Premises for a term commencing on the date of the disclaimer or other event and continuing for the residue then remaining unexpired of the term, such new lease to be at the cost of the Lessee and to be at the same rents and subject to the same covenants, conditions and provisions as are contained in the Lease 5. This guarantee shall enure for the benefit of the successors and assigns of the Lessor under the Lease without the necessity for any assignment thereof. IN WITNESS whereof this agreement has been executed and delivered as a deed the 41 43 day and year first above written SIGNED AND DELIVERED AS A DEED ) by the aforementioned MARLDOWN ) LIMITED acting by a director and ) secretary or two directors:- ) /s/ M. D. POSEN - ---------------------------------- Director M. D. Posen /s/ M. T. HARRWON - ---------------------------------- Director M. T. Harrwon 42 44 DATED _____________________ 1997 MARLDOWN LIMITED - and - MICROMUSE plc - and - CHRISTOPER JOHN DAWES ------------------------- L E A S E relating to Gladstone House, Adelaide Road, London SW18 ------------------------- EX-10.7 9 OFFICE LEASE DATED AS OF MARCH 3, 1997 1 EXHIBIT 10.7 Page 1 Dated 3rd March 1993 B E T W E E N GUILDQUOTE LIMITED (1) -a n d- MICROMUSE LIMITED (2) -a n d- CHRISTOPHER JOHN DAWES (3) - -------------------------------------------------------------------------------- L E A S E relating to Disraeli House, Adelaide Road, London, SW15 - -------------------------------------------------------------------------------- Russell-Cooke Potter & Chapman 2 Putney Hill London SW15 6AB Tel: 01.789 9111 Ref: SPC/GUILDQUOTE 2 Page 2 THIS LEASE is made the 3rd day of March 1993 BETWEEN the Landlord and the Tenant and the Surety whose respective names and addresses are set out in the First Schedule WITNESSETH:- 1. In this Lease unless the context otherwise requires the various expressions set out below shall have the meaning or bear the interpretation there set out (a) "the Landlord" shall include the reversioner and any other person for the time being immediately expectant on the term hereby created and for the purpose of entering upon the Demised Promises shall include the Superior Landlord (if any) (b) "the Tenant" shall include the person from time to time entitled to the Term and the personal representatives of the Tenant (c) words importing the masculine gender shall where necessary be construed as importing the feminine gender and words importing the neuter gender shall where necessary be construed as importing the masculine gender or the feminine gender as the case may be (d) words importing the singular number only shall include the plural number and vice versa and where there are two or more persons included in the expression "the Landlord" or "the Tenant" or "the Surety" the covenants expressed to be made by the Landlord or the Tenant or the Surety shall be deemed to be made by such persons jointly and severally 3 Page 3 (e) "the Demised Premises" means all that premises described in Part I of the Second Schedule (f) "Conduits" means and includes chimney flues ventilating ducts air conditioning systems cisterns tanks radiators water gas soil and waste water pipes sewers and drains central heating boilers and pipes wires and cables used for the conveyance of electrical current telephone cables valves traps and switches (g) "the Development" means the land shown edged green on the Plan annexed and more particularly described in Part II of the Second Schedule (h) "the Access Road" means the roadways and the footpaths adjacent thereto shown hatched brown on the Plan annexed (i) "the Common Parts of the Development" means those parts of the Development which at the date hereof have not been and are not intended to be let or sold by the Landlord and are capable of benefiting and being used by the Tenant in connection with the use of the Demised Premises and for the purpose of the Seventh Schedule hereof the Common Parts of the Development shall be deemed to include spaced for parking vehicles used by the Lessee and spaces used for parking vehicles by other lessees in the Development 2. THE Landlord demises to the Tenant the Demised Premises together with the rights but subject to the exceptions and reservations mentioned in the Second Schedule TO HOLD unto the Tenant for the term of years specified in the First Schedule ("the Term") PAYING yearly, during the Term the rent specified in the Third Schedule such rent to be paid by equal quarterly payments in advance on the usual quarter days in every year or proportionately for any fraction of a year the first of such payments to be made on the execution hereof or if later the date upon which the Fitting Out Works as defined in Clause 7.1 4 Page 4 of the Contract hereinafter defined are completed as evidenced by the certificate referred to in Clause 7.3 of the agreement dated 23rd December 1992 and made between the parties hereto and in this latter case such rent shall not be payable for the period ending on the day before such date and in each case without deduction 3. THE Tenant covenants with the Landlord to observe and perform the covenants and stipulations set out in the Fourth Schedule 4. THE Landlord covenants with the Tenant to observe and perform the covenants and stipulations set out in the Fifth Schedule 5. THE Landlord and the Tenant agree the provisions set out in the Sixth Schedule 6. THE Surety hereby covenants with the Landlord to observe and perform the covenants set out in the Eighth Schedule PROVIDED ALWAYS that the Surety will cease to be liable under this clause and shall be released entirely from all subsequent liability hereunder in the event that (1) The Tenant shall provide to the Landlord accounts for the most recent three consecutive years audited by a Chartered Accountant and approved by the directors of the Tenant not more than three months before such accounts are provided to the Landlord showing for each such year net profits before tax amounting to not less than three times the annual rent reserved by the lease under Clause 2 hereof in the year to which the said accounts relate and PROVIDED FURTHER that at the time of production of such accounts no monies shall be due from the Tenant or the Surety to the Landlord or 5 Page 5 (2) on completion of lawful assignment of the Lease in accordance with the provisions hereto PROVIDED ALWAYS that there is produced a grant of license for such assignment a surety reasonably acceptable to the Landlord who will covenant therein in equivalent form to the provisions of the Eighth Schedule hereto or there is provided on the grant of such license a security deposit in an amount equivalent to one half of the annual rent then payable under the Lease such amount to be placed in a separate designated Deposit Account interest accruing to the Tenant and otherwise upon the terms of the agreed draft deed set out in the Ninth Schedule hereto IN WITNESS whereof the parties hereto have caused this instrument to be executed as a Deed in the presence of the person(s) mentioned below the day and year first before written T H E F I R S T S C H E D U L E THE LANDLORD : Guildquote Limited of 54 Brodrick Road London SW17 THE TENANT : MicroMuse Limited whose registered office is situated at Bridge House, Station Road; Hayes, Middlesex THE SURETY : Christopher John Dawes of 11 Tournay Road; London SW6 THE TERM : 10 years 6 Floorplan A 7 Page 6 THE COMMENCEMENT DATE : 25th December 1992 THE AUTHORISED USER : Use within Class Bl of the Town and Country Planning (Use Classes) Order 1987 T H E S E C O N D S C H E D U L E The Demised Premises ALL THAT BUILDING situate and known as Disraeli House Adelaide Road (all of which premises are for the purposes of identification only shown edged red on the plan annexed hereto ('the Plan') and for the purposes of obligation as well as grant INCLUDE:- the structure roof and foundations thereof and all pipes wires cables channels sewers and drains which are situate therein TOGETHER WITH:- (a) the Landlords fixture and fittings on the Demised Premises (b) the free and uninterrupted passage and running of water soil gas and electricity and all other services to and form the Demised Premised in through and along the Conduits which are now or may hereafter during the Term be in on over or under the Development which serve the Demised Premises (c) the right of support shelter and protection for the Demised Premises from the remainder of the Development as enjoyed at the date hereof 8 Page 7 (d) the right to pass and repass for all purposes connected with the use and enjoyment of the Demised Premises to and from the Demised Premises from to and to the nearest highway maintainable at public expense:- (i) with or without vehicles of any description over and along the Access Road (ii) on foot only over and along those parts of the Common Parts of the Development which give access to the Demised Premises (e) a right of access on to any part of the Development for the purpose of inspecting maintaining repairing renewing and replacing any part of the Demised Premises or any of the Conduits exclusively serving the same to the extent that the Tenant cannot otherwise do so (f) the right to display a sign indicating the Tenant's name and business on the exterior of the Demised Premises in a position approved by the Landlord such approval not to be unreasonably withheld (g) the exclusive right to park twelve roadworthy vehicles in the car parking spaces shown edged yellow on the Plan ("the Car Parking Spaces") EXCEPTING AND RESERVING to the Landlord and its Lessees tenants servants and licensees and the owners lessees and occupiers for the time being of the Development and any adjoining or neighbouring property and all other persons from time to time having the like right 9 Page 8 (a) the free and uninterrupted passage and running of water soil gas and electricity and all other services to and from the Demised Premises and such adjoining neighbouring property through the Conduits which now are in on over or under the Demised Premises or any part thereof together with a full right of entry to the Demised Premises at all reasonable times on giving reasonable notice for the purposes of installing adding to inspecting maintaining replacing and repairing the Conduits the person or persons exercising such right making good all damage to the Demised Premises occasioned by such entry or any works consequent thereon and provided that the person or persons so entering shall cause as little inconvenience and interference as possible to the Tenant and the business of the Tenant (b) full right and liberty at any time or times to execute works repairs and make erections upon or to erect upon rebuild reconstruct modify or alter the Development or any part thereof (except the Demised Premises) or the adjoining and neighbouring property and to use the Development (except the Demised Premises) and the adjoining and neighbouring property in such manner as they may think fit provided that the access of light and air to the Demised Premises or any part thereof shall not materially thereby be interfered with (c) the right of support shelter and protection for the Development and any adjoining and neighbouring property as enjoyed at the date hereof (d) the right to enter the Demised Premises at all reasonable times upon 48 hours prior notice (except in case of emergency) for the purpose of carrying out any works or doing anything whatsoever comprised within the Landlords rights and obligations in this Lease Provided that the person or persons so entering the Demised Premises shall cause as little 10 Page 9 interference and inconvenience as possible to the Tenant shall not interfere with the Tenant's ability to carry out business from the Demised Premises and shall make good all damage occasioned by such entry or the carrying out of the any works to the reasonable satisfaction of the Tenant PART II The Development ALL THAT parcel of land with the buildings erected thereon situate and known as the Adelaide Centre Adelaide Road London SW15 1HR as the same is registered at H M Land Registry under Title Numbers TGL 54450 and LN159125 T H E T H I R D S C H E D U L E The Rents 1. IN this Schedule "Review Date" means the 25th day of December in the year 1997 and "Review Period" means the period starting with the Review Date up to the end of the Term 2. THE yearly rent shall be:- (a) until the first Review Date the rent of Fifty Thousand Four Hundred and Seventy POUNDS (L50,470) (b) during the Review Period a rent equal to the rent previously payable hereunder or such revised rent as may be ascertained as herein provided whichever be the greater 11 Page 10 3. SUCH revised rent for the Review Period may be agreed at any time between the Landlord and the Tenant or (in the absence of agreement) determined not earlier than the Review Date by an arbitrator such arbitrator to be nominated in the absence of agreement by or on behalf of the President for the time being of the Royal Institution of Chartered Surveyors on the application of the Landlord or the Tenant made not earlier than six months before the Review Date and so that in the case of such arbitration the revised rent to be awarded by the arbitrator shall be such as he shall decide should be the yearly rent at the Review Date for the Demised Premises (A) On the following assumptions at that date:- (i) that the Demised Premises are fit for immediate occupation and use and that no work has been carried out thereon by the Tenant its sub-tenants or their predecessors in title during the Term which has diminished the rental value of the Demised Premises and that in case the Demised Premises have been destroyed or damaged they have been fully restored (ii) that the Demised Premises are available to let by a willing landlord to a willing tenant as a whole without a premium but with vacant possession and subject to the provisions of this Lease (other than the amount of the rent hereby reserved but including the provisions for rent review after five years) for a term equal to the original term of this Lease (iii) that the covenants herein contained on the part of the Tenant have been fully performed and observed 12 Page 11 AND having regard to open market rental values current at the relevant Review Date (B) BUT disregarding: (i) any effect on rent of the fact that the Tenant its sub-tenants or their respective predecessors in title have been in Occupation of the Demised Premises (ii) any goodwill attached to the Demised Premises by reason of the carrying on thereat of the business of the Tenant its sub-tenants or their predecessors in title in their respective businesses and (iii) any increase in rental value of the Demised Premises attributable to the existence at the Review Date of any improvement to the Demised Premises or any part thereof carried out with consent where required otherwise than in pursuance of an obligation to the Landlord or its predecessors in title by the Tenant its sub-tenants or their respective predecessors in title during the Term or during any period of occupation prior thereto arising out of an agreement to grant such Term PROVIDED ALWAYS that it is hereby for the avoidance of doubt agreed that any improvements carried out by or under an obligation to the Tenant in carpeting and in the installation of air conditioning in so far as any work would tend to increase the rental value of the Demised Premises on review shall not be disregarded but that any such improvements carried out by or under an obligation to the Tenant in partitioning the Demised Premises shall be disregarded 13 Page 12 (iv) insofar as permitted by law all restrictions whatsoever relating to rent contained in any statute or order rules or regulations thereunder and any directions thereby given relating to any method of determination of rent (v) any effect reducing the rent (but not disregarding any effect increasing the rent) that may result from the Landlord either having elected to charge VAT in addition to the rent or reserving the right to do so 4. IT IS PROVIDED AND AGREED in relation to the said revised rent: (A) in the case of a revised rent being determined by an arbitrator the arbitration shall be conducted in accordance with the Arbitration Acts 1950 to 1979 or any statutory modifications or reenactments thereof for the time being in force (B) When the amount of the rent to be ascertained as hereinbefore provided shall have been so ascertained memoranda thereof shall thereupon be signed by or on behalf of the Landlord and the Tenant and annexed to this Lease and counterpart thereof and the parties shall bear their own costs in respect thereof (C) (i) if the revised rent payable on and from the Review Date has not been ascertained by the Review Date rent shall thereafter be a payable at the initial yearly rent previously payable and forthwith upon the revised rent being ascertained the Tenant shall pay to the Landlord any shortfall between the rent previously payable and the revised rent payable up 14 Page 13 to and on the preceding quarter day together with interest thereon from the Review Date to the date of payment at 3% below the Prescribed Rate (ii) for the purposes of this proviso the revised rent shall be deemed to have been ascertained on the date when the same has been agreed between the parties or as the case may be the date of the award of the arbitrator T H E F 0 U R T H S C H E D U L E The Covenants by the Tenant 1. TO pay the reserved rents on the days and in the manner aforesaid without any deduction and if the Landlord so requires to pay the same by Bankers Standing Order direct to the bank account of the Landlord or as it shall direct 2. TO pay and contribute the Interim Charge and the Service Charge (as those expressions are defined in the Seventh Schedule) at the time and in the manner provided in that Schedule 3. TO bear pay and discharge all existing and future rates taxes duties assessments impositions charges liabilities and outgoings whatsoever (whether parliamentary parochial or otherwise and whether or not of a capital or non-recurring nature) which are now or may at any time hereafter be assessed charged or imposed upon or payable in respect of the Demised Premises or any part thereof or on the owner or occupier in respect thereof (excluding any payable by the Landlord in respect of the receipt of rents or other payments made by the Tenant in accordance with the provisions hereof except any Value Added Tax payable on the rents or any other such payments on any disposition or dealing with or the ownership of the reversion to this Lease) 15 Page 14 4. (a) AT all times during the Term to repair replace rebuild cleanse and keep the Demised Premises and all additions and improvements thereto and the Landlord's fixtures and fittings and the Conduits therein in good and substantial repair and condition provided always that the Tenant shall not be liable hereunder where the damage is caused by an insured risk (as hereinafter defined) except where the insurance money is irrecoverable through the fault of the Tenant or its sub-tenants (b) to paint with two coats of best quality paint or otherwise treat in a proper and workmanlike manner all the wood and iron work of the Demised Premises heretofore or usually painted or otherwise treated once in every fifth year as regards the interior of the Demised Premises and once in every third year as regards the exterior thereof and in each case in the last year of the Term (whether determined by effluxion of time or under the provisions for re-entry hereinafter contained or otherwise) and also to grain varnish clean paper and otherwise decorate in a proper and workmanlike manner all such internal parts of the Demised Premises as have been or ought properly to be so treated and so that in the last year of the Term the tints colours and patterns of all such works of interior decoration shall be such as shall be approved by the Landlord (c) Without prejudice to the generality of the foregoing to maintain, repair and service at all necessary times the air conditioning system in the Demised Premises using the services of Barrier Air Conditioning Limited or such other contractor as the Landlord may nominate and to produce to the Landlord evidence of the service agreement and maintenance inspections and repairs carried out provided always that if the Tenant shall not maintain and regularly 16 Page 15 service the air conditioning system, the Landlord shall be entitled on not less than 14 days notice to enter upon the Demised Premises with all necessary workmen and execute such necessary maintenance and servicing at the expense of the Tenant in accordance with the covenants herein contained, and the cost thereof shall be a debt due from the Tenant to the Landlord and be forthwith recoverable by action (d) Without prejudice to the generality of the foregoing to repair maintain upkeep renew and service the lift in the Demised Premises using the services of Hammond and Champness Limited or such other contractor as the Landlord may nominate and to produce to the Landlord evidence of the service agreement and maintenance inspections and repairs carried out provided always that if the Tenant shall not maintain and regularly service the lift, the Landlord shall be entitled on not less than 14 days notice to enter upon the Demised Premises with all necessary workmen and execute such necessary maintenance and servicing at the expense of the Tenant in accordance with the covenants herein contained, and the cost thereof shall be a debt due from the Tenant to the Landlord and be forthwith recoverable by action PROVIDED ALWAYS that the Tenant shall be entitled to obtain quotations for services comparable to those to be provided by the nominated contractors under the provisions of sub-clauses (c) and (d) from three other reputable contractors and in the event that the charges of such nominated contractor are 20% higher than the average of such quotations the Tenant shall be reimbursed by the Landlord for the amount equal to the difference between 120% of such average and the actual charges of such nominated sub-contractor 17 Page 16 5. TO yield up the Demised Premises with the fixtures and additions thereto at the expiration or sooner determination of the Term in good and substantial repair and condition in accordance with the covenants hereinbefore contained 6. TO permit the Landlord and its agent with or without workmen and others authorised by the Landlord at all reasonable times during the Term to enter upon and view the condition of the Demised Premises and forthwith (so far as the Tenant is liable) to execute all repairs and works required to be done by written notice given by the Landlord PROVIDED ALWAYS that if the Tenant shall not within two months after service of such notice commence and proceed diligently with the execution of the repairs and works mentioned in such notice it shall be lawful for the Landlord to enter upon the Demised Premises with all necessary workmen and execute such repairs and works at the expense of the Tenant in accordance with the covenants herein contained and the costs thereof shall be a debt due from the Tenant to the Landlord and be forthwith recoverable by action 7. TO permit the Landlord and its agents and workmen and other persons authorised by the Landlord and the tenants or occupiers of other parts of the Development and adjoining properties belonging to the Landlord at all reasonable times to enter upon the Demised Premises to execute repairs or alterations to the Development or such adjoining properties causing as little inconvenience as possible and making good all damage thereby occasioned to the Demised Premises 8.1 NOT to make any structural or external alterations to the Demised Premises nor to erect to or permit or suffer to be erected any new building on the Demised Premises or make or permit or suffer to be made any alteration of or addition to or external projection in front of the Demised Premises save that telecommunications or satellite equipment may be erected on the 18 Page 17 exterior of the Demised Premises with the prior written consent of the Landlord such consent not to be unreasonably withheld or delayed 8.2 NOT without the previous consent in writing of the Landlord (and then only in accordance with plans previously approved by the Landlord and under the supervision of and to the satisfaction of the Landlords Surveyor) to alter the layout or arrangement of the Demised Premises or to make any internal non-structural alterations or add to or alter any new buildings or alterations erected or made in pursuance of the consent of the Landlord given under this Clause or to cut injure or permit or suffer to be cut or injured any of the walls or timbers of the Demised Premises or any alterations or additions thereto or to carry out or permit or suffer to be carried out any development within the meaning of the Planning Acts PROVIDED ALWAYS that the Tenant shall be entitled to:- without any consent from the Landlord to effect internal non-structural alterations to the Demised Premises subject to:- (aa) the Tenant giving not less than 14 days prior notice in writing to the Landlord of the nature of such proposed alterations and (bb) the Tenant delivering to the Landlord in duplicate the drawings specification and other details of such alterations within 28 days after their completion 9. AT all times during the Term to comply in all respects with the provisions and requirements of the Planning Acts and all regulations or orders made thereunder whether as to the Authorised User or otherwise and to indemnify and keep indemnified the Landlord against all liabilities whatsoever including all actions proceedings costs expenses claims and demands in respect thereof AND forthwith to produce to the 19 Page 18 Landlord a copy of any notice order or proposal therefor made given or issued to the Tenant or any sub-tenant by a planning authority under or by virtue of the Planning Acts affecting or relating to the Demised Premises and at the request and cost of the Landlord to make or join with the Landlord in making every such objection representation or appeal against the same as the Landlord shall deem expedient 10. TO use or suffer to be used the Demised Premises for the Authorised User specified in the First Schedule PROVIDED ALWAYS that the Tenant hereby acknowledges and admits that notwithstanding the foregoing provisions the Landlord does not thereby or in any other way give or make nor has given or made at any other time any representation or warranty that the Authorised User is or will remain a permitted use within the provisions of the Planning Acts nor shall any consent in writing which the Landlord may hereafter give to any change of use be taken as including any such representation or warranty and that notwithstanding that the Authorised User is not a permitted use within such provisions as aforesaid the Tenant shall remain fully bound and liable to the Landlord in respect of the obligations undertaken by the Tenant by virtue of this Lease without any compensation recompense or relief of any kind whatsoever 11. NOT to do or permit or suffer to be done anything whereby the policy or policies of insurance of the Demised Premises against the Insured Risks (as hereinafter defined) may become void or voidable or whereby the rate of premium thereon may be increased and to repay to the Landlord all sums paid by way of increased premiums and all expenses incurred by it in or about any renewal of such policy or policies rendered necessary by a breach of this covenant (all of which payments shall be included in the rent herein reserved) and to comply with all recommendations of the insurers as to fire precautions 20 Page 19 12. NOT to do or permit or suffer to be done anything in or upon the Demised Premises or any part thereof which may be or become a nuisance annoyance or damage to the Landlord or the tenants or occupiers of the remainder of the Development or of other property in the neighbourhood 13. NOT to exhibit or permit or suffer to be exhibited on any part of the exterior of the Development and the Demised Premises or in the windows or on the external walls rails or fences thereof any placard poster signboard fascia board or fascia sign or other advertisement PROVIDED ALWAYS that the Tenant may with the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) erect on the exterior of the Demised Premises a sign of a size approved by the Landlord consistent with the size of other tenants' signs at the Development specifying the name and nature of the Tenant's business 14. TO comply forthwith at the Tenant's own expense with any nuisance sanitary or other statutory notices lawfully served by any local or public authority upon either the Landlord or the Tenant so far as the same relate to the Demised Premises and to comply with all the requirements of the Office Shops and Railway Premises Act 1963 and the Fire Precautions Act 1971 and any Act or Acts for the time being amending or replacing the same and to keep the Landlord fully indemnified against all actions proceedings costs expenses claims and demands in respect thereof 15. IN connection with the Defective Premises Act 1972 or any legislation modifying amending or replacing the same to:- 21 Page 20 (a) notify the Landlord in writing immediately of any defect in the Demised Premises of which the Tenant is aware (b) erect and maintain within the Demised Premises prominent notices of warning of relevant defects within the meaning of Section 4 of the said Act in such form as the Landlord may from time to time require (c) indemnify the Landlord against any actions proceedings costs expenses claims and demands incurred thereunder by reason of the Tenant's failure to erect and display such notices (d) permit the Landlord and its agent with or without workmen and others at any time on reasonable notice to enter upon the Demised Premises erect and exhibit notices thereon giving warning of relevant defects within the meaning of the said Section 4 in the Demised Premises and to install lighting or any other reasonable means of warning or protection against such defects 16. NOT to hold or permit or suffer to be held any sale by auction on the Demised Premises 17. (a) NOT to assign charge underlet or part with or share possession of any part or parts (as distinct from the whole) of the Demised Premises or to part with or share possession of the whole of the Demised Premises for all or any part of the Term or to permit any company or person to occupy the same save by way of an assignment or underlease of the whole of the Demised Premises Save that the Tenant may share occupation of the Demised Premises with another company which is a holding or subsidiary company (as defined by Section 736 of the Companies Act 1985) of the Tenant or a subsidiary company 22 Page 19 12. NOT to do or permit or suffer to be done anything in or upon the Demised Premises or any part thereof which may be or become a nuisance annoyance or damage to the Landlord or the tenants or occupiers of the remainder of the Development or of other property in the neighbourhood 13. NOT to exhibit or permit or suffer to be exhibited on any part of the exterior of the Development and the Demised Premises or in the windows or on the external walls rails or fences thereof any placard poster signboard fascia board or fascia sign or other advertisement PROVIDED ALWAYS that the Tenant may with the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) erect on the exterior of the Demised Premises a sign of a size approved by the Landlord consistent with the size of other tenants' signs at the Development specifying the name and nature of the Tenant's business 14. TO comply forthwith at the Tenant's own expense with any nuisance sanitary or other statutory notices lawfully served by any local or public authority upon either the Landlord or the Tenant so far as the same relate to the Demised Premises and to comply with all the requirements of the Office Shops and Railway Premises Act 1963 and the Fire Precautions Act 1971 and any Act or Acts for the time being amending or replacing the same and to keep the Landlord fully indemnified against all actions proceedings costs expenses claims and demands in respect thereof 15. IN connection with the Defective Premises Act 1972 or any legislation modifying amending or replacing the same to:- 23 Page 20 (a) notify the Landlord in writing immediately of any defect in the Demised Premises of which the Tenant is aware (b) erect and maintain within the Demised Premises prominent notices of warning of relevant defects within the meaning of Section 4 of the said Act in such form as the Landlord may from time to time require (c) indemnify the Landlord against any actions proceedings costs expenses claims and demands incurred thereunder by reason of the Tenant's failure to erect and display such notices (d) permit the Landlord and its agent with or without workmen and others at any time on reasonable notice to enter upon the Demised Premises erect and exhibit notices thereon giving warning of relevant defects within the meaning of the said Section 4 in the Demised Premises and to install lighting or any other reasonable means of warning or protection against such defects 16. NOT to hold or permit or suffer to be held any sale by auction on the Demised Premises 17. (a) NOT to assign charge underlet or part with or share possession of any part or parts (as distinct from the whole) of the Demised Premises or to part with or share possession of the whole of the Demised Premises for all or any part of the Term or to permit any company or person to occupy the same save by way of an assignment or underlease of the whole of the Demised Premises Save that the Tenant may share occupation of the Demised Premises with another company which is a holding or subsidiary company (as defined by Section 736 of the Companies Act 1985) of the Tenant or a subsidiary company 24 Page 21 of such holding company provided that no relationship of landlord and tenant shall be thereby created nor shall any such company otherwise acquire any interest in the Demised Premises provided further that such arrangements shall cease and each such company shall quit the Demised Premises forthwith upon it ceasing to be a holding or subsidiary company (as defined aforesaid) of the Tenant or subsidiary company of such holding company or in any event no later than the day prior to the determination of the Term (b) Subject to Paragraph (a) of this Clause not to assign charge or underlet the whole of the Demised Premises without the previous written consent of the Landlord but so that such consent shall not be unreasonably withheld or delayed (c) On any assignment of the Demised Premises to procure that the Assignee covenants directly with the Landlord to pay the rents reserved by and to observe and perform the covenants and conditions on the part of the Tenant contained in this Lease throughout the remainder of the Term and covenants not further to assign or underlet the Demised Premises without such consent as aforesaid PROVIDED THAT if the intended Assignee shall be a private limited liability company then if the Landlord shall in its absolute discretion so require the Tenant shall procure that one (or more if the Landlord so reasonably requires) acceptable surety for the intended Assignee shall covenant with the Landlord in the terms set out in the Eighth Schedule (d) Not to underlet the whole of the Demised Premises at a fine or premium nor at a rent (including without prejudice to the generality of that expression any insurance rent or 25 Page 22 service charge rent) less than the greater of the rent payable hereunder or the open market rent of the Demised Premises at the date of such underlease (e) To procure that any underlease of the Demised Premises shall contain:- (i) an unqualified covenant on the part of the underlessee with the Landlord that the underlessee will not assign or charge any part or parts of the Demised Premises (as distinct from the whole) and will not underlet or (save by way of an assignment of the whole) part with or share possession of or permit any person or company to occupy the whole or any part of the Demised Premises (ii) a covenant on the part of the underlessee with the Landlord that the underlessee will not assign or charge the whole of the Demised Premises without the previous written consent of the Landlord (iii) such covenants by the underlessee (which the Tenant hereby undertakes to enforce) as to prohibit the underlessee from doing or suffering any act or thing upon or in relation to the Demised Premises which will contravene any of the Tenant's obligations in this Lease (iv) provision for review of the rent reserved by the underlease (which the Tenant hereby undertakes to operate and enforce) corresponding both as to terms and dates with the provisions set out in the Third Schedule hereto for revision of the rent hereby reserved 26 Page 23 (v) a condition for re-entry on breach of any covenant on the part of the underlessee (vi) to procure in any underletting of the Demised Premises that the rent under such underletting is reviewed in accordance with the terms of such review but not to agree the rent payable thereunder with the underlessee without the prior written consent of the Landlord such consent not to be unreasonably withheld and to procure the Landlord's written representations as to the rent payable thereunder are made to any arbitrator appointed 18. WITHIN one month after the execution of any assignment assent transfer charge or underlease or assignment of an underlease of or relating to the Demised Premises to give notice thereof in writing with particulars thereof to the solicitors for the time being of the Landlord and to produce to them a certified copy of the deed evidencing such dealing or transmission (and in case of a devolution of the interest of the Tenant not perfected by an assent within six months of the happening thereof to produce to the said Solicitors the grant of representation under which such devolution arises) and to pay to them a registration fee of TEN POUNDS (L10.00) together with Value Added Tax thereon (or such other sum as the said Solicitors may reasonably require) in respect of each such dealing or transmission together with such fees as may be payable to any Superior Landlord 19. TO permit the Landlord during the three months immediately preceding the determination of this Lease to affix and retain without interference upon any part of the Demised Premises or the Building a notice for reletting the same and to permit 27 Page 24 persons with written authority from the Landlord or its agent at all reasonable times and by prior notice to view the Demised Premises 20. TO pay to the Landlord all reasonable costs charges and expenses (including solicitors counsels and surveyors and other professional costs and fees and bailiffs costs charges expenses and commission) which may be charged or incurred by the Landlord or any Superior Landlord: (a) in any application by the Tenant to any planning authority or any application by the Tenant to the Landlord for any consent pursuant to the covenants herein contained (b) in or in contemplation of any proceedings under Sections 146 or 147 of the Law of Property Act 1925 or the preparation or service of notice thereunder (notwithstanding forfeiture is avoided otherwise than by relief granted by the Court) or for the preparation and service of and negotiations consequent upon a Schedule of Dilapidations served at any time during or within one month after the expiry of the Term (c) in connection with the recovery of any arrears of rent and monies payable and recoverable as rent hereunder (d) in connection with the enforcement of any of the Tenants covenants herein contained AND to keep the Landlord fully indemnified against all actions proceedings reasonably taken and reasonable costs expenses claims and demands whatsoever in respect of all or any of the said applications consents notices negotiations and proceedings PROVIDED ALWAYS that whenever in this Lease the consent or licence of the Landlord is required in any matter then the 28 Page 25 Landlord shall be entitled to withhold its consent or licence unless and until it has obtained the consent of any Superior Landlord 21. NOT to allow any encroachment to be made or easement acquired on or over the Demised Premises and in particular not to allow the right of access of light from or over the Demised Premises to any neighbouring property to be acquired and if any encroachment or easement shall be made or threatened to be made or if any window or opening shall be opened or made or threatened to be opened or made in any neighbouring property which if not obstructed might by lapse of time confer the right to such access of light on the owner of any neighbouring property to give notice thereof to the Landlord and to permit it and its servants to enter the Demised Promises and to do all such things as may be proper for the purpose of preventing the making of such encroachment or the acquisition of such easement or right to light 22. TO reimburse the Landlord upon demand the cost of periodic valuations or assessments of the cost of reinstatement of the Demised Promises for insurance purposes 23. IN the event that Value Added Tax shall be chargeable on the Landlord in respect of any supplies made to the Tenant the Tenant shall in addition to any amounts otherwise payable pay the Landlord the amount of the Value Added Tax so chargeable and further in the event of the Landlord electing at any time during the term to waive exemption from Value Added Tax in respect of the Demised Premises to pay the amount of Value Added Tax chargeable on the rents hereby reserved and on the interim charge and the service charge as defined in the Seventh Schedule as a result of such election having been made and all or any of such payments shall be made by way of rent 29 Page 26 24. (a) IF the rent hereby reserved or any part thereof or any other sum payable by the Tenant to the Landlord pursuant to the provisions of this Lease shall not have been paid upon the date whereon payment of the same was due then the Tenant shall pay to the Landlord interest upon such rent or other sum at the Prescribed Rate until the said rent or other sum shall have been paid (b) BY "Prescribed Rate" is meant 4% over the base rate published from time to time of Hill Samuel & Co Limited or if the same shall cease to exist or publish a base rate during the Term of such other London Clearing Bank as the Landlord may nominate (c) INTEREST payable by the Tenant pursuant to this Sub-Clause shall be calculated from day to day (d) INTEREST payable by the Tenant upon arrears of rent shall not itself be deemed to be rent 25. NOT to use the Car Parking Spaces for any purposes whatsoever other than (i) for loading and unloading or (ii) to park thereon twelve roadworthy vehicles 26. NOT to cause or permit any obstruction of any of the common accessways within the Development T H E F I F T H S C H E D U L E The Covenants of the Landlord 1. THAT the Tenant paying the rents hereby reserved and observing and performing the several covenants and stipulations herein on its part contained shall peaceably hold and enjoy the Demised 30 Page 27 Premises during the Term without any lawful interruption by the Landlord or any person rightfully claiming under or in trust for it 2. TO maintain repair amend renew cleanse repaint and redecorate and otherwise keep in good and tenantable condition (a) the boundary walls and fences of and in the curtilage of the Development (b) the Access road and the Common Parts of the Development (C) the Car Parking Spaces PROVIDED THAT the Landlord shall not be liable to the Tenant for any defect or want of repair herein before mentioned unless the Landlord has had notice thereof nor in respect of any obligations hereunder that is within the ambit of any of the Tenants covenants hereinbefore contained 3. TO maintain in good working order and repair all Conduits in under and upon the Development and which shall serve the Demised Premises (excluding nevertheless any which exclusively serve the Demised Premises) 4. SO far as possible and subject always as provided in Clause 6 of the Sixth Schedule to perform the following services:- (a) to keep the Common Parts of the Development clean and well lighted (b) to supply maintain repair and renew as need be such alarms and fire-fighting equipment in the Common Parts of the Development as the Landlord may doom desirable or 31 Page 28 necessary or as may be required to be supplied and maintained by the Landlord by statute or by the fire authority for the district (c) to supply provide purchase maintain renew replace repair and keep in good and serviceable order and condition all appurtenances appointments fixtures and fittings bins receptacles tools appliances materials and other things which the Landlord may in the interests of good estate management deem desirable or necessary for the maintenance upkeep or cleanliness of the Development (d) to employ such staff as the Landlord may at its discretion deem desirable or necessary to enable the Landlord to carry out or maintain the said services or any of then and for the general conduct management and security of the common Parts of the Development PROVIDED ALWAYS that the Landlord may at the Landlords discretion add to extend vary or alter the rendering of the said services or any of them from time to time if the Landlord shall reasonably deem it desirable so to do for the more convenient or efficient conduct and management of the Development 5. TO insure and keep insured in the full reinstatement value the Demised Premises and the Common Parts of the Development and the Landlords fixtures therein against lose or damage by fire lightning, explosion, aircraft (or other aerial device) or articles dropped therefrom, riot, civil commotion, malicious person, earthquake, storm, tempest, flood, bursting and overflowing of water pipes, tanks and other apparatus, impact by road vehicles and such other risks as the Landlord may deem desirable or expedient including loss of rent hereunder for 32 Page 29 four years and architects and surveyors fees and demolition and clearance and similar expenses ("the Insured Risks") in some insurance office or with underwriters of repute and shall procure that the interest of the Tenant is noted on the policy and to produce to the Tenant at the Tenant's own expense a copy of such policy and of the annual premium receipt and in case of destruction of or damage to the Demised Premises or the Common Parts of the Development any part thereof from any cause covered by such insurance to lay out all monies received in respect of such insurance (other than monies received for loss of rent and architects and surveyors fees and for demolition and clearance expenses) in rebuilding and reinstating the same as soon as reasonably practicable PROVIDED ALWAYS that if such rebuilding or reinstating be prevented or frustrated all such insurance monies (other than as aforesaid) shall be retained by the Landlord and this Lease shall thereupon determine 6. TO bear pay and discharge all existing and future rates (including water rates) taxes duties assessments charges impositions and outgoings whatsoever assessed charged and imposed upon the Common Parts of the Development 7. In the event that any third party shall require that any part of the land in the Development being the whole or part of title LN159125 be excluded from the Development so that the Tenant is no longer able to park twelve vehicles in the Car Parking Spaces the Landlord shall procure at its expense that alternative car parking spaces are made available on the Development so that the Tenant maintains the exclusive right to park twelve cars in a designated area of the Development and further shall at its own expense re-fence and landscape the new boundaries of the Development resulting from the removal of any such land 33 Page 30 T H E S I X T H S C H E D U L E Proviso Agreements and Declarations 1. 1.1 AT any time after any of the following events shall happen the Landlord may re-enter upon all or any part of the Demised Premises:- 1.1.1 the whole or any part of the rent shall be unpaid for twenty one days after becoming payable whether formally demanded or not or 1.1.2 there shall be any breach of any of the Tenant's covenants or 1.1.3 the Tenant or any surety for the Tenant (being a company) shall enter into liquidation whether compulsory or voluntary (save for the liquidation of a solvent company for the purpose of amalgamation or reconstruction) or suffers an administrative receiver to be appointed or enters into a voluntary arrangement as defined in Section I of the Insolvency Act 1986 or does or suffers anything which would entitle a receiver to take possession of any of its assets or does or suffers anything which would entitle any person to present a petition for winding up or apply for an administration order to cease to exist or is dissolved or 1.1.4 the Tenant or any surety for the Tenant (being an individual) shall be unable to pay a debt or have no reasonable prospect of being able to pay a debt within the meaning of Section 268 of the Insolvency Act 1986 or make an application to the Court for an interim order under Section 253 of the Insolvency Act 1986 or does anything 34 Page 31 which would entitle A petition for a bankruptcy order to be made or makes any assignment for the benefit of or enters into any arrangement with his creditors either by composition or otherwise PROVIDED ALWAYS that if any of the events in paragraphs 1.1.3 or 1.1.4 shall occur to a surety of the Tenant rather than the Tenant or if the surety shall die (then the Landlord may not re-enter under paragraph 1.1. for a period of two months thereafter PROVIDED FURTHER that if the Tenant within such period shall provide the Landlord with an alternative surety reasonably acceptable to the Landlord or a security deposit for rent equivalent to six months value of the then passing rent such deposit to be in the form of the Ninth Schedule hereto the Landlord shall not be entitled to re-enter the Demised Premises because of such an event having occurred to a surety 1.2 If the Landlord shall re-enter in accordance with Clause 1.1. of this Schedule then this Lease shall thereupon terminate but without prejudice to any right of action or remedy of the Landlord in respect of any breach non-observance or non-performance of any of the Tenants covenants or the conditions herein contained 2.1 IN case the Demised Premises or any part thereof shall at any time during the Term be so damaged or destroyed by the Insured Risks so as to be unfit for occupation and use then (unless the insurance money shall be wholly or partially irrecoverable by reason solely or in part of any act or default of the Tenant) the rent hereby reserved or a fair proportion thereof according to the nature and extent of the damage sustained shall be suspended for the period for which loss of rent insurance is maintained under Clause 5 of the Fifth Schedule or if earlier until the Demised Premises shall again be rendered fit for 35 Page 32 occupation and use and any dispute with reference to this proviso shall be determined by the Landlords Surveyor whose decision shall be final and binding on the parties hereto 2.2 PROVIDED THAT if the Demised Premises shall be destroyed or damaged by any of the insured risks so as to become unfit for occupation and use and the damage is not made good within four years of such destruction or damage then the Tenant or the Landlord may on the expiration of such period of four years of such destruction or damage by written notice given to the other elect to determine this Lease and upon the service of such notice(PROVIDED ALWAYS that in the case of notice given by the Tenant to the landlord the Ten ant has complied with the covenants in the lease on the Tenant's part contained) this Lease shall forthwith determine and the parties hereto shall forthwith be released from all and singular their further duties and obligations hereunder but without prejudice to the rights of either party in respect of any antecedent breach of any of the covenants herein contained 3. IT is hereby agreed between the Landlord and the Tenant that the provisions for compensation contained in Section 37 of the Landlord and Tenant Act 1954 shall not apply to this Lease except in the events specified in Section 38(2) of that Act 4. THIS Lease shall incorporate the regulations as to notices contained in Section 196 of the Law of Property Act 192S as amended by the Recorded Delivery Service Act 1962 5. THE expression "the Planning Acts" shall in this Lease include any Act or Acts for the time being in force amending or replacing the Town and Country Planning Act 1990 the Planning (Listed Buildings and Conservation Areas)Act 1990, the Listed Buildings Act 1990 and the Planning (Consequential Provisions) Act 1990 and any other legislation of a similar nature and any statutory modification or re-enactment thereof for the time 36 Page 33 being in force and any orders instruments plans rules regulations permissions consents and directives made under or in pursuance of the said Acts or any of them 6. NOTWITHSTANDING anything herein contained the Landlord shall not be liable to the Tenant nor shall the Tenant have any claim against the Landlord in respect of:- (a) any interruption in any of the services hereinbefore mentioned by reason of necessary repair or maintenance of any installations or apparatus or damage thereto or destruction thereof by fire water Act of God or other cause beyond the Landlords control or by reason of mechanical or other defect or breakdown or frost or other inclement conditions or unavoidable shortage of fuel materials water or labour or (b) any act omission or negligence of any porter attendant or other servant of the Landlord in or about the performance or purported performance of any duty relating to the provision of the said services or any of them T H E S E V E N T H S C H E D U L E The Service Charge 1. THE Service Charge hereinbefore made payable means 23.77 per centum of the Annual Service Cost (as hereinafter defined) in respect of each calendar year running from the lot day of January and ending on the 31st day of December next following or such other period as the Landlord may determine ("the Accounting Period") SAVE THAT in respect of any part of the Annual Service-Cost as under Paragraph 3(a) to (g) of this Schedule relates directly to that part of the Access Road as forms the Parking Access Road as the same is shown cross hatched brown on the Plan and the Car Parking Spaces and the 37 Page 34 area hatched green on the plan the Service Charge means 44.60 percent of such part of the Annual Service Cost as so relates and further in respect of any part of the Annual Service Cost which relates directly to costs incurred in complying with the Landlord's insurance obligations hereinbefore contained in paragraph 5 of the Fifth Schedule (other than so far as the same relates to the Common Parts of the Development) the Service Charge means 100 per cent 2. THE Interim Charge hereinbefore made payable means such sum to be paid on account of the Service Charge in respect of each Accounting Period as the Landlord shall specify to be a fair and reasonable payment The first payment of the Interim Charge (on account of the Service Charge for the Accounting Period during which this Lease is executed) shall be made on the execution hereof and thereafter shall be by equal payments in advance on the 24th day of June and the 25th day of December in each year and in case of default shall be recoverable as rent in arrear 3. THE Annual Service Cost in each Accounting Period shall be the aggregate of the sums actually expended or liabilities incurred by the Landlord in connection with the following matters:- (a) the cost of the observance and performance of the covenants on the part of the Landlord hereinbefore contained in paragraphs 2,3,4,5,6 of the Fifth Schedule (b) the reasonable fees charges and expenses payable to any qualified person whom the "Landlord may reasonably employ to inspect repair and keep in running order the alarm systems including the Landlords costs from time to time incurred in entering into a contract or contracts in usual form with any such qualified persons 38 Page 35 (c) the reasonable costs of taking out and maintaining in force an effective insurance policy or policies against any and every liability of the Landlord for injury to or death of any person (including every agent servant and workman of the Landlord) and damage to or destruction of the property of any such person arising out of the management and/or maintenance of the Common Parts of the Development and in particular but without prejudice to the generality of the foregoing the cost of insurance against such injury death damage or destruction as aforesaid due to the act neglect default or misconduct of any agent servant or workman of the Landlord employed in connection with the management and/or maintenance of the Common Parts of the Development (d) in addition to the wages from time to time payable by the Landlord the employers National Insurance and Industrial Injuries Contributions and any taxes or similar levies from time to time payable by the employer in respect of all agents servants and workmen employed by the Landlord solely in connection with the performance and observance of any of the covenants on its part herein contained (e) the reasonable cost of the carrying out of other work or services of any kind whatsoever which the Landlord may reasonably consider desirable for the purpose of maintaining or improving services in the Development (f) all reasonable fees and expenses payable to any person firm or company whom the Landlord may from time to time employ in connection with the management and/or maintenance of the Common Parts of the Development including the cost of preparing statements of the Annual 39 Page 36 Service Cost and including legal costs incurred relating to the management and maintenance of the Development and in the collection of service charges and rent (g) the cost of complying with all statutory requirements regulations or requirements of any competent local or other authority relating to the Common Parts of the Development 4. THE Landlord shall be entitled to make such reasonable provision for a reserve for anticipated future expenditure to be incurred in the performance of the covenants on the part of the Landlord contained herein as the Landlord may reasonably deem appropriate and the amounts so provided shall form part of the Annual Service Cost 5. THE Landlord will use its best endeavours to maintain the Annual Service Cost at the lowest reasonable figure consistent with due performance and observance of its obligations hereunder but the Tenant shall not be entitled to object to any items comprised therein by the reason only that the materials work or service in question might have been provided or performed at a lower cost 6. AS soon as practicable after the end of each Accounting Period the Landlord will submit to the Tenant an itemised statement certified by the Managing Agents for the time being to the Landlord containing the following information:- (a) the amount of the Annual Service Cost (b) the amount of the Interim Charge paid by the Tenant in respect of that Accounting Period together with any surplus carried forward from the previous Accounting Period 40 Page 37 (c) the amount of the Service Charge in respect of that Accounting Period and of any excess or deficiency of the Service Charge over the Interim Charge 7. THE Tenant shall be entitled within twenty-eight days of the receipt of such statement to inspect the vouchers and receipts for all items included in such statement 8. IF the Interim Charge paid by the Tenant in respect of any Accounting Period exceeds the Service Charge for that period the surplus of the Interim Charge so paid over and above the Service Charge shall be carried forward by the Landlord and credited to the account of the Tenant in computing the Service Charge in succeeding Accounting Periods as hereinbefore provided 9. IF the Service Charge in respect of any Accounting Period exceeds the Interim Charge paid by the Tenant in respect of that Accounting Period together with any surplus from previous years carried forward as aforesaid then the Tenant shall pay the excess to the Landlord within twenty-one days of service upon the Tenant of the statement referred to above and in case of default the same shall be recoverable from the Tenant as rent in arrear T H E E I G H T H S C H E D U L E The Covenant of the Surety 1. THE Surety in consideration of the demise hereinbefore contained having been made at his request HEREBY COVENANTS with the Landlord that the Tenant will throughout the Term hereby created or any extension or continuation thereof under Section 24 of the Landlord and Tenant Act 1954 or any statutory modification thereof for the time being in force or otherwise 41 Page 38 by statute or common law pay the said rents hereby reserved or subsequently increased on the days and in manner aforesaid and will perform and observe all the Tenant's covenants hereinbefore contained and that in case of default in such payment of rents or in the performance or observance of such covenants as aforesaid the surety will pay and make good to the Landlord on demand all losses damages costs and expenses thereby arising or incurred by the Landlord notwithstanding:- (a) any neglect or forbearance of the Landlord in endeavouring to obtain payment or to enforce performance of the several stipulations herein on the Tenant's part contained (and any time which may be given to the Tenant by the Landlord shall not release or exonerate or in any way affect the liability of the Surety under this covenant) (b) that the terms of this Lease may have been varied by agreement between the Landlord and the Tenant where such variation is immaterial and not prejudical to the Surety (c) any other act or thing whereby but for this provision the surety would have been released 2. IF a liquidator or trustee in bankruptcy shall disclaim this Lease and if the Landlord shall by notice in writing have so required the Surety will take from the Landlord a lease of the Demised Premises for a term commensurate with the residue of the Term which would have remained had there been no disclaimer at the same rent and subject to the same covenants and conditions as are reserved by and contained in thin Lease such lease to take effect from the date of such disclaimer and in such case the Surety shall without delay take or join in all acts necessary for the grant of such new lease and will pay all costs relating to the grant of such new lease and execute and deliver to the Landlord a counterpart thereof 42 Page 39 3. IF the Landlord shall not require the Surety to take a lease of the Demised Premises pursuant to Clause 2 above the Surety shall nevertheless upon demand pay to the Landlord a sum equal to the rent that would have been payable under this Lease but for the disclaimer or other event putting an end to the effect of the Lease in respect of that period from the date of the said disclaimer or the Lease ceasing to have effect as aforesaid until the expiration of three months therefrom or until the Demised Premises shall have been relet by the Landlord whichever shall first occur T H E N I N T H S C H E D U L E Form of Rent Deposit Deed THIS DEED is made the day of 199 BETWEEN: (1) THE Landlord (which expression shall mean only the person for the time being in whom the reversin immediately expectant upon the determination of the Lease is vested) who is currently (2) THE Tenant (which expression shall mean only the person in whom the benefit of the term of the Lease is vested) who is currently SUPPLEMENTAL TO A Lease ("the Lease") dated the day of 199 and made between GUILDQUOTE LIMITED of the first part MICROMUSE 43 Page 40 LIMITED of the second part and CHRISTOPHER JOHN DAWES of the third part relating to the premises known as Disraeli House, the Adelaide Centre, Putney Bridge Road, London, SW.15 NOW THIS DEED WITNESSETH as follows: 1.1 "The Initial Deposit" shall mean a sum equivalent to one half of the annual rent payable at the date hereof or such greater sum as shall represent one half of the annual rent from time to time reserved under the Lease 1.2 "The Deposit Account" means the interest earning deposit account opened by the Landlord's Solicitors (as hereinafter defined) at one of the London Clearing Banks ("the Bank") on or before the date of this Deed and in which the Landlord's Solicitors shall place the Initial Deposit 1.3 "The Deposit Balance" means the amount from time to time standing to the credit of the Deposit Account 2. The Landlord and the Tenant irrevocably instruct the Landlords Solicitors Messrs Russell Cooke, Potter & Chapman ("the Landlord's Solicitors") by this Deed to act as stakeholders the operation of the Deposit Account in accordance with this Deed and in particular to act in accordance with this Deed in: 2.1 the making of payments into the Deposit Account 2.2 the withdrawal of sums from the Deposit Account and 2.3 accounting to the Landlord and the Tenant for money due to either of them from the Deposit Account 44 Page 41 3.1 The Tenant shall on the execution hereof deposit with the Landlord's Solicitors the Initial Deposit as security for the due performance and observance of the covenants on the part of the tenant contained in the lease without prejudice to the rights and remedies of the Landlord under the Lease 3.2 The Landlord's Solicitors are instructed to forthwith pay the Initial Deposit into and to keep it in the Deposit Account and the Tenant may with the Landlords prior agreement (such agreement not to be unreasonably withheld) authorise the Landlord's Solicitors to vary the terms of the Deposit Account 4.1 The interest which shall accrue upon the Deposit Balance shall be added to the Deposit Balance and shall remain in the Deposit Account and shall be dealt with as part of the Deposit Balance 4.2 The Tenant (acting on its own behalf or by its Solicitors) shall after reasonable intervals following the date of this Deed or any payment made to the Tenant pursuant to this clause be entitled by notice in writing to require the Landlord's Solicitors to draw upon the Deposit Account in payment to the Tenant of an amount equal to the interest which at the date of such notice has accrued to the Deposit Balance 5. The Landlord shall whenever so reasonably requested by the Tenant supply to the Tenant copies of all statements and other information relating to the Deposit Account as the Tenant may from time to time reasonably require 6. The Tenant hereby covenants with the Landlord as follows: 6.1 Until the release of the Deposit Balance or appropriation from the Deposit Balance under Clause 7 hereof to maintain the Deposit held by the Landlord's Solicitors in an amount equal (excluding any interest accrued to the Deposit) to one half of the annual rent from time to time reserved under the Lease and 45 Page 42 6.2 If the rent reserved by the Lease shall be increased pursuant to the provisions for the review of rent therein contained or if any monies shall be appropriated from the Deposit Balance by the Landlord in the manner hereinafter authorised under Clause 7 hereof within twenty one days of written request from the Landlord so to do to deposit with the Landlord's Solicitors an amount necessary to maintain the Deposit Balance at the appropriate level 7.1 The Landlord shall be entitled at any time to require the Landlord's Solicitors to draw from the Deposit Account in payment to the Landlord of any amount not exceeding any sum then due to the Landlord arising out of default by the Tenant if: 7.1.1 The Landlord shall have previously given to the Tenant not less than fourteen days notice in writing of the Landlords intention to procure any withdrawal from the Deposit Account and the notice shall have specified the default to which the withdrawal relates and; 7.1.2 The Tenant shall not have remedied the default complained of by the expiration of the notice 8. The Deposit Balance (including interest thereon) and unpaid accrued interest thereon will be released to the Tenant by the Landlord following whichever shall be the earlier of: 8.1 The completion of a lawful assignment of the Premises by the Tenant with the consent of the Landlord in accordance with the terms of the Lease to an assignee who shall provide an equivalent deposit in the terms of this Deed whereupon the provisions of this Deed shall automatically cease and determine 46 Page 43 8.2 The expiry or sooner determination of the term created by the Lease subject to the Landlords prior right of withdrawal under clause 7.1 hereof in the event of any default by the Tenant whereupon the provisions of this Deed shall automatically cease and determine 8.3 In the event that the lease becomes vested in a company which is registered in the United Kingdom such company providing the Landlord with its most recent three consecutive years accounts audited by a Chartered Accountant the most recent of which must have been approved by the directors of such company not more than three months before such accounts are provided to the Landlords and each set of such accounts showing net profits amounting to not less than three times the annual rent first reserved by the Lease in the year to which the said accounts relate whereupon the provision of this Deed shall automatically cease and determine 9. DEALINGS WITH REVERSION In the event of the Landlord assigning subletting or otherwise disposing of the reversion expectant upon the termination of the term created by the Lease it is hereby agreed that the Landlord will procure that such persons entitled to the reversion expectant upon the termination of the term created by the Lease shall enter into a new Deed of Rent Deposit and that the Tenant will following a written request from the Landlord so to do and upon the monies then standing in the Deposit Account enter into a new Deed of Rent Deposit in the same terms (mutatis mutandis) as this Deed save that the expression "the Initial Deposit" shall mean half the yearly rent then reserved and the term "the Landlord's Solicitors shall mean the solicitors acting on behalf of the party in whom the term expectant upon the determination of the said term is vested and the deposit account shall be held at the Bank or such other bank as the Solicitors for the Assignee of the reversion shall reasonably require 47 Page 44 10. The Tenant hereby 10.1 acknowledges that the Landlord's right of re-entry contained in the Lease shall be exercisable in the event of any breach by the Tenant of any of the terms of this Deed to the intent that all covenants herein shall be deemed to be covenants contained in the Lease 10.2 hereby agrees to charge the Rent Deposit to the Landlord as security for the performance of its obligations in the Lease and in this Deed IN WITNESS whereof the parties hereto have signed this instrument as their Dead in the presence of the person(s) mentioned below the day and year first before written The Common Seal of GUILDQUOTE LIMITED was hereunto affixed [SEAL] in the presence of: Director [sig] Secretary [sig] EX-11 10 COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING 1 EXHIBIT 11 MICROMUSE INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PROFORMA NET LOSS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, 1997 ------------- Net loss applicable to holders of common stock.............................. $(8,631) ------------- Weighted average shares outstanding during the period....................... 6,329 Preferred stock on an "as if" converted basis............................... 1,290 Common shares issued and stock options granted in accordance with Staff Accounting Bulletin No. 83:............................................... Common stock option......................................................... 577 Preferred stock............................................................. 1,454 Preferred stock warrant..................................................... 1,167 ------------- Shares used in per share calculation........................................ 10,817 ------------- Pro forma loss from continuing operations per share......................... $ (0.83) ------------- Pro forma loss from discontinued operations per share....................... $ (0.01) Pro forma gain on disposal of discontinued operations per share............. $ .11 Pro forma net loss applicable to holders of common stock per share\......... $ (0.80)
EX-21.1 11 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Micromuse plc, a company registered in England and Wales. Micromuse USA Inc., a Texas corporation, a wholly owned subsidiary of Micromuse plc. Micromuse (Australia) Pty. Limited, an Australian corporation. EX-23.1 12 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS The Board of Directors Micromuse Inc.: We consent to the use of our report included herein and to the references to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Palo Alto, California December 12, 1997 2 EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 13,741 0 4,461 0 0 20,290 4,375 1,925 22,740 7,109 0 0 22,865 66 (7,300) 22,740 0 9,292 0 1,565 15,256 0 1,404 (8,933) 0 (8,933) 1,057 0 0 (7,876) (.80) 0
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