-----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, B1vi8cGO0z5N8OuNvMW2HHFvLSaLO2+x70ncKRta9Wd+amWN1DN2QGmfzKHr6pnL DOYKUhEakPmGGMYg7fJu6g== 0001012870-99-002032.txt : 19990623 0001012870-99-002032.hdr.sgml : 19990623 ACCESSION NUMBER: 0001012870-99-002032 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19990622 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VITRIA TECHNOLOGY INC CENTRAL INDEX KEY: 0001050808 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770386311 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-81297 FILM NUMBER: 99650335 BUSINESS ADDRESS: STREET 1: 500 ELLIS STREET CITY: MOUNTAINVIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 6502376900 MAIL ADDRESS: STREET 1: 500 ELLIS ST CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on June 22, 1999 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- VITRIA TECHNOLOGY, INC. (Exact name of Registrant as specified in its charter) --------------- Delaware 7372 77-0386311 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
500 Ellis Street Mountain View, CA 94043 (650) 237-6900 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive office) --------------- JOMEI CHANG, Ph.D. Vitria Technology, Inc. President and Chief Executive Officer 500 Ellis Street Mountain View, CA 94043 (650) 237-6900 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: Eric C. Jensen, Esq. Jose F. Macias, Esq. Cooley Godward LLP Wilson Sonsini Goodrich & Rosati Five Palo Alto Square Professional Corporation 3000 El Camino Real 650 Page Mill Road Palo Alto, CA 94306 Palo Alto, CA 94304 (650) 843-5000 --------------- (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 145 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration 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 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 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 Securities To Be Aggregate Amount Of Registered Offering Price(1) Registration Fee - ------------------------------------------------------------------------------------ Common Stock, $.001 par value par share........ $75,000,000 $20,850 - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee, in accordance with Rule 457(o) under the Securities Act of 1933. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JUNE 22, 1999 Shares [LOGO OF VITRIA TECHNOLOGY, INC.] Common Stock --------- Prior to this offering, there has been no public market for the common stock. The initial public offering price of the common stock is expected to be between $ and $ per share. We have applied to list the common stock on The Nasdaq Stock Market's National Market under the symbol "VITR." The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares. Investing in our common stock involves risks. See "Risk Factors" on page 5.
Underwriting Price to Discounts and Proceeds to Vitria Public Commissions Technology ------------ ------------- ------------------ Per Share.................................. $ $ $ Total...................................... $ $ $
Delivery of the shares of common stock will be made on or about , 1999. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston Merrill Lynch & Co. BancBoston Robertson Stephens SoundView Technology Group The date of this prospectus is , 1999. [DESCRIPTION OF GRAPHICS: Inside cover gatefold . Vitria logo . Graphic: Combines a graphic of the Vitria solution coupled with a graphical representation of an order fulfillment business process. Each step in the process is shown as an IT system that is named according to its business function (e.g. Billing). The Vitria solution is shown as a graphic that illustrates the four elements of our solution: (1) process automation, (2) real-time analysis, (3) Internet-based communications, and (4) application integration. There is a call-out for each of the elements to describe and/or illustrate its function.] ------------ TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 5 Special Note Regarding Forward-Looking Statements........................ 16 Use of Proceeds.......................................................... 17 Dividend Policy.......................................................... 17 Capitalization........................................................... 18 Dilution................................................................. 19 Selected Financial Data.................................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Business................................................................. 30
Page ---- Management................................................................. 42 Certain Transactions....................................................... 52 Principal Stockholders..................................................... 53 Description of Capital Stock............................................... 55 Shares Eligible for Future Sale............................................ 58 Underwriting............................................................... 60 Notice to Canadian Residents............................................... 62 Legal Matters.............................................................. 63 Experts.................................................................... 63 Where You Can Find More Information........................................ 63 Index to Financial Statements.............................................. F-1
------------ You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. ------------ Except as otherwise indicated, information in this prospectus is based on the following assumptions: . the conversion of all our outstanding shares of preferred stock into shares of common stock upon the closing of this offering; . no exercise of the underwriters' over-allotment option; . our reincorporation from California to Delaware; and . the filing of our amended and restated certificate of incorporation prior to the closing of this offering. "Vitria" and the Vitria logo are registered trademarks of Vitria, and we have filed for federal trademark registration for "BusinessWare." This prospectus also includes trademarks owned by other parties. ------------ Dealer Prospectus Delivery Obligation Until , 1999 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before buying shares in the offering. You should read the entire prospectus carefully. Vitria Technology, Inc. Vitria is pioneering a new category of software platform for real-time eBusiness. Our product suite, BusinessWare, combines business process automation and analysis, application integration and Internet-based communications in one comprehensive platform. BusinessWare is designed to provide business managers with an infrastructure that gives them end-to-end visibility and control of their business operations, enabling them to reduce time to market, rapidly respond to change, and manage the growing complexity of business interactions across the extended enterprise. Rapid advances in new technology, deregulation and global competition are transforming today's business environment. In particular, the use of the Internet to conduct business, often referred to as "eBusiness," is radically changing business-to-business, business-to-consumer and business-to-employee interactions. To compete in this new environment, companies must find ways to streamline and manage mission-critical business processes across their "extended enterprises" which include their partners and customers. From order fulfillment to customer service, there are significant benefits to automating business processes across the extended enterprise. For example, companies that allow their customers to place and track orders using self-service Web applications can increase revenue opportunities while reducing order management and customer service costs. Deploying eBusiness solutions that deliver these business benefits, however, is a significant challenge. To address this challenge, BusinessWare combines in a single solution the four elements that we believe are essential for an eBusiness platform: (1) Process automation--Empowers business users to define, manage and automate business processes through a graphical modeling environment; (2) Application integration--Integrates the internal and external IT systems that implement business process steps across the extended enterprise; (3) Internet-based communications--Exchanges business information between a company and its partners and customers in a secure and reliable fashion using Internet standards; and (4) Real-time analysis--Gathers key business and process information in real time, analyzes the data in real time, and selectively uses the results to automatically change business processes. We have initially targeted the telecommunications, business services, manufacturing and financial services industries. To date, we have licensed BusinessWare to over 30 companies, including CableVision, Covad, Deutsche Bank, Duke Energy, FedEx, Fujitsu PC, Inacom, Level 3, PageMart Wireless, Qwest, SBC, Sprint and Verio. We intend to expand our position in our current markets and leverage this position to penetrate other markets. As part of our strategy to establish BusinessWare as the eBusiness platform of choice, we have developed strong working relationships with leading system integrators, including Andersen Consulting and EDS. In addition, Vitria is developing vertical eBusiness solutions built on the BusinessWare platform. We were incorporated in California in October 1994. We intend to reincorporate in Delaware prior to the closing of this offering. Our principal executive offices are located at 500 Ellis Street, Mountain View, California 94043, and our telephone number is (650) 237-6900. Our Internet address is www.vitria.com. The information on our website is not incorporated by reference into this prospectus. 3 The Offering Common stock offered by Vitria.............. shares Common stock to be outstanding after this offering................................... shares Use of proceeds ............................ General corporate purposes, including relocation of our principal offices, expansion of our sales and marketing capabilities, product development, and other working capital requirements. See "Use of Proceeds." Proposed Nasdaq National Market symbol ..... VITR
The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 31, 1999, and excludes: . 2,061,740 shares subject to options outstanding as of March 31, 1999, at a weighted average exercise price of $0.41 per share; . 4,488,792 additional shares that we could issue under our stock option plans; and . 1,500,000 shares that we could issue under our employee stock purchase plan. Summary Financial Information (in thousands, except per share data)
Year Ended Three Months December 31, Ended March 31, ---------------------- ---------------- 1996 1997 1998 1998 1999 ------ ------ ------- ------- ------- Statement of Operations Data: Revenues: License............................ $ -- $ 955 $ 5,198 $ 139 $ 3,487 Service............................ 1,042 1,425 1,633 151 1,472 Government grant................... 984 1,255 796 371 250 ------ ------ ------- ------- ------- Total revenues.................... 2,026 3,635 7,627 661 5,209 Cost of revenues..................... 1,167 1,611 2,905 493 1,606 ------ ------ ------- ------- ------- Gross profit......................... 859 2,024 4,722 168 3,603 Income (loss) from operations........ 235 (655) (9,875) (1,607) (2,840) Net income (loss).................... 243 (580) (9,569) (1,516) (2,711) ====== ====== ======= ======= ======= Net income (loss) per share: Basic.............................. $ 0.03 $(0.06) $ (0.80) $ (0.14) $ (0.21) Diluted............................ $ 0.02 $(0.06) $ (0.80) $ (0.14) $ (0.21) Weighted average shares: Basic.............................. 7,044 9,915 12,003 10,490 12,699 Diluted............................ 13,835 9,915 12,003 10,490 12,699 Pro forma basic and diluted net loss per share........................... $ (0.48) $ (0.12) Pro forma basic and diluted weighted average shares...................... 20,111 23,250
March 31, 1999 ------------------- Actual As Adjusted ------- ----------- Balance Sheet Data: Cash and cash equivalents................................... $11,444 $ Working capital............................................. 10,771 Total assets................................................ 18,240 Deferred revenue............................................ 3,277 Stockholders' equity........................................ 12,023
- -------- See Note 1 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The as adjusted balance sheet data gives effect to the receipt of net proceeds of $4.5 million from the sale of 1,003,980 shares of Series D preferred stock in May 1999 and the net proceeds from the sale of the shares of common stock offered hereby at an assumed public offering price of $ per share after deducting the estimated underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization." 4 RISK FACTORS You should carefully consider the risks described below before purchasing our shares. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently see as immaterial may also impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. Risks Related to Vitria Our short operating history makes it difficult to evaluate our prospects. We were incorporated in October 1994. Until November 1997, we were engaged primarily in research and development of our initial products. We licensed our first product in November 1997 and have only recently established sales and service organizations. We will experience heightened risks and unexpected expenses and difficulties frequently encountered by small companies in an early stage of development. Such risks include: . fluctuations in operating results and uncertain growth rates; . market acceptance of our products; . dependence on system integrators; . long and variable sales and product implementation cycles; . concentration of revenues in a relatively small number of customers; . concentration of our revenues in a single product line; . need to manage rapidly expanding operations; . need to expand our sales and marketing organization; and . need to attract, train and recruit qualified personnel. If we do not manage these risks, our business will be significantly harmed. We have a large accumulated deficit and expect future losses. We have incurred substantial losses since inception as we funded the development of our products and technologies, and through our efforts to expand our sales and marketing organization. Our net losses for 1998 were $9.6 million, and our net losses for the three months ended March 31, 1999 were $2.7 million. As of March 31, 1999, we had an accumulated deficit of $12.9 million. We intend to continue to invest heavily in sales, marketing and research and development. As a result, we will need to significantly increase our quarterly revenues to achieve profitability. We cannot predict when we will operate profitably, if at all. Our operating results fluctuate significantly and we may not be able to maintain our existing growth rates. Although we have had significant revenue growth in recent quarters, our growth rates may not be sustainable and prospective investors should not use these past results to predict future operating margins or results. Our quarterly operating results have fluctuated significantly in the past and may vary significantly in the future. Our future operating results will depend on many factors, including the following: . size and timing of customer orders and product and service delivery; . level of demand for our professional services; . changes in the mix of our products and services; 5 . actions taken by our competitors, including new product introductions and pricing changes; . costs of maintaining and expanding our operations; . timing of our development and release of new and enhanced products; . costs and timing of hiring qualified personnel; . success in maintaining and enhancing existing relationships and developing new relationships with system integrators; . technological changes in our markets, including changes in standards for computer and networking software and hardware; . deferrals of customer orders in anticipation of product enhancements or new products; . delays in our ability to recognize revenue as a result of the decision by our customers to postpone software delivery; . customer budget cycles and changes in these budget cycles; . delays or reductions in spending for, or the implementation of, application software by our potential customers as companies attempt to stabilize their computer systems prior to January 1, 2000 in order to reduce the risk of computer system problems associated with the occurrence of the Year 2000; and . costs related to acquisition of technologies or businesses. Our revenues and operating results depend upon the volume and timing of customer orders and payments and the date of product delivery. Historically, a substantial portion of revenues in a given quarter have been recorded in the third month of that quarter, with a concentration of such revenues in the last two weeks of the third month. We expect this trend to continue and, therefore, any failure or delay in the closing of orders would have a material adverse effect on our quarterly operating results. Since our operating expenses are based on anticipated revenues and because a high percentage of these expenses are relatively fixed, a delay in the recognition of revenue from one or more license transactions could cause significant variations in operating results from quarter to quarter and cause unexpected results. We record as deferred revenues payments from customers that do not meet our revenue recognition policy requirements. Since only a small portion of our revenues each quarter is recognized from deferred revenues, our quarterly results will depend primarily upon entering into new contracts to generate revenues for that quarter. New contracts may not result in revenue in the quarter in which the contract was signed, and we may not be able to predict accurately when revenues from these contracts will be recognized. As a result of these and other factors, we believe that period-to-period comparisons of our historical results of operations are not a good predictor of our future performance. If our operating results are below the expectations of stock market analysts or investors, our stock price is likely to decline. Market acceptance of our products is uncertain. The limited sales and deployment of our products, and limited acceptance of process automation technology, makes our prospects difficult to predict. In addition, we have only licensed our products to a small number of customers, and only a portion of these customers have commenced commercial deployment. Successful deployment will require our products to interoperate with a variety of software applications and systems and, in some cases, to process a high number of transactions per second. If our products fail to satisfy these demanding technological objectives, our customers will be dissatisfied and our business will be harmed. Failure to establish a significant base of customer references will significantly reduce our ability to license our products to additional customers. 6 Our growth is dependent upon the successful development of relationships with system integrators. We believe that our future growth will depend significantly on our ability to develop and maintain successful strategic relationships with system integrators. These entities design and develop custom systems and perform custom integration of systems and applications. Some system integrators engage in joint marketing and sales efforts with us. These system integrators include Andersen Consulting and EDS Corporation. In many cases, these parties have extensive relationships with our existing and potential customers and influence the decisions of these customers. We rely upon these firms for recommendations of our products during the evaluation stage of the purchasing process, as well as for implementation and customer support services. Our strategy is to continue to increase the number of licenses to customers introduced to us by these entities and to rely on them to implement our products at customer sites. A number of our competitors have stronger relationships with these system integrators and, as a result, these system integrators may be more likely to recommend competitors' products and services. In addition, a number of our competitors have relationships with a greater number of these system integrators and, therefore, have access to a broader base of enterprise customers. Our failure to establish or maintain such relationships would significantly harm our ability to license and successfully implement our software products. In addition, we rely on the vertical market expertise and reach of these firms. Therefore, this failure would also harm our ability to develop new products for new vertical markets. We are currently investing, and plan to continue to invest, significant resources to develop these relationships. Our operating results could be adversely affected if these efforts do not generate license and service revenues necessary to offset such investment. In addition, if these relationships fail, we will have to devote substantially more resources to the distribution, sales and marketing, implementation and support of our products than we would otherwise, and our efforts may not be as effective as those of the system integrators. We depend on third party implementation providers. We rely on system integrators and other third party implementation providers. If the number of implementations of our products increases, we must maintain our existing relationships with these parties and build alliances with additional implementation partners. These parties are not contractually required to continue to help implement our products. As a result of the competition for the resources of these service providers, we may be unable to obtain sufficient resources to provide the necessary implementation services to support our needs. If these resources are unavailable, we will be required to provide these services internally, which would significantly limit our ability to meet our customers' implementation needs and adversely affect operating results. In addition, we cannot control the level and quality of service provided by our current and future implementation partners. Our dependence upon a limited number of customers could cause fluctuations in our results. A relatively small number of customers account for a significant portion of our total revenues. In 1998, sales to our ten largest customers accounted for 86% of total revenues. In 1998, sales to Level 3 accounted for 30% of total revenues, and sales to KPMG accounted for 12% of total revenues. In addition, research grants awarded to us by the National Institute of Standards and Technology, or NIST, accounted for 10% of revenues in 1998. Our license agreements do not generally provide for ongoing license payments. Therefore, we expect that revenues from a limited number of new customers will continue to account for a large percentage of total revenues in future quarters. Our ability to attract new customers will depend on a variety of factors, including the performance, quality, breadth and depth of our products. The loss or delay of individual orders could have a significant impact on revenues and operating results. Our failure to add new customers that make significant purchases of our products and services would harm our business. Our markets are highly competitive and our customers may choose to purchase our competitors' products. The market for our products is intensely competitive, evolving and subject to rapid technological change. The intensity of competition is expected to increase in the future. Increased competition is likely to result in 7 price reductions, reduced gross margins and loss of market share, any one of which could seriously harm our business. Our current competitors include: EAI vendors. We face competition from vendors offering Enterprise Application Integration, or EAI, software products. EAI products have generally been designed only to address the application integration needs of customers. These vendors include Active Software, Inc., CrossWorlds Software, Inc., and New Era of Networks, Inc., also known as NEON. A number of other companies are offering products that address specific aspects of EAI including BEA Systems, Inc., Forte Software, Inc., Hewlett-Packard Company, IBM Corporation and Tibco Software Inc. In the future, some of these companies may expand their products to also provide the process automation and real-time analysis functionality of our BusinessWare product suite. Internal IT departments. "In house" information technology departments of potential customers have developed or may develop systems that provide for some or all of the functionality of our BusinessWare product suite. We expect that internally developed application integration and process automation efforts will continue to be a principal source of competition for the foreseeable future. In particular, it can be difficult to sell our products to a potential customer whose internal development group has already made large investments in and progress towards completion of systems that our products are intended to replace. Other software vendors. We may in the future also encounter competition from major enterprise software developers such as Oracle Corporation, PeopleSoft, Inc., and SAP AG. In addition, Microsoft Corporation has announced its intention to introduce products which could compete with certain aspects of our products. These companies have significantly greater resources than Vitria. Many of our competitors have more resources and broader customer relationships than we do. In addition, many of these competitors have extensive knowledge of our industry. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to offer a single solution and increase the ability of their products to address customer needs. Although we believe that our solutions generally compete favorably with respect to these factors, our market is relatively new and is evolving rapidly. In the past, we have lost potential customers to competitors for various reasons, including lower prices for less complex implementations. We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater resources. We experience long and variable sales cycles. Our products are often used by our customers to deploy mission-critical solutions used throughout their organization. Customers generally consider a wide range of issues before committing to purchase our products, including product benefits, ability to operate with existing and future computer systems, ability to accommodate increased transaction volume and product reliability. Many customers will be addressing these issues for the first time. As a result, we or other parties, such as system integrators, must educate potential customers on the use and benefits of our products and services. In addition, the purchase of our products generally involves a significant commitment of capital and other resources by a customer. This commitment often requires significant technical review, assessment of competitive products, and approval at a number of management levels within the customer's organization. Because of these issues, our sales cycle has ranged from two to nine months and is difficult to predict for any particular license transaction. The cost and difficulties of our product implementation may harm our ability to license additional products to our customers. Our products are often purchased as part of large projects undertaken by our customers. Such projects are complex, time consuming and expensive. In many cases, our customers must interact with, modify, or replace significant elements of their existing computer systems. The costs of our products and services represent only a portion of the related hardware, software, development, training and consulting costs. The significant 8 involvement of third parties, such as system integrators, reduces the control we have over the implementation of our products or the quality of customer service provided to organizations which license our software. Failure by the customer to successfully deploy our products, or the failure by us or third party consultants to ensure customer satisfaction, could damage our reputation with existing and future customers. Any adverse impact on our ability to license additional software for new projects to our current customers and enter into software licenses with new customers would significantly harm our business. Our sales are concentrated in certain vertical markets. A key element of our strategy is to target certain vertical markets. Sales to customers in the telecommunications and financial services industries accounted for 57% of total revenues in 1998 and 73% of total revenues in the first quarter of 1999. Our future success will depend on our ability to continue to penetrate these vertical markets. Given our limited market penetration, the high degree of competition and the rapidly changing environment in these industries, there is no assurance that we will be able to continue sales in these industries at current levels. In addition, we intend to address new vertical markets. Customers in these new vertical markets are likely to have different requirements and may require us to change our product design or features, sales methods, support capabilities or pricing policies. A failure to successfully address these new vertical markets could adversely affect our business. In particular, our strategy is to develop packaged versions of our product which incorporate business processes of our target vertical markets. This presents technical challenges and will require collaboration with system integrators and the commitment of significant resources. If we are not successful in developing these targeted products or these products do not achieve market acceptance, our business could be harmed. Our operating results are substantially dependent on license revenues from one product family. Since 1998 a majority of our total revenues has been, and is expected to be, derived from the license of our BusinessWare product suite. Accordingly, our future operating results will depend on the demand for BusinessWare by future customers, including new and enhanced releases that are subsequently introduced. If our competitors release new products that are superior to BusinessWare in performance or price, or we fail to enhance BusinessWare and introduce new products in a timely manner, demand for our products may decline. A decline in demand for BusinessWare as a result of competition, technological change or other factors would seriously harm our business. If our products do not operate with the many hardware and software platforms and applications used by our customers, we will not be successful. We currently serve a customer base with a wide variety of constantly changing hardware, packaged software applications and networking platforms. To gain broad market acceptance, we believe that we will have to support our products on a variety of these platforms. Our success will depend, among others, on the following factors: . our ability to integrate our product with multiple platforms and existing, or legacy, systems and to modify our products as new versions of packaged applications are introduced; . access to the application programming interface, or API, of the packaged applications with which our products need to integrate; . the portability of our products, particularly the number of hardware platforms, operating systems and databases that our products can source or target; . our ability to anticipate and support new standards, especially Internet standards; . the integration of additional software modules under development with existing products; and . our management of software being developed by third parties for our customers or use with our product. 9 Our access to APIs of third-party applications are controlled by the provider of such applications. If the application provider denies or delays our access to APIs, our business may be harmed. Some application providers may become competitors or establish alliances with our competitors, increasing the likelihood that we would not be granted access to their APIs. We depend on the timely release of our products. We may fail to introduce or deliver new products on a timely basis, if at all. In the past, we have experienced delays in the commencement of commercial shipments of our BusinessWare products. If new releases or products are delayed or do not achieve market acceptance, we could experience a delay or loss of revenues and cause customer dissatisfaction. In addition, customers may delay purchases of products in anticipation of future releases. If customers defer material orders in anticipation of new releases or new product introductions, our business would be harmed. Our products rely on third party programming tools and applications. Our programs utilize Java programming technology provided by Sun Microsystems. In addition, we license technology related to the connectivity of our products to third-party database and other applications. Loss of the ability to use such technology, delays in upgrades, or failure of these third parties to support these technologies or offer technology compatible with emerging industry standards, could harm our business. New versions and releases of our products may contain errors or defects. Our products and their interactions with customers' software applications and IT systems are complex and, accordingly, there may be undetected errors or failures when products are introduced or as new versions are released. We have in the past discovered software errors in our new releases and new products after their introduction. For example, we discovered problems with respect to the ability of software written in Java to run sufficiently fast to meet the needs of users in certain high performance applications. These errors have resulted in product release delays, delayed revenues and customer dissatisfaction. We may in the future discover errors, including Year 2000 compliance errors and additional performance limitations, in new releases or new products after the commencement of commercial shipments. Since many customers are using our products for mission-critical business operations, any such occurrence could seriously harm our business. If we fail to manage the growth of operations, our business may be adversely affected. We must plan and manage our growth effectively in order to successfully offer products and services and implement our business plan in a rapidly evolving market. We continue to increase domestically, and to a lesser extent internationally, the scope of our operations, and have added a number of employees. For example, the number of our employees grew from 34 at December 31, 1997 to 157 at May 31, 1999. In particular, our sales force grew from four people at December 31, 1997 to 46 people at May 31, 1999. This growth has and will continue to place a significant strain on our management systems and resources. Many of our executive officers have not held positions of comparable responsibility at a public company. For us to effectively manage our growth, we must continue to do the following: . improve our operational, financial and management controls; . improve our reporting systems and procedures; . install new management and information control systems; and . expand, train and motivate our workforce. In particular, we are currently migrating to a new accounting software package designed to allow greater flexibility in reporting and tracking results. In addition, we are implementing new management information systems, including sales and marketing management and human resources management software. If we fail to 10 install this software in an efficient and timely manner, or if the new systems fail to adequately support our level of operations, then we could incur substantial additional expenses to remedy such failures. In addition, by October 1999 we expect to move our primary offices to a larger facility in Sunnyvale, California. This move may disrupt our sales and marketing and research and development activities and adversely impact our business if it is not done efficiently. If we do not keep pace with technological change, our customers may purchase our competitors' products. Our industry is characterized by very rapid technological change, frequent new product introductions and enhancements, changes in customer demands and evolving industry standards. Our existing products will be rendered obsolete if we fail to introduce new products or product enhancements that meet new customer demands, support new standards or integrate with new or upgraded versions of packaged applications. We have also found that the technological life cycles of our products are difficult to estimate. We believe that our future success will depend upon our ability to continue to enhance our current product line while we concurrently develop and introduce new products that anticipate emerging technology standards and keep pace with competitive and technological developments. Failure to do so will harm our ability to compete. As a result, we are required to continue to make substantial product development investments. If we fail to attract and retain qualified personnel, our business may be adversely affected. Our success greatly depends on the continued service of our key technical, sales and senior management personnel. None of these persons are bound by an employment agreement. The loss of any of our senior management or other key research, development, sales and marketing personnel could have a material adverse effect on our future operating results. In particular Dr. JoMei Chang, our President and Chief Executive Officer, and Dr. Dale Skeen, our Chief Technology Officer, would be difficult to replace. In addition, our future success will depend in large part upon our ability to attract, retain and motivate highly skilled employees. In particular, we are actively seeking a vice president of engineering. We face significant competition for individuals with the skills required to develop, market and support our products and services. We cannot assure that we will be able to recruit and retain sufficient numbers of these highly skilled employees. Our business and reputation could be harmed if we have improperly reported wages or made withholdings for our employees and independent contractors. On May 25, 1999 we were subject to an onsite audit by the California Employment Development Department. The purpose of the audit was to ensure that we have properly reported wages and made all required withholdings and other payments under California law for our employees and independent contractors. We provided the documentary information requested in connection with the audit, and we are awaiting the results of the audit. To the extent that we are required to make significant additional payments on behalf of our employees or independent contractors, or pay penalties, our business and operating results could be harmed. Risks Related to Our Industry We depend on the increasing use of the Internet and on the growth of electronic commerce. If the use of the Internet and electronic commerce does not grow as anticipated, our business will be seriously harmed. We depend on the increased acceptance and use of the Internet as a medium for electronic commerce and the adoption by businesses of eBusiness solutions. Rapid growth in the use of the Internet is a recent occurrence. As a result, acceptance and use may not continue to develop at historical rates and a sufficiently broad base of business customers may not adopt or continue to use the Internet as a medium of commerce. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty, and there exist few proven services and products. 11 If we fail to adequately protect our proprietary rights, we may lose such rights and our business may be adversely affected. Our success is dependent upon our ability to develop and protect our proprietary technology and intellectual property rights. We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We have no issued patents. Despite our efforts to protect our proprietary rights, existing laws afford only limited protection. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, there can be no assurance that we will be able to protect our proprietary rights against unauthorized third-party copying or use. Use by others of our proprietary rights could materially harm our business. Furthermore, policing the unauthorized use of our products is difficult and expensive litigation may be necessary in the future to enforce our intellectual property rights. Certain of our license agreements require us to place the source code for our products in escrow. These agreements generally provide these customers with a limited, non-exclusive license to use this code if: . we fail to provide products or maintenance and support; . we cease to do business without a successor; or . there is a bankruptcy proceeding by or against Vitria. Our business would be harmed if customers were granted this access. Our products could infringe the intellectual property rights of others causing costly litigation and the loss of significant rights. We expect that third parties may claim that we have infringed their current or future intellectual property rights. We expect that software developers in our market will increasingly be subject to infringement claims as the number of products in different software industry segments overlap. Any claims, with or without merit, could be time-consuming, result in costly litigation, prevent product shipment or cause delays, or require us to enter into royalty or licensing agreements, any of which could harm our business. Patent litigation in particular has complex technical issues and inherent uncertainties. In the event an infringement claim against us is successful and we cannot obtain a license on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be harmed. Furthermore, former employers of our current and future employees may assert that our employees have improperly disclosed to us or are using confidential or proprietary information. There are many risks associated with international operations which may adversely affect our business. To date, we have not generated any revenue from sales outside of the United States. We have recently opened an office in the United Kingdom and intend to establish additional offices in Europe. We anticipate devoting significant resources and management attention to expanding international opportunities. There are a number of challenges to establishing operations outside of the United States and we may be unable to successfully establish international operations. If we fail to sell our products in international markets, our business would be adversely affected. Potential year 2000 problems with our software, third party equipment or our internal operating systems could adversely affect our business. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning in the year 2000, these code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates, known as "Year 2000 compliant." As a result, in a few months, computer systems and/or software products used by many companies may need to be upgraded to be Year 2000 compliant. While we have assessed our products, services and internal systems, certain internal 12 financial packages have not yet been implemented and may require further assessment by us. We believe we are currently expending sufficient resources to review our products and services, as well as our internal management information systems in order to remedy those products, services and systems that are not Year 2000 compliant. We expect such modifications will be made on a timely basis and we do not believe that the cost of such modifications will have a material effect on our operating results. There can be no assurance, however, that we will be able to modify such products, services and systems in a timely and successful manner to be Year 2000 compliant, which could have a material adverse effect on our operating results. Conversely, concerns regarding Year 2000 compliance could cause a significant number of companies, including our current customers, to reevaluate their current system needs and, as a result, consider switching to other systems and suppliers. Although we have not experienced the effects of such a trend to date, if customers defer purchases of our products because of such a reallocation, it could adversely affect our operating results. Risks Related to Our Offering The substantial number of shares that will be eligible for sale in the near future may adversely affect the market price for our common stock. Sales of substantial number of shares of our common stock in the public market following this offering could materially adversely affect the market price for our common stock. The number of shares of common stock available for sale in the public market is limited by restrictions under federal securities law and under certain agreements that our stockholders have entered into with the underwriters and with us. Those lockup agreements restrict our stockholders from selling, pledging our otherwise disposing of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Credit Suisse First Boston Corporation. However, Credit Suisse First Boston Corporation may, in its sole discretion, release all or any portion of the common stock from the restrictions of the lockup agreements. The following table indicates approximately when the 26,836,895 shares of our common stock that are not being sold in the offering but which were outstanding as of June 1, 1999 will be eligible for sale into the public market:
Eligibility of Restricted Shares for Sale in Public Market ------------------------- At effective date................................ 0 180 days after effective date.................... 24,693,040 At various times after the effective date........ 2,143,855
Additionally, of the 2,303,900 shares issuable upon exercise of options to purchase our common stock outstanding as of June 1, 1999, approximately 324,076 shares will be vested and eligible for sale 180 days after the completion of this offering. For a further description of the eligibility of shares for sale into the public market following the offering. See "Shares Eligible for Future Sale." We may need to raise additional capital that may not be available. We expect that the net proceeds from this offering will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. After that, we may need to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, or at all. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things: . develop or enhance our products and services; . acquire technologies, products or businesses; . expand operations, in the United States or internationally; . hire, train and retain employees; or . respond to competitive pressures or unanticipated capital requirements. Our failure to do any of these things could seriously harm our business. 13 Our stock price may be volatile because our shares have not been publicly traded before. Prior to this offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after the offering and therefore we cannot predict the extent to how liquid this market will become. We will negotiate and determine the initial public offering price with the representatives of the underwriters and this price may not be indicative of prices that will prevail in the trading market. As a result you may be unable to sell your shares of common stock at or above the offering price. The market price of the common stock may fluctuate significantly in response to the following factors, most of which are beyond our control: . variations in our quarterly operating results; . changes in securities analysts' estimates of our financial performance; . changes in market valuations of similar companies; . announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; . loss of a major customer or failure to complete significant license transactions; . additions or departures of key personnel; and . fluctuations in stock market price and volume, which are particularly common among securities of software and Internet-oriented companies. We are at risk of securities class action litigation due to our expected stock price volatility. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources, and could seriously harm our business. We have implemented certain anti-takeover provisions. Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include: . establishment of a classified board of directors such that not all members of the board may be elected at one time; . authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; . prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; . limitations on who may call special meetings of stockholders; . prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and . establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. In addition, Section 203 of the Delaware General Corporations Law and the terms of our stock option plans may discourage, delay or prevent a change in control of Vitria. 14 Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions. Upon completion of this offering, our executive officers, directors and principal stockholders will beneficially own, in the aggregate, approximately % of our outstanding common stock. As a result, these stockholders will be able to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could have the effect of delaying or preventing a change of control of Vitria and will make some transactions difficult or impossible without the support of these stockholders. See "Principal Stockholders." 15 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "anticipates," "believes," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "should" or "will" or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under "Risk Factors," that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results, unless required by law. 16 USE OF PROCEEDS We estimate that the net proceeds to us from the sale of the shares of our common stock to be approximately million, approximately $ million if the underwriters' over-allotment option is exercised in full, at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. We expect to use approximately $1.4 million of the net proceeds of the offering for capital expenditures in connection with leasing a new facility for our primary offices, which we expect to occupy by October 1999. The remaining net proceeds will be used for general corporate purposes, including expansion of sales and marketing capabilities, product development, and other working capital requirements. We will retain broad discretion over the use of the net proceeds of this offering. The amounts and timing of the expenditures for these purposes may vary significantly depending on numerous factors, such as the progress of our research and development efforts, technological advances and the competitive environment for our products. We may also use a portion of the net proceeds to acquire or invest in other businesses, products and technologies. We have no agreements or understandings regarding any such acquisition or investments. We believe that our available cash, together with the net proceeds of this offering, will be sufficient to meet our capital requirements for at least the next twelve months. Pending use of the net proceeds, we intend to invest the net proceeds in short-term, interest bearing, investment grade securities. DIVIDEND POLICY We have never paid or declared any cash dividends. We currently expect to retain earnings for use in the operation and expansion of our business, and therefore do not anticipate paying any cash dividends. See "Description of Capital Stock." 17 CAPITALIZATION The following table sets forth the following information: . Our actual capitalization as of March 31, 1999; . Our pro forma capitalization after giving effect to (1) the receipt of net proceeds of approximately $4.5 million from the sale of 1,003,980 shares of Series D preferred stock in May 1999 and (2) the conversion of all outstanding shares of preferred stock upon the closing of this offering; and . Our pro forma as adjusted capitalization to give effect to the sale of the shares of common stock at an assumed initial public offering price of $ per share in this offering, less the estimated underwriting discounts and commissions and estimated offering expenses.
March 31, 1999 ------------------------------- Pro Pro Forma Actual Forma As Adjusted -------- -------- ----------- (in thousands, except share data) Stockholders' equity: Convertible Preferred Stock: issuable in series, $0.001 par value; 13,469,745 shares authorized, 10,551,635 actual shares issued and outstanding; no shares issued and outstanding, pro forma; 5,000,000 shares authorized; no shares issued and outstanding, pro forma as adjusted.......... $ 11 $ -- $ Common Stock: $0.001 par value; 51,000,000 shares authorized, 15,541,180 actual shares issued and outstanding; 27,096,795 shares issued and outstanding, pro forma; 250,000,000 shares authorized; shares issued and outstanding, pro forma as adjusted.................................... 16 27 Additional paid-in capital................... 31,391 35,890 Unearned stock-based compensation............ (6,456) (6,456) Accumulated deficit.......................... (12,939) (12,939) -------- -------- ------- Total stockholders' equity................. 12,023 16,522 -------- -------- ------- Total capitalization..................... $ 12,023 $ 16,522 $ ======== ======== =======
This table excludes the following shares: . 2,061,740 shares of common stock issuable upon the exercise of stock options outstanding under our stock option plans, and 4,488,792 additional shares of common stock available for issuance under these stock option plans; and . 1,500,000 shares of common stock available for issuance under our employee stock purchase plan. 18 DILUTION The pro forma net tangible book value of our common stock, on March 31, 1999, after giving effect to the receipt of the net proceeds of approximately $4.5 million from the sale of 1,003,980 shares of Series D preferred stock in May 1999 and the conversion of all outstanding shares of preferred stock upon the closing of the offering was approximately $16,522,000, or approximately $0.61 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities divided by the number of shares of common stock outstanding. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of our common stock immediately afterwards. Assuming our sale of shares of common stock offered by this prospectus at an assumed initial public offering price of $ per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our net tangible book value at March 31, 1999 would have been approximately $ million or $ per share. This represents an immediate decrease in net tangible book value of $ per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share................... $ Pro forma net tangible book value per share at March 31, 1999... $0.61 Decrease per share attributable to new investors................ ----- Pro forma net tangible book value per share after this offering... ------ Dilution per share to new investors............................... $ ======
The following table summarizes, on a pro forma basis, as of March 31, 1999, the differences between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by the new investors purchasing shares in this offering. We have assumed an initial public offering price of $ per share, and we have not deducted estimated underwriting discounts and commissions and estimated offering expenses in our calculations.
Shares Purchased Total Consideration Average ------------------ ------------------- Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- --------- Existing stockholders.......... 27,096,795 % $32,554,000 % $1.20 New investors.................. ---------- ----- ----------- ----- Total........................ % $ % ========== ===== =========== =====
The foregoing discussion and tables assume no exercise of any outstanding stock options. The exercise of options outstanding under our stock option plans having an exercise price less than the offering price would increase the dilutive effect to new investors. See "Capitalization" and "Management-- Employee Stock Plans." If the underwriters exercise their over-allotment in full, the following will occur: . the number of shares of common stock held by existing stockholders will decrease to or approximately % of the total number of shares of our common stock outstanding; and . the number of shares held by new investors will increase to , or approximately % of the total number of our common stock outstanding after this offering. 19 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with Vitria's financial statements and related notes included elsewhere in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The statement of operations data for the years ended December 31, 1996, 1997 and 1998, and the balance sheet data as of December 31, 1997 and 1998, are derived from the audited financial statements included elsewhere in this prospectus. The statement of operations data for the period from inception (October 17, 1994) to December 31, 1994 and for the year ended December 31, 1995, and the balance sheet data as of December 31, 1994, 1995 and 1996, are derived from the audited financial statements not included elsewhere in this prospectus. The statement of operations data for the three months ended March 31, 1998 and 1999 and the balance sheet data as of March 31, 1999 are derived from the unaudited financial statements included elsewhere in this prospectus. The historical results are not necessarily indicative of results to be expected for future periods.
Three Months Ended Period from Inception Year Ended December 31, March 31, (October 17, 1994) to ------------------------------ -------------------- December 31, 1994 1995 1996 1997 1998 1998 1999 --------------------- ------ ------ ------ ------- --------- --------- (in thousands, except per share data) Statement of Operations Data: Revenues: License................ $ -- $ -- $ -- $ 955 $ 5,198 $ 139 $ 3,487 Service................ 67 376 1,042 1,425 1,633 151 1,472 Government grant....... -- -- 984 1,255 796 371 250 ---- ------ ------ ------ ------- --------- --------- Total revenues....... 67 376 2,026 3,635 7,627 661 5,209 ---- ------ ------ ------ ------- --------- --------- Cost of revenues: License................ -- -- -- 18 -- -- 62 Service................ -- 15 183 338 2,109 122 1,294 Government grant....... -- -- 984 1,255 796 371 250 ---- ------ ------ ------ ------- --------- --------- Total cost of revenues............ -- 15 1,167 1,611 2,905 493 1,606 ---- ------ ------ ------ ------- --------- --------- Gross profit............ 67 361 859 2,024 4,722 168 3,603 ---- ------ ------ ------ ------- --------- --------- Operating expenses: Sales and marketing.... -- -- 80 1,143 6,572 701 2,889 Research and development........... 124 575 397 841 4,794 717 1,961 General and administrative........ 28 37 147 695 1,807 234 726 Amortization of stock- based compensation.... -- -- -- -- 1,424 123 867 ---- ------ ------ ------ ------- --------- --------- Total operating expenses............ 152 612 624 2,679 14,597 1,775 6,443 ---- ------ ------ ------ ------- --------- --------- Income (loss) from operations............. (85) (251) 235 (655) (9,875) (1,607) (2,840) Interest income......... -- 14 8 75 306 91 129 ---- ------ ------ ------ ------- --------- --------- Net income (loss)....... $(85) $ (237) $ 243 $ (580) $(9,569) $ (1,516) $ (2,711) ==== ====== ====== ====== ======= ========= ========= Net income (loss) per share: Basic.................. $ -- $(0.05) $ 0.03 $(0.06) $ (0.80) $ (0.14) $ (0.21) Diluted................ $ -- $(0.05) $ 0.02 $(0.06) $ (0.80) $ (0.14) $ (0.21) Weighted average shares: Basic.................. -- 4,843 7,044 9,915 12,003 10,490 12,699 Diluted................ -- 4,843 13,835 9,915 12,003 10,490 12,699 Pro forma basic and diluted net loss per share.................. $ (0.48) $ (0.12) Pro forma basic and diluted weighted average shares......... 20,111 23,250
December 31, ------------------------------- March 31, 1994 1995 1996 1997 1998 1999 ---- ---- ---- ------- ------- --------- (in thousands) Balance Sheet Data: Cash and cash equivalents............ $ 33 $128 $399 $ 9,138 $12,792 $11,444 Working capital...................... (92) 179 585 9,762 12,336 10,771 Total assets......................... 136 252 961 11,141 20,000 18,240 Deferred revenue..................... -- -- -- 223 2,874 3,277 Stockholders' equity (deficit)....... (85) 241 636 10,099 13,391 12,023
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements, trend analysis and other information contained in the following discussion relative to markets for our products and trends in revenues, gross margins and anticipated expense levels, as well as other statements including words such as "anticipate," "believe," "could" "estimate," "expect" "intend" and "plan" and other similar expressions constitute forward- looking statements. These forward-looking statements are subject to business and economic risks and uncertainties, and our actual results of operations may differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors" as well as other risks and uncertainties referenced in this prospectus. Overview Vitria was incorporated in October 1994. We initially generated revenues exclusively through consulting contracts with third parties and government grants from NIST. In June 1997, we commercially released our first products. With the initial release of these products, we accelerated the development of our sales and marketing organizations. We have incurred significant losses since inception, and as of March 31, 1999, we had an accumulated deficit of $12.9 million. We derive revenues from three sources: licenses, services, and government grants. Since the introduction of our products in 1997, licenses have become our primary source of revenue. Products are typically licensed to customers for a perpetual term, with pricing based on the number of systems or applications managed. We record license revenues when a license agreement has been signed by both parties, the fee is fixed and determinable, collection of the fee is probable, and delivery of our product has occurred. For electronic transmissions, we consider our products to have been delivered when the access code to download the software from the Internet has been provided to the customer. Payments received in advance of revenue recognition are recorded as deferred revenue. Service revenues include product maintenance, consulting and training. Customers who license BusinessWare products normally purchase maintenance contracts. These contracts provide unspecified software upgrades and technical support over a specified term, which is typically twelve months. Maintenance contracts are usually paid in advance, and revenues from these contracts are recognized ratably over the term of the contract. Customers typically purchase consulting services from us to enlist our support in implementation activities related to their purchase of BusinessWare licenses. These consulting services are generally sold on a time and materials basis and recognized as the services are performed. We also offer training services which are sold on a per student basis and recognized as the classes are attended. We have received government grants to conduct research and development on emerging technologies. These grants permit us to be reimbursed for costs related to these activities. We recognize revenues from these grants as the research is performed and qualifying costs are incurred. We market our products through our direct sales force, and augment our sales efforts through relationships with system integrators and other strategic partners. While our revenues to date have been derived exclusively from accounts in the United States, we opened an office in the United Kingdom in June 1999. We believe international revenues will represent a more meaningful component of our total revenues as we grow. To date, we have not experienced significant seasonality of revenues. We expect that future results may be affected by the fiscal or quarterly budget cycles of our customers. A relatively small number of customers account for a significant portion of our total revenues. As a result, the loss or delay of individual orders can have a significant impact on our revenues. In 1998, sales to our ten largest customers accounted for 86% of total revenues. In 1998, revenues from Level 3, KPMG and NIST accounted for 30%, 12% and 10% of total revenues. We expect that revenues from a limited number of 21 customers will continue to account for a large percentage of total revenues in future quarters. Our ability to attract new customers will depend on a variety of factors, including the reliability, security, scalability and cost- effectiveness of our products. We have a limited operating history which makes it difficult to predict future operating results. We believe our success requires expanding our customer base and continuing to enhance our BusinessWare products. We intend to continue to invest significantly in sales, marketing and research and development and expect to incur operating losses for at least the next eighteen months. Our operating expenses are relatively fixed and are based on anticipated revenue trends; a delay in the recognition of revenue from one or more license transactions could cause significant variations in operating results from quarter to quarter and could result in unforeseen losses. Fees from contracts that do not meet our revenue recognition policy requirements are recorded as deferred revenues. While a small portion of our revenues each quarter is recognized from deferred revenue, our quarterly performance will depend primarily upon entering into new contracts to generate revenues for that quarter. New contracts may not result in revenue during the quarter in which the contract was signed, and we may not be able to predict accurately when revenues from these contracts will be recognized. As a result of these factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. It is likely that in some future quarter our operating results will be below the expectations of public market analysts and investors. In such event, the price of our common stock would likely decline. 22 Results Of Operations The following tables set forth statement of operations data for each of the five quarters ended March 31, 1999, as well as the percentage of our total revenues represented by each item. This information has been derived from our unaudited financial statements. The unaudited financial statements have been prepared on the same basis as the audited financial statements contained in this prospectus and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of such information. You should read this information in conjunction with our annual audited financial statements and related notes appearing elsewhere in this prospectus. Our quarterly operating results are expected to vary significantly from quarter to quarter and you should not draw any conclusions about our future results from the results of operations for any quarter.
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, 1998 1998 1998 1998 1999 -------- -------- --------- -------- -------- (in thousands) Statement of Operations Data: Revenues: License.................. $ 139 $ 888 $ 1,643 $ 2,528 $ 3,487 Service.................. 151 111 279 1,092 1,472 Government grant......... 371 54 121 250 250 ------- ------- ------- ------- ------- Total revenues.......... 661 1,053 2,043 3,870 5,209 ------- ------- ------- ------- ------- Cost of revenues: License.................. -- -- -- -- 62 Service.................. 122 198 540 1,249 1,294 Government grant......... 371 54 121 250 250 ------- ------- ------- ------- ------- Total cost of revenues.. 493 252 661 1,499 1,606 ------- ------- ------- ------- ------- Gross profit............... 168 801 1,382 2,371 3,603 ------- ------- ------- ------- ------- Operating expenses: Sales and marketing...... 701 1,653 1,585 2,633 2,889 Research and development............. 717 1,346 1,369 1,362 1,961 General and administrative.......... 234 399 617 557 726 Amortization of stock- based compensation...... 123 215 412 674 867 ------- ------- ------- ------- ------- Total operating expenses............... 1,775 3,613 3,983 5,226 6,443 ------- ------- ------- ------- ------- Loss from operations....... (1,607) (2,812) (2,601) (2,855) (2,840) Interest income............ 91 69 56 90 129 ------- ------- ------- ------- ------- Net loss................... $(1,516) $(2,743) $(2,545) $(2,765) $(2,711) ======= ======= ======= ======= ======= As a Percentage of Total Revenues: Revenues: License.................. 21% 84% 80% 65% 67% Service.................. 23 11 14 28 28 Government grant......... 56 5 6 7 5 ------- ------- ------- ------- ------- Total revenues.......... 100 100 100 100 100 ------- ------- ------- ------- ------- Cost of revenues: License.................. -- -- -- -- 1 Service.................. 19 19 26 32 25 Government grant......... 56 5 6 7 5 ------- ------- ------- ------- ------- Total cost of revenues.. 75 24 32 39 31 ------- ------- ------- ------- ------- Gross profit............... 25 76 68 61 69 ------- ------- ------- ------- ------- Operating expenses: Sales and marketing...... 106 157 78 68 56 Research and development............. 108 128 67 35 38 General and administrative.......... 35 38 30 15 14 Amortization of stock- based compensation...... 19 20 20 17 16 ------- ------- ------- ------- ------- Total operating expenses............... 268 343 195 135 124 ------- ------- ------- ------- ------- Loss from operations....... (243) (267) (128) (74) (55) Interest income............ 14 7 3 3 3 ------- ------- ------- ------- ------- Net loss................... (229)% (260)% (125)% (71)% (52)% ======= ======= ======= ======= =======
23 Revenues License. We recognized no license revenue in 1996. License revenues increased from $955,000 in 1997 to $5.2 million in 1998 primarily due to the growth in the number of licenses to new customers. Comparing the first quarter of 1998 to the first quarter of 1999, license revenues increased from $139,000 to $3.5 million due to the growth in the number of licenses to new customers and higher average transaction size. Service. Service revenues increased from $1.0 million in 1996, to $1.4 million in 1997, to $1.6 million in 1998. Prior to the introduction of our products in 1997, we partially funded our operations through the provision of custom design services. Throughout 1998, resources were redeployed from custom design services to product support services in support of the newly introduced products. This redeployment resulted in a volatile revenue stream and slower overall growth in service revenues in 1998, as illustrated by the drop in service related revenues in the second quarter of 1998. Comparing the first quarter of 1998 to the first quarter of 1999, service revenues grew from $151,000 to $1.5 million. This substantial increase in service revenues began in the fourth quarter of 1998 due to the growth of maintenance, support and consulting revenues associated with license agreements signed in earlier periods. These service revenues continued to increase in the first quarter of 1999 as we supported a number of new deployments of our products. Government grant. Government grant revenues were $984,000 in 1996, $1.3 million in 1997 and $796,000 in 1998. Government grant revenues were $371,000 in the first quarter of 1998 and $250,000 in the first quarter of 1999. Revenues vary from quarter to quarter based upon the extent to which our internal development resources are deployed to work on activities covered under the grants. Since each grant is awarded on a competitive basis, we cannot predict whether these government grant revenues will continue in future periods. Based on our current awards, we can conduct research activities and seek reimbursement for up to an additional $1.4 million of associated costs. Cost of Revenues License. Cost of license revenues consists primarily of royalty payments to third parties for technology incorporated in certain of our products. We began incurring these costs in the first quarter of 1999 due to the licensing to our customers of products which incorporated third-party technology. Service. Cost of service revenues consists primarily of salaries, facility costs, and payments to third party consultants incurred in providing customer support, training, and implementation services. Cost of service revenues was $183,000 in 1996, $338,000 in 1997 and $2.1 million in 1998. As a percentage of our service revenues, these costs represented 18% in 1996, 24% in 1997 and 129% in 1998. In the first quarter of 1998, cost of service revenues was $122,000, or 81% of service revenues and, in the first quarter of 1999, $1.3 million, or 88% of service revenues. In the last three quarters of 1998 we invested heavily in service personnel and infrastructure in anticipation of supporting a larger customer base in future periods. This increased investment, combined with slower service revenue growth during this period, resulted in a substantial increase in the cost of services measured as a percentage of service revenues. Comparing the third quarter of 1998 to the fourth quarter of 1998 and the first quarter of 1999, our cost of service revenues increased significantly in dollar amounts primarily due to our engagement of a third-party service provider to support our significantly increased activity. We expect that cost of service revenues will continue to increase in dollar amount as we continue to expand our customer support organization to meet anticipated customer demand. Government grant. Under the terms of the government grants, we receive reimbursements for costs incurred in connection with related research activities. The employees who work on the grant activities are members of our research and development team. Our work related to these grants varies from quarter to quarter depending on the priorities in the research and development organization. As eligible work is performed by the research and development team, the allowable costs are charged to cost of government grant revenues. These charged costs are exactly equal to the grant revenues recognized. 24 Operating Expenses Sales and marketing. Sales and marketing expenses consist primarily of salaries, commissions, field office expenses, travel and entertainment and promotional expenses. Sales and marketing expenses increased from $80,000 in 1996, to $1.1 million in 1997, to $6.6 million in 1998, and were $701,000 in the first quarter of 1998 and $2.9 million in the first quarter of 1999. These expenses decreased as a percentage of total revenues from approximately 106% in the first quarter of 1998 to approximately 55% in the first quarter of 1999. Sales and marketing expense increased in dollar amounts due primarily to the hiring of additional sales and marketing personnel, increased commissions associated with higher sales and costs associated with expanded promotional activities. The decrease in sales and marketing expenses in dollar amount and as a percentage of total revenues from the second quarter to the third quarter of 1998 resulted from the departure of several marketing employees and a decrease in promotional spending. We expect that sales and marketing expenses will continue to increase in dollar amounts as we continue to expand our sales and marketing efforts, establish additional U.S. and international sales offices and increase promotional activities. Research and development. Research and development expenses include costs associated with the development of new products, enhancements to existing products, and quality assurance activities. These costs consist primarily of employee salaries, benefits, and the cost of consulting resources that supplement the internal development team. We have not capitalized any software development costs and have expensed all such costs as incurred. Research and development expenses increased from $397,000 in 1996, to $841,000 in 1997, to $4.8 million in 1998, and were $717,000 in the first quarter of 1998 and $2.0 million in the first quarter of 1999. The increases in the dollar amounts of research and development expenses during these comparison periods were primarily attributable to costs related to the hiring of additional personnel. Research and development expenses consistently increased on a quarterly basis, with the exception of the third and fourth quarters of 1998. While the dollars spent on research and development continued to increase during this period, the portion of these dollars that were spent on activities related to the government grants and charged to cost of government grant revenues increased when compared to earlier quarters. We anticipate that we will continue to devote substantial resources to research and development and that such expenses will increase in dollar amounts. General and administrative. General and administrative expenses consist primarily of salaries for administrative, executive and finance personnel, recruiting costs, information systems costs, professional service fees and allowances for doubtful accounts. These expenses increased from $147,000 in 1996, to $695,000 in 1997, to $1.8 million in 1998 and were $234,000 in the first quarter of 1998 and $726,000 in the first quarter of 1999. Increases in dollar amounts were primarily attributable to an increase in the number of employees, higher professional service fees, and increased allowances for doubtful accounts. We believe that our general and administrative expenses will continue to increase in dollar amounts as a result of our growing operations and the expenses associated with operating as a public company. Amortization of stock-based compensation. Amortization of stock-based compensation includes the amortization of unearned employee stock-based compensation and expenses for stock granted to consultants in exchange for services. Employee stock-based compensation expense is amortized over a five- year vesting period using the multiple option approach. In connection with the grant of certain employee stock options, we recorded aggregate unearned stock- based compensation of $8.6 million through March 31, 1999 and expect to record an additional $2.4 million in the second quarter of 1999. We amortized employee stock-based compensation expense of $1.3 million in 1998 and $867,000 for the quarter ended March 31, 1999. We expect to record employee stock-based compensation expenses of approximately $1.1 million for the quarter ending June 30, 1999, $1.1 million for the quarter ending September 30, 1999, $1.0 million for the quarter ending December 31, 1999 and $846,000 for the quarter ending March 31, 2000. We anticipate such expense to decrease consistently in future periods. Unearned compensation expense will be reduced for future periods to the extent that options are terminated prior to full vesting. We recorded expenses of $147,000 for the year ended December 31, 1998 in connection with stock issued for services. Interest Income Interest income is primarily comprised of income earned on our cash and cash equivalent balances. 25 Provision For Income Taxes We incurred operating losses for all periods with the exception of 1996, when we had net income of $243,000. Our 1996 tax liability, however, was reduced due to the utilization of net operating loss carryforwards. Our deferred tax assets primarily consist of net operating loss carryforwards, nondeductible allowances and research and development tax credits. We have recorded a valuation allowance for the full amount of our net deferred tax assets, as the future realization of the tax benefit is not currently likely. As of December 31, 1998, we had net operating loss carryforwards for federal tax purposes of approximately $7.2 million and for state tax purposes of approximately $3.3 million. These federal and state tax loss carryforwards are available to reduce future taxable income and expire at various dates through fiscal 2013. Under the provisions of the Internal Revenue Code, certain substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. Liquidity and Capital Resources Since inception, we have financed our operations through private sales of common and preferred stock, with net proceeds totaling $22.7 million. As of March 31, 1999, we had $11.4 million in cash and cash equivalents, and $10.8 million in working capital with no outstanding debt. In May 1999, we completed an additional round of private funding which resulted in net proceeds of $4.5 million. Net cash generated in operating activities was $223,000 in 1996. Net cash used in operating activities was $873,000 in 1997 and $6.8 million in 1998 and $1.5 million in the three months ended March 31, 1999. Net cash used to fund operating activities in each of these periods reflect net losses, offset in part by increases in deferred revenues. Net cash used in investing activities was $104,000 in 1996, $431,000 in 1997, $947,000 in 1998 and $300,000 for the first quarter of 1999. Investing activities consist primarily of purchases of computer hardware and software, office furniture and equipment and leasehold improvements. Net cash generated from financing activities was $152,000 in 1996, $10.0 million in 1997, $11.4 million in 1998 and $476,000 for the first quarter of 1999. Net cash generated from financing activities consists primarily of net proceeds from the issuance of convertible preferred stock. We signed a lease for a new principal facility in April 1999. Lease payments under the agreement commence in August 1999 and continue for forty-nine months, resulting in aggregate lease expenses of approximately $500,000 per quarter. We have commitments for capital expenditures in 1999 of $1.4 million related to the establishment of this facility, which we expect to occupy by October 1999. We expect to experience significant growth in our operating expenses for the foreseeable future in order to execute our business plan. As a result, we anticipate that operating expenses and planned capital expenditures will constitute a material use of our cash resources. In addition, we may utilize cash resources to fund acquisitions or investments in other businesses, technologies or product lines. We believe that available cash and cash equivalents and the net proceeds from the sale of the common stock in this offering will be sufficient to meet our working capital and operating expense requirements for at least the next twelve months. Thereafter, we may require additional funds to support our working capital and operating expense requirements or for other purposes and may seek to raise such additional funds through public or private debt or equity financings. There can be no assurance that such additional financing will be available, or if available, will be on reasonable terms and not dilutive to our stockholders. Recently Issued Accounting Pronouncements Our revenue recognition policies are in accordance with Statement of Position or SOP 97-2, "Software Revenue Recognition" which we adopted on January 1, 1998, with the exception of the provision deferred by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2." The adoption of SOP 97-2 resulted, for certain agreements, in the deferral of software license revenues that would have been recognized upon delivery of the related software under prior accounting standards. Prior to January 1, 1998, we recorded 26 revenue in accordance with the provisions of SOP 91-1, "Software Revenue Recognition". In December 1998, SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition" was issued. We adopted SOP 98-9 for all transactions entered into in fiscal 1999. The adoption of this statement did not have a material impact on our operating results, financial position or cash flow. In March 1998, SOP, 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" was issued. SOP 98-1 establishes the accounting for costs of software products developed or purchased for internal use, including when such costs should be capitalized. We adopted SOP 98-1 in fiscal 1999. The adoption of this did not have a material effect on our financial position, results of operations or cash flow. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. Because we do not currently hold any derivative instruments and do not engage in hedging activities, we expect the adoption of SFAS No. 133 will not have a material impact on our financial position, results of operations or cash flow. We will be required to adopt SFAS No. 133 in fiscal 2000. Qualitative and Quantitative Disclosures About Market Risk We develop products in the United States and currently market our products in North America. We anticipate marketing products in Europe in the second half of 1999. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the short-term nature of our investments, we believe that there is no material risk exposure. Therefore, no quantitative tabular disclosures are required. Year 2000 Readiness The "Year 2000 issue" refers generally to the problems that some software may have in determining the correct century for the year. For example, software with date-sensitive functions that is not Year 2000 compliant may not be able to distinguish whether "00" means 1900 or 2000, which may result in failures or the creation of erroneous results. We designed all of our products to be Year 2000 compliant when configured and used in accordance with the related documentation, and provided that the underlying operating system of the host machine and any other software used with or in the host machine or our products are Year 2000 compliant. However, we have not exhaustively tested our products for Year 2000 compliance. We continue to respond to customer questions about prior versions of our products on a case-by-case basis. We have defined Year 2000 compliant as the ability to: . Correctly handle date information needed for the December 31, 1999 to January 1, 2000 date change; . Function according to the product documentation provided for this date change, without changes in operation resulting from the advent of a new century, assuming correct configuration; . Respond to two-digit date input in a way that resolves the ambiguity as to century in a disclosed, defined and predetermined manner; . Store and provide output of date information in ways that are unambiguous as to century if the date elements in interfaces and data storage specify the century; and . Recognize year 2000 as a leap year. 27 We are seeking assurances from our vendors that licensed software is Year 2000 compliant. To date, we have received assurances from a subset of the vendors of our enterprise resource planning software, and technology support software as to their Year 2000 compliance. Despite testing by us and current and potential customers, and assurances from developers of products incorporated into our products, our products may contain undetected errors or defects associated with Year 2000 date functions. Known or unknown errors or defects in our products could result in delay or loss of revenues, diversion of development resources, damage to our reputation, increased service and warranty costs, or liability from our customers, any of which could seriously harm our business. As a specific example, older versions of Vitria's BusinessWare product were designed to work with Sun Microsystem's Java Developer Kit version 1.1.5. Sun Microsystems has announced that this version and earlier versions of the Java Developer Kit are not Year 2000 compliant. Vitria customers who are still using these older versions of the BusinessWare products are thus subject to Year 2000 operating risk due to this Java Developer Kit compliance problem. We are currently working with each of the affected customers to migrate them to newer versions of the BusinessWare product which use Sun Microsystem's Java Developer Kit version 1.1.7. Sun Microsystems claims that version 1.1.7 is Year 2000 compliant. We have not made any representations to our customers concerning the Year 2000 readiness of this development kit. To the extent one or more of these customers fail to migrate to the newer Vitria BusinessWare products, these customers could potentially suffer operating difficulties in systems using Vitria's BusinessWare products. Vitria could be exposed to an indirect liability in this event. Some commentators have predicted significant litigation regarding Year 2000 compliance issues, and we are aware of these lawsuits against other software vendors. Because of the unprecedented nature of this litigation, it is uncertain whether or to what extent we may be affected by it. There is a bill being discussed by Congress which could eliminate liability for certain failures to achieve Year 2000 compliance. There can be no assurance that this bill will be signed into law or that it will provide us with any protection. We have initiated an assessment of our material internal information technology systems, including both our own software products and third-party software and hardware technology. We have not initiated an assessment of our non-information technology systems. We expect to complete testing of our information technology systems in 1999. To the extent that we are not able to test the technology provided by third-party vendors, we are seeking assurances from these vendors that their systems are Year 2000 compliant. We are not currently aware of any material operational issues or costs associated with preparing our internal information technology and non-information technology systems for the Year 2000. However, we may experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in our internal information technology and non-information technology systems. We do not currently have any information concerning the Year 2000 compliance status of our customers. Our current or future customers may incur significant expenses to achieve Year 2000 compliance. If our customers are not Year 2000 compliant, they may experience material costs to remedy problems, or they may face litigation costs. In either case, Year 2000 issues could reduce or eliminate the budgets that current or potential customers could have for or delay purchases of our products and services. As a result, our business could be seriously harmed. We have funded our Year 2000 plan from operating cash flows and have not separately accounted for these costs in the past. To date, these costs have not been material. We will incur additional costs related to the Year 2000 plan for administrative personnel to manage the project, outside contractor assistance, technical support for our products, product engineering and customer satisfaction. In addition, we may experience material problems and costs with Year 2000 compliance that could seriously harm our business. We do not have a contingency plan to address situations that may result if our critical operations are not Year 2000 ready, and we do not anticipate the need to do so. The cost of developing and implementing such a plan may itself be material. Finally, we are also subject to external forces that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failure interruptions. 28 Year 2000 issues affecting our business, if not adequately addressed by us, our third party vendors or suppliers or our customers, could have a number of "worst case" consequences. These include: . claims from our customers asserting liability, including liability for breach of warranties related to the failure of our products and services to function properly, and any resulting settlements or judgments; and . our inability to manage our own business. 29 BUSINESS This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in these forward-looking statements. Factors that may cause differences include, but are not limited to, those discussed in "Risk Factors." Vitria is pioneering a new category of software platform for real-time eBusiness. Our product suite, BusinessWare, combines business process automation and analysis, application integration and Internet-based communications in one comprehensive platform. BusinessWare is designed to provide business managers with an infrastructure that gives them end-to-end visibility and control of their business operations, enabling them to reduce time to market, rapidly respond to change, and manage the growing complexity of business interactions across the extended enterprise. We have initially targeted the telecommunications, business services, manufacturing and financial services industries. To date, we have licensed BusinessWare to over 30 companies, including CableVision, Covad, Deutsche Bank, Duke Energy, FedEx, Fujitsu PC, Inacom, Level 3, PageMart Wireless, Qwest, SBC, Sprint and Verio. We intend to expand our position in our current markets and leverage this position to penetrate other markets. As part of our strategy to establish BusinessWare as the eBusiness platform of choice, we have developed strong working relationships with leading system integrators, including Andersen Consulting and EDS. In addition, Vitria is developing vertical eBusiness solutions built on the BusinessWare platform. Industry Background Rapid advances in new technology, deregulation and global competition are transforming the business environment. In particular, the use of the Internet to conduct business, often referred to as "eBusiness," is radically changing business-to-business, business-to-consumer and business-to-employee interactions. Many companies are exploring innovative business models to capitalize on this eBusiness opportunity. These eBusiness participants include established companies transitioning to new Internet-enabled business models, new companies formed specifically to deliver products and services over the Internet, and providers of the Internet infrastructure, such as networking and telecommunications companies. These companies operate in an environment characterized by rapid change and increasingly complex business interactions with partners and customers. The business processes that define these complex interactions often span an "extended enterprise" that links companies with an Internet-enabled network of partners and customers. To compete in this new environment, companies must find ways to streamline and manage mission-critical business processes across their extended enterprise. From order fulfillment to customer service, the benefits of automating business processes across the extended enterprise are significant. For example, telecommunications service providers that automate manual order hand-offs between themselves and local network providers can reduce service activation times, resulting in increased customer satisfaction. Similarly, companies that allow their customers to place and track orders using self- service Web applications can increase revenue opportunities while reducing order management and customer service costs. Deploying eBusiness solutions that deliver these business benefits is a significant challenge. Companies need to define and manage the business processes that implement these solutions. Once defined, these business processes must be tied into the underlying information technology, or IT, systems that support them so that information can flow smoothly from the first step of the process to the last. Business processes must often coordinate the flow of information across multiple stand-alone IT systems, including both packaged applications and legacy systems. These stand-alone systems add additional complexity to the effort because they typically are not designed to work with each other. 30 The following diagram illustrates the challenges of deploying an eBusiness solution. The diagram depicts the order fulfillment process for a company that allows customers to place orders directly, using a self-service Web application, and outsources its inventory management and shipping processes to a distribution partner. The diagram shows how each step in the order fulfillment process directs the flow of information across internal and external IT systems, and how these systems must be integrated to smoothly process the customer order from initial placement to final product delivery to customer billing. [Graphic shows the flow of an order from a customer to a Web browser to an order entry system to an order fulfillment system to an inventory management system to a billing system.] In order to successfully deploy sophisticated eBusiness solutions, companies need to (1) define, manage and automate their business processes, (2) integrate the internal and external IT systems that implement business process steps, (3) exchange business information between a company and its partners and customers in a secure and reliable fashion using Internet standards, and (4) gather and analyze, in real time, key business and process information, and use the results to automatically change business processes. Until now, no solution has combined these four elements in a single platform optimized for the deployment of eBusiness solutions. Current approaches typically focus on the use of enterprise application integration, or EAI, software products. These approaches suffer from the following limitations: Weak Process Automation and Real-Time Analysis Functionality. EAI products address the application integration aspect of eBusiness solution deployment. However, they do not generally provide the functionality to manage and automate the business processes that define eBusiness solutions. In addition, EAI products typically do not support real-time analysis of business and process information. Require Extensive IT Involvement. EAI products generally require multiple custom software programs to define and implement business processes. As a result, the design, implementation and modification of business processes require extensive involvement by IT personnel. This makes it is difficult for business managers to manage their business processes. Limited Scalability. EAI products are typically built on "hub-and-spoke" architectures that are designed for single site deployment. Generally, solutions based on these architectures can neither be incrementally expanded, or scaled, to support high transaction volumes nor distributed across multiple locations without incurring significant administrative overhead. Lack of Support for Internet Standards. Ideally, companies need to seamlessly exchange information between their corporate intranets and the Internet. EAI products typically use proprietary communication protocols and data formats, rather than Internet standards, such as HTTP and XML, to exchange information between applications. This makes it difficult for companies to deploy eBusiness solutions that link them with their partners and customers over the Internet. We believe that there is a significant market opportunity for a software platform that addresses these limitations and enables companies to rapidly deploy comprehensive eBusiness solutions. The independent research firm, International Data Corporation, identified this opportunity as the "Businessware Management System" market in a May 1999 report. IDC estimates that the market will grow from $313 million in 1998 to more than $5 billion by 2003. 31 Vitria Solution Vitria is pioneering a new category of software platform for real-time eBusiness. Our product suite BusinessWare, enables customers to deploy sophisticated eBusiness solutions within and across their extended enterprises. BusinessWare automates business processes that link partners and customers, and integrates the underlying IT systems that must work together to support these processes. BusinessWare combines in a single solution the four elements that we believe are essential for an eBusiness platform: (1) Process Automation--Empowers business users to define, manage and automate business processes through a graphical modeling environment; (2) Application Integration--Integrates the internal and external IT systems that implement business process steps across the extended enterprise; (3) Internet-Based Communications--Exchanges business information between a company and its partners and customers in a secure and reliable fashion using Internet standards; and (4) Real-Time Analysis--Gathers key business and process information in real time, analyzes the data in real time, and selectively uses the results to automatically change business processes. Once customers use BusinessWare to define their business process models and integrate the underlying IT systems, BusinessWare starts controlling the flow of information across the IT systems as specified by the process models. BusinessWare continuously analyzes the customer's business processes and can automatically change the processes in response to this analysis. This capability allows companies to transform the information flowing through their IT systems into "actionable intelligence" that enables business managers to automate and optimize their business operations. BusinessWare allows customers to solve their eBusiness problems using graphical models rather than developing custom programs. Business managers use the visual process modeling environment to define their business processes graphically, and then use our application integration products to map the graphical models to the underlying IT systems. Our graphical process models are "directly executable," which means that they can be deployed immediately, without programming by IT personnel. We believe that BusinessWare provides the following benefits to customers: Easy for Business Managers to Use. The combination of our graphical process modeling and automation functionality with our robust application integration foundation, allows customers to focus on the business objectives of their eBusiness solutions rather than the mechanics of solution implementation. Reduces Time to Market. We enable customers to reduce their time to market by allowing them to graphically define and automate new business processes to support the delivery of new products and services. Leverages IT Investment. We help companies to preserve and leverage the substantial IT investment they have made by allowing them to assemble eBusiness solutions using their existing IT systems. Allows Rapid Response to Change. We enable customers to graphically model their existing business processes, and then continuously refine and optimize them as business conditions change over time. To change a business process, managers simply change the associated graphical model. Provides a Comprehensive Solution. BusinessWare combines the four elements of an eBusiness platform in a single comprehensive solution. This eliminates the need for our customers to purchase and integrate separate solution components from multiple vendors. Scales to Support High Transaction Volumes and Distributed Deployment. Our platform features an architecture that uses the same distributed processing principles as those used on the Web. Unlike alternative "hub-and-spoke" architectures that are optimized for single site deployment, our "federated" architecture 32 allows customers to incrementally add servers to support increasing loads, without adding administrative complexity. Enables Mission-Critical Deployments. The importance of our customers' eBusiness initiatives demand that our software platform meets high standards for performance, security and reliability. BusinessWare has been designed for superior performance to accommodate the high transaction volumes enabled by the Internet. In addition, our solution was designed to ensure secure communication of business information across the extended enterprise using rigorous authentication and data encryption technologies. BusinessWare provides high availability through multiple server redundancy and automatic failover to backup systems. Strategy Our objective is to establish BusinessWare as the leading software platform for real-time eBusiness. Key elements of our strategy to achieve this objective include: Leverage and Expand Strategic Alliances. We intend to leverage our relationships with leading system integrators, such as Andersen Consulting and EDS, to extend our reach and provide comprehensive solutions to our customers. We have established a group to focus exclusively on strengthening and expanding these relationships. Our partners' relationships with the most senior levels of management facilitate access to strategic projects which often generate large commitments from our customers. We believe that this access also reduces the length of our sales cycles. In addition, our partners' software deployment expertise and vertical industry knowledge shortens implementation time and helps us to secure add-on business. Develop Market-Focused Solutions. We are developing packaged eBusiness solutions built on the BusinessWare platform which capture business processes used widely in specific vertical markets. We intend to leverage the industry expertise of our system integrator partners and our customers to rapidly build these market-focused solutions. We believe customers and partners will derive significant time-to-market benefits and reduce their implementation and maintenance costs by deploying these out-of-the-box business solutions. This strategy also provides us with additional revenue opportunities while reducing our internal development costs. Expand Product and Technology Leadership. We have established a new category of software platform that combines process automation, application integration, Internet-based communications, and real-time analysis in a single unified environment. We intend to continue to introduce innovative products which enable our customers to rapidly deploy complex business solutions and extend their enterprise easily and cost-effectively. We also intend to extend our technological leadership by continuing to invest significantly in research and development. We have assembled a team of prominent developers and engineers with expertise in Internet communication protocols, messaging technologies, and enterprise software and have established a corporate culture which fosters continuous product innovation. In addition, by promoting and embracing emerging Internet standards, we intend to facilitate the broad acceptance of our eBusiness platform. Target Fast-Growing Vertical Markets. To date, we have targeted the telecommunications, business services, manufacturing and financial services industries. These markets are characterized by high rates of growth, dynamic business processes and rapid adoption of eBusiness solutions. We intend to expand our position in these markets and leverage this position to target other markets. Extend Relationships with Customers. The strategic importance of BusinessWare to our customers allows us to develop relationships with their senior decision makers. This visibility to senior management and a focused implementation approach facilitate the rapid adoption and deployment of BusinessWare throughout the organization. We intend to leverage these relationships as we introduce new products and services. Additionally, because BusinessWare is used by companies to automate and manage their interactions across their extended enterprise, we are introduced to opportunities with our customers' business partners. 33 Products BusinessWare is a software product suite designed to provide customers with a comprehensive platform for rapidly deploying sophisticated eBusiness solutions. The BusinessWare platform is illustrated and summarized below: [Graphic: Depicts the components of the Vitria product suite including the following: . BusinessWare Modeler . BusinessWare Administrator . BusinessWare Server . BusinessWare Automator . BusinessWare Analyzer . BusinessWare Communicator . BusinessWare Connectors and Transformers . BusinessWare Common Services . Customer's IT systems] BusinessWare Modeler. The Modeler is BusinessWare's process modeling component. Business managers use the Modeler to create graphical models of their business processes using a point-and-click interface. These process models provide an intuitive visual representation of interdependent processing steps. Users can add business rules to each processing step to provide additional modeling flexibility. Once specified and saved in the BusinessWare Repository, process models can be directly executed by the BusinessWare Automator. The Modeler supports advanced modeling constructs that allow users to define and manage complex, real-world business processes. The Modeler supports Unified Modeling Language, the industry standard for business process modeling and automation. BusinessWare Server. The BusinessWare Server provides the host environment for five functional components: Automator, Analyzer, Communicator, Connector and Transformer. The BusinessWare Server is designed to provide a set of common services that are shared by each of these components: . Security: provides rigorous support for authentication, data encryption and access control. . Transaction management: ensures the integrity of business processes and related updates to underlying IT systems. . Persistence: provides automatic recovery in the event of system or network failures. . Repository: stores and manages all BusinessWare metadata, such as process models. BusinessWare Automator. Automator is BusinessWare's process automation component. It executes the business process models defined by users in the Modeler and stored in the BusinessWare Repository. Automator automates business processes by coordinating the flow of information among the underlying IT systems. BusinessWare Analyzer. Analyzer selectively gathers and analyzes business and process information throughout the extended enterprise. Analyzer provides real-time visibility into key business metrics, that business users need to manage their business effectively. Analyzer also helps companies to rapidly identify processing bottlenecks, thus providing them with the information they need to support their continuous process improvement efforts. Analyzer's results can be automatically fed back into Automator to change business processes in real time. BusinessWare Communicator. Communicator provides the communications backbone that ties together all of the BusinessWare components and the IT systems that they integrate. Communicator provides fast and secure information delivery with multiple quality of service options. Communicator supports Internet standards, such as HTTP and XML. Communicator is designed to interoperate with third-party products, like IBM MQ Series and Microsoft MSMQ. 34 BusinessWare Connectors and Transformers. Connectors and Transformers together provide BusinessWare's application integration functionality, enabling heterogeneous IT systems to exchange information. . Connectors translate business information to Internet standards, such as XML. We provide off-the-shelf Connectors for a number of popular packaged applications, messaging systems and databases. We also provide a toolkit that enables customers to rapidly develop Connectors for custom or legacy systems. . Transformers map data structures from one IT system to another. In addition to our own transformation components, customers have the option to augment their BusinessWare solution with transformation products from third parties. BusinessWare Administrator. Administrator is BusinessWare's graphical systems management and monitoring component. Administrator allows systems administrators to perform local and remote administration from any BusinessWare server. Customers and Case Studies We have initially targeted the telecommunications, business services, manufacturing and financial services industries. As of June 15, 1999, over 30 customers had licensed BusinessWare, including the following customers who have paid $250,000 or more for licenses and related services: A.B. Watley, Inc. ICG Communications, Inc. Advanced Radio Telecom Corp. Inacom Corporation CableVision Systems Corporation KPMG LLP Covad Communications Company Level 3 Communications, Inc. Deutsche Bank AG PageMart Wireless, Inc. Duke Energy Corporation Qwest Communications Corporation Federal Express Corporation SBC Communications, Inc. Sprint Communications Fujitsu PC Corporation Company, L.P. Hewitt Associates LLC Verio, Inc.
The following case studies illustrate how some of our customers have used BusinessWare: Covad Communications Group, Inc. Covad is a leading high-speed Internet and network access provider offering DSL-based high speed Internet access through Internet Service Providers, or ISPs. Covad sells its service indirectly to small and medium businesses and consumers through ISPs and sells directly to large enterprise customers. Opportunity: As a new player in the fiercely competitive telecommunications market, Covad needed to make it simple and inexpensive for ISPs, to resell Covad's high-speed Internet access service. Specifically, they wanted to create an eBusiness link with ISPs that would automate the DSL ordering process, improve service levels and lower operating costs. Solution: Covad is using BusinessWare to build an eBusiness solution which enables ISPs to automate their business interactions with Covad. The solution will automate the DSL ordering process and integrate each ISP's order entry system with Covad's order management system. Covad expects the solution to have significant business benefits for both themselves and their ISP partners. Major benefits for ISPs include faster time to market with a DSL-based Internet access service, automatic access to order status information, and lower administration costs. Major benefits for Covad include deeper, stronger links with their ISP partners, lower operating costs, and the ability to make it easier for ISPs to do business with Covad than with competing DSL providers. 35 Fujitsu PC Corporation Fujitsu PC Corporation, or FPC, is a subsidiary of Fujitsu Limited, a leading provider of information technology products and solutions for the global marketplace. FPC delivers high-performance mobile computing solutions for the North American market. Opportunity: Faced with growing competitive pressures, FPC needed to automate their order fulfillment process for custom-configured notebook computers. This required FPC to integrate disparate IT systems, including a Web-based order configuration system, an enterprise resource planning system, and a manufacturing execution system. FPC's goal is to reduce the time required to ship orders and improve customer satisfaction. Solution: FPC is using BusinessWare to link the IT systems that support their order fulfillment process. This will eventually automate the entire fulfillment process for custom-configured notebook computers. The BusinessWare solution is expected to provide end-to-end visibility and control of the process, significantly reducing the time required to take customer orders, and assemble and ship custom-configured notebook computers. FPC also expects to lower costs and increase customer satisfaction. Inacom Corporation Inacom Corp. is a global Fortune 500 technology services leader. The company designs, implements and manages distributed technology infrastructure solutions that optimize clients' return on IT investments. Opportunity: One of Inacom's services is to provide an outsourced PC service and support operation to meet the needs of Fortune 500 companies and major PC hardware vendors. This service is designed to reduce PC service and support costs. Inacom needed a solution that would allow them to automate these processes, tailor them to the unique requirements of each client, and proactively manage them to best-in-industry service levels. Solution: Inacom used BusinessWare to graphically model and automate their PC service and support processes. In parallel with this initiative, the company used BusinessWare to integrate its internal IT systems, including a legacy system for managing service dispatch requests, with their customers' systems. Now, Inacom's clients can send PC service dispatch requests over the Internet, using EDI or XML, to Inacom's PC repair technicians. The solution also allows clients to receive automatic status updates on all open service requests. This initial project established BusinessWare as Inacom's standard platform for eBusiness solutions. Subsequent projects will leverage this platform to automate additional mission-critical business processes. One project will use BusinessWare to enable Inacom's PC hardware vendor customers to automatically update Inacom's internal systems each time they change a PC part. Technology We have assembled a team of software engineers with expertise in distributed computing, model-driven business process automation, real-time query processing and publish-and-subscribe communications. Our founders, Dr. JoMei Chang and Dr. Dale Skeen, have established reputations as technology innovators. Dr. Chang is the principal patent author for one of the first "reliable multicast" protocols. Multicast protocols reduce traffic congestion over the Internet. Dr. Skeen is the principal author of multiple patents for publish-and-subscribe communication, which is the preferred communication method for enterprise application integration. In recognition of our significant technology expertise, the National Institute of Standards and Technology's Advanced Technology Program awarded us three prestigious, multi-million dollar research grants to address complex business integration and supply chain management problems. For a description of these awards, see "Government Grants." 36 Model-Driven Business Process Automation. We have pioneered and commercialized the concept of direct manipulation and execution of business processes through graphical models. This powerful concept combines visual process modeling with business rules to express and automate complex business scenarios using terminology and concepts familiar to business users. Advanced modeling functions, such as nested and concurrent processes, are designed to provide users with the sophisticated modeling power they need to express the real-world complexity of today's business operations. In addition, our process models are dynamically adaptable through a capability known as parameterized sub-processing. Specifically, this allows companies to define business processes that can automatically select alternate processing flows based on current business conditions. Real-Time Analysis. We have pioneered and commercialized the concept of a general purpose real-time query tool. This tool allows users to define queries that continuously monitor and analyze, in real time, information flowing across their business processes and IT systems. Real-time query processing is fundamentally different from more traditional query processing. Whereas traditional query processing optimizes the one-time, bulk evaluation of a single query across a large number of records, Vitria's technology is designed to optimize the incremental evaluation of a single new message against a large number of outstanding queries. Since it is possible to have thousands of real- time queries concurrently active, we have developed patent-pending algorithms for optimizing the processing of a large number of concurrent queries. Vitria has also pioneered technology to perform complex real-time queries that join two or more real-time information streams together, or that join a real-time information stream to information stored in a database. This capability significantly increases the power of real-time querying. We have developed patent-pending algorithms to execute and optimize such complex, real- time queries. Scalability and Reliability. BusinessWare implements a federated architecture and a naming scheme modeled after that used by the Web. This kind of architecture partitions workload among an unlimited number of servers and supports incremental expansion, as needed. Additional servers can be added in a manner that is transparent to end users and system administrators, resulting in scalability to high orders of magnitude without unnecessary administrative overhead. BusinessWare is also designed to support the caching and replication of information across multiple servers to provide faster information access and robust failover and recovery support in the event of system or network failures. BusinessWare supports the option to use a reliable multicast protocol that is built on top of the Internet-based IP multicast protocol. Multicast protocols provide a particularly efficient method for disseminating real-time information to a large number of users. The combination of our federated architecture, extensive use of cached and replicated information, and support for multicast protocols is designed to enable our solutions to communicate business information across the extended enterprise with little latency, and high scalability and reliability. Security. Security is essential for business-critical applications operating over extranets and the Internet. BusinessWare provides a security framework based on the widely accepted Secure Socket Layers, or SSL, standard. Our security framework supports digital signatures, multiple authentication services and multiple encryption services, including both public key and private key encryption. The framework is designed to be easily extended to support additional authentication and encryption services. All BusinessWare components provide discretionary authorization of users through the use of Access Control Lists. In addition, BusinessWare can support multiple security domains and provide secure communication between domains. Security domains allow the selective and secure sharing of information among business partners, while allowing each partner to retain control over their own security policies. Sales and Marketing We license our products and sell services primarily through our direct sales organization, complemented by the selling and support efforts of our system integrators and other strategic partners. As of June 1, 1999, our sales force consisted of 46 sales professionals and technical sales engineers located in nine domestic locations and an office in the United Kingdom. We have sales offices in the greater metropolitan areas of Boston, 37 Chicago, Dallas, Denver, Irvine, New York City (two offices), San Jose, Washington D.C., and London, England. System engineers who provide pre-sales support to potential customers on product information and deployment capabilities complement our direct sales professionals. We plan to significantly expand the size of our direct sales organization and to establish additional sales offices domestically and internationally. Our sales process requires that we work closely with targeted customers to identify short-term technical needs and long-term goals. Our sales team, which includes both sales and technical professionals, then works with the customer to develop a proposal to address these needs. In many cases, we collaborate with our customers' senior management team, including the chief executive officer, chief information officer and chief financial officer, to develop mission-critical applications. The level of customer analysis and financial commitment required for many of our product implementations has caused our sales cycle to range from two to nine months. We focus our marketing efforts on educating potential customers, generating new sales opportunities, and creating awareness of our products and their applications. We conduct a variety of marketing programs to educate our target market, including seminars, trade shows, direct mail campaigns, press relations, and industry analyst programs. Strategic Partners To enhance the productivity of our sales and service organizations, we have established relationships with system integrators, value-added resellers and technology partners. System Integrators. We have established strategic relationships with a number of leading system integrators including Andersen Consulting and EDS. Many of our system integrators have deep relationships across a broad range of enterprise customers and our relationships with these system integrators often enable us to reach key decision makers within these enterprises more quickly, thus reducing sales cycles. The significant financial and technical resources of many of our system integrators help us secure large, mission-critical engagements. Working with system integrators enables us to leverage our service organization and shorten solution implementation time. In addition, by leveraging our partners' domain expertise, we can more effectively and rapidly build custom templates which codify business process solutions for vertical markets. Value-Added Resellers. We also deliver BusinessWare through value-added resellers or "VARs." VARs enable us to seed the market with specific pre- packaged solutions built on the BusinessWare platform. Many of these VARs specialize in providing solutions to particular industries such as telecommunications and financial services. We intend to leverage our VARs' industry expertise to deliver solutions that accelerate our penetration in key markets. Technology Partners. Our technology partners include application software, database and hardware providers. We work with these partners to ensure compatibility of BusinessWare with their software and hardware. We have relationships with leading companies including Clarify, Inc., Hewlett-Packard Company, IBM, Informix Corp., Microsoft Corporation, Oracle Corp., Siebel Systems, Inc., Sun Microsystems Inc., Sybase Inc. and The Vantive Corporation. Service and Support The primary function of our professional services organization is to facilitate the implementation of our products by system integrators. We advise our customers and system integrators on BusinessWare project analysis, implementation and performance training. Our professional services organization works closely with our strategic partners to train their personnel in the design and implementation of our products. Customer support is available by telephone and over the Internet seven days a week, 24 hours a day. Our education services group delivers education and product training to our customers and strategic partners, 38 concerning the design of business solutions using BusinessWare, as well as the technical aspects of deployment, use and maintenance. Our professional service and customer support organizations consisted of 26 employees as of June 1, 1999. Research and Development As of June 1, 1999, our engineering group consisted of 56 employees, divided into the following groups: Product Development. Our product development teams are organized around components of BusinessWare. Each component is developed independently in order to speed design and testing. Development of the customer interface is centralized, with the goal of creating a consistent and unified product look and feel. Advanced Research. Our advanced research group works independently from our product development teams to research and develop advanced architectures and technologies. This group also closely monitors developments in industry standards related to eBusiness, Internet technologies, operating systems, networks and software applications. Quality Assurance and Platform Support. This group designs and manages a process designed to identify and prevent software defects throughout the development cycle. Documentation. This group is responsible for creating and maintaining customer and system integrator documentation for our products. Research and development expenses, together with expenditures under NIST grants, were $1.4 million in 1996, $2.1 million in 1997 and $5.6 million in 1998. Government Grants We have received three governmental research grants that have funded, and continue to fund, portions of our research and development. We were awarded our first grant in January 1996 by the National Institute of Standards and Technology, commonly referred to as NIST, under its advanced technology program. This NIST program is a partnership between government and private industry to encourage commercially promising, but highly challenging research. We used this grant to fund research and development of model-driven technologies for integrating IT systems. We received an additional grant from NIST in October 1997 to conduct further research and development into these technologies. Under the terms of these grants, we retain all intellectual property rights to all research results except that the federal government has a non-exclusive, non-transferable, paid-up license to any patents arising from this research. In addition, the NIST grants require us to commercially license the research results. We are fulfilling this obligation by incorporating our results into our BusinessWare software products. Our third grant was awarded to us as a member of the Extended Enterprise Coalition for Integrated Collaborative Manufacturing Systems, also known as EECOMS. EECOMS is a consortium of vendors, customers and providers of enabling technologies, whose goal is to develop new frameworks to improve supply chain logistics, product delivery to customers, product inventories and the competitive ability of U.S. manufacturers in the global marketplace. We were awarded this grant in January 1998 and the grant is scheduled to conclude in December 2000. Funds under this grant have been used to develop supply chain scenarios for the extended enterprise. Research results from this grant are jointly owned by EECOMS and the federal government is granted a non-exclusive license to these research results and related intellectual property rights. We have not used these funds for technology development. 39 Competition The market for our products is competitive, evolving and subject to rapid technological change. The intensity of competition is expected to increase in the future. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which could seriously harm our business. Our competitors include: EAI vendors. We face competition from vendors offering EAI software products. These vendors include Active Software, Inc., CrossWorlds Software, Inc., and New Era of Networks, Inc., also known as NEON. A number of other companies are offering products that address specific aspects of EAI including BEA Systems, Inc., Forte Software, Inc., Hewlett-Packard Company, IBM and Tibco Software Inc. EAI products address the application integration needs of customers. In the future, some of these companies may expand their products to also provide the advanced process automation and real time analysis functionality of our BusinessWare product suite. Internal IT departments. "In house" information technology departments of potential customers have developed or may develop systems that substitute for some or all of the functionality of our BusinessWare product suite. We expect that internally developed application integration and process automation efforts will continue to be a principal source of competition for the foreseeable future. In particular, it can be difficult to sell our products to a potential customer whose internal development group has already made large investments in and progress towards completion of systems that our products are intended to replace. Other software vendors. We may in the future also encounter competition from major enterprise software developers such as Oracle Corporation, PeopleSoft, Inc., and SAP AG. In addition, Microsoft Corporation has announced its intention to introduce products which could compete with certain aspects of our products. We believe that the principal competitive factors in our market include: . the breadth and depth of solutions; . product quality and performance; . ability of products to operate with multiple software applications; . ability to implement solutions; . customer service; . relationship with system integrators; . establishment of a significant base of reference customers; . strength of core technology; and . product price. Although we believe that our solutions compete favorably with respect to these factors, our market is relatively new and is evolving rapidly. In the past, we have lost potential customers to competitors for various reasons, including lower prices for less complex implementations. We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater resources. Intellectual Property and Other Property Rights Our success is dependent upon our ability to develop and protect our proprietary technology and intellectual proprietary rights. We rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, and patent, copyright and trademark laws to accomplish these goals. 40 We license BusinessWare pursuant to non-exclusive license agreements which impose restrictions on customers' ability to utilize the software. In addition, we seek to avoid disclosure of our trade secrets, including but not limited to, requiring employees, customers and others with access to our proprietary information to execute confidentiality agreements with us and restricting access to our source code. We also seek to protect our software, documentation and other written materials under trade secret and copyright laws. We have four U.S. patent applications pending. It is possible that the patents that we have applied for, if issued, or our potential future patents may be successfully challenged or that no patent will be issued from our patent application. It is also possible that we may not develop proprietary products or technologies that are patentable, that any patent issued to us may not provide us with any competitive advantages, or that the patents of others will seriously harm our ability to do business. Despite our efforts to protect our proprietary rights, existing laws afford only limited protection. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, there can be no assurance that we will be able to protect our proprietary rights against unauthorized third-party copying or use. Use by others of our proprietary rights could materially harm our business. Furthermore, policing the unauthorized use of our products is difficult and expensive litigation may be necessary in the future to enforce our intellectual property rights. It is also possible that third parties will claim that we have infringed their current or future products. We expect that eBusiness developers will increasingly be subject to infringement claims as the number of products in different industry segments overlap. Any claims, with or without merit, could be time-consuming, result in costly litigation, prevent product shipment, cause delays, or require us to enter into royalty or licensing agreements, any of which could harm our business. Patent litigation in particular has complex technical issues and inherent uncertainties. In the event an infringement claim against us was successful and we could not obtain a license on acceptable terms or license a substitute technology or redesign to avoid infringement, our business would be harmed. Employees As of June 1, 1999, we had a total of 157 employees, including 56 in research and development, 55 in sales and marketing, 26 in customer support, professional services and training, and 20 in administration and finance. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good. Our success greatly depends on the continued service of our key technical, sales and senior management personnel. None of these persons are bound by an employment agreement. The loss of any of our senior management or other key research, development, sales and marketing personnel could have a material adverse effect on our future operating results. In particular Dr. JoMei Chang, our President and Chief Executive Officer, and Dr. Dale Skeen, our Chief Technology Officer, would be difficult to replace. In addition, our future success will depend in large part upon our ability to attract, retain and motivate highly skilled employees. In particular, we are actively seeking a vice president of engineering. We face significant competition for individuals with the skills required to develop, market and support our products and services. We cannot assure that we will be able to recruit or retain sufficient numbers of these highly skilled employees. Facilities Our principal sales, marketing, research and development and administrative offices are currently located in approximately 18,000 square feet in Mountain View, California, under a lease that expires on May 1, 2003. On April 6, 1999 we entered into a four-year lease relating to approximately 63,000 square feet in Sunnyvale, California, which we intend to occupy by October 1999. 41 MANAGEMENT Executive Officers and Directors Our executive officers and directors and information about them as of June 22, 1999 are as follows:
Name Age Position ---- --- -------- JoMei Chang, Ph.D. .......... 46 President, Chief Executive Officer and Director Dale Skeen, Ph.D. ........... 44 Chief Technology Officer and Director Jay W. Shiveley.............. 42 Senior Vice President, Worldwide Sales Aleksander Osadzinski........ 40 Vice President, Marketing Paul Auvil, III.............. 35 Vice President, Finance, Chief Financial Officer and Secretary Robert M. Halperin (1)(2).... 71 Director John L. Walecka (1).......... 39 Director William H. Younger, Jr. (2).. 49 Director
- --------------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. JoMei Chang, Ph.D., founded Vitria in 1994 and has been our President, Chief Executive Officer and a Director since Vitria's inception. Prior to founding Vitria, Dr. Chang was Vice President General Manager, Trader Workstation and General Manager, Emerging Technologies from 1986 to 1994 at Teknekron Software Systems, now TIBCO, Inc., a software company. From 1984 to 1986 she served as a senior engineer in the Network File System group at Sun Microsystems. Dr. Chang holds a B.S. in Computer Science from National ChiaoTung University, Taiwan and a Ph.D. in Electrical Engineering on Database Management Systems from Purdue University. Dale Skeen, Ph.D., founded Vitria in 1994 and has been our Chief Technology Officer and a Director since Vitria's inception. Prior to founding Vitria, Dr. Skeen worked at TIBCO where he served as Chief Scientist from 1986 to 1994. Dr. Skeen was a researcher at IBM, Almaden Research Center from 1984 to 1986. Dr. Skeen was on the faculty at Cornell University from 1981 to 1984. Dr. Skeen holds a B.S. in Computer Science from North Carolina State University and a Ph.D. in Distributed Database Systems from the University of California, Berkeley. Jay W. Shiveley, has been our Senior Vice President, Worldwide Sales since 1997. He was Senior Vice President of Operations of Forte Software, Inc., a software company, from 1991 to 1997. From 1984 to 1991, he worked at Oracle Corporation and was a principal at Lawson Associates, a financial software company, from 1981 to 1984. Mr. Shiveley holds a B.S. in Finance and Accounting from Mankato State University. Aleksander Osadzinski, has been our Vice President, Marketing since 1998. From 1996 to 1998 he was Vice President of Sales and Marketing at Be, Inc., a company specializing in computer operating systems. From 1994 to 1996, Mr. Osadzinski held a number of management positions at Grass Valley Group, a producer of digital video production equipment, most recently as General Manager of the Telecommunications Unit. Mr. Osadzinski has also held a number of management positions in both the United States and Europe at Sun Microsystems, including Vice President, Markets and Product Strategy from 1986 to 1994. Paul Auvil, III, has been our Vice President, Finance and Chief Financial Officer since 1998, and Secretary since 1999. From 1997 to 1998, he served as Vice President and General Manager of the Internet Products Division of VLSI Technology Inc., a semiconductor company, and as its General Manager, PC Products Strategic Business Unit from 1996 to 1997. Mr. Auvil also held various other positions at VLSI, including European Controller in 1992 and Director of Financial Planning from 1993 to 1995. Mr. Auvil holds a Bachelor of Engineering from Dartmouth College and an Master of Management from the Kellogg Graduate School of Management. 42 Robert M. Halperin, has been a Director since 1994. Mr. Halperin has been an advisor to Greylock Management, a venture capital firm, since 1994. Mr. Halperin was also Vice Chairman of the Board of Raychem Corporation, an electronic instrument and controls company, from 1990 to 1994. Mr. Halperin is also a director of Avid Technology Inc., a computer peripheral company, theGlobe.com, an Internet information service provider, as well as several privately-held companies. Mr. Halperin holds a Ph.B. in Liberal Arts from the University of Chicago, a Bachelor of Mechanical Engineering from Cornell University and an M.B.A. from Harvard Business School. John L. Walecka, has been a Director since 1997. He has been a general partner of venture capital funds associated with Brentwood Associates since 1990. From 1984 to 1990, Mr. Walecka was an associate with Brentwood Associates. He is also a director of Rhythms Net Connections, a provider of high-speed Internet access, Xylan Corporation, a company specializing in telephone and telegraph equipment, Documentum, Inc., a software firm, and several privately-held companies. Mr. Walecka holds a B.S and M.S. in Engineering and an M.B.A. from Stanford University. William H. Younger, Jr., has been a Director since 1997. Mr. Younger is the managing director and a general partner of Sutter Hill Ventures, a venture capital firm, where he has been employed since 1981. Mr. Younger currently serves as a director of Forte Software, Inc., a software company, and Information Advantage Inc., a software company specializing in Web-based intelligence technologies and several privately-held companies. Mr. Younger holds a B.S.E.E. degree from the University of Michigan and an M.B.A. from Stanford University. There are no family relationships between any of our directors or executive officers, except that JoMei Chang, Ph.D. our President, Chief Executive Officer and a Director and Dale Skeen, Ph.D., our Chief Technology Officer and a Director, are married. Board Committees . Audit committee. Our audit committee currently consists of Messrs. Halperin and Walecka. The audit committee reviews our internal accounting procedures and consults with and reviews the services provided by our independent accountants. . Compensation committee. Our compensation committee currently consists of Messrs. Younger and Halperin. The compensation committee administers our stock option plans, reviews and approves the compensation and benefits of all our officers and establishes and reviews general policies relating to compensation and benefits of our employees. Director Compensation Directors currently receive no cash compensation from us for their services as members of the board or for attendance at committee meetings. Compensation Committee Interlocks and Insider Participation None of our executive officers serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. Messrs. Younger and Halperin serve as members of the compensation committee. Mr. Halperin is an investor in Vitria. Mr. Younger is affiliated with funds that have invested in Vitria. See "Certain Transactions." Board Composition Upon the closing of this offering, we will have authorized five directors. In accordance with the terms of our certificate of incorporation, the terms of office of the board of directors will be divided into three classes. As a result, a portion of our board of directors will be elected each year. The division of the three classes and their respective election dates are as follows: . the class I directors' term will expire at the annual meeting of stockholders to be held in 2000; 43 . the class II directors' term will expire at the annual meeting of stockholders to be held in 2001; and . the class III director's term will expire at the annual meeting of stockholders to be held in 2002. Our class I directors will be Dr. Skeen and Mr. Younger. Our class II directors will be Messrs. Halperin and Walecka. Our class III director will be Dr. Chang. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of Vitria. Executive Compensation The following table sets forth summary information concerning the compensation paid to our Chief Executive Officer and four most highly compensated executive officers for services during the year ended December 31, 1998. Summary Compensation Table
Annual Compensation ---------------------------- Number of Securities Underlying Other Name and Principal Position Salary Bonus Options Compensation - --------------------------- -------- -------- ---------- ------------ JoMei Chang, Ph.D.(1)............... $175,000 $ 75,000 -- -- President and Chief Executive Officer Dale Skeen, Ph.D.(2)................ 150,000 60,000 -- -- Chief Technology Officer Jay W. Shiveley..................... 140,000 210,000 150,000 -- Senior Vice President, Worldwide Sales Aleksander Osadzinski(3)............ 39,965 -- 300,000 -- Vice President, Marketing Paul Auvil, III(4).................. 126,215 29,479 250,000 $4,302 Vice President, Finance, Chief Financial Officer and Secretary
- --------------------- (1) Dr. Chang's salary figure includes $9,798 in non-qualified deferred compensation. (2) Dr. Skeen's salary figure includes $8,592 in non-qualified deferred compensation. (3) Mr. Osadzinski joined our company in October 1998. His current annual salary is $185,000. (4) Mr. Auvil joined our company in April 1998. His current salary is $160,000. Mr. Auvil's other annual compensation consists of reimbursement of relocation expenses. Option Grants in Fiscal Year 1998 The following table sets forth each grant of stock options during the fiscal year ended December 31, 1998, to each of the individuals listed on the previous table. The exercise price of each option was equal to the fair market value of our common stock as valued by the board of directors on the date of grant. The exercise price may be paid in cash, in shares of our 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. 44 The potential realizable value is calculated based on the ten-year term of the option at the time of grant. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent our prediction of our stock price performance. The potential realizable values at 5% and 10% appreciation are calculated by . multiplying the number of shares of common stock subject to a given option by the assumed initial public offering price of $ per share; . assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table until the expiration of the options; and . subtracting from that result the aggregate option exercise price. The initial public offering price may be higher than the estimated fair market value on the date of grant, and the potential realizable value of the option grants could be significantly higher than the numbers shown in the table if future stock prices were projected to the end of the option term by applying the same annual rates of stock price appreciation to the initial public offering price. The shares listed in the following table under "Number of Securities Underlying Options Granted" are subject to vesting. Upon completion of 12 months of service from the vesting start date, 20% of the option shares vest and the balance vest in a series of equal monthly installments over the next four years of service. Each of the options has a ten-year term, subject to earlier termination if the optionee's service with us ceases. See "Employee Stock Plans" for a description of the material terms of these options. Percentages shown under "Percent of Total Options Granted to Employees in Fiscal Year" are based on an aggregate of 3,257,740 options granted to employees of Vitria under our stock option plans during the fiscal year ended December 31, 1998.
Potential Realizable Value at Assumed Annual Number of Percent of Rates of Stock Price Securities Total Options Appreciation for Underlying Granted to Exercise Option Term Options Employees in Price Per Expiration --------------------------- Name Granted Fiscal Year Share Date 5% 10% - ---- ---------- ------------- --------- ---------- ------------- ------------- JoMei Chang, Ph.D. ..... -- -- -- -- -- -- Dale Skeen, Ph.D. ...... -- -- -- -- -- -- Jay W. Shiveley......... 150,000 4.60% $0.25 10/15/08 Aleksander Osadzinski... 300,000 9.21% $0.25 10/15/08 Paul Auvil, III......... 250,000 7.67% $0.25 5/18/08
45 Fiscal Year-End Option Values The following table sets forth the number and value of securities underlying unexercised options that are held by each of the individuals listed on the previous page as of December 31, 1998. Amounts shown under the column "Value Realized" are based on the difference between the fair market value of the common stock at December 31, 1998 as determined by the board of directors and the exercise price of the options. Amounts shown under the column "Value of Unexercised In-the-Money Options at December 31, 1998" are based on the assumed initial public offering price of $ , without taking into account any taxes that may be payable in connection with the transaction, multiplied by the number of shares underlying the option, less the exercise price payable for these shares. Vitria's stock option plans allow for the early exercise of options granted to employees. All options exercised early are subject to repurchase by Vitria at the original exercise price, upon the optionee's cessation of service prior to the vesting of the shares.
Number of Securities Underlying Unexercised Value of Unexercised Options at In-the-Money Options at December 31, 1998 December 31, 1998 Shares Acquired Value ------------------------- ------------------------- Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable - ---- --------------- -------- ------------------------- ------------------------- JoMei Chang, Ph.D. ..... -- -- -- -- Dale Skeen, Ph.D. ...... -- -- -- -- Jay W. Shiveley......... 200,000(1) $90,000 550,000/0 Aleksander Osadzinski... 112,500(2) 50,625 0/0 Paul Auvil, III......... 250,000(3) 90,000 187,500/0
- --------------------- (1) Includes 50,000 shares subject to repurchase as of December 31, 1998. (2) Includes 112,500 shares subject to repurchase as of December 31, 1998. (3) Includes 250,000 shares subject to repurchase as of December 31, 1998. 46 Employee Stock Plans 1999 Equity Incentive Plan. We adopted the 1999 Equity Incentive Plan in June 1999. The incentive plan is an amendment and restatement of our 1995 Equity Incentive Plan. Share Reserve. We have currently reserved 10,000,000 shares for issuance under the incentive plan, less shares issued or issuable under Vitria's 1998 Executive Incentive Plan. On December 31 of each year for 10 years, starting with the year 1999, the number of shares in this reserve shared by the incentive plan and the executive plan will automatically increase by 6.5% of the outstanding common stock on a fully-diluted basis. However, no more than 8,000,000 shares may be used for incentive stock options under both the executive plan and the incentive plan. If stock awards granted under the incentive plan expire or otherwise terminate without being exercised, the shares not acquired pursuant to the stock awards again become available for issuance under the incentive plan. Administration. The board administers the incentive plan unless it has delegated administration to a committee. The board has the authority to construe, interpret and amend the incentive plan as well as to determine: . the grant recipients; . the grant dates; . the number of shares subject to the award; . the exercisability of the award; . the exercise price; . the type of consideration; and . the other terms of the award. Eligibility. The board may grant incentive stock options that qualify under Section 422 of the Internal Revenue Code of 1986, as amended, to employees, including officers, of Vitria or an affiliate of Vitria. The board may grant nonstatutory stock options, stock bonuses, restricted stock purchase awards and stock appreciation rights to employees, including officers, or directors of and consultants to Vitria or an affiliate of Vitria. A restricted stock purchase award is an offer to purchase our shares at a price either at or near the fair market value of the shares. A stock bonus, on the other hand, is a grant of our shares at no cost to the recipient in consideration for past services rendered. Vitria may reacquire the shares under either type of award at the original purchase price (which is zero in the case of a stock bonus) if the recipient's service to Vitria or an affiliate is terminated before the shares vest. A stock appreciation right is a right that allows a recipient to elect to receive cash or stock of a value equal to the appreciation of optioned rights. The board may not grant an incentive stock option to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of Vitria or any affiliate of Vitria, unless the exercise price is at least 110% of the fair market value of the stock on the grant date and the option term is five years or less. In addition, the aggregate fair market value, determined at the grant date, of incentive stock option shares that are exercisable for the first time during a calendar year (under the incentive plan and all other stock plans of Vitria and its affiliates) may not exceed $100,000. Section 162(m) of the Internal Revenue Code, among other things, denies a deduction to publicly held corporations to certain compensation paid to specific employees in a taxable year to the extent that the compensation exceeds $1,000,000. When we become subject to Section 162(m), the board may not grant options and stock appreciation rights under the incentive plan to an employee covering an aggregate of more than 1,200,000 shares in any calendar year. 47 Options and Stock Appreciation Rights. The board may grant incentive stock options and stock appreciation rights with an exercise price of 100% or more of the fair market value of a share of our common stock on the grant date. It may grant nonstatutory stock options with an exercise price as low as 85% of the fair market value of a share on the grant date. Option Terms. The maximum option term is 10 years. The board may provide for exercise periods of any length in individual option grants, subject to certain limitations. However, generally an option terminates three months after the optionholder's service terminates. If the termination is due to the optionholder's disability, the exercise period generally is extended to 12 months. If the termination is due to the optionholder's death or if the optionholder dies within three months after his or her service terminates, the exercise period generally is extended to 18 months following death. Other Provisions. The optionholder may designate a beneficiary to exercise the option following the optionholder's death. Nonstatutory stock options may be transferable. Otherwise, the option exercise rights will pass by the optionholder's will or by the laws of descent and distribution. The board determines the purchase price of other stock awards, but the purchase price may not be less than 85% of the fair market value of Vitria's common stock on the grant date. However, the board may award stock bonuses in consideration of past services without a purchase payment. Shares sold or awarded under the incentive plan may, but need not be, restricted and subject to a repurchase option in favor of Vitria in accordance with a vesting schedule that the board determines. The board, however, may accelerate the vesting of the restricted stock. Transactions not involving receipt of consideration by Vitria, such as a merger, consolidation, reorganization, stock dividend, or stock split, may change the class and number of shares subject to the incentive plan and to outstanding awards. In that event, the board will appropriately adjust the incentive plan as to the class and the maximum number of shares subject to the incentive plan, to the incentive stock option limitation and to the Section 162(m) limitation. It also will adjust outstanding awards as to the class, number of shares and price per share subject to the awards. Upon a change in control of Vitria the surviving entity will either assume or substitute outstanding awards under the incentive plan. Otherwise, the vesting and exercisability of awards generally will accelerate. Options Issued. As of June 1, 1999, Vitria has issued 2,698,032 shares upon the exercise of options under the incentive plan, 598,000 shares of which have been repurchased and 1,326,192 shares of which are subject to repurchase; options to purchase 2,043,900 shares were outstanding; and 4,488,792 shares, less shares issued or issuable pursuant to the exercise or award of stock awards under Vitria's 1998 Executive Incentive Plan, remained available for future grant. As of June 1, 1999, the board has granted 1,005,000 restricted stock awards under the incentive plan, 30,000 shares of which have been repurchased. The incentive plan will terminate in 2009 unless the board terminates it sooner. 1998 Executive Incentive Plan We adopted the 1998 Executive Incentive Plan in October 1998 and amended it in December 1998. We again amended the executive plan in June 1999. Share Reserve. We have currently reserved 10,000,000 shares for issuance under the executive plan less shares issued or issuable under Vitria's 1999 Equity Incentive Plan. On December 31 of each year for 10 years, starting with the year 1999, the number of shares in this reserve shared by the incentive plan and the executive plan will automatically increase by 6.5% of the outstanding common stock on a fully-diluted basis. However, no more than 8,000,000 shares may be used for incentive stock options under both the executive plan and the incentive plan. If options granted under the executive plan expire or otherwise terminate without being exercised, the shares not acquired pursuant to the options again become available for issuance under the executive plan. 48 Administration. The board administers the executive plan unless it has delegated administration to a committee. The board has the authority to construe, interpret and amend the executive plan as well as to determine: . the grant recipients; . the grant dates; . the number of shares subject to the option; . the exercisability of the option; . the exercise price; . the type of consideration; and . the other terms of the option. Eligibility. The board may grant incentive stock options that qualify under Section 422 of the Internal Revenue Code to employees, including officers, of Vitria or an affiliate of Vitria. The board may grant nonstatutory stock options to employees, including officers, or directors of and consultants to Vitria or an affiliate of Vitria. The board may not grant an incentive stock option to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of Vitria or an affiliate of Vitria, unless the exercise price is at least 110% of the fair market value of the stock on the grant date and the option term is five years or less. In addition, the aggregate fair market value, determined at the grant date, of incentive stock option shares that are exercisable for the first time during a calendar year (under the executive plan and all other stock plans of Vitria and its affiliates) may not exceed $100,000. Section 162(m) of the Internal Revenue Code, among other things, denies a deduction to publicly held corporations to compensation paid to specific employees in a taxable year to the extent that the compensation exceeds $1,000,000. When we become subject to Section 162(m), the board may not grant options under the executive plan to an employee covering an aggregate of more than 1,200,000 shares in any calendar year. Options Rights. The board may grant incentive stock options with an exercise price of 100% or more of the fair market value of a share of our common stock on the grant date. It may grant nonstatutory stock options with any exercise price it determines. Option Terms. The maximum incentive stock option term is 10 years. The board may provide for exercise periods of any length in individual option grants. However, generally an option terminates three months after the optionholder's service terminates. If the termination is due to the optionholder's disability, the exercise period generally is extended to 12 months. If the termination is due to the optionholder's death or if the optionholder dies within three months after his or her service terminates, the exercise period generally is extended to 18 months following death. Other Provisions. The optionholder may designate a beneficiary to exercise the option following the optionholder's death. Nonstatutory stock option rights may be transferable. Otherwise, the option exercise rights will pass by the optionholder's will or by the laws of descent and distribution. Transactions not involving receipt of consideration by Vitria, such as a merger, consolidation, reorganization, stock dividend, or stock split, may change the class and number of shares subject to the executive plan and to outstanding options. In that event, the board will appropriately adjust the executive plan as to the class and the maximum number of shares subject to the executive plan and to the Section 162(m) limitation. It also will adjust outstanding options as to the class, number of shares and price per share subject to the options. 49 Upon a change in control of Vitria the surviving entity will either assume or substitute all outstanding options under the executive plan. Otherwise, the vesting and exercisability of the options generally will accelerate. Options Issued. As of June 1, 1999, Vitria has issued 62,500 shares upon the exercise of options under the executive plan, 25,000 of which have been repurchased and 31,666 of which are subject to repurchase; options to purchase 260,000 shares were outstanding; and 4,488,792 shares less shares issued or issuable pursuant to the exercise or award of stock awards under Vitria's 1999 Equity Incentive Plan, remained available for future grant. The executive plan will terminate in 2008 unless the board terminates it sooner. 1999 Employee Stock Purchase Plan We adopted the 1999 Employee Stock Purchase Plan in June 1999. Share Reserve. We authorized the issuance of 1,500,000 shares of our common stock pursuant to purchase rights granted to employees of Vitria and to employees of designated affiliates of Vitria. On August 14 of each year for 10 years, beginning in 2000, the number of shares in the reserve automatically will be increased by the greater of: . 2% of our outstanding shares on a fully-diluted basis, or . that number of shares so that the share reserve is 1,500,000 shares. The automatic share reserve increase in the aggregate may not exceed 16,500,000 shares over the 10-year period. Eligibility. The purchase plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. The purchase plan provides a means by which employees may purchase our common stock through payroll deductions. We implement this purchase plan by offerings of purchase rights to eligible employees. Generally, all employees of Vitria and any United States affiliate may participate in the purchase plan, excluding part-time and seasonal employees. However, no employee may participate in the purchase plan if immediately after we grant the employee a purchase right, the employee has voting power over 5% or more of our outstanding capital stock. As of the date of this prospectus, no shares of common stock have been purchased under the purchase plan. Administration. Under the purchase plan, the board may specify offerings of up to 27 months. The first offering will begin on the effective date of this initial public offering. Unless the board otherwise determines, our common stock is purchased for accounts of participating employees at a price per share equal to the lower of: . 85% of the fair market value of a share on the first day of the offering, or . 85% of the fair market value of a share on the purchase date. The board may provide that employees who become eligible to participate after the offering period begins nevertheless may enroll in the offering. These employees will purchase our stock at the lower of: . 85% of the fair market value of a share on the day they began participating in the purchase plan, or . 85% of the fair market value of a share on the purchase date. Under the current offering, employees may authorize payroll deductions of up to 10% of their base compensation, not including sales commissions or bonuses, for the purchase of stock under the purchase plan and may end their participation in the offering at any time up to 10 days before a purchase date. Participation ends automatically on termination of employment with Vitria or its affiliate. Other Provisions. The board may grant eligible employees purchase rights under the purchase plan only if the purchase rights together with any other purchase rights granted under other employee stock purchase 50 plans established by Vitria or its affiliate, if any, do not permit the employee's rights to purchase our stock to accrue at a rate that exceeds $25,000 of the fair market value of our stock for each calendar year in which the purchase rights are outstanding. The board also may limit the number of shares that an employee may purchase on any purchase date. Upon a change of control of Vitria the board may provide that the successor corporation will assume or substitute outstanding purchase rights. Alternatively, the board may shorten the offering and provide that shares will be purchased for participants immediately before the change in control. 401(k) Plan The Company maintains a 401(k) Plan for eligible employees. An employee participant may contribute up to 20% of his or her total annual compensation to the 401(k) Plan, up to a legal annual limit. The annual limit for calendar year 1999 is $10,000. Each participant is fully vested in his or her deferred salary contributions. Participant contributions are held and invested by the 401(k) Plan's trustee. We may make discretionary contributions as a percentage of participant contributions, subject to established limits. To date, we have made no contributions to the 401(k) Plan on behalf of the participants. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code, so that contributions by employees or by Vitria to the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by Vitria, if any, will be deductible when made. 1998 Nonqualified Deferred Compensation Plan In December 1998, we established a nonqualified, unfunded deferred compensation plan for executive officers providing for payments upon retirement, death or disability. Under the plan, these employees receive payments equal to the employee's entire accrued benefit, the sum of all deferred amounts and any discretionary corporate contributions credited to the plan and due and owing to the employee, together with earning adjustments, minus any distributions. These employees may elect to defer up to 70% of their salary compensation and 100% of their bonus compensation. As of June 1, 1999, we have not made any contributions to the plan. Amounts, if any, deferred by executive officers during 1998 are included in the Summary Compensation Table above. Limitation of Liability and Indemnification Our amended and restated certificate of incorporation and bylaws contain provisions permitted under Delaware law relating to the liability of directors. These provisions eliminate a director's personal liability for monetary damages resulting from a breach of fiduciary duty, except in circumstances involving wrongful acts, such as: . for any breach of the director's duty of loyalty to Vitria or our stockholders; . for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . for any acts under Section 174 of the Delaware General Corporation Law; or . for any transaction from which the director derives an improper personal benefit. These provisions do not limit or eliminate our rights or any stockholder's rights to seek non-monetary relief such as an injunction or rescission, in the event of a breach of director's fiduciary duty. These provisions will not alter a director's liability under federal securities laws. In addition, we intend to enter into separate indemnification agreements with our directors and executive officers that provide each of them indemnification protection in the event the amended and restated certificate of incorporation and amended and restated bylaws are subsequently amended. We believe that these provisions and agreements will assist us in attracting and retaining qualified individuals to serve as directors and officers. 51 CERTAIN TRANSACTIONS The following executive officers, directors or holders of more than five percent of our voting securities purchased securities in the amounts as of the date set forth below.
Shares of Preferred Stock ---------------------------------------------------------- Common Stock Series A Series A1 Series B Series C Series D -------------- ------------- --------- --------- ------------- -------- Directors and Executive Officers JoMei Chang, Ph.D....... 4,276,878 421,875 -- -- -- -- Dale Skeen, Ph.D........ 5,458,125 421,875 -- -- -- -- Robert M. Halperin (1).. 687,498 675,832 271,475 -- -- -- William H. Younger, Jr..................... -- -- -- -- 11,885 21,146 Entities Affiliated with Directors Brentwood Associates (2).................... -- -- -- 2,481,327 248,756 444,444 Sutter Hill Ventures (3).................... -- -- -- 2,481,327 248,756 444,444 Other 5% Stockholders Weston Presidio Capital II, L.P................ -- -- -- -- 1,430,349 105,880 The Chang Family Trust, Michael W. Taylor, Trustee (4)............ 1,691,247 -- 678,688 -- -- -- Price Per Share......... $0.004-$0.25 $0.36 $0.61 $1.81 $4.02 $4.50 Date(s) of Purchase..... 12/94 to 09/98 1/95 and 8/96 5/96(5) 10/97 10/98 to 1/99 5/99
- -------- (1) Includes shares held by Mr. Halperin's children and trusts for his grandchildren. (2) John L. Walecka, one of our directors, is a general partner of venture funds associated with Brentwood Associates. (3) William H. Younger, Jr., one of our directors, is a general partner of Sutter Hill Ventures. (4) The Chang Family Trust is a trust for the benefit of family members of JoMei Chang, Ph.D. (5) Notes convertible into Series A1 preferred stock were issued in May 1996. The conversion of these notes occurred in December 1997. Investor Rights Agreement. Vitria and the preferred stockholders described above have entered into an agreement, pursuant to which these and other preferred stockholders will have registration rights with respect to their shares of common stock following this offering. Upon the completion of this offering, all shares of our outstanding preferred stock will be automatically converted into an equal number of shares of common stock. We intend to enter into indemnification agreements with our directors and officers for the indemnification of and advancement of expenses to these persons to the full extent permitted by law. We also intend to execute such agreements with our future directors and officers. We believe that all of the transactions set forth above were made on terms no less favorable to Vitria than could have been obtained from unaffiliated third parties. All future transactions, including loans, between Vitria 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 directors, and will continue to be on terms no less favorable to Vitria than could be obtained from unaffiliated third parties. 52 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of our common stock as of June 1, 1999, and as adjusted to reflect the sale of our common stock offered by this prospectus, by: . each of the individuals listed on the "Summary Compensation Table" above; . each of our directors; . each person (or group of affiliated persons) who is known by us to own beneficially 5% or more of our common stock; and . all current directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of June 1, 1999 are deemed outstanding. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares shown as beneficially owned by them. Percentage of ownership is based on 26,836,895 shares of common stock outstanding on June 1, 1999 and shares of common stock outstanding after completion of this offering. This table assumes no exercise of the underwriters' over-allotment option. Unless otherwise indicated, the address of each of the individuals named below is: c/o Vitria Technology, Inc., 500 Ellis Street, Mountain View, California 94043.
Beneficial Ownership Prior to Offering -------------------------------- Percent Shares Issuable Beneficially Number of pursuant to Owned Shares Options Exercisable ----------------- Beneficially within 60 days of Before After Name of Beneficial Owner Owned June 1, 1999 Offering Offering - ------------------------ ------------ ------------------- -------- -------- Directors and Executive Officers JoMei Chang, Ph.D.(1)...... 4,612,253 -- 17.19% The Chang Family Trust, Michael W. Taylor, Trustee(2)................ 2,369,935 -- 8.83 Dale Skeen, Ph.D.(3)....... 5,794,500 -- 21.59 William H. Younger, Jr.(4).................... 3,174,527 -- 11.83 John L. Walecka(5)......... 3,174,527 -- 11.83 Robert M. Halperin(6)...... 1,451,213 -- 5.41 Jay W. Shiveley(7)......... 400,000 350,000 2.76 Paul Auvil, III(8)......... 254,975 -- 1.0 Aleksander Osadzinski(9)... 112,500 187,500 1.1 Other 5% Stockholders Entities affiliated with Brentwood Associates(10).. 3,174,527 -- 11.83 3000 Sand Hill Road Building 1, Suite 260 Menlo Park, CA 94025 Entities affiliated with Sutter Hill Ventures(11).. 3,174,527 -- 11.83 755 Page Mill Road Suite A200 Palo Alto, CA 94304 Weston Presidio Capital II, L.P....................... 1,536,229 -- 5.72 343 Sansome Street Suite 1210 San Francisco, CA 94104 All directors and executive officers as a group (8 persons)(12)........... 18,974,495 537,500 71.28
53 - --------------------- (1) Includes 54,199 shares subject to repurchase by Vitria which shall expire on July 1, 1999. (2) The Chang Family Trust is a trust for the benefit of family members of JoMei Chang, Ph.D. Dr. Chang does not have voting or dispositive power over and disclaims beneficial ownership of the shares held by the trust. (3) Includes 54,199 shares subject to repurchase by Vitria which shall expire on July 1, 1999. (4) Includes 2,380,896 shares held by Sutter Hill Ventures, a California Limited Partnership, 760,600 shares held by parties affiliated with Sutter Hill Ventures and 33,031 shares held by William H. Younger, Jr. Trustee, The Younger Living Trust. Mr. Younger is a general partner of Sutter Hill Ventures and disclaims beneficial ownership of the shares held by these entities except to the extent of his proportionate partnership interest therein. (5) Includes 3,047,546 shares held by Brentwood Associates VIII, L.P. and 126,981 shares held by Brentwood Affiliates Fund, L.P. Mr. Walecka is a general partner of Brentwood Associates and disclaims beneficial ownership of the shares held by these entities except to the extent of his proportionate partnership interest therein. (6) Includes 550,780 shares held by Mr. Halperin's children for which he has power of attorney but as to which he does not have dispositive power over and disclaims beneficial ownership of the shares held by his children. Excludes 183,592 shares of common stock held in trust for Mr. Halperin's grandchildren. Mr. Halperin does not have voting or dispositive power and disclaims beneficial ownership of the shares held by his grandchildren's trusts. (7) Includes 170,000 shares subject to repurchase by Vitria within 60 days of June 1, 1999. (8) Includes 187,500 shares subject to repurchase by Vitria within 60 days of June 1, 1999. (9) Includes 112,500 shares subject to repurchase by Vitria within 60 days of June 1, 1999. (10) Includes 3,047,546 shares held by Brentwood Associates VIII, L.P and 126,981 shares held by Brentwood Affiliates Fund, L.P. (11) Includes 2,380,896 shares held by and Sutter Hill Ventures, a California Limited Partnership and 793,631 shares held by parties affiliated with Sutter Hill Ventures. Sutter Hill Ventures disclaims voting power and beneficial ownership to the shares held by its affiliated parties. (12) Includes 130,078 shares subject to repurchase by Vitria which will expire on July 1, 1999, 470,000 shares subject to repurchase by Vitria within 60 days of June 1, 1999. See footnotes (1) and (3) through (9). 54 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, our authorized capital stock will consist of 250 million shares of common stock, $0.001 par value, and five million shares of preferred stock, $0.001 par value. Common Stock As of June 1, 1999, there were 26,836,895 shares of common stock outstanding that were held of record by approximately 145 stockholders after giving effect to the conversion of our preferred stock into common stock at a one-to-one ratio. There will be shares of common stock outstanding (assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options) after giving effect to the sale of the shares of common stock offered by this prospectus. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of our stockholders. Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive ratably any dividends out of assets legally available therefor as our board of directors may from time to time determine. Upon liquidation, dissolution or winding up of Vitria, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding shares of preferred stock. Holders of common stock have 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. Preferred Stock Pursuant to our amended and restated certificate of incorporation, our board of directors will have the authority, without further action by the stockholders, to issue up to five million shares of preferred stock in one or more series. The board will be able to fix the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of this series. The issuance of preferred stock could adversely affect the voting power of holders of common stock, and the likelihood that holders of preferred stock will receive dividend payments and payments upon liquidation may have the effect of delaying, deferring or preventing a change in control of Vitria, which could depress the market price of our common stock. We have no present plan to issue any shares of preferred stock. Registration Rights of Stockholders Upon completion of this offering, 11,460,839 shares of common stock or their transferees will be entitled to rights to register these shares under the Securities Act of 1933. If we propose to register any of our securities under the Securities Act, either for our own account or for the account of other securityholders, the holders of these shares will be entitled to notice of the registration and will be entitled to include, at our expense, their shares of common stock. In addition, the holders of these shares may require us, at our expense and on not more than two occasions at any time beginning approximately six months from the date of the closing of this offering, to file a registration statement under the Securities Act with respect to their shares of common stock, and we will be required to use our best efforts to effect the registration. Further, the holders may require us at our expense to register their shares on Form S-3 when this form becomes available. These rights shall terminate on the earlier of four years after the effective date of this offering, or when a holder is able to sell all its shares pursuant to Rule 144 under the Securities Act in any 90-day period. Anti-Takeover Provisions of Delaware Law and Certain Charter Provisions We are subject to Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in any business combination with any 55 interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless: . prior to the 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; . upon consummation of the transaction that resulted in the stockholder's 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 those shares owned by persons who are directors and also officers, and 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 . on or subsequent to the 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 two-thirds of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines "business combination" to include: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; . subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; or . 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 the entity or person. Our bylaws provide that candidates for director may be nominated only by the board of directors or by a stockholder who gives written notice to us no later than 60 days prior nor earlier than 90 days prior to the first anniversary of the last annual meeting of stockholders. The board may consist of one or more members to be determined from time to time by the board. The board currently consists of five members divided into three different classes. As a result, only one class of directors will be elected at each annual meeting of stockholders of Vitria, with the other classes continuing for the remainder of their respective terms. Between stockholder meetings, the board may appoint new directors to fill vacancies or newly created directorships. Our amended and restated certificate of incorporation requires that upon completion of the offering, any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by a consent in writing. Our certificate of incorporation also provides that the authorized number of directors may be changed only by resolution of the board of directors. Delaware law and these charter provisions may have the effect of deterring hostile takeovers or delaying changes in control or our management, which could depress the market price of our common stock. Section 2115 We are currently subject to Section 2115 of the California Corporations Code. Section 2115 provides that, regardless of a company's legal domicile, provisions of California corporate law relating to shareholder rights, 56 election and removal of directors and distributions to shareholders will apply to that company if the company meets the requirements of Section 2115. We will not be subject to Section 2115 if: . we are qualified for trading as a national market security on The Nasdaq National Market, and we have at least 800 stockholders of record as of the record date of our most recent annual meeting, or . during any income year less than 50% of our outstanding voting securities are held of record by persons having addresses in California. The following table sets forth some of the effects on our corporate governance of California Corporations Code Section 2115:
Section 2115 Non-Section 2115 ------------ ---------------- Election of Cumulative voting is allowed, No cumulative voting is allowed; Directors which allows each shareholder to accordingly a holder of 50% or vote the number of votes equal to more of voting stock controls the number of candidates election of all directors. multiplied by the number of votes to which the shareholders' shares are normally entitled in favor of one candidate. This potentially allows minority stockholders to elect some members of the board. Removal of Directors Removal with or without cause by If the board is classified, the affirmative vote of the removal is only allowed for cause holders of a majority of upon the affirmative vote of a outstanding voting stock is majority of the outstanding allowed. voting stock entitled to vote in the election of directors. Supermajority Vote Requirement In order to institute a Simple majority may adopt supermajority provision, the amendment providing for amendment must be approved by at supermajority. least as large a proportion as would be required under the amendment. Dividend Dividends are only payable out of Dividends are payable out of Distribution the surplus of retained earnings either the surplus of retained and if, immediately after the earnings or out of its net distribution, a company's assets profits for the year the are at least equal to its distribution takes place, or the liabilities. preceding year. Dissenters' Rights Generally available in any type Generally only available in a of reorganization, including a merger. No rights so long as our merger, sale of assets or common stock is quoted on The sale/exchange of shares. If the Nasdaq National Market or traded shares are listed on an exchange, on an exchange. 5% of the shareholders must assert their right for any shareholder to have these rights.
In addition to these differences, Section 2115 also provides for information rights and required filings in the event a company effects a sale of assets or completes a merger. Transfer Agent The transfer agent and registrar for our common stock is BankBoston, N.A. Its phone number is (781) 575-3120. 57 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices. Furthermore, since no shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale as described below, sales of substantial amounts of our common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding an aggregate of shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options. Of these shares, all of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless these shares are purchased by affiliates. The remaining 27,020,295 shares of common stock held by existing stockholders are restricted securities. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration described below under Rules 144, 144(k) or 701 promulgated under the Securities Act. As a result of the contractual restrictions described below and the provisions of Rules 144, 144(k) and 701, the restricted shares will be available for sale in the public market as follows: . no shares will be eligible for immediate sale on the date the registration statement of which this prospectus is a part is declared effective; . no shares will be eligible for sale prior to 180 days from the date the registration statement of which this prospectus is a part is declared effective; . 24,876,440 shares will be eligible for sale upon the expiration of the lock-up agreements, described below, 180 days after the date this offering is declared effective; and . 324,076 shares will be eligible for sale upon the exercise of vested options 180 days after the date this offering is declared effective. Lock-Up Agreements. All of our officers, directors, stockholders and option holders have agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, for a period of 180 days after the date the registration statement of which this prospectus is a part is declared effective. Transfers or dispositions can be made sooner with the prior written consent of Credit Suisse First Boston Corporation. Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date the registration statement of which this prospectus is a part is declared effective, a person or persons whose shares are aggregated, who his beneficially owned restricted securities for at least one year, including the holding period of any prior owner except an affiliate, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: . 1% of the number of shares of our common stock then outstanding which will equal approximately shares immediately after this offering; or . the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about Vitria. Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at 58 least two years, including the holding period of any prior owner except an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. No shares will qualify as "144(k) shares" within 180 days after the date the registration statement, of which this prospectus is a part, is declared effective. Rule 701. In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors, other than affiliates, who purchases or receives shares from us in connection with a compensatory stock purchase plan or option plan or other written agreement will be eligible to resell their shares beginning 90 days after the effective date of the registration statement of which this prospectus is a part, subject only to the manner of sale provisions of Rule 144, and by affiliates under Rule 144 without compliance with its holding period requirements. Registration Rights. Upon completion of this offering, the holders of 11,460,839 shares of our common stock, or their transferees, will be entitled to rights with respect to the registration of their shares under the Securities Act. Registration of their shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of such registration. Stock Options. Immediately after this offering, we intend to file a registration statement under the Securities Act covering the shares of common stock reserved for issuance under our 1999 Equity Incentive Plan and 1998 Executive Incentive Plan and the 1999 Employee Stock Purchase Plan. The registration statement is expected to be filed and become effective as soon as practicable after the closing of this offering. Accordingly, shares registered under the registration statements will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market, beginning 180 days after the effective date of the registration statement of which this prospectus is a part. 59 UNDERWRITING Under the terms and subject to the conditions contained in the underwriting agreement dated , we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancBoston Robertson Stephens Inc. and SoundView Technology Group, Inc. are acting as representatives, the following respective number of shares of common stock:
Number of Underwriter Shares ----------- ------- Credit Suisse First Boston Corporation............................... Merrill Lynch, Pierce, Fenner & Smith Incorporated............................................... BancBoston Robertson Stephens Inc. .................................. SoundView Technology Group, Inc. .................................... ------- Total.............................................................. =======
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares from us at the initial public offering price less the underwriting discounts and commissions. This option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock to the public initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
Per Share Total ------------------- ------------------- Without With Without With Over- Over- Over- Over- allotment allotment allotment allotment --------- --------- --------- --------- Underwriting discounts and commissions paid by us......................... $ $ $ $ Expenses payable by us.............. $ $ $ $
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. We, our directors, officers and our stockholders have agreed that we and they will not offer, sell, contract to sell, announce our intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 relating to, any additional shares of our common stock or securities convertible into or exchangeable or exercisable for any of our common stock without the prior consent of Credit Suisse First Boston Corporation for a period of 180 days 60 after the date of this prospectus, except in connection with our stock option and employee stock purchase plans. The underwriters have reserved for sale, at the initial public offering price, up to shares of the common stock for employees, directors and certain other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase these reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. We have agreed to indemnify the underwriters against liabilities under the Securities Act of 1933 or to contribute to payments which the underwriters may be required to make in that respect. We have applied to list our shares of common stock on The Nasdaq Stock Market's National Market under the symbol "VITR." ML IBK Positions, Inc., an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the representatives of the underwriters, holds shares of preferred stock of Vitria that will convert into 746,269 shares of common stock upon the closing of the offering. Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation between us and the underwriters. 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 underwriters; the history and the prospects for the industry in which we will compete; the ability of our management; the prospects for our future earnings; the present state of our development and our 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. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. . Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. . Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. . Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. . Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on The Nasdaq Stock Market's National Market or otherwise and, if commenced, may be discontinued at any time. 61 NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that Vitria prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. Representations of Purchasers Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to Vitria and the dealer from whom the purchase confirmation is received that (i) the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under the securities laws, (ii) where required by law, that the purchaser is purchasing as principal and not as agent, and (iii) the purchaser has reviewed the text above under "Resale Restrictions". Rights of Action (Ontario Purchasers) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or recission or rights of action under the civil liability provisions of the U.S. federal securities laws. Enforcement of Legal Rights All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or these persons. All or a substantial portion of the assets of the issuer and these persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or these persons in Canada or to enforce a judgment obtained in Canadian courts against the issuer or these persons outside of Canada. Notice to British Columbia Residents A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that the purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by the purchaser in this offering. This report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from Vitria. Only one report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. Taxation and Eligibility for Investment Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 62 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Cooley Godward LLP, Palo Alto, California. As of the date of this prospectus, partners and associates of Cooley Godward LLP own an aggregate of approximately 12,437 shares of common stock through an investment partnership. Various 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 balance sheet of Vitria Technology, Inc. as of December 31, 1997 and 1998, and the statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998, included in this prospectus, have been included herein in reliance upon the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement (which term shall include any amendment thereto) on Form S-1 under the Securities Act of 1933 with respect to the shares of common stock offered by our company. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the Registration Statement, some items of which are contained in exhibits to the registration statement as permitted by the rules and regulations of the Commission. For further information with respect to Vitria and the common stock offered, reference is made to the registration statement, including the exhibits, and the financial statements and notes filed as a part of the registration statement. Statements made in this prospectus as to the contents of any document referred to in the registration statement are not necessarily complete, and, in each instance, please review the copy of the document filed as an exhibit for a more complete description of the matter involved. A copy of the registration statement, including the exhibits and the financial statements and notes filed as a part of it, may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the Commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon the payment of fees prescribed by it. The Securities and Exchange Commission maintains a Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with it. 63 VITRIA TECHNOLOGY, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.......................................... F-2 Balance Sheet.............................................................. F-3 Statement of Operations.................................................... F-4 Statement of Stockholders' Equity.......................................... F-5 Statement of Cash Flows.................................................... F-6 Notes to Financial Statements.............................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders' of Vitria Technology, Inc. The reincorporation described in Note 9 to the financial statements has not been consummated as of June 22, 1999. When the reincorporation has been consummated, we will be in a position to furnish the following report: "In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Vitria Technology, Inc. at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above." PricewaterhouseCoopers LLP San Jose, California June 22, 1999, except for Note 9, which is as of June , 1999 F-2 VITRIA TECHNOLOGY, INC. BALANCE SHEET (in thousands, except per share amounts)
Pro Forma Stockholders' December 31, Equity at ---------------- March 31, March 31, 1997 1998 1999 1999 ------- ------- --------- ------------- (unaudited) Assets Current assets: Cash and cash equivalents.......... $ 9,138 $12,792 $ 11,444 Accounts receivable, net........... 1,600 5,973 5,255 Other current assets............... 66 180 289 ------- ------- -------- Total current assets............. 10,804 18,945 16,988 Property and equipment, net.......... 275 967 1,108 Other assets......................... 62 88 144 ------- ------- -------- $11,141 $20,000 $ 18,240 ======= ======= ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable................... $ 211 $ 757 $ 331 Accrued liabilities................ 608 2,978 2,609 Deferred revenue................... 223 2,874 3,277 ------- ------- -------- Total current liabilities........ 1,042 6,609 6,217 ------- ------- -------- Commitments and contingencies (Note 5) Stockholders' equity: Convertible Preferred Stock: issuable in series, $0.001 par value; 8,470, 13,470 and 13,470 shares authorized, respectively; 7,708, 10,445, and 10,552 (unaudited) actual shares issued and outstanding, respectively; 5,000 shares authorized; no shares issued and outstanding, pro forma (unaudited) (Liquidation value of $21,600)................. 8 11 11 $ -- Common Stock: $0.001 par value; 40,000, 41,000 and 51,000 shares authorized, respectively; 13,249, 15,268 and 15,541 (unaudited) actual shares issued and outstanding, respectively; 250,000 shares authorized; 26,091 (unaudited) shares issued and outstanding, pro forma......................... 13 15 16 27 Additional paid-in capital........... 10,737 29,104 31,391 31,391 Unearned stock-based compensation.... -- (5,511) (6,456) (6,456) Accumulated deficit.................. (659) (10,228) (12,939) (12,939) ------- ------- -------- -------- Total stockholders' equity....... 10,099 13,391 12,023 $ 12,023 ------- ------- -------- ======== $11,141 $20,000 $ 18,240 ======= ======= ========
The accompanying notes are an integral part of these financial statements. F-3 VITRIA TECHNOLOGY, INC. STATEMENT OF OPERATIONS (in thousands, except per share amounts)
Year Ended December Three Months 31, Ended March 31, ---------------------- ---------------- 1996 1997 1998 1998 1999 ------ ------ ------- ------- ------- (unaudited) Revenues: License........................... $ -- $ 955 $ 5,198 $ 139 $ 3,487 Service........................... 1,042 1,425 1,633 151 1,472 Government grant.................. 984 1,255 796 371 250 ------ ------ ------- ------- ------- Total revenues.................. 2,026 3,635 7,627 661 5,209 ------ ------ ------- ------- ------- Cost of revenues: License........................... -- 18 -- -- 62 Service........................... 183 338 2,109 122 1,294 Government grant.................. 984 1,255 796 371 250 ------ ------ ------- ------- ------- Total cost of revenues.......... 1,167 1,611 2,905 493 1,606 ------ ------ ------- ------- ------- Gross profit........................ 859 2,024 4,722 168 3,603 ------ ------ ------- ------- ------- Operating expenses: Sales and marketing............... 80 1,143 6,572 701 2,889 Research and development.......... 397 841 4,794 717 1,961 General and administrative........ 147 695 1,807 234 726 Amortization of stock-based compensation..................... -- -- 1,424 123 867 ------ ------ ------- ------- ------- Total operating expenses........ 624 2,679 14,597 1,775 6,443 ------ ------ ------- ------- ------- Income (loss) from operations....... 235 (655) (9,875) (1,607) (2,840) Interest income..................... 8 75 306 91 129 ------ ------ ------- ------- ------- Net income (loss)................... $ 243 $ (580) $(9,569) $(1,516) $(2,711) ====== ====== ======= ======= ======= Net income (loss) per share: Basic............................. $ 0.03 $(0.06) $ (0.80) $ (0.14) $ (0.21) ====== ====== ======= ======= ======= Diluted........................... $ 0.02 $(0.06) $ (0.80) $ (0.14) $ (0.21) ====== ====== ======= ======= ======= Weighted average shares: Basic............................. 7,044 9,915 12,003 10,490 12,699 ====== ====== ======= ======= ======= Diluted........................... 13,835 9,915 12,003 10,490 12,699 ====== ====== ======= ======= ======= Pro forma basic and diluted net loss per share (unaudited).............. $ (0.48) $ (0.12) ======= ======= Pro forma basic and diluted weighted average shares (unaudited)......... 20,111 23,250 ======= =======
The accompanying notes are an integral part of these financial statements. F-4 VITRIA TECHNOLOGY, INC. STATEMENT OF STOCKHOLDERS' EQUITY (in thousands)
Convertible Preferred Stock Common Stock Additional Unearned Total ------------- ------------- Paid-In Stock-Based Accumulated Stockholders' Shares Amount Shares Amount Capital Compensation Deficit Equity ------ ------ ------ ------ ---------- ------------ ----------- ------------- Balance at December 31, 1995................... 1,406 $ 1 11,918 $12 $ 550 $ -- $ (322) $ 241 Issuance of Series A Convertible Preferred Stock, net............ 114 1 -- -- 39 -- -- 40 Issuance of Common Stock, net............ -- -- 1,170 1 111 -- -- 112 Net income............. -- -- -- -- -- -- 243 243 ------ --- ------ --- ------- ------- -------- ------- Balance at December 31, 1996................... 1,520 2 13,088 13 700 -- (79) 636 Issuance of Common Stock, net............ -- -- 161 -- 15 -- -- 15 Issuance of Series A1 Convertible Preferred Stock for note payable............... 950 1 -- -- 559 -- -- 560 Issuance of Series B Convertible Preferred Stock, net............ 5,238 5 -- -- 9,463 -- -- 9,468 Net loss............... -- -- -- -- -- -- (580) (580) ------ --- ------ --- ------- ------- -------- ------- Balance at December 31, 1997................... 7,708 8 13,249 13 10,737 -- (659) 10,099 Issuance of Common Stock, net............ -- -- 2,019 2 615 -- -- 617 Issuance of Series C Convertible Preferred Stock, net............ 2,737 3 -- -- 10,964 -- -- 10,967 Unearned stock-based compensation.......... -- -- -- -- 6,788 (6,788) -- -- Amortization of stock- based compensation.... -- -- -- -- -- 1,277 -- 1,277 Net loss............... -- -- -- -- -- -- (9,569) (9,569) ------ --- ------ --- ------- ------- -------- ------- Balance at December 31, 1998................... 10,445 11 15,268 15 29,104 (5,511) (10,228) 13,391 Issuance of Common Stock, net (unaudited)........... -- -- 273 1 55 -- -- 56 Issuance of Series C Convertible Preferred Stock, net (unaudited)........... 107 -- -- -- 420 -- -- 420 Unearned stock-based compensation (unaudited)........... -- -- -- -- 1,812 (1,812) -- -- Amortization of stock- based compensation (unaudited)........... -- -- -- -- -- 867 -- 867 Net loss (unaudited)... -- -- -- -- -- -- (2,711) (2,711) ------ --- ------ --- ------- ------- -------- ------- Balance at March 31, 1999 (unaudited)....... 10,552 $11 15,541 $16 $31,391 $(6,456) $(12,939) $12,023 ====== === ====== === ======= ======= ======== =======
The accompanying notes are an integral part of these financial statements. F-5 VITRIA TECHNOLOGY, INC. STATEMENT OF CASH FLOWS (in thousands)
Year Ended December Three Months 31, Ended March 31, ----------------------- ---------------- 1996 1997 1998 1998 1999 ----- ------- ------- ------- ------- (unaudited) Cash flows from operating activities: Net income (loss)................. $ 243 $ (580) $(9,569) $(1,516) $(2,711) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization... 115 207 255 19 159 Provision for doubtful accounts....................... 25 -- 350 -- 118 Amortization of stock-based compensation................... -- -- 1,424 123 867 Changes in assets and liabilities: Accounts receivable........... (474) (1,097) (4,723) (1,050) 600 Other current assets.......... -- (58) (140) 11 (109) Other assets.................. -- (62) -- (7) (56) Accounts payable.............. 139 62 546 (19) (426) Accrued liabilities........... 175 432 2,370 (54) (369) Deferred revenue.............. -- 223 2,651 932 403 ----- ------- ------- ------- ------- Net cash provided by (used in) operating activities............. 223 (873) (6,836) (1,561) (1,524) ----- ------- ------- ------- ------- Cash flows from investing activities: Net cash used in purchasing property and equipment .......... (104) (431) (947) (182) (300) ----- ------- ------- ------- ------- Cash flows from financing activities: Issuance of Convertible note...... -- 560 -- -- -- Issuance of Convertible Preferred Stock, net....................... 40 9,468 10,967 -- 420 Issuance of Common Stock, net..... 112 15 470 5 56 ----- ------- ------- ------- ------- Net cash provided by financing activities....................... 152 10,043 11,437 5 476 ----- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents................... 271 8,739 3,654 (1,738) (1,348) Cash and cash equivalents at beginning of period................ 128 399 9,138 9,138 12,792 ----- ------- ------- ------- ------- Cash and cash equivalents at end of period............................. $ 399 $ 9,138 $12,792 $ 7,400 $11,444 ===== ======= ======= ======= ======= Supplemental noncash financing activities: Issuance of Convertible Preferred Stock to founders for convertible note payable..................... $ -- $ 560 $ -- $ -- $ -- ===== ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-6 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS Note 1--The Company and Summary of Significant Accounting Policies: The Company Vitria Technology, Inc. (the "Company"), develops, markets and supports a software platform, BusinessWare, which enables customers to deploy sophisticated eBusiness solutions across the extended enterprise. The Company was incorporated in California in October 1994. Unaudited interim results The interim financial statements as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 are unaudited. In the opinion of management, interim financial statements have been prepared on the same basis as the audited financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of interim periods. The financial data and other information disclosed in these notes to financial statements for the related periods are unaudited. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any future periods. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents and investments with original maturities greater than three months to be short-term investments. Property and equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets of three years. Leasehold improvements are amortized using the straight-line method over the term of the lease or estimated useful lives, whichever is shorter. Revenue recognition The Company derives revenues from software licenses to end users for its BusinessWare products and related services, which include maintenance and support, consulting and training services. Effective January 1, 1998, the Company adopted Statement of Position ("SOP") 97-2, "Software Revenue Recognition" with the exception of the provision deferred by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2." In accordance with the adopted provisions of SOP 97-2, the Company records revenue from software licenses when a license agreement is signed by both parties, the fee is fixed and determinable, collection of the fee is probable and delivery of the product has occurred. For electronic delivery, the product is considered to have been delivered when the access code to download the software from the Internet has been provided to the customer. If an element of the license agreement has not been delivered, revenue for the element is deferred based on vendor-specific objective evidence of fair value. If vendor-specific objective evidence of fair value does not exist, all revenue is deferred until sufficient objective evidence exists or all elements have been delivered. Payments received in advance of revenue recognition are recorded as deferred revenue. The adoption F-7 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) of SOP 97-2 resulted in the deferral of software license revenues in certain agreements that would have been recognized upon delivery of the related software under prior accounting standards. Revenues from maintenance and support are deferred and recognized ratably over the term of the contract. Revenues from consulting and training are deferred and recognized when the services are performed and collectibility is deemed probable. Prior to January 1, 1998, the Company recorded revenue in accordance with the provisions of SOP 91-1, "Software Revenue Recognition." In December 1998, the American Institute of Certified Public Accountants issued SOP 98-9 "Modification of SOP 97-2, "Software Revenue Recognition" and the Company adopted the statement for all transactions entered into in fiscal 1999. The adoption of this statement did not have a material impact on the Company's operating results, financial position or cash flows. A portion of the Company's revenues are also derived from government grants. Government grant revenue is recognized as the research is performed and allowable costs are incurred. Unbilled grant revenue is composed of allowable reimbursable costs for the period in which a reimbursement application has yet to be filed with the government. Fair value of financial instruments The Company's financial instruments, including cash and cash equivalents, accounts receivables and accounts payable, are carried at cost, which approximates their fair value because of the short-term maturity of these financial instruments. Research and development Research and development expenses include costs incurred by the Company to develop and enhance the Company's software. Research and development costs are charged to expense as incurred. Software development costs Software development costs incurred prior to the establishment of technological feasibility are charged to research and development expense as incurred. Material software development costs incurred subsequent to the time a product's technological feasibility has been established using the working model approach, through the time the product is available for general release to customers, are capitalized. Amortization of capitalized software development costs begins when the products are available for general release to customers, and is computed as the greater of (1) the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues for the product, or (2) the straight-line method over the estimated economic life of the product. To date, development costs qualifying for capitalization have been insignificant and therefore have been expensed as incurred. Stock-based compensation The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25, unearned compensation is based on the difference, if any, on the date of the grant, between the fair value of the Company's stock and the exercise price. Unearned compensation is amortized and expensed in accordance with Financial Accounting Standards Board Interpretation No. 28 using the multiple option approach. The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." F-8 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Pro forma stockholders' equity (unaudited) Effective upon the closing of the Company's initial public offering (the "Offering"), the outstanding shares of Convertible Preferred Stock will automatically convert into 10,551,635 shares of Common Stock. Also effective upon the closing of this offering 250,000,000 shares of Common Stock and 5,000,000 shares of undesignated Convertible Preferred Stock will be authorized. The pro forma effects of these transactions are unaudited and have been reflected in the accompanying pro forma Stockholders' Equity as of March 31, 1999. Income taxes Income taxes are accounted for using an asset and liability approach that requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Net income and net loss per share Basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of shares of Common Stock outstanding during the period. Diluted net income per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potential common equivalent shares outstanding during the period. The calculation of diluted net loss per share excludes potential common shares if the effect is antidilutive. Potential common shares are composed of Common Stock subject to repurchase rights and incremental shares of Common Stock issuable upon the exercise of stock options, upon conversion of Preferred Stock and conversion of debt. F-9 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):
Three Months Year Ended December 31, Ended March 31, ------------------------- ---------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- (unaudited) Numerator: Net income (loss)........... $ 243 $ (580) $(9,569) $(1,516) $(2,711) ======= ======= ======= ======= ======= Denominator: Weighted average shares..... 12,315 13,116 13,881 13,250 15,268 Weighted average Common Stock subject to repurchase agreements................. (5,271) (3,201) (1,878) (2,760) (2,569) ------- ------- ------- ------- ------- Denominator for basic calculation................ 7,044 9,915 12,003 10,490 12,699 ------- ------- ------- ------- ------- Weighted average effect of diluted securities: Series A Preferred Stock.... 1,520 -- -- -- -- Common Stock subject to repurchase agreements...... 5,271 -- -- -- -- ------- ------- ------- ------- ------- Denominator for diluted calculation................ 13,835 9,915 12,003 10,490 12,699 ------- ------- ------- ------- ------- Net income (loss) per share: Basic....................... $ 0.03 $ (0.06) $ (0.80) $ (0.14) $ (0.21) ======= ======= ======= ======= ======= Diluted..................... $ 0.02 $ (0.06) $ (0.80) $ (0.14) $ (0.21) ======= ======= ======= ======= =======
The following table sets forth the weighted average potential shares of Common Stock that are not included in the diluted net income (loss) per share calculation above because to do so would be antidilutive for the periods indicated (in thousands):
Three Months Year Ended Ended March December 31, 31, ----------------- ------------- 1996 1997 1998 1998 1999 ---- ----- ------ ------ ------ (unaudited) Weighted average effect of antidilutive securities: Series A Preferred Stock................ -- 1,520 1,520 1,520 1,520 Series A-1 Preferred Stock.............. -- -- 950 950 950 Series B Preferred Stock................ -- 875 5,238 5,238 5,238 Series C................................ -- -- 400 -- 2,843 Convertible debt........................ -- 557 -- -- -- Employee stock options.................. -- 527 1,624 1,450 1,833 Common Stock subject to repurchase agreements............................. -- 3,201 1,878 2,760 2,569 ---- ----- ------ ------ ------ -- 6,680 11,610 11,918 14,958 ==== ===== ====== ====== ======
F-10 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Pro forma net loss per share (unaudited) Pro forma net loss per share for the year ended December 31, 1998 and the three months ended March 31, 1999 (unaudited) is computed using the weighted average number of common shares outstanding, including the conversion of the Company's Convertible Preferred Stock into shares of the Company's Common Stock effective upon the closing of the Company's initial public offering, as if such conversion occurred on January 1, 1998 or at date of original issuance, if later. The resulting unaudited pro forma adjustment includes an increase in the weighted average shares used to compute basic and diluted net loss per share of 8,108,000 and 10,551,000 for the year ended December 31, 1998 and the three months ended March 31, 1999, respectively. The calculation of pro forma diluted net loss per share excludes other potential shares of Common Stock as the effect would be antidilutive. Pro forma potential shares of Common Stock are composed of Common Stock subject to repurchase rights and incremental Common Stock issuable upon the exercise of stock options and upon conversion of debt. Comprehensive income Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. During each of the three years ended December 31, 1998, and the three months ended March 31, 1998 and 1999 (unaudited) the Company has not had any significant transactions that are required to be reported in comprehensive income. Segment information Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures about Segments of Enterprise and Related Information." During each of the three years ended December 31, 1998 and the three months ended March 31, 1998 and 1999 (unaudited) the Company's management considers its business activities to be focused on the license of its product and related services to end-user customers. Since management's primary form of internal reporting is aligned with the offering of products and services the Company believes it operates in one segment. The Company's customers have all been located in the United States. Concentration of credit risks Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivable. All of the Company's available funds at December 31, 1997 and 1998 and March 31, 1999 (unaudited), were deposited in money market accounts with financial institutions which management believes are of high credit quality. The Company's accounts receivable are derived from transactions with clients located in the United States. The Company performs ongoing credit evaluations of its client's financial condition and generally requires no collateral from its clients. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. F-11 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The following table summarizes the revenue from customers in excess of 10% of total customer revenues:
Three Month Year Ended Ended March December 31, 31, ---------------- ------------- 1996 1997 1998 1998 1999 ---- ---- ---- ----- ----- (unaudited) Company A..................................... 52% 67% --% --% --% Company B..................................... --% 12% --% 30% --% Company C..................................... --% 10% 14% 10% --% Company D..................................... 44% --% --% --% --% Company E..................................... --% --% 34% --% --% Company F..................................... --% --% --% --% 20% Company G..................................... --% --% --% --% 15% Company H..................................... --% --% --% 45% --% Company I..................................... --% --% --% --% 10%
The following table summarizes receivables from customers in excess of 10% of total accounts receivable:
Three Month Year Ended Ended December 31, March 31, ---------------- ------------- 1996 1997 1998 1998 1999 ---- ---- ---- ----- ----- (unaudited) Company A..................................... 61% 50% --% 20% --% Company B..................................... --% 24% --% --% --% Company C..................................... --% 21% --% 49% --% Company D..................................... 37% --% --% --% --% Company E..................................... --% --% 54% --% 13% Company F..................................... --% --% 14% --% 34% Company G..................................... --% --% 11% --% --% Company J..................................... --% --% --% 15% --%
Stock split In 1996, the Board of Directors approved a one and a half-for-one stock split of the Company's Preferred and Common Stock. All information presented in these financial statements has been retroactively adjusted to reflect the stock split. Recent accounting pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. The Company has adopted the provisions of SOP 98-1 in its fiscal year beginning January 1, 1999, and does not expect such adoption to have a material effect on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters beginning with the quarter ending June 30, 2000. SFAS 133 establishes accounting and reporting standards of derivative F-12 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company will adopt SFAS 133 in its quarter ending June 30, 2000 and does not expect such adoption to have an impact on the Company's results of operations, financial position or cash flows. Note 2--Balance Sheet Components:
December 31, -------------- March 31, 1997 1998 1999 ------ ------ ----------- (unaudited) Accounts receivable, net: Accounts receivable.......................... $1,139 $5,884 $4,499 Unbilled consulting services................. -- 100 703 Unbilled grant revenue....................... 496 322 504 ------ ------ ------ 1,635 6,306 5,706 Less: Allowance for doubtful accounts.......... (35) (333) (451) ------ ------ ------ $1,600 $5,973 $5,255 ====== ====== ====== Property and equipment, net: Computer equipment........................... $ 66 $ 479 $ 706 Software licenses............................ 20 124 194 Furniture and fixtures....................... 198 404 373 Leasehold improvements....................... 92 263 297 ------ ------ ------ 376 1,270 1,570 Less: Accumulated depreciation and amortization.................................. (101) (303) (462) ------ ------ ------ $ 275 $ 967 $1,108 ====== ====== ====== Accrued liabilities: Payroll and related expense.................. $ 232 $1,916 $1,000 Deferred grant awards........................ 258 581 581 Sales taxes.................................. -- 86 214 Other........................................ 118 395 814 ------ ------ ------ $ 608 $2,978 $2,609 ====== ====== ======
Note 3--Income Taxes: For the year ended December 31, 1996, the Company's current tax provison was reduced by the utilization of available net operating loss carryforwards. The tax provision is reconciled to the amount computed using the federal statutory rate as follows:
Year Ended December 31, --------------------- 1996 1997 1998 ----- ----- ------- Federal statutory provision (benefit)................ $ 87 $(197) $(3,254) State taxes, net of federal benefit.................. 15 (8) (287) Future benefits not currently recognized............. -- 205 2,971 Nondeductible compensation........................... -- -- 570 Utilization of net loss carryforwards................ (102) -- -- ----- ----- ------- $ -- $ -- $ -- ===== ===== =======
At December 31, 1998, the Company had approximately $7,200,000 of federal and $3,300,000 of state net operating loss carryforwards available to offset future taxable income which expire at various dates through F-13 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 2013. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. Deferred tax assets and liabilities consist of the following (in thousands):
December 31, -------------- 1997 1998 ----- ------- Deferred tax assets: Net operating loss carryforwards........................... $ 197 $ 2,656 Accruals and allowances.................................... 34 492 Research credits........................................... 74 519 ----- ------- Net deferred tax assets...................................... 305 3,667 Valuation allowance.......................................... (305) (3,667) ----- ------- $ -- $ -- ===== =======
The Company has incurred losses for the years ended December 31, 1997 and 1998. Management believes that, based on the history of such losses and other factors, the weight of available evidence indicates that it is more likely than not that the Company will not be able to realize its deferred tax assets and thus a full valuation reserve has been recorded at December 31, 1997 and 1998. Note 4--Government Grants: During January 1996, the Company received a grant award from the National Institute of Standards and Technology ("NIST") totaling $2,000,000 to conduct research and provide technical and business reports on a project to create a highly flexible technology to simplify the task of integrating and sharing real-time data among many different planning, tracking and control systems. The grant reimburses the Company's allowable expenses over a period of two years with $1,011,000 and $990,000 budgeted for the grant years ended January 25, 1997 and 1998, respectively. NIST requires the Company to comply with certain cost accounting and reporting requirements, as applicable. For the period ending December 31, 1996 and 1997, the Company has been reimbursed for grant- related expenditures in the amount of $984,000 and $1,016,000, respectively. In October 1997, the Company received an additional NIST grant totaling $2,000,000 to investigate at least three categories of Model-Driven Components. The grant reimburses the Company's allowable expenses over a period of two years with $970,000 and $1,030,000 of amended budget for the grant years ending September 30, 1998 and 1999, respectively. Additionally, NIST requires the Company to comply with certain cost accounting and reporting requirements, as applicable. For the period ended December 31, 1997 and 1998, the Company has incurred costs of $401,000 and $822,000, respectively, in grant-related expenditures. Also in November 1997, the Company received a joint-venture NIST grant totaling $1,300,000 to help develop technology to enable the building of integrated manufacturing applications for multi-company supply chain planning and execution. The grant reimburses the Company's allowable expenses over a period of three years with $300,000, $500,000 and $500,000 of the amended budget for the grant years ending December 31, 1998, 1999 and 2000, respectively. Additionally, NIST requires the Company to comply with certain cost accounting and reporting requirements, as applicable. For the periods ended December 31, 1997 and 1998, the Company has incurred costs of $30,000 and $638,000, respectively, in grant-related expenditures. The Company incurs costs in connection with the NIST grants and in some cases, additional approval by the grant officer is required. Amounts received subject to NIST grant approval are deferred, which are $258,000 and $323,000, respectively, at December 31, 1997 and 1998. Such amounts will be recognized as revenue or refunded, depending upon the outcome of the approval process. F-14 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Note 5--Commitments and Contingencies: Leases The Company leases office space under noncancelable operating leases with various expiration dates through 2003. The leases require payment of property taxes, insurance, maintenance and utilities. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has recognized prepaid expense for rent expenditures not incurred but paid. Rent expense under these leases are $158,000, $146,000, $546,000, $134,000 and $174,000 for the years ended December 31, 1996, 1997 and 1998, and for the three months ended March 31, 1998 and 1999 (unaudited), respectively. Future net minimum lease payments, under noncancelable operating leases at December 31, 1998, including the Company's new facility lease entered into in April 1999, are as follows (in thousands):
Year ending Operating December 31, Leases ------------ --------- 1999.............................................................. $1,144 2000.............................................................. 1,942 2001.............................................................. 2,029 2002.............................................................. 2,072 2003.............................................................. 1,258 ------ Total minimum lease payments.................................... $8,445 ======
Contingencies From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. In the opinion of management, there are no pending claims of which the outcome is expected to result in a material adverse effect on the financial position or results of operations or cash flows of the Company. Employee benefits In December 1998, the Company established a nonqualified, unfunded deferred compensation plan for certain key executives providing for payments upon retirement, death or disability. Under the plan, certain employees receive payments equal to the employee's entire accrued benefit, the sum of all deferred amounts and any corporate contributions credited to the plan and due and owing to the employee, together with earning adjustments, minus any distributions. Through December 31, 1998 and March 31, 1999 (unaudited), the Company did not make any contributions to the plan. The Company has recorded the assets and liabilities for the deferred compensation at gross amounts in the accompanying balance sheet because such assets are not protected from the Company's general creditors and, as such, these assets could be used to meet the obligations of the Company in the event of bankruptcy. The assets are recorded at fair value. Any changes in fair value are recognized as a reduction or increase in compensation expense. F-15 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Note 6--Convertible Preferred Stock: Convertible Preferred Stock ("Convertible Preferred") at December 31, 1998, consist of the following, except for shares authorized, which reflect the Articles of Incorporation as amended in May 1999 (in thousands):
Proceeds Net of Shares Liquidation Issuance Series Authorized Outstanding Amount Costs ------ ---------- ----------- ----------- -------- A................................ 1,520 1,520 $ 540 $ 526 A1............................... 950 950 560 560 B................................ 6,000 5,238 9,500 9,468 C................................ 5,000 2,737 11,000 10,967 D................................ 1,200 -- -- -- Undesignated..................... 1,330 -- -- -- ------ ------ ------- ------- 16,000 10,445 $21,600 $21,521 ====== ====== ======= =======
In January 1999, the Company issued 107,213 shares of $0.001 par value Series C Convertible Preferred Stock and received proceeds net of issuance costs totaling $420,000. In May 1999, the Company issued 1,003,980 shares of $0.001 par value Series D Convertible Preferred Stock and received proceeds net of issuance costs totaling $4,500,000. The holders of Convertible Preferred have various rights and preferences as follows: Voting Each share of Convertible Preferred has voting rights equal to an equivalent number of shares of Common Stock into which it is convertible and votes together as one class with the Common Stock. As long as 150,000 shares of Convertible Preferred remain outstanding, the Company must obtain approval from the holders of a majority of the shares of Convertible Preferred in order to alter the Articles of Incorporation as related to Convertible Preferred, change the authorized number of shares of Common Stock or Convertible Preferred, create a new class of stock with rights and preferences above those of Convertible Preferred, repurchase any shares of Common Stock other than shares subject to the right of repurchase by the Company, authorize a dividend on Common Stock or Convertible Preferred or effect a merger, corporate reorganization, sale of control or any other transaction in which all or substantially all of the assets of the Company are sold, or increase the maximum authorized number of directors to greater than seven. Dividends The holders of the Series C Convertible Preferred are entitled to receive noncumulative dividends, in preference to any dividends on the Company's outstanding Series A, A1, B and D Convertible Preferred and Common Stock, at the per annum rate of 8% of the "Original Issue Price," when and as declared by the Board of Directors. The holders of the Series A, A1, B and D Convertible Preferred are entitled to receive, in preference to the holders of the Common Stock, noncumulative dividends at the per annum rate of 8% of the original issue price, when and as declared by the Board of Directors. The Original Issue Price of Series A, Series A1, Series B, Series C and Series D is $0.3555, $0.6101, $1.8135, $4.02 and $4.50 per share, respectively. The holders of Convertible Preferred will also be entitled to participate in dividends on Common Stock, when and if declared by the Board of Directors, based on the number of shares of Common Stock held F-16 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) on an as-if converted basis. No dividends on Convertible Preferred or Common Stock have been declared by the Board from inception through March 31, 1999 (unaudited). Liquidation In the event of any liquidation or winding up of the Company, the holders of Series C Convertible Preferred are entitled to receive, in preference to the holders of the Common Stock and the other holder of Convertible Preferred, a per share amount equal to the Original Issue Price, plus any declared but unpaid dividends. The holders of Series A, A1, B and D Convertible Preferred then receive their Original Issue Prices plus any declared but unpaid dividends. The holders of Series C Convertible Preferred then receive an additional amount equal to the difference between two times its Original Issue Price less the dollar amount received above. Then the remaining assets shall be distributed ratably to the holders of all Common Stock and Convertible Preferred on a common equivalent basis until each series has received three times the Original Issue Price for such series. The additional dollar amount which Series C receives from its distribution of the remaining assets shall be reduced by its previously received dollar amount equal to two times its Original Issue Price. A merger, acquisition, sale of voting control or sale of substantially all of the assets of the Company in which the shareholders of the Company do not own a majority (50% or more) of the outstanding shares of the surviving corporation is deemed to be a liquidation. Conversion Each share of Convertible Preferred is convertible at the option of the holder into shares of Common Stock by multiplying the appropriate conversion rate in effect by the number of Convertible Preferred being converted. The conversion rate is the quotient obtained by dividing the Original Issue Price by the conversion price (which is initially the respective Original Issue Price, until it is adjusted). Additionally, each share of Convertible Preferred shall automatically be converted upon (i) an initial public offering of the Company equal to or exceeding $8.04 per share with aggregate proceeds not less than $20,000,000, or (ii) the written consent of a majority of the Convertible Preferred holders then outstanding. Note 7--Common Stock: At December 31, 1997 and 1998, there were 13,249,498 and 15,268,180 shares outstanding, respectively, of Common Stock issued to the founders of the Company, affiliates and other nonrelated parties. At March 31, 1999 (unaudited) there were 15,541,180 shares outstanding of Common Stock. A portion of the shares sold are subject to a right of repurchase by the Company subject to vesting, which is generally over a five year period from the earlier of grant date or employee hire date, as applicable, until vesting is complete. At December 31, 1997 and 1998 and March 31, 1999 (unaudited), there were approximately 3,320,000, 3,056,000 and 2,739,000 shares, respectively, subject to repurchase. The Company issued 52,500 shares of Common Stock to consultants in exchange for services. In connection with these issuances the Company recorded expenses of $147,000 based on the fair value of the Common Stock on the date of grant. F-17 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The Company had reserved shares of Common Stock for future issuance as follows (in thousands):
March 31, 1999 ----------- (unaudited) Conversion of Series A........................................... 1,520 Conversion of Series A1.......................................... 950 Conversion of Series B........................................... 5,238 Conversion of Series C........................................... 4,000 Common Stock issued.............................................. 15,541 Exercise of options under the Equity Incentive Plans............. 7,003 Undesignated..................................................... 16,748 ------ 51,000 ======
In May 1999, the Company reserved an additional 1,003,980 shares for the conversion of Series D Convertible Preferred Stock. Note 8--Employee Benefit Plans: Equity Incentive Plans In March 1995, the Company adopted the 1995 Equity Incentive Plan, which provides for the granting of stock options, stock appreciation rights, stock bonuses and restricted stock to employees, directors and consultants of the Company. In October 1998, the Company adopted the 1998 Executive Incentive Plan which provides for the granting of stock options to employees, directors and consultants. Options granted under the 1995 Equity Incentive Plan and the 1998 Executive Incentive Plan (the "Plans") may be either incentive stock options ("ISO") or nonqualified stock options ("NSO"). ISO may be granted only to employees (including officers and directors who are also employees) of the Company. NSO may be granted to employees and consultants of the Company. For the year ended December 31, 1998 and the three months ended March 31, 1999 (unaudited), the Company has reserved 4,992,000 and 7,003,000 shares, respectively, of Common Stock for issuance under the Plans. Options under the Plans may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant, respectively. Furthermore, under the 1998 Executive Incentive Plan, no employee shall be eligible to be granted options covering more than 400,000 shares of the Common Stock during any calendar year. Options are exercisable immediately subject to repurchase options held by the Company which lapse over a maximum period of five years at such times and under such conditions as determined by the Board of Directors. To date, options granted generally vest over five years. F-18 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The following table summarizes information about stock option transactions under the Plans (in thousands, except per share amounts):
Year Ended December 31, Three Months ------------------------------------------------- Ended March 31, 1996 1997 1998 1999 --------------- ---------------- ---------------- ---------------- Weighted Weighted Weighted Weighted Average Average Average Average Exercise Exercise Exercise Exercise Shares Price Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ -------- ------ -------- (unaudited) Outstanding at beginning of period.............. -- $ -- 489 $0.10 1,627 $0.22 1,877 $0.36 Granted below fair value.................. -- -- -- 0.25 3,258 0.31 463 0.70 Granted at fair value .. 489 0.10 1,583 0.25 -- -- -- -- Exercised............... -- -- (201) 0.11 (2,014) 0.24 (271) 0.53 Canceled................ -- -- (244) 0.25 (994) 0.22 (7) 0.25 --- ----- ------ ----- Outstanding at end of period.............. 489 0.10 1,627 0.22 1,877 0.36 2,062 0.41 === ===== ====== ===== Options vested.......... -- -- 60 67 === ===== ====== ===== Weighted average fair value of options granted during the period................. $0.03 $0.06 $0.10 $0.15 ===== ===== ===== =====
The following table summarizes the information about stock options outstanding and exercisable as of December 31, 1998 (in thousands, except per share amounts):
Options Vested and Options Outstanding Exercisable -------------------------------- -------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Outstanding Price -------------- ----------- ----------- -------- ----------- -------- $0.10................ 10 7.67 $0.10 5 $0.10 0.25................ 1,431 9.30 0.25 30 0.25 0.70................ 436 9.92 0.70 25 0.70 ----- --- 1,877 60 ===== ===
The following table summarizes the information about stock options outstanding and exercisable as of March 31, 1999 (unaudited) (in thousands, except per share amounts):
Options Vested and Options Outstanding Exercisable -------------------------------- -------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Outstanding Price -------------- ----------- ----------- -------- ----------- -------- $0.10................ 10 7.42 $0.10 5 $0.10 0.25................ 1,324 9.04 0.25 37 0.25 0.70................ 728 9.67 0.70 25 0.70 ----- --- 2,062 67 ===== ===
F-19 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Fair value disclosures The Company applies the measurement principles of APB No. 25 in accounting for its stock option plan. Had compensation expense for options granted for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (unaudited) been determined based on the fair value at the grant dates as prescribed by SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been increased or decreased to the pro forma amounts indicated below.
Year Ended December Three Months Ended 31, March 31, --------------------- -------------------- 1996 1997 1998 1998 1999 ----- ------ ------- --------- --------- (unaudited) Net income (loss): As reported.................. $ 243 $ (580) $(9,569) $ (1,516) $ (2,711) ----- ------ ------- --------- --------- Pro forma.................... $ 243 $ (636) $(9,572) $ (1,530) $ (2,738) ----- ------ ------- --------- --------- Net income (loss) per share: As reported: Basic...................... $0.03 $(0.06) $ (0.80) $ (0.14) $ (0.21) ----- ------ ------- --------- --------- Diluted.................... $0.02 $(0.06) $ (0.80) $ (0.14) $ (0.21) ----- ------ ------- --------- --------- Pro forma: Basic $0.03 $(0.06) $ (0.80) $ (0.15) $ (0.22) ----- ------ ------- --------- --------- Diluted.................... $0.02 $(0.06) $ (0.80) $ (0.15) $ (0.22) ----- ------ ------- --------- ---------
The Company calculated the minimum fair value of each option grant on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:
Three Months Ended Year Ended December 31, March 31, -------------------------- -------------------- 1996 1997 1998 1998 1999 ---- --------- --------- --------- --------- (unaudited) Risk-free interest rates................... 6.51% 5.55-6.20% 4.13-5.46% 5.43-5.46% 4.45-4.99% Expected lives (in years).................. 5 5 5 5 5 Dividend yield........... 0% 0% 0% 0% 0% Expected volatility...... 0% 0% 0% 0% 0%
Because the determination of fair value of all options granted after such time as the Company becomes a public entity will include an expected volatility factor in addition to the factors described in the preceding paragraph, the above results may not be preventative of future periods. Unearned stock-based compensation In connection with certain stock option grants, during the year ended December 31, 1998 and the three months ended March 31, 1999 (unaudited), the Company recognized unearned compensation totaling $6,788,000 and $1,812,000, respectively, which is being amortized over the five year vesting periods of the related options using the multiple option approach. Amortization expense recognized for the year ended December 31, 1998 and the three months ended March 31, 1999 (unaudited) totaled approximately $1,277,000 and $867,000, respectively. In determining the fair market value on each grant date, the Company considered, among other things, the relative level of revenues and other operating results, the absence of a public trading market for the Company's securities and the competitive nature of the Company's market. F-20 VITRIA TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 401(k) Plan In May 1996, the Board of Directors adopted an employee savings and retirement plan (the "401(k) Plan") covering substantially all of the Company's employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the statutory prescribed limit and have the amount of such reduction contributed to the 401(k) Plan. The Company may make contributions to the 401(k) Plan on behalf of eligible employees. The Company has not made any contributions to the 401(k) Plan. Note 9--Subsequent Events: Reincorporation In June 1999, the Company's Board of Directors authorized the reincorporation of the Company in the state of Delaware. Following the reincorporation, the Company will continue to be authorized to issue 250,000,000 shares of $0.001 par value Common Stock and 5,000,000 shares of $0.001 par value Preferred Stock. The Board of Directors has the authority to issue the undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. Stock option grants In May 1999, the Company granted incentive stock options to employees to purchase 541,500 shares at $1.04 per share. In connection with the stock option grants, the Company will record $2.4 million in unearned stock-based compensation during the second quarter of 1999. 1999 Equity Incentive Plan and 1998 Executive Incentive Plan In June 1999, the Board of Directors adopted, subject to stockholder approval, the 1999 Equity Incentive Plan, which amended the 1995 Equity Incentive Plan, and amended the 1998 Executive Incentive Plan (the "Amended Plans"). The Amended Plans provide for the granting of stock options, stock appreciation rights, stock bonuses, and restricted stock purchase awards to employees, including officers, directors or consultants. The Company has reserved 10,000,000 shares of Common Stock for issuance under the Amended Plans and on December 31 of each year for 10 years, starting with the year 1999, the number of shares reserved will automatically increases by 6.5% of the outstanding Common Stock on a fully-diluted basis, with the number of options granted which qualify as incentive stock options, never to exceed 8,000,000 shares issued and available. 1999 Employee Stock Purchase Plan In June 1999, the Board of Directors adopted, subject to stockholder approval, the 1999 Employee Stock Purchase Plan ("Purchase Plan") which provides for the issuance of 1,500,000 shares of Common Stock pursuant to purchase rights granted to employees. Under the plan, eligible employees can have up to 10% of their earnings withheld to be used to purchase shares of Common Stock on specified dates determined by the Board of Directors. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock on the commencement date of each offering period or the specified purchase date. On August 14 of each year for 10 years, starting with the year 2000, the number of shares in the reserve automatically increases by the greater of (i) 2% of the outstanding shares on a fully-diluted basis, or (ii) the number of shares that have been issued under the Purchase Plan during the prior 12-month period, so that the reserve automatically is restored to 1,500,000 shares; never to exceed 16,500,000 shares issued and available. F-21 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO OF VITRIA TECHNOLOGY, INC.] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 us in connection with the sale of the common stock being registered hereby. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC Registration Fee............................................. $ 20,850 NASD Filing Fee.................................................. 8,000 NASDAQ National Market Additional Listing Fee.................... 53,750 Printing......................................................... 150,000 Legal Fees and Expenses.......................................... 400,000 Accounting Fees and Expenses..................................... 250,000 Blue Sky Fees and Expenses....................................... 15,000 Transfer Agent and Registrar Fees................................ 10,000 Director's and Officer's Insurance............................... * Miscellaneous.................................................... * -------- Total.......................................................... * ========
-------- *To be supplied by amendment. We intend to pay all expenses of registration, issuance and distribution. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Delaware law, our amended and restated certificate of incorporation provides that no director of ours will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability: . for any breach of duty of loyalty to us or to our stockholders; . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . under Section 174 of the Delaware General Corporation Law; or . for any transaction from which the director derived an improper personal benefit. Our amended and restated certificate of incorporation further provides that we must indemnify our directors and executive officers and may indemnify its other officers and employees and agents to the fullest extent permitted by Delaware law. We believe that indemnification under our amended and restated certificate of incorporation covers negligence and gross negligence on the part of indemnified parties. We have entered into indemnification agreements with each of our directors and officers. These agreements, among other things, require us to indemnify each director and officer for certain expenses including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Vitria, arising out of person's services as our director or officer, any subsidiary of ours or any other company or enterprise to which the person provides services at our request. The underwriting agreement (Exhibit 1.1) will provide for indemnification by the underwriters of Vitria, our directors, our officers who sign the registration statement, and our controlling persons for some liabilities, including liabilities arising under the Securities Act. II-1 ITEM 15. Recent Sales of Unregistered Securities Since inception, Vitria has sold and issued the following unregistered securities: (1) From January 1995 through June 1, 1999, Vitria has granted stock options to purchase 6,330,740 shares of the common stock and 94,776 shares of Series C preferred stock to employees, consultants and directors pursuant to its 1999 Equity Incentive Plan and 1998 Executive Incentive Plan. Of these stock options, 1,266,308 shares have been canceled without being exercised, 2,760,532 shares have been exercised, 623,000 shares of which have been repurchased and 2,303,900 shares remain outstanding. From December 13, 1997 through June 1, 1999, Vitria has also granted restricted stock awards to purchase 1,005,000 shares of the common stock pursuant to the stock option plans, 30,000 shares of which have been repurchased. (2) In December 1994, Vitria issued an aggregate of 11,093,748 shares of common stock to 7 purchasers at $0.004 per share, for an aggregate purchase price of $49,552. (3) In August 1996, Vitria issued an aggregate of 1,020,000 shares of common stock to 3 purchasers at $0.10 per share, for an aggregate purchase price of $102,000. (4) In January 1995 and August 1996, Vitria issued an aggregate of 1,519,582 shares of Series A preferred stock to 6 purchasers at $0.36 per share, for an aggregate purchase price of $540,202. Shares of Series A preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series A preferred stock owned. (5) In May 1996, Vitria issued notes convertible into an aggregate of 950,163 shares of Series A1 preferred stock to 3 purchasers at a purchase price of $0.61 per share for an aggregate purchase price of $579,599, which conversion occurred in December 1997. Shares of Series A1 preferred stock are convertible into shares of common stock at the rate of one share of common stock for each shares of Series A1 preferred stock owned. (6) From December 1997 to September 1998, Vitria issued an aggregate of 47,500 shares of common stock to 7 purchasers at $0.25 per share, for an aggregate purchase price of $11,875. (7) In October 1997, Vitria issued an aggregate of 5,238,357 shares of Series B preferred stock to 8 purchasers at $1.81 per share, for an aggregate purchase price of $9,499,970. Shares of Series B preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series B preferred stock owned. (8) From October 1998 to January 1999, Vitria issued an aggregate of 2,843,533 shares of Series C preferred stock to 39 purchasers at a purchase price of $4.02 per share, for an aggregate purchase price of $11,431,003. Shares of Series C preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series C preferred stock owned. (9) In January 1999, Vitria issued an aggregate of 7,500 shares of common stock to 1 purchaser at $0.70 per share, for an aggregate purchase price of $5,250. (10) In May 1999, Vitria issued an aggregate of 1,003,980 shares of Series D preferred stock to 17 purchasers at a purchase price of $4.50 per share for an aggregate purchase price of $4,517,910. Shares of Series D preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series D preferred stock owned. The sales and issuances of securities described in paragraph (1) above were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 of the Securities Act in that they were offered and sold either pursuant to a written compensatory benefit plan or pursuant to a written contract relating to compensation, as provided by Rule 701. The sales and issuances of securities described in paragraphs (2) through (10) above were deemed to be exempt from registration under the Securities Act by virtue of Rule 4(2), Regulation D or Regulation S promulgated thereunder. With respect to the grant of stock options and restricted stock awards described in II-2 paragraph (1), an exemption from registration was unnecessary in that none of the transactions involved a "sale" of securities as such term is used in Section 2(3) of the Securities Act. Appropriate legends are affixed to the stock certificates issued in the aforementioned transactions. Similar legends were imposed in connection with any subsequent sales of any such securities. All recipients either received adequate information about Vitria or had access, through employment or other relationships, to such information. II-3 ITEM 16. Exhibits and Financial Schedules
Exhibit Number Description of Document ------- ----------------------- 1.1* Form of Underwriting Agreement. 3.1* Agreement and Plan of Merger, dated June , 1999. 3.2 Amended and Restated Certificate of Incorporation of the Registrant to be effective following the closing of this offering. 3.3 Bylaws of the Registrant. 4.1 Reference is made to Exhibits 3.1 through 3.3. 4.2* Specimen Stock Certificate. 4.3 Second Amended and Restated Investor Rights Agreement, dated May 20, 1999. 5.1* Opinion of Cooley Godward LLP. 10.1* Form of Indemnity Agreement. 10.2 Amended and Restated 1999 Equity Incentive Plan. 10.3 1998 Executive Incentive Plan. 10.4 1999 Employee Stock Purchase Plan. 10.5 1998 Nonqualified Deferred Compensation Plan. 10.6 Standard Industrial/Commercial Single-Tenant Lease-Net by and between Portola Land Company and the Registrant, dated January 28, 1997. 10.7 Sublease by and between Applied Materials, Inc. and the Registrant, dated April 6, 1999. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2* Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. 24.1 Power of Attorney. See Signature Page. 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. ITEM 17. Undertakings The undersigned registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, the information omitted from the form of this prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) That for purposes 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. (3) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 15 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, and will be governed by the final adjudication of such issue. (4) To provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denomination and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Palo Alto, state of California, on June 22, 1999. VITRIA TECHNOLOGY, INC. /s/ JoMei Chang, Ph.D. By: _____________________________________ JoMei Chang, Ph.D. President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints JoMei Chang, Ph.D., Paul Auvil, III and Dale Skeen, Ph.D., and each of them, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments (including post-effective amendments) to this registration statement together with all schedules and exhibits thereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, together with all schedules and exhibits thereto, (ii) act on, sign and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith, (iii) act on and file any supplement to any prospectus included in this registration statement or any such amendment or any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and (iv) take any and all actions which may be necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be done by virtue thereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on these dates stated:
Signature Title Date --------- ----- ---- /s/ JoMei Chang, Ph.D. President, Chief Executive June 22, 1999 ______________________________________ Officer and Director JoMei Chang, Ph.D. (Principal Executive Officer) /s/ Paul Auvil, III Vice President, Finance, June 22, 1999 ______________________________________ Chief Financial Officer Paul Auvil, III and Secretary (Principal Financial and Accounting Officer) /s/ Dale Skeen, Ph.D. Chief Technology Officer June 22, 1999 ______________________________________ and Director Dale Skeen, Ph.D. /s/ Robert M. Halperin Director June 22, 1999 ______________________________________ Robert M. Halperin /s/ William H. Younger, Jr. Director June 22, 1999 ______________________________________ William H. Younger, Jr. /s/ John L. Walecka Director June 22, 1999 ______________________________________ John L. Walecka
II-5 EXHIBIT INDEX
Exhibit Number Description of Document ------- ----------------------- 1.1* Form of Underwriting Agreement. 3.1* Agreement and Plan of Merger, dated June , 1999. 3.2 Amended and Restated Certificate of Incorporation of the Registrant to be effective following the closing of this offering. 3.3 Bylaws of the Registrant. 4.1 Reference is made to Exhibits 3.1 through 3.3. 4.2* Specimen Stock Certificate. 4.3 Second Amended and Restated Investor Rights Agreement, dated May 20, 1999. 5.1* Opinion of Cooley Godward LLP. 10.1* Form of Indemnity Agreement. 10.2 Amended and Restated 1999 Equity Incentive Plan. 10.3 1998 Executive Incentive Plan. 10.4 1999 Employee Stock Purchase Plan. 10.5 1998 Nonqualified Deferred Compensation Plan. 10.6 Standard Industrial/Commercial Single-Tenant Lease-Net by and between Portola Land Company and the Registrant, dated January 28, 1997. 10.7 Sublease by and between Applied Materials, Inc. and the Registrant, dated April 6, 1999. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2* Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. 24.1 Power of Attorney. See Signature Page. 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. EX-3.2 2 CERTIFICATE OF INCORPORATION Exhibit 3.2 AMENDED RESTATED CERTIFICATE OF INCORPORATION OF VITRIA TECHNOLOGY, INC. JoMei Chang and Paul Auvil hereby certify that: ONE: They are the duly elected and acting President and Secretary, respectively, of Vitria Technology, Inc., a Delaware corporation. TWO: The Certificate of Incorporation of this corporation is hereby amended and restated to read as follows: I. The name of the corporation is VITRIA TECHNOLOGY, INC. (the "Corporation" or the "Company"). II. The address of the registered office of the Corporation in the State of Delaware is: Corporation Service Company 1013 Centre Road Wilmington, DE 19805 The name of the Corporation's registered agent at said address is Corporation Service Company. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. IV. A. 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 two hundred fifty five million (255,000,000) shares. Two hundred fifty million (250,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($.001). Five million (5,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($.001). B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law ("DGCL"), to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the 1. qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares 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 decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. Management 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Board of Directors a. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1993 Act"), covering the offer and sale of Common Stock to the public (the "Initial Public Offering"), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. During such time or times that the corporation is subject to Section 2115(b) of the California General Corporation Law ("CGCL"), this Section A.2.a of this Article V shall not be effective and Section A.2.b of this Article shall apply. b. In the event that the corporation is subject to Section 2115(b) of the CGCL, Section A.2.a of this Article V shall not apply and all directors shall be shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. 2. c. No person entitled to vote at an election for directors may cumulate votes to which such person is entitled, unless, at the time of such election, the corporation (i) is subject to Section 2115(b) of the CGCL and (ii) is not a "listed" corporation or ceases to be a "listed" corporation under Section 301.5 of the CGCL. During this time, every stockholder entitled to vote at an election for directors may cumulate such stockholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which such stockholder's shares are otherwise entitled, or distribute the stockholder's votes on the same principle among as many candidates as such stockholder thinks fit. No stockholder, however, shall be entitled to so cumulate such stockholder's votes unless (i) the names of such candidate or candidates have been placed in nomination prior to the voting and (ii) the stockholder has given notice at the meeting, prior to the voting, of such stockholder's intention to cumulate such stockholder's votes. If any stockholder has given proper notice to cumulate votes, all stockholders may cumulate their votes for any candidates who have been properly placed in nomination. Under cumulative voting, the candidates receiving the highest number of votes, up to the number of directors to be elected, are elected. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3. Removal of Directors a. During such time or times that the corporation is subject to Section 2115(b) of the CGCL, the Board of Directors or any individual director may be removed from office at any time without cause by the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote on such removal; provided, however, that unless the entire Board is removed, no individual director may be removed when the votes cast against such director's removal, or not consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of such director's most recent election were then being elected. b. At any time or times that the corporation is not subject to Section 2115(b) of the CGCL and subject to any limitations imposed by law, Section A. 3. a. above shall no longer apply and removal shall be as provided in Section 141(k) of the DGCL. 4. Vacancies a. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in 3. office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. b. If at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Delaware Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in offices as aforesaid, which election shall be governed by Section 211 of the DGCL. c. At any time or times that the corporation is subject to Section 2115(b) of the CGCL, if, after the filling of any vacancy by the directors then in office who have been elected by stockholders shall constitute less than a majority of the directors then in office, then (i) Any holder or holders of an aggregate of fifty percent (50%) or more of the total number of shares at the time outstanding having the right to vote for those directors may call a special meeting of stockholders; or (ii) The Superior Court of the proper county shall, upon application of such stockholder or stockholders, summarily order a special meeting of stockholders, to be held to elect the entire board, all in accordance with Section 305(c) of the CGCL. The term of office of any director shall terminate upon that election of a successor. B. 1. Bylaw Amendments Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock of the corporation entitled to vote. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. 2. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. No action shall be taken by the stockholders of the corporation except (i) at an annual or special meeting of stockholders called in accordance with the Bylaws or (ii) by written consent of stockholders in accordance with the Bylaws prior to the closing of the Initial Public Offering and following the closing of the Initial Public Offering no action shall be taken by the stockholders by written consent. 4. 4. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law. B. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the CGCL) for breach of duty to the corporation and its shareholders through bylaw provisions or through agreements with the agents, or through shareholder resolutions, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the CGCL, subject, at any time or times the corporation is subject to Section 2115(b) to the limits on such excess indemnification set forth in Section 204 of the CGCL. C. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, following the closing of the Initial Public Offering the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, shall be required to alter, amend or repeal Articles. * * * * THREE: This Amended and Restated Certificate of Incorporation has been duly approved by the Board of Directors of this Corporation. FOUR: This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware by the Board of Directors and the stockholders of the Corporation. The total number of outstanding shares entitled to vote or act by written consent was 100 shares of Common Stock. A majority of the outstanding shares of Common Stock approved this Restated Certificate of Incorporation by written consent in accordance with Section 5. 228 of the General Corporation Law of the State of Delaware and written notice of such was given by the Corporation in accordance with said Section 228. In Witness Whereof, Vitria Technology, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by the President and the Secretary in Mountain View, California this _______ day of ____ 1999. Vitria Technology, Inc. By:________________________________ JoMei Chang President Attest: By:______________________ Paul Auvil Secretary 6. EX-3.3 3 BYLAWS OF THE REGISTRANT EXHIBIT 3.3 Exhibit C-2 BYLAWS OF VITRIA ACQUISITION CORPORATION (A DELAWARE CORPORATION) BYLAWS OF VITRIA ACQUISITION CORPORATION (A DELAWARE CORPORATION) Article I Offices Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. Section 2. Other Offices. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. Article II Corporate Seal Section 3. Corporate Seal. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal- Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Article III Stockholders' Meetings Section 4. Place Of Meetings. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. Section 5. Annual Meetings. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought 1. before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or, in the event public announcement of the date of such annual meeting is first made by the corporation fewer than seventy (70) days prior to the date of such annual meeting, the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the corporation. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the 2. corporation in accordance with the provisions of paragraph (b) of this Section 5. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 5. At the request of the Board of Directors, any person nominated by a stockholder for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. (d) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act. Section 6. Special Meetings. (a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, (iii) holders of fifty percent of the Company's voting stock, or (iv) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption), and shall be held at such place, on such date, and at such time as the Board of Directors, shall fix. (b) If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon 3. determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. If the notice is not given within sixty (60) days after the receipt of the request, the person or persons requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. Section 7. Notice Of Meetings. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. Section 8. Quorum. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the vote cast, excluding abstentions, at any meeting at which a quorum is present shall be valid and binding upon the corporation; provided, however, that directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of the votes cast, including abstentions, by the holders of shares of such class or classes or series shall be the act of such class or classes or series. 4. Section 9. Adjournment And Notice Of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes, excluding abstentions. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 10. Voting Rights. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. Section 11. Joint Owners Of Stock. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is 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 (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the General Corporation Law of Delaware, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest. Section 12. List Of Stockholders. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of 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 the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present. 5. Section 13. Action Without Meeting. (a) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, 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 the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the corporation in the manner herein required, written consents signed by a sufficient number of stockholders to take action are delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. (c) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of the State of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written consent has been given in accordance with Section 228 of the General Corporation Law of Delaware. (d) Notwithstanding the foregoing, no such action by written consent may be taken following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock of the corporation (the "Initial Public Offering"). Section 14. Organization. (a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if 6. any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. Article IV Directors Section 15. Number And Term Of Office. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. Section 16. Powers. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. Section 17. Classes Of Directors. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the Initial Public Offering, the directors shall be divided into three classes designated as Class I, Class II, and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease 7. in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 18. Vacancies. Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any director. Section 19. Resignation. Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. Section 20. Removal. Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time (i) with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation entitled to vote at an election of directors (the "Voting Stock") or (ii) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all the then-outstanding shares of the Voting Stock. Section 21. Meetings. (a) Annual Meetings. The annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) Regular Meetings. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Certificate of 8. Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolution of the Board of Directors or the written consent of all directors. (c) Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the President or any two of the directors. (d) Telephone Meetings. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (e) Notice Of Meetings. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means, during normal business hours, at least twenty- four (24) hours before the date and time of the meeting, or sent in writing to each director by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (f) Waiver Of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting. 9. Section 22. Quorum And Voting. (a) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 43 hereof, for which a quorum shall be one-third of the exact number of directors fixed from time to time in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. Section 23. Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 24. Fees And Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. Section 25. Committees. (a) Executive Committee.The Board of Directors may appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors 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; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by Delaware the General Corporation Law to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any bylaw of the corporation. 10. (b) Other Committees. The Board of Directors may, from time to time, appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws. (c) Term. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such member's term on the Board of Directors. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Bylaw may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. Section 26. Organization. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or if the President is absent, the most senior Vice President, or, in the absence of any such officer, a 11. chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. Article V Officers Section 27. Officers Designated. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the Controller, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. Section 28. Tenure And Duties Of Officers. (a) General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (b) Duties Of Chairman Of The Board Of Directors. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. If there is no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 28. (c) Duties Of President. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. 12. (d) Duties Of Vice Presidents. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) Duties Of Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (f) Duties Of Chief Financial Officer. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. Section 29. Delegation Of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. Section 30. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. 13. Section 31. Removal. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. Article VI Execution Of Corporate Instruments And Voting Of Securities Owned By The Corporation Section 32. Execution Of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, or the President or any Vice President, and by the Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 33. Voting Of Securities Owned By The Corporation. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President. 14. Article VII Shares Of Stock Section 34. Form And Execution Of Certificates. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. Section 35. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. Section 36. Transfers. (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. 15. (b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. Section 37. Fixing Record Dates. (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 of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the 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 of Directors may fix a new record date for the adjourned meeting. Section 38. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. Article VIII Other Securities Of The Corporation Section 39. Execution Of Other Securities. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall 16. have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. Article IX Dividends Section 40. Declaration Of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 41. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. Article X Fiscal Year Section 42. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. Article XI Indemnification Section 43. Indemnification Of Directors, Executive Officers, Other Officers, Employees And Other Agents. (a) Directors And Executive Officers. The corporation shall indemnify its directors and executive officers (for the purposes of this Article XI, "executive officers" shall have the meaning defined in Rule 3b-7 promulgated under the 1934 Act) to the fullest extent not prohibited by the Delaware General Corporation Law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and 17. executive officers; and, provided, further, that the corporation shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law or (iv) such indemnification is required to be made under subsection (d). (b) Other Officers, Employees and Other Agents. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. (c) Expenses. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or executive officer, of the corporation, or is or was serving at the request of the corporation as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Bylaw, no advance shall be made by the corporation to an executive officer of the corporation (except by reason of the fact that such executive officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. (d) Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or executive officer. Any right to indemnification or advances granted by this Bylaw to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. In connection with any claim for indemnification, the 18. corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. (e) Non-Exclusivity Of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. (f) Survival Of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) Insurance. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw. (h) Amendments. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (i) Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. 19. (j) Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply: (1) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (2) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (3) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (4) References to a "director," "executive officer," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (5) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Bylaw. Article XII Notices Section 44. Notices. 20. (a) Notice To Stockholders. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. (b) Notice To Directors. Any notice required to be given to any director may be given by the method stated in subsection (a), or by facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director. (c) Affidavit Of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained. (d) Time Notices Deemed Given. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. (e) Methods Of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (f) Failure To Receive Notice. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such director to receive such notice. (g) Notice To Person With Whom Communication Is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. 21. (h) Notice To Person With Undeliverable Address. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. Article XIII Amendments Section 45. Amendments. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. Article XIII Right Of First Refusal Section 46. Right Of First Refusal. No holder of common stock shall sell, assign, pledge, or in any manner transfer any of the shares of common stock of the corporation or any right or interest therein, whether voluntarily or by operation of law, or by gift or otherwise, except by a transfer which meets the requirements hereinafter set forth in this bylaw: (a) If the holder of common stock desires to sell or otherwise transfer any of his shares of stock, then the holder of common stock shall first give written notice thereof to the corporation. The notice shall name the proposed transferee and state the number of shares to be transferred, the proposed consideration, and all other terms and conditions of the proposed transfer. (b) For thirty (30) days following receipt of such notice, the corporation shall have the option to purchase all (but not less than all) of the shares specified in the notice at the price and upon the terms set forth in such notice; provided, however, that, with the consent of the holder of common stock, the corporation shall have the option to purchase a lesser portion of the 22. shares specified in said notice at the price and upon the terms set forth therein. In the event of a gift, property settlement or other transfer in which the proposed transferee is not paying the full price for the shares, and that is not otherwise exempted from the provisions of this Section 46, the price shall be deemed to be the fair market value of the stock at such time as determined in good faith by the Board of Directors. In the event the corporation elects to purchase all of the shares or, with consent of the holder of common stock, a lesser portion of the shares, it shall give written notice to the transferring holder of common stock of its election and settlement for said shares shall be made as provided below in paragraph (d). (c) The corporation may assign its rights hereunder. (d) In the event the corporation and/or its assignee(s) elect to acquire any of the shares of the transferring holder of common stock as specified in said transferring holder of common stock's notice, the Secretary of the corporation shall so notify the transferring holder of common stock and settlement thereof shall be made in cash within thirty (30) days after the Secretary of the corporation receives said transferring holder of common stock's notice; provided that if the terms of payment set forth in said transferring holder of common stock's notice were other than cash against delivery, the corporation and/or its assignee(s) shall pay for said shares on the same terms and conditions set forth in said transferring holder of common stock's notice. (e) In the event the corporation and/or its assignees(s) do not elect to acquire all of the shares specified in the transferring holder of common stock's notice, said transferring holder of common stock may, within the sixty-day period following the expiration of the option rights granted to the corporation and/or its assignees(s) herein, transfer the shares specified in said transferring holder of common stock's notice which were not acquired by the corporation and/or its assignees(s) as specified in said transferring holder of common stock's notice. All shares so sold by said transferring holder of common stock shall continue to be subject to the provisions of this bylaw in the same manner as before said transfer. (f) Anything to the contrary contained herein notwithstanding, the following transactions shall be exempt from the provisions of this bylaw: (1) A holder of common stock's transfer of any or all shares held either during such holder of common stock's lifetime or on death by will or intestacy to such holder of common stock's immediate family or to any custodian or trustee for the account of such holder of common stock or such holder of common stock's immediate family or to any limited partnership of which the holder of common stock, members of such holder of common stock's immediate family or any trust for the account of such holder of common stock or such holder of common stock's immediate family will be the general of limited partner(s) of such partnership. "Immediate family" as used herein shall mean spouse, lineal descendant, father, mother, brother, or sister of the holder of common stock making such transfer. (2) A holder of common stock's bona fide pledge or mortgage of any shares with a commercial lending institution, provided that any subsequent transfer of said shares by said institution shall be conducted in the manner set forth in this bylaw. 23. (3) A holder of common stock's transfer of any or all of such holder of common stock's shares to the corporation or to any other holder of common stock of the corporation. (4) A holder of common stock's transfer of any or all of such holder of common stock's shares to a person who, at the time of such transfer, is an officer or director of the corporation. (5) A corporate holder of common stock's transfer of any or all of its shares pursuant to and in accordance with the terms of any merger, consolidation, reclassification of shares or capital reorganization of the corporate holder of common stock, or pursuant to a sale of all or substantially all of the stock or assets of a corporate holder of common stock. (6) A corporate holder of common stock's transfer of any or all of its shares to any or all of its stockholders. (7) A transfer by a holder of common stock which is a limited or general partnership to any or all of its partners or former partners. In any such case, the transferee, assignee, or other recipient shall receive and hold such stock subject to the provisions of this bylaw, and there shall be no further transfer of such stock except in accord with this bylaw. (g) The provisions of this bylaw may be waived with respect to any transfer either by the corporation, upon duly authorized action of its Board of Directors, or by the holder of common stocks, upon the express written consent of the owners of a majority of the voting power of the corporation (excluding the votes represented by those shares to be transferred by the transferring holder of common stock). This bylaw may be amended or repealed either by a duly authorized action of the Board of Directors or by the holder of common stocks, upon the express written consent of the owners of a majority of the voting power of the corporation. (h) Any sale or transfer, or purported sale or transfer, of securities of the corporation shall be null and void unless the terms, conditions, and provisions of this bylaw are strictly observed and followed. (i) The foregoing right of first refusal shall terminate on either of the following dates, whichever shall first occur: (1) On June 30, 2009; or (2) Upon the date securities of the corporation are first offered to the public pursuant to a registration statement filed with, and declared effective by, the United States Securities and Exchange Commission under the Securities Act of 1933, as amended. 24. (j) The certificates representing shares of common stock of the corporation shall bear on their face the following legend so long as the foregoing right of first refusal remains in effect: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION AND/OR ITS ASSIGNEE(S), AS PROVIDED IN THE BYLAWS OF THE CORPORATION." Article XIV Loans To Officers Section 47. Loans To Officers. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 25. Table Of Contents
Page Article I Offices................................................................................................ 1 Section 1. Registered Office............................................................................ 1 Section 2. Other Offices................................................................................ 1 Article II Corporate Seal....................................................................................... 1 Section 3. Corporate Seal............................................................................... 1 Article III Stockholders' Meetings............................................................................... 1 Section 4 Place Of Meetings............................................................................ 1 Section 5 Annual Meetings.............................................................................. 1 Section 6 Special Meetings............................................................................. 3 Section 7 Notice Of Meetings........................................................................... 4 Section 8 Quorum....................................................................................... 4 Section 9 Adjournment And Notice Of Adjourned Meetings................................................. 5 Section 10. Voting Rights................................................................................ 5 Section 11. Joint Owners Of Stock........................................................................ 5 Section 12. List Of Stockholders......................................................................... 5 Section 13. Action Without Meeting....................................................................... 6 Section 14. Organization................................................................................. 6 Article IV Directors............................................................................................. 7 Section 15. Number And Term Of Office.................................................................... 7 Section 16. Powers....................................................................................... 7 Section 17. Classes Of Directors......................................................................... 7 Section 18. Vacancies.................................................................................... 8 Section 19. Resignation.................................................................................. 8 Section 20. Removal...................................................................................... 8 Section 21. Meetings..................................................................................... 8 (a) Annual Meetings.............................................................................. 8 (b) Regular Meetings............................................................................. 8 (c) Special Meetings............................................................................. 9 (d) Telephone Meetings........................................................................... 9
i. Table Of Contents (Continued)
Page (e) Notice Of Meetings........................................................................... 9 (f) Waiver Of Notice............................................................................. 9 Section 22. Quorum And Voting............................................................................ 10 Section 23. Action Without Meeting....................................................................... 10 Section 24. Fees And Compensation........................................................................ 10 Section 25. Committees................................................................................... 10 (a) Executive Committee.......................................................................... 10 (b) Other Committees............................................................................. 11 (c) Term......................................................................................... 11 (d) Meetings..................................................................................... 11 Section 26. Organization................................................................................. 11 Article V Officers.............................................................................................. 12 Section 27. Officers Designated.......................................................................... 12 Section 28. Tenure And Duties Of Officers................................................................ 12 (a) General...................................................................................... 12 (b) Duties Of Chairman Of The Board Of Directors................................................. 12 (c) Duties Of President.......................................................................... 12 (d) Duties Of Vice Presidents.................................................................... 13 (e) Duties Of Secretary.......................................................................... 13 (f) Duties Of Chief Financial Officer............................................................ 13 Section 29. Delegation Of Authority...................................................................... 13 Section 30. Resignations................................................................................. 13 Section 31. Removal...................................................................................... 14 Article VI Execution Of Corporate Instruments And Voting Of Securities Owned By The Corporation................. 14 Section 32. Execution Of Corporate Instruments........................................................... 14 Section 33. Voting Of Securities Owned By The Corporation................................................ 14 Article VII Shares Of Stock...................................................................................... 15 Section 34. Form And Execution Of Certificates........................................................... 15
ii. Table Of Contents (Continued)
Page Section 35. Lost Certificates............................................................................ 15 Section 36. Transfers.................................................................................... 15 Section 37. Fixing Record Dates.......................................................................... 16 Section 38. Registered Stockholders...................................................................... 16 Article VIII Other Securities Of The Corporation................................................................. 16 Section 39. Execution Of Other Securities................................................................ 16 Article IX Dividends............................................................................................ 17 Section 40. Declaration Of Dividends..................................................................... 17 Section 41. Dividend Reserve............................................................................. 17 Article X Fiscal Year............................................................................................ 17 Section 42. Fiscal Year.................................................................................. 17 Article XI Indemnification....................................................................................... 17 Section 43. Indemnification Of Directors, Executive Officers, Other Officers, Employees And Other Agents. 17 (a) Directors And Executive Officers............................................................. 17 (b) Other Officers, Employees and Other Agents................................................... 18 (c) Expenses..................................................................................... 18 (d) Enforcement.................................................................................. 18 (e) Non-Exclusivity Of Rights.................................................................... 19 (f) Survival Of Rights........................................................................... 19 (g) Insurance.................................................................................... 19 (h) Amendments................................................................................... 19 (i) Saving Clause................................................................................ 19 (j) Certain Definitions.......................................................................... 20 Article XII Notices............................................................................................. 20 Section 44. Notices...................................................................................... 20 (a) Notice To Stockholders....................................................................... 21 (b) Notice To Directors.......................................................................... 21 (c) Affidavit Of Mailing......................................................................... 21
iii. Table Of Contents (Continued)
Page (d) Time Notices Deemed Given.................................................................... 21 (e) Methods Of Notice............................................................................ 21 (f) Failure To Receive Notice.................................................................... 21 (g) Notice To Person With Whom Communication Is Unlawful......................................... 21 (h) Notice To Person With Undeliverable Address.................................................. 22 Article XIII Amendments.......................................................................................... 22 Section 45. Amendments................................................................................... 22 Right Of First Refusal........................................................................................... 22 Section 46. Right Of First Refusal....................................................................... 22 Article XIV Loans To Officers.................................................................................... 25 Section 47. Loans To Officers............................................................................ 25
iv. EX-4.3 4 AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT EXHIBIT 4.3 VITRIA TECHNOLOGY, INC. SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT This Second Amended and Restated Investor Rights Agreement (the "Agreement") is entered into as of the 20/th/ day of May 1999, by and among Vitria Technology, Inc., a California corporation (the "Company") and holders of the Company's Series A Preferred Stock (the "Series A Stock"), holders of the Company's Series A1 Preferred Stock (the "Series A1 Stock"), holders of the Company's Series B Preferred Stock (the "Series B Stock"), the holders of the Company's Series C Preferred Stock (the "Series C Stock") and the purchasers of the Company's Series D Preferred Stock (the "Series D Stock") set forth on Exhibit A of that certain Series D Preferred Stock Purchase Agreement of even date herewith (the "Purchase Agreement"), all as set forth on Exhibit A hereto. Such holders of Series A Stock, Series A1 Stock, Series B Stock, Series C Stock and purchasers of the Series D Stock shall be referred to hereinafter, collectively, as the "Investors" and each individually as an "Investor." Recitals Whereas, the Company has issued the Series A Stock, Series A1 Stock, Series B Stock and Series C Stock to certain of the Investors; Whereas, the Company issued Series C Stock to certain Investors and signed the First Amended and Restated Investor Rights Agreement dated October 23, 1998 (the "Prior Agreement") entered into between the Company and the holders of Series A Stock, Series A1 Stock, Series B Stock and Series C Stock. The holders of Series A Stock, Series A1 Stock, Series B Stock and Series C Stock possess certain registration rights, information rights and other rights under such Prior Agreement; Whereas, the Company and the undersigned holders of Series A Stock, Series A1 Stock, Series B Stock and Series C Stock desire to terminate the Prior Agreement and to accept the rights created pursuant hereto in lieu of the rights granted to them under the Prior Agreement; Whereas, the Company proposes to sell and issue certain shares of its Series D Stock pursuant to the Purchase Agreement; and Whereas, as a condition of entering into the Purchase Agreement, the purchasers of Series D Stock have requested that the Company extend to them registration rights, information rights and other rights as set forth below. Now, Therefore, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement and in the Purchase Agreement, the parties mutually agree as follows: 1. Amendment and Restatement of Prior Agreement. 1.1 Amendment and Restatement. The Prior Agreement is terminated in its entirety and restated herein. Such termination and restatement is effective upon execution of this Agreement by the Company and the holders of at least a majority in interest of the Registrable Securities (as the term is defined in the Prior Agreement). Upon such execution, all provisions of, rights granted and covenants made in the Prior Agreement are hereby waived, released and terminated in their entirety and shall have no further force or effect. The rights and covenants contained in this Agreement set forth the sole and entire agreement among the Company and the holders of Series A Stock, Series A1 Stock, Series B Stock, 1. Series C Stock and Series D Stock on the subject matter hereof and supersede any and all rights granted and covenants made under any prior agreements. 2. General. 2.1 Definitions. As used in this Agreement the following terms shall have the following respective meanings: "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Form S-3" means such form under the Securities Act (as hereinafter defined) as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC (as hereinafter defined) which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "Holder" means any person owning of record Registrable Securities (as hereinafter defined) or any assignee of record of such Registrable Securities in accordance with Section 3.10 hereof that have not been sold to the public. "Initial Offering" means the Company's first firm commitment underwritten public offering of its common stock registered under the Securities Act. "Register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. "Registrable Securities" means (a) common stock of the Company issued or issuable upon conversion of the Shares (as hereinafter defined) and (b) any common stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such above-described securities. Notwithstanding the foregoing, Registrable Securities shall not include any securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under Section 3 of this Agreement are not assigned. "Registrable Securities then outstanding" shall be the number of shares determined by calculating the total number of shares of the Company's common stock that are Registrable Securities and either (a) are then issued and outstanding or (b) are issuable pursuant to then exercisable or convertible securities. "Registration Expenses" shall mean all expenses incurred by the Company in complying with Sections 3.2, 3.3 and 3.4 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements not to exceed Twenty Five Thousand Dollars ($25,000) of a single special counsel for the Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "SEC" or "Commission" means the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. 2. "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale. "Shares" shall mean the Series A Stock, Series A1 Stock, Series B Stock, Series C Stock and Series D Stock, whose holders are parties hereto, all as held by the Investors listed on Exhibit A hereto and their permitted assigns pursuant to Section 3.10 hereof. 3. Registration; Restrictions on Transfer. 3.1 Restrictions on Transfer. (a) Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) The transferee has agreed in writing to be bound by the terms of this Agreement, (B) such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation, (C) a limited liability company to its members or former members in accordance with their interest in the limited liability company, or (D) to such Holder's family member or trust for the benefit of an individual Holder; provided that in each case the transferee will be subject to the terms of this Agreement to the same extent as if he were an original Holder hereunder. (b) Each certificate representing Shares or Registrable Securities shall (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws or as provided elsewhere in this Agreement): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. (c) The Company shall be obligated to reissue promptly unlegended certificates with respect to Shares or Registrable Securities at the request of any holder thereof if such holder shall have obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to 3. the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 3.2 Demand Registration. (a) Subject to the conditions of this Section 3.2, if the Company shall receive a written request from the Holders of a majority of the Registrable Securities then outstanding (the "Initiating Holders") that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities having an aggregate offering price to the public of at least $5,000,000 (a "Qualified Public Offering"), then the Company shall, within thirty (30) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 3.2, use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 3.2 or any request pursuant to Section 3.4 and the Company shall include such information in the written notice referred to in Section 3.2(a) or Section 3.4(a), as applicable. In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company (which underwriter or underwriters shall be reasonably acceptable to a majority in interest of the Initiating Holders). Notwithstanding any other provision of this Section 3.2 or Section 3.4, if the underwriter advises the Company that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders), provided however that the number of Shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. (c) The Company shall not be required to effect a registration pursuant to this Section 3.2: (i) prior to the earlier of October 31, 2001 or one hundred and eighty (180) days following the effective date of the registration statement pertaining to the Initial Offering; (ii) after the Company has effected two (2) registrations pursuant to this Section 3.2, and such registrations have been declared or ordered effective; (iii) during the period starting with the date of filing of, and ending on the date one hundred eighty (180) days following the effective date of the registration statement pertaining to 4. the Initial Offering; provided that the Company makes reasonable good faith efforts to cause such registration statement to become effective; (iv) if within thirty (30) days of receipt of a written request from Initiating Holders pursuant to Section 3.2(a), the Company gives notice to the Holders of the Company's intention to make its Initial Offering within one hundred and eighty (180) days; provided that the Company makes reasonable good faith efforts to cause such registration statement to become effective; or (v) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 3.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than one hundred eighty (180) days after receipt of the request of the Initiating Holders; provided that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period. 3.3 Piggyback Registrations. The Company shall notify all Holders of Registrable Securities in writing at least thirty (30) days prior to the initial filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within twenty (20) days after the above-described notice from the Company, so notify the Company in writing and the Company shall, subject to Section 3.3(a), cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. (a) Underwriting. If the registration statement under which the Company gives notice under this Section 3.3 is for an underwritten offering, the Company shall so advise the Holders. In such event, the right of any such Holder to be included in a registration pursuant to this Section 3.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of the Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to the Holders on a pro rata basis based on the total number of Registrable Securities held by the Holders; and third, to any shareholder of the Company (other than a Holder) on a pro rata basis. No such reduction shall reduce the amount of securities of the selling Holders included in the registration below twenty percent (20%) of the total amount of securities included in such registration, unless such offering is the Initial Offering and such registration does not include shares of any other selling shareholders, in which event any or all of the Registrable Securities of the Holders may be excluded in accordance with the immediately preceding sentence. In no event will shares of any other selling shareholder be included in such registration which would reduce the number of shares which may be included by Holders without 5. the written consent of Holders of not less than a majority of the Registrable Securities proposed to be sold in such offering. For purposes of allocation in this Section 3.3(a), for any selling shareholder that is a Holder of Registrable Securities and that is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling Holder," and any pro rata reduction with respect to such "selling Holder" shall be based upon the aggregate amount of Registrable Securities owned by all such related entities and individuals. (b) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 3.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with Section 3.5 hereof. 3.4 Form S-3 Registration. In case the Company shall receive from any Holder or Holders of Registrable Securities a written request or requests that the Company effect a registration on Form S-3 or any similar short-form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and (b) use commercially reasonable efforts to effect as soon as practicable, such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within twenty (20) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 3.4 under the following circumstances: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $1,000,000; (iii) if the Company shall furnish to the Holders a certificate signed by the Chairman of the Board of Directors of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than one hundred twenty (120) days after receipt of the request of the Holder or Holders under this Section 3.4; provided, that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period; (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two (2) registrations on Form S-3 for the Holders pursuant to this Section 3.4; or 6. (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 3.4 shall not be counted as requests for registration effected pursuant to Section 3.2. 3.5 Expenses of Registration. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 3.2 or any registration under Section 3.3 or Section 3.4 herein shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder, shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 3.2 or 3.4, the request of which has been subsequently withdrawn by the Initiating Holders unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were not aware at the time of such request or (b) the Holders of a majority of Registrable Securities agree to forfeit their right to one requested registration pursuant to Section 3.2 or Section 3.4, as applicable, in which event such right shall be forfeited by all Holders. If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (a) above, then the Holders shall not forfeit their rights pursuant to Section 3.2 or Section 3.4 to a demand registration. 3.6 Obligations of the Company. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days or, if earlier, until the Holder or Holders have completed the distribution related thereto. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. 7. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities, and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. (h) Cause the shares offered hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. (i) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. 3.7 Termination of Registration Rights. All registration rights granted under this Section 2 shall terminate and be of no further force and effect four (4) years after the date of the Company's Initial Offering. In addition, a Holder's registration rights shall expire if (a) the Company has completed its Initial Offering and is subject to the provisions of the Exchange Act and (b) all Registrable Securities held by and issuable to such Holder (and its affiliates, partners and former partners) may be sold under Rule 144 during any ninety (90) day period. 3.8 Delay of Registration; Furnishing Information. (a) No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 3. (b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 3.2, 3.3 or 3.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. 8. (c) The Company shall have no obligation with respect to any registration requested pursuant to Section 3.2 or Section 3.4 if, due to the operation of subsection 3.2(b), the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company's obligation to initiate such registration as specified in Section 3.2 or Section 3.4, whichever is applicable. 3.9 Indemnification. In the event any Registrable Securities are included in a registration statement under Sections 3.2, 3.3 or 3.4: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer, director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 3.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, legal counsel, underwriter or controlling person of such Holder; provided further, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Holder or underwriter, or any person controlling such Holder or underwriter, from whom the person asserting any such losses, claims, damages or liabilities purchased shares in the offering, if a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Holder or underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the shares to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, its officers, and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other 9. Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director, or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 3.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 3.9(b) exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 3.9 of notice of the commencement of any action (including any governmental action),such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 3.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 3.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 3.9. (d) If the indemnification provided for in this Section 3.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 10. (f) The obligations of the Company and Holders under this Section 3.9 shall survive completion of any offering of Registrable Securities in a registration statement and the termination of this agreement. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. 3.10 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 3 may be assigned by a Holder to a transferee or assignee of Registrable Securities which (a) is a subsidiary, parent, general partner, limited partner or retired partner of a Holder, (b) is a Holder's family member or trust for the benefit of an individual Holder or (c) acquires at least one hundred fifty thousand (150,000) shares of Registrable Securities (as adjusted for stock splits, stock dividends, combinations, recapitalizations and the like with respect to such shares); provided, however, (i) the transferor shall, within fifteen (15) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned, (ii) such transferee shall agree in writing to be subject to all restrictions set forth in this Agreement and (iii) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee is restricted under the Securities Act. 3.11 Amendment of Registration Rights. Any provision of this Section 3 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of at least a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 3.11 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Section 3, Holders of Registrable Securities hereby agree to be bound by the provisions hereunder. 3.12 Limitation on Subsequent Registration Rights. After the date of this Agreement, the Company shall not without the prior written consent of the Holders of a majority of the Registrable Securities then outstanding enter into any agreement with any holder or prospective holder of any securities of the Company that would grant such holder registration rights senior to, or on parity with, those granted to the Holders hereunder. 3.13 "Market Stand-Off" Agreement. Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Initial Offering and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (l80) days) (a) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock (whether such shares or any such securities are then owned by the Holder or are thereafter acquired), or (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described in clause (a) or (b) above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The foregoing provisions of this Section 3.13 shall not apply to (i) the sale of any shares to the underwriters pursuant to the underwriting agreement or (ii) transactions relating to shares of common stock or other securities acquired in the Initial Offering or in open market transactions after the completion of the Initial Offering. The underwriters in connection with the Initial Offering are intended third party beneficiaries of this Section 3.13 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. In order to enforce the foregoing covenant, the 11. Company may impose stop transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 3.14 Rule 144 Reporting. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; (c) So long as a Holder owns any Registrable Securities furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. 4. Covenants of the Company. 4.1 Basic Financial Information and Reporting. (a) The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied; (b) As soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter, the Company will furnish each Investor a consolidated balance sheet of the Company, as at the end of such fiscal year, and a consolidated statement of income and statement of shareholder's equity as of the end of such year, and a consolidated statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. Such financial statements shall be accompanied by a report and opinion thereon by independent public accountants of national standing selected by the Company's Board of Directors; (c) The Company will furnish each Investor, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company as of the end of each such quarterly period, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made; 12. (d) As long as an Investor, together with its affiliates, holds five hundred thousand shares (500,000) of Series B Stock, Series C Stock and/or Series D Stock (as adjusted for stock splits, dividends, combinations, recapitalizations and the like with respect to such shares) (the "Major Investor"), as soon as practicable, but in any event at least thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets, income statements and statements of cash flows for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company; and (e) Such other information relating to the financial condition, business, prospects or corporate affairs of the Company as the Investor or any assignee of the Investor may from time to time request, provided, however, that the Company shall not be obligated under this subsection (e) or any other subsection of Section 4.1 to provide information that it deems in good faith to be a trade secret or similar confidential information. 4.2 Inspection Rights. Each Investor shall have the right to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such reasonable times and as often as may be reasonably requested; provided, however, that the Company shall not be obligated under this Section 4.2 to provide such access for any competitor of the Company or to any information which the Board of Directors determines in good faith is confidential and should not, therefore, be disclosed. 4.3 Confidentiality of Records. Each Investor agrees to use and to use its best efforts to insure that its authorized representatives use the same degree of care as such Investor uses to protect its own confidential information to keep confidential any information furnished to it which the Company identifies as being confidential or proprietary (so long as such information is not in the public domain), except that such Investor may disclose such proprietary or confidential information to any partner, subsidiary or parent of such Investor for the purpose of evaluating its investment in the Company as long as such partner, subsidiary or parent is advised of the confidentiality provisions of this Section 4.3. 4.4 Reservation of Common Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Series A Stock, Series A1 Stock, Series B Stock, Series C Stock and/or Series D Stock, all common stock issuable from time to time upon such conversion. 4.5 Termination of Covenants. All covenants of the Company contained in Section 4 of this Agreement shall expire and terminate as to each Investor on the effective date of the registration statement pertaining to the Initial Offering. 5. Rights of First Refusal. 5.1 Subsequent Offerings. So long as an Investor (with its affiliates) holds at least one hundred thousand shares (100,000) of preferred stock (as adjusted for stock splits, stock dividends, combinations, recapitalizations and the like with respect to such shares) (a "Major Investor"), such Major Investor shall have a right of first refusal to purchase its pro rata share of all Equity Securities, as defined below, that the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 5.6 hereof. Each Major Investor's pro rata share is equal to the ratio of (a) the number of shares of the Company's common stock (including all shares of common stock issued or issuable upon conversion of the Shares) which such Major Investor is deemed to be a holder immediately prior to the issuance of such Equity Securities to (b) the total number 13. of shares of the Company's outstanding common stock (including all shares of common stock issued or issuable upon conversion of the Shares or upon the exercise of any outstanding warrants or options) immediately prior to the issuance of the Equity Securities. The term "Equity Securities" shall mean (i) any common stock, preferred stock or other security of the Company, (ii) any security convertible, with or without consideration, into any common stock, preferred stock or other security (including any option to purchase such a convertible security), (iii) any security carrying any warrant, option or right to subscribe to or purchase any common stock, preferred stock or other security and (iv) any such warrant, option or right. 5.2 Exercise of Rights. If the Company proposes to issue any Equity Securities, it shall give each Major Investor written notice of its intention, describing the Equity Securities, the price and the terms and conditions upon which the Company proposes to issue the same. Each Major Investor shall have twenty (20) days from the giving of such notice to agree to purchase its pro rata share of the Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company shall not be required to offer or sell such Equity Securities to any Major Investor who would cause the Company to be in violation of applicable federal or state securities laws by virtue of such offer or sale. 5.3 Issuance of Equity Securities to Other Persons. If not all of the Major Investors elect to purchase their pro rata share of the Equity Securities, then the Company shall promptly notify in writing the Major Investors who do so elect and shall offer such Major Investors the right to acquire such unsubscribed shares. The Major Investors shall have ten (10) days after receipt of such notice to notify the Company of its election to purchase all or a portion thereof of the unsubscribed shares. If the Major Investors fail to exercise in full the rights of first refusal, the Company shall have one hundred twenty (120) days thereafter to sell the Equity Securities in respect of which the Major Investor's rights were not exercised at a price and upon general terms and conditions materially no more favorable to the purchasers thereof than specified in the Company's notice to the Major Investors pursuant to Section 5.2 hereof. If the Company has not sold such Equity Securities within one hundred twenty (120) days of the notice provided pursuant to Section 5.2, the Company shall not thereafter issue or sell any Equity Securities without first offering such securities to the Major Investors in the manner provided above. 5.4 Termination and Waiver of Rights of First Refusal. The rights of first refusal established by this Section 5 shall not apply to and shall terminate upon the effective date of the registration statement pertaining to the Company's Initial Offering. The rights of first refusal established in this Section 5 may be amended or any provision waived with the written consent of the Major Investors holding a majority of the Registrable Securities held by all Major Investors outstanding on the date of such amendment or such waiver. 5.5 Transfer of Rights of First Refusal. The rights of first refusal of each Major Investor under this Section 5 may be transferred to the same parties, subject to the same restrictions as any transfer of registration rights pursuant to Section 3.10. 5.6 Excluded Securities. The rights of first refusal established by this Section 5 shall have no application to any of the following Equity Securities: (a) shares of common stock (and/or options, warrants or other common stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary for the primary purpose of soliciting or retaining their services, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors; 14. (b) stock issued pursuant to any rights or agreements outstanding as of the date of this Agreement, options and warrants outstanding as of the date of this Agreement; and stock issued pursuant to any such rights or agreements granted after the date of this Agreement, provided that the rights of first refusal established by this Section 5 applied with respect to the initial sale or grant by the Company of such rights or agreements; (c) any Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination that are approved by the Board of Directors; (d) shares of common stock issued in connection with any stock split, stock dividend or recapitalization by the Company; (e) shares of common stock issued upon conversion of the Shares; (f) any Equity Securities issued pursuant to any equipment leasing arrangement, or commercial credit arrangement from a bank or similar financial institution or in connection with development of licensing transactions with third party operating companies; (g) any Equity Securities that are issued by the Company in its Initial Offering; and (h) any shares of Series D Stock sold pursuant to the Purchase Agreement. 6. Miscellaneous. 6.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 6.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 6.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of and be binding upon the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price. 6.4 Entire Agreement. This Agreement, the Exhibits and Schedules hereto, the Purchase Agreement and the other documents delivered pursuant thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 15. 6.5 Severability. In case any provision of the Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 6.6 Amendment and Waiver. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding; provided, however, that in the event that such amendment or waiver adversely affects the obligations and/or rights of any such Holders in a different manner than the other Holders, such amendment or waiver shall also require the written consent of a majority in interest of such Holders adversely affected. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities, each future holder of all such Registrable Securities, and the Company. 6.7 New Investors. Notwithstanding anything herein to the contrary, if pursuant to Section 2.3 of the Purchase Agreement, additional parties purchase shares of Series D Stock, then each such new investor shall become a party to this Agreement as an "Investor" hereunder, without the need for any consent, approval or signature of any Investor when such new investor has both: (a) purchased shares of Series D Stock under the Purchase Agreement and paid the Company all consideration payable for such shares; and (b) executed one or more counterpart signature pages to this Agreement as an "Investor" with the Company's consent. 6.8 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power or remedy nor shall it be construed to be a waiver of any such breach, default or noncompliance nor any acquiescence therein nor of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on any Holder's part of any breach, default or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law or otherwise afforded to Holders shall be cumulative and not alternative. 6.9 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day; (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on Exhibit A hereto with regard to the Investors, the address as set forth on the signature page hereto with regard to the Company or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. 6.10 Attorneys' Fees. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including, without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 6.11 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 16. 6.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 6.13 Aggregation of Stock. All shares of Registrable Securities held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. [THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] 17. In Witness Whereof, the parties hereto have executed this Second Amended and Restated Investor Rights Agreement as of the date set forth in the first paragraph hereof. COMPANY: INVESTORS: Vitria Technology, Inc. __________________________________ 500 Ellis Street [Name of Investor] Mountain View, CA 94043 By:_______________________________ By:________________________________ Title:____________________________ JoMei Chang, President Weston Presidio Capital II, L.P. By:_______________________________ Title:____________________________ Sutter Hill Ventures, A California Limited Partnership By:_______________________________ General Partner of the General Partner Sutter Hill Associates, L.P. By:_______________________________ General Partner Wells Fargo Bank, Trustee SHV M/P/T Sherryl W. Hossack By:_______________________________ Title:____________________________ Second Amended and Restated Investors Rights Agreement Signature Page Brentwood Associates VIII, L.P. By Brentwood VIII Ventures, L.L.C. Its General Partner By:_______________________________ General Partner Brentwood Affiliates Fund, L.P. By Brentwood VIII Ventures, L.P. Its General Partner By:_______________________________ General Partner Integral Capital Partners III, L.P. By Integral Capital Management III, L.P. Its General Partner By:_______________________________ a General Partner Integral Capital Partners International III, L.P. By Integral Capital Management III, L.P. Its Investment General Partner By:_______________________________ a General Partner Second Amended and Restated Investors Rights Agreement Signature Page Stanford University By:_______________________________ Title:____________________________ __________________________________ JoMei Chang __________________________________ Dale Skeen __________________________________ Robert Halperin __________________________________ Peggy Halperin Dow __________________________________ Mark R. Halperin __________________________________ Sarah Ruth Halperin Trust __________________________________ Mariah Shores Halperin Trust __________________________________ Robert Joshua Halperin Trust __________________________________ Wells Fargo Bank, Trustee SHV M/P/T FBO Tench Coxe Second Amended and Restated Investors Rights Agreement Signature Page TOW Partners, A California Limited Partnership By:_______________________________ Title:____________________________ Paul M. and Marsha R. Wythes, Trustees of the Wythes Living Trust By:_______________________________ Title:____________________________ David L. Anderson, Trustee, The Anderson Living Trust, U/A/D 1/22/98 By:_______________________________ Title:____________________________ Anvest, L.P. By:_______________________________ Title:____________________________ __________________________________ G. Leonard Baker, Jr. William H. Younger, Jr., Trustee, The Younger Living Trust, U/A/D 1/20/95 By:_______________________________ Title:____________________________ Second Amended and Restated Investors Rights Agreement Signature Page __________________________________ Gregory P. Sands Saunders Holdings, L.P. By:_______________________________ Title:____________________________ Tench Coxe, Trustee, The Coxe/Otus Revocable Trust By:_______________________________ Title:____________________________ __________________________________ Michele Phua ML IBK Positions, Inc. By:_______________________________ Title:____________________________ Second Amended and Restated Investors Rights Agreement Signature Page VITRIA TECHNOLOGY, INC. SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT Dated: May 20, 1999 Table of Contents
Page 1. Amendment and Restatement of Prior Agreement.1 1.1 Amendment and Restatement.................................... 1 2. General........................................................... 2 2.1 Definitions.................................................. 2 3. Registration; Restrictions on Transfer............................ 3 3.1 Restrictions on Transfer.................................... 3 3.2 Demand Registration......................................... 4 3.3 Piggyback Registrations..................................... 5 3.4 Form S-3 Registration....................................... 6 3.5 Expenses of Registration.................................... 7 3.6 Obligations of the Company.................................. 7 3.7 Termination of Registration Rights.......................... 8 3.8 Delay of Registration; Furnishing Information............... 8 3.9 Indemnification............................................. 9 3.10 Assignment of Registration Rights........................... 11 3.11 Amendment of Registration Rights............................ 11 3.12 Limitation on Subsequent Registration Rights................ 11 3.13 "Market Stand-Off" Agreement................................ 11 3.14 Rule 144 Reporting.......................................... 12 4. Covenants of the Company.......................................... 12 4.1 Basic Financial Information and Reporting................... 12 4.2 Inspection Rights........................................... 13 4.3 Confidentiality of Records.................................. 13 4.4 Reservation of Common Stock................................. 13 4.5 Termination of Covenants.................................... 13 5. Rights of First Refusal........................................... 13 5.1 Subsequent Offerings........................................ 13 5.2 Exercise of Rights.......................................... 14 5.3 Issuance of Equity Securities to Other Persons.............. 14 5.4 Termination and Waiver of Rights of First Refusal........... 14 5.5 Transfer of Rights of First Refusal......................... 14 5.6 Excluded Securities......................................... 14
i. Table of Contents (continued)
Page 6. Miscellaneous..................................................... 15 6.1 Governing Law............................................... 15 6.2 Survival.................................................... 15 6.3 Successors and Assigns...................................... 15 6.4 Entire Agreement............................................ 15 6.5 Severability................................................ 16 6.6 Amendment and Waiver........................................ 16 6.7 New Investors............................................... 16 6.8 Delays or Omissions......................................... 16 6.9 Notices..................................................... 16 6.10 Attorneys' Fees............................................. 16 6.11 Titles and Subtitles........................................ 17 6.12 Counterparts................................................ 17 6.13 Aggregation of Stock........................................ 17
ii. SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT Exhibit A SCHEDULE OF INVESTORS Name - ---- David L. Anderson, Trustee, The Anderson Living Trust, U/A/D 1/22/98 755 Page Mill Road Suite A-200 Palo Alto, CA 94304 Anvest, L.P. 755 Page Mill Road Suite A-200 Palo Alto, CA 94304 G. Leonard Baker, Jr. 755 Page Mill Road Suite A-200 Palo Alto, CA 94304 Brentwood Affiliates Fund, L.P. 3000 Sand Hill Road Building 1, Suite 260 Menlo Park, CA 94025 Brentwood Associates VIII, L.P. 3000 Sand Hill Road Building 1, Suite 260 Menlo Park, CA 94025 JoMei Chang 3826 Magnolia Drive Palo Alto, CA 94301 GC&H Investments One Maritime Plaza 20/th/ Floor San Francisco, CA 94111 Peggy Halperin Dow c/o Robert M. Halperin, Attorney-in-fact 80 Reservoir Road Atherton, CA 94027 Second Amended and Restated Investors Rights Agreement Exhibit A SCHEDULE OF INVESTORS Name - ---- Mariah Shores Halperin Trust c/o Robert M. Halperin, Attorney-in-fact 80 Reservoir Road Atherton, CA 94027 Mark R. Halperin c/o Robert M. Halperin, Attorney-in-fact 80 Reservoir Road Atherton, CA 94027 Robert Halperin 80 Reservoir Road Atherton, CA 94027 Robert Joshua Halperin Trust c/o Robert M. Halperin, Attorney-in-fact 80 Reservoir Road Atherton, CA 94027 Sarah Ruth Halperin Trust c/o Robert M. Halperin, Attorney-in-fact 80 Reservoir Road Atherton, CA 94027 Integral Capital Partners III, L.P. 2750 Sand Hill Road Menlo Park, CA 94025 Integral Capital Partners International III, L.P. 2750 Sand Hill Road Menlo Park, CA 94025 ML IBK Positions, Inc. 3300 Hillview Avenue, Suite 150 Palo Alto, CA 94304 Gregory P. Sands 755 Page Mill Road Suite A-200 Palo Alto, CA 94304 Dale Skeen 3826 Magnolia Drive Palo Alto, CA 94301 Second Amended and Restated Investors Rights Agreement Exhibit A SCHEDULE OF INVESTORS Name - ---- Stanford University 2770 Sand Hill Road Menlo Park, CA 94025 Sutter Hill Ventures, A California Limited Partnership 755 Page Mill Road Suite A-200 Palo Alto, CA 94304 Sutter Hill Associates, L.P. 755 Page Mill Road Suite A-200 Palo Alto, CA 94304 TOW Partners, A California Limited Partnership 755 Page Mill Road Suite A-200 Palo Alto, CA 94304 Wells Fargo Bank, Trustee SHV M/P/T Tench Coxe 420 Montgomery Street, 2/nd/ Floor San Francisco, CA 94163 Attention: Vicki Bandel Wells Fargo Bank, Trustee SHV M/P/T Sherryl W. Hossack MAC #0101-021 420 Montgomery Street, 2/nd/ Floor San Francisco, CA 94163 Attention: Vicki Bandel Weston Presidio Capital II, L.P. 343 Sansome Street Suite 1210 San Francisco, CA 94104-1316 Paul M. and Marsha R. Wythes, Trustees, The Wythes Living Trust 755 Page Mill Road Suite A-200 Palo Alto, CA 94304 Second Amended and Restated Investors Rights Agreement Exhibit A SCHEDULE OF INVESTORS Name - ---- William H. Younger, Jr., Trustee, The Younger Living Trust, U/A/D 1/20/95 755 Page Mill Road Suite A-200 Palo Alto, CA 94304 Saunders Holdings, L.P. 755 Page Mill Road, Suite A-200 Palo Alto, CA 94304 Tench Coxe, Trustee The Coxe/Otus Revocable Trust 755 Page Mill Road, Suite A-200 Palo Alto, CA 94304 Michele Phua 755 Page Mill Road, Suite A-200 Palo Alto, CA 94304 Second Amended and Restated Investors Rights Agreement Exhibit A EX-10.2 5 AMENDED AND RESTATED 1999 EQUITY INCENTIVE PLAN EXHIBIT 10.2 Vitria Technology, Inc. 1999 EQUITY INCENTIVE PLAN Adopted on _______________, 1999 Approved by the Stockholders on _______________, 1999 Termination Date: _______________, 2009 1. Purposes. (a) The Plan initially was established as the Vitria Technology, Inc. 1995 Equity Incentive Plan, effective as of March 10, 1995 (the "Initial Plan"). The Initial Plan hereby is amended and restated in its entirety as the Vitria Technology, Inc. 1999 Equity Incentive Plan, effective as of its adoption by the Board. The terms of the Initial Plan (other than the aggregate number of shares issuable thereunder) shall remain in effect and apply to all Stock Awards granted pursuant to the Initial Plan. (b) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase restricted stock, and (v) stock appreciation rights, all as defined below. (c) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (d) The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock appreciation rights granted pursuant to Section 8 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 2. Definitions. (a) "Affiliate" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "Board" means the Board of Directors of the Company. 1. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "Common Stock" means the common stock of the Company. (f) "Company" means Vitria Technology, Inc., a Delaware corporation. (g) "Concurrent Stock Appreciation Right" or "Concurrent Right" means a right granted pursuant to subsection 8(b)(ii) of the Plan. (h) "Consultant" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term "Consultant" shall not include either Directors who are not compensated by the Company for their services as Directors or Directors who are merely paid a director's fee by the Company for their services as Directors. (i) "Continuous Service" (formerly, "Continuous Status as an Employee, Director or Consultant") means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Participant's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (j) "Covered Employee" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (k) "Director" means a member of the Board. (l) "Disability" means (i) before the Listing Date, the inability of a person, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of that person's position with the Company or an Affiliate of the Company because of the sickness or injury of the person and (ii) after the Listing Date, the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. 2. (m) "Employee" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (o) "Fair Market Value" means, as of any date, the value of the Common Stock determined as follows and in each case in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the mean between the bid and asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (iv) Prior to the Listing Date, the value of the Common Stock shall be determined in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations. (p) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (q) "Independent Stock Appreciation Right" or "Independent Right" means a right granted pursuant to subsection 8(b)(iii) of the Plan. (r) "Listing Date" means the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system if such securities exchange or interdealer quotation system has been certified in accordance with the provisions of Section 25100(o) of the California Corporate Securities Law of 1968. 3. (s) "Non-Employee Director" means a Director of the Company who either (i) is not a current Employee or Officer of the Company or its parent or a subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or a subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (t) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (u) "Officer" means (i) before the Listing Date, any person designated by the Company as an officer and (ii) on and after the Listing Date, a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (v) "Option" means a stock option granted pursuant to the Plan. (w) "Option Agreement" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (x) "Optionholder" means an Employee, Director or Consultant who holds an outstanding Option. (y) "Outside Director" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (z) "Participant" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. (aa) "Plan" means this 1999 Equity Incentive Plan. (bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (cc) "Securities Act" means the Securities Act of 1933, as amended. 4. (dd) "Stock Appreciation Right" means any of the various types of rights which may be granted under Section 8 of the Plan. (ee) "Stock Award" means any right granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock, and any Stock Appreciation Right. (ab) "Stock Award Agreement" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (cd) "Tandem Stock Appreciation Right" or "Tandem Right" means a right granted pursuant to subsection 8(b)(i) of the Plan. (ff) "Ten Percent Stockholder" means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. 3. Administration. (a) The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). Any interpretation of the Plan by the Board and any decision by the Board under the Plan shall be final and binding on all persons. (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; whether a person shall be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which a Stock Award shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Award as provided in Section 13. 5. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company that are not in conflict with the provisions of the Plan. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee may be, in the discretion of the Board, Non-Employee Directors and also may be, in the discretion of the Board, Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Additionally, prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, and notwithstanding anything to the contrary contained herein, the Board may delegate administration of the Plan to any person or persons and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. Notwithstanding anything in this Section 3 to the contrary, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Stock Awards to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, or (ii) not persons with respect to whom the Company wishes to avoid the application of Section 162(m) of the Code. 4. Shares Subject To The Plan. (a) Subject to the provisions of Section 12 relating to adjustments upon changes in stock and the provisions of subsection 4(a)(iii) relating to automatic increases, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate Ten Million (10,000,000) shares less shares issued or issuable pursuant to the exercise or award of Stock Awards under the Company's 1998 Executive Incentive Plan on the date hereof or as such Stock Awards are issued or become issuable from time to time under such 1998 Executive Incentive Plan (as adjusted from time to time provided herein, the "Reserved Amount"). (i) Until such time as the shares of the Company's Series C Preferred Stock are converted into shares of Common Stock, the Reserved Amount shall consist of Nine Million Nine Hundred Two Thousand Seven Hundred Twenty- four (9,902,724) shares of Common Stock and Ninety-seven Thousand Two Hundred Seventy-six (97,276) shares of the Company's Series C Preferred Stock. (ii) On and after such date that the shares of the Company's Series C Preferred Stock are converted into shares of Common Stock, the entire Reserved Amount shall consist of shares of Common Stock. (iii) For a period of ten (10) years, commencing on December 31, 1999 and ending on December 31, 2008, the aggregate number of shares of stock specified in subsection 6. 4(a) hereof automatically shall be increased each December 31 (the "Calculation Date") by six and one half percent (6.5%) of the Diluted Shares Outstanding on the Calculation Date. (iv) For purposes of subsection 4(a)(iii), "Diluted Shares Outstanding" means the number of outstanding shares of Common Stock on the Calculation Date, plus the number of shares of Common Stock issuable upon the Calculation Date assuming the conversion of all outstanding Preferred Stock and convertible notes, plus the additional number of dilutive Common Stock equivalent shares outstanding as the result of any options or warrants outstanding during the prior 12-month period, calculated using the treasury stock method. (v) If any Stock Award shall for any reason expire, be repurchased or otherwise terminate, in whole or in part, the stock under such Stock Award shall revert to and again become available for issuance under the Plan. (vi) Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan shall not be available for subsequent issuance under the Plan. (vii) In no event shall Stock Awards qualifying as Incentive Stock Options exceed Eight Million (8,000,000) shares. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. (c) Prior to the Listing Date and to the extent then required by Section 260.140.45 of Title 10 of the California Code of Regulations, the total number of shares of Common Stock issuable upon exercise of all outstanding Options and the total number of shares of Common Stock provided for under any stock bonus or similar plan of the Company shall not exceed the applicable percentage as calculated in accordance with the conditions and exclusions of Section 260.140.45 of Title 10 of the California Code of Regulations, based on the shares of Common Stock that are outstanding at the time the calculation is made./1/ 5. Eligibility. (a) Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants. __________________________ /1/ Section 260.140.45 generally provides that the total number of shares issuable upon exercise of all outstanding options (exclusive of certain rights) and the total number of shares called for under any stock bonus or similar plan shall not exceed a number of shares which is equal to 30% of the then outstanding shares of the issuer (convertible preferred or convertible senior common shares counted on an as if converted basis), exclusive of shares subject to promotional waivers under Section 260.141, unless a percentage higher than 30% is approved by at least two-thirds of the outstanding shares entitled to vote. 7. (b) Ten Percent Stockholders. (i) A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. (ii) Prior to the Listing Date, a Ten Percent Stockholder shall not be granted a Nonstatutory Stock Option unless the exercise price of such Option is at least (i) one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant or (ii) such lower percentage of the Fair Market Value of the Common Stock at the date of grant as is permitted by Section 260.140.41 of Title 10 of the California Code of Regulations at the time of the grant of the Option. (iii) Prior to the Listing Date, a Ten Percent Stockholder shall not be granted a restricted stock award unless the purchase price of the restricted stock is at least (i) one hundred percent (100%) of the Fair Market Value of the Common Stock at the date of grant or (ii) such lower percentage of the Fair Market Value of the Common Stock at the date of grant as is permitted by Section 260.140.41 of Title 10 of the California Code of Regulations at the time of the grant of the Option. (c) Section 162(m) Limitation. Subject to the provisions of Section 12 relating to adjustments upon changes in the shares of Common Stock, no Employee shall be eligible to be granted Options and/or Stock Appreciation Rights covering more than One Million Two Hundred Thousand (1,200,000) shares of Common Stock during any calendar year. This subsection 5(c) shall not apply prior to the Listing Date and, following the Listing Date, this subsection 5(c) shall not apply until (i) the earliest of: (1) the first material modification of the Plan (including any increase in the number of shares of Common Stock reserved for issuance under the Plan in accordance with Section 4); (2) the issuance of all of the shares of Common Stock reserved for issuance under the Plan; (3) the expiration of the Plan; or (4) the first meeting of stockholders at which Directors are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under Section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. (d) Consultants. (i) Prior to the Listing Date, a Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, either the offer or the sale of the Company's securities to such Consultant is not exempt under Rule 701 of the Securities Act ("Rule 701") because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by Rule 701, unless the Company determines that such grant need not comply with the requirements of Rule 701 and will satisfy another exemption under the Securities Act as well as comply with the securities laws of all other relevant jurisdictions. 8. (ii) From and after the Listing Date, a Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("Form S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by the rules governing the use of Form S-8, unless the Company determines both (i) that such grant (A) shall be registered in another manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or (B) does not require registration under the Securities Act in order to comply with the requirements of the Securities Act, if applicable, and (ii) that such grant complies with the securities laws of all other relevant jurisdictions. (iii) Rule 701 and Form S-8 generally are available to consultants and advisors only if (i) they are natural persons; (ii) they provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or (for Rule 701 purposes only) majority-owned subsidiaries of the issuer's parent; and (iii) the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer's securities. 6. Option Provisions. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) Term. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) Exercise Price of an Incentive Stock Option. Subject to the provisions regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) Exercise Price of a Nonstatutory Stock Option. Subject to the provisions regarding Ten Percent Stockholders, the exercise price of each Nonstatutory Stock Option granted prior to the Listing Date shall be not less than eighty-five percent (85%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. The exercise price of each Nonstatutory Stock Option granted on or after the Listing Date shall be not less than eighty-five percent (85%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. 9. (d) Consideration. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other Common Stock, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other Common Stock) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(f), or (C) in any other form of legal consideration that may be acceptable to the Board; provided, however, that at any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (e) Transferability of an Incentive Stock Option. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (f) Transferability of a Nonstatutory Stock Option. A Nonstatutory Stock Option granted prior to the Listing Date shall not be transferable except by will or by the laws of descent and distribution and, to the extent provided in the Option Agreement, to such further extent as permitted by Section 260.140.41(d) of Title 10 of the California Code of Regulations at the time of the grant of the Option, and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. A Nonstatutory Stock Option granted on or after the Listing Date shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (g) Vesting Generally. The total number of shares of Common Stock subject to periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(g) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised. 10. (h) Minimum Vesting Prior to the Listing Date. Notwithstanding the foregoing subsection 6(g), to the extent that the following restrictions on vesting are required by Section 260.140.41(f) of Title 10 of the California Code of Regulations at the time of the grant of the Option, then: (i) Options granted prior to the Listing Date to an Employee who is not an Officer, Director or Consultant shall provide for vesting of the total number of shares of Common Stock at a rate of at least twenty percent (20%) per year over five (5) years from the date the Option was granted, subject to reasonable conditions such as continued employment; and (ii) Options granted prior to the Listing Date to Officers, Directors or Consultants may be made fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company. (i) Termination of Continuous Service. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement, which period shall not be less than thirty (30) days for Options granted prior to the Listing Date unless such termination is for cause), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (j) Extension of Termination Date. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (k) Disability of Optionholder. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement, which period shall not be less than six (6) months for Options granted prior to the Listing Date) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. 11. (l) Death of Optionholder. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder's death, but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement, which period shall not be less than six (6) months for Options granted prior to the Listing Date) or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. (m) Early Exercise. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Subject to the "Repurchase Limitation" in subsection 11(h), any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. (n) Right of Repurchase. Subject to the "Repurchase Limitation" in subsection 11(h), the Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to repurchase all or any part of the vested shares of Common Stock acquired by the Optionholder pursuant to the exercise of the Option. (o) Right of First Refusal. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to exercise a right of first refusal following receipt of notice from the Optionholder of the intent to transfer all or any part of the shares of Common Stock received upon the exercise of the Option. Except as expressly provided in this subsection, such right of first refusal shall otherwise comply with any applicable provisions of the Bylaws of the Company. (p) Re-Load Options. Without in any way limiting the authority of the Board or Committee to make or not to make grants of Options hereunder, the Board or Committee shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "Re-Load Option") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (ii) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re- Load Option; and (iii) shall have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option or, in the case of a 12. Re-Load Option which is an Incentive Stock Option and which is granted to a Ten Percent Stockholder shall have an exercise price which is equal to one hundred ten percent (110%) of the Fair Market Value of the stock subject to the Re-Load Option on the date of exercise of the original Option. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board or Committee may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on exercisability of Incentive Stock Options described in subsection 11(c) of the Plan and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options under subsection 5(c), and shall be subject to such other terms and conditions as the Board or Committee may determine. 7. Provisions of Stock Bonuses and Purchases of Restricted Stock. (a) Stock Bonus Awards. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) Consideration. A stock bonus may be awarded in consideration for past services actually rendered to the Company or an Affiliate for its benefit. (ii) Vesting. Subject to the "Repurchase Limitation" in subsection 11(h), shares of Common Stock awarded under the stock bonus agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iii) Termination of Participant's Continuous Service. Subject to the "Repurchase Limitation" in subsection 11(h), in the event a Participant's Continuous Service terminates, the Company may reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the stock bonus agreement. (iv) Transferability. For a stock bonus award made before the Listing Date, rights to acquire shares of Common Stock under the stock bonus agreement shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. For a stock bonus award made on or after the Listing Date, rights to acquire shares of Common Stock under the stock bonus agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the stock bonus agreement, as the Board shall determine in its discretion, so long as 13. Common Stock awarded under the stock bonus agreement remains subject to the terms of the stock bonus agreement. (b) Restricted Stock Awards. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) Purchase Price. Subject to the provisions of subsection 5(b) regarding Ten Percent Stockholders, the purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such restricted stock purchase agreement. For restricted stock awards made prior to the Listing Date, the purchase price shall not be less than eighty-five percent (85%) of the Common Stock's Fair Market Value on the date such award is made or at the time the purchase is consummated. For restricted stock awards made on or after the Listing Date, the purchase price shall not be less than eighty-five percent (85%) of the Common Stock's Fair Market Value on the date such award is made or at the time the purchase is consummated. (ii) Consideration. The purchase price of Common Stock acquired pursuant to the restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in Delaware, then payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. (iii) Vesting. Subject to the "Repurchase Limitation" in subsection 11(h), shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iv) Termination of Participant's Continuous Service. Subject to the "Repurchase Limitation" in subsection 11(h), in the event a Participant's Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the restricted stock purchase agreement. (v) Transferability. For a restricted stock award made before the Listing Date, rights to acquire shares of Common Stock under the restricted stock purchase agreement shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. For a restricted stock award made on or after the Listing Date, rights to acquire shares of Common Stock under the restricted stock purchase agreement shall be transferable by the Participant only upon such terms 14. and conditions as are set forth in the restricted stock purchase agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the restricted stock purchase agreement remains subject to the terms of the restricted stock purchase agreement. 8. Stock Appreciation Rights. (a) The Board or Committee shall have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights under the Plan to Employees or Directors of or Consultants to, the Company or its Affiliates. To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such right. If a Stock Appreciation Right is granted to an individual who is at the time subject to Section 16(b) of the Exchange Act (a "Section 16(b) Insider"), the Stock Award Agreement of grant shall incorporate all the terms and conditions at the time necessary to assure that the subsequent exercise of such right shall qualify for the safe-harbor exemption from short-swing profit liability provided by Rule 16b-3 promulgated under the Exchange Act (or any successor rule or regulation). No limitation shall exist on the aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of a Stock Appreciation Rights. (b) Three types of Stock Appreciation Rights shall be authorized for issuance under the Plan: (i) Tandem Stock Appreciation Rights. Tandem Stock Appreciation Rights will be granted appurtenant to an Option, and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. Tandem Stock Appreciation Rights will require the holder to elect between the exercise of the underlying Option for shares of stock and the surrender, in whole or in part, of such Option for an appreciation distribution. The appreciation distribution payable on the exercised Tandem Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the Option surrender) in an amount up to the excess of (A) the Fair Market Value (on the date of the Option surrender) of the number of shares of stock covered by that portion of the surrendered Option in which the Optionholder is vested over (B) the aggregate exercise price payable for such vested shares. (ii) Concurrent Stock Appreciation Rights. Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of stock subject to the underlying Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. A Concurrent Right shall be exercised automatically at the same time the underlying Option is exercised with respect to the particular shares of stock to which the Concurrent Right pertains. The appreciation distribution payable on an exercised Concurrent Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Concurrent Right) in an amount equal to such portion as shall be determined by the Board or the Committee at the time of the grant of the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Concurrent Right) of the vested 15. shares of stock purchased under the underlying Option which have Concurrent Rights appurtenant to them over (B) the aggregate exercise price paid for such shares. (iii) Independent Stock Appreciation Rights. Independent Rights will be granted independently of any Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6. They shall be denominated in share equivalents. The appreciation distribution payable on the exercised Independent Right shall be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Company stock equal to the number of share equivalents in which the holder is vested under such Independent Right, and with respect to which the holder is exercising the Independent Right on such date, over (B) the aggregate Fair Market Value (on the date of the grant of the Independent Right) of such number of shares of Company stock. The appreciation distribution payable on the exercised Independent Right shall be in cash or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Independent Right. 9. Covenants Of The Company. (a) During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. 10. Use Of Proceeds From Stock. Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company. 11. Miscellaneous. (a) Neither an Employee, Director or Consultant nor any person to whom a Stock Award is transferred shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (b) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Director, Consultant or other holder of Stock Awards 16. any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment or relationship as a Director or Consultant of any Employee, Director, Consultant or other holder of Stock Awards with or without cause. (c) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by any Optionholder during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (d) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred, as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (iii) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (iv) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (e) To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the Common Stock. (f) The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. 17. (g) Prior to the Listing Date, to the extent required by Section 260.140.46 of Title 10 of the California Code of Regulations, the Company shall deliver financial statements to Participants at least annually. This subsection 11(g) shall not apply to key Employees whose duties in connection with the Company assure them access to equivalent information. (h) The terms of any repurchase option shall be specified in the Stock Award and may be either at Fair Market Value at the time of repurchase or at not less than the original purchase price. To the extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the California Code of Regulations at the time a Stock Award is made, any repurchase option contained in a Stock Award granted prior to the Listing Date to a person who is not an Officer, Director or Consultant shall be upon the terms described below: (i) If the repurchase option gives the Company the right to repurchase the shares of Common Stock upon termination of employment at not less than the Fair Market Value of the shares of Common Stock to be purchased on the date of termination of Continuous Service, then (i) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares of Common Stock within ninety (90) days of termination of Continuous Service (or in the case of shares of Common Stock issued upon exercise of Stock Awards after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Participant (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code regarding "qualified small business stock") and (ii) the right terminates when the shares of Common Stock become publicly traded. (ii) If the repurchase option gives the Company the right to repurchase the shares of Common Stock upon termination of Continuous Service at the original purchase price, then (i) the right to repurchase at the original purchase price shall lapse at the rate of at least twenty percent (20%) of the shares of Common Stock per year over five (5) years from the date the Stock Award is granted (without respect to the date the Stock Award was exercised or became exercisable) and (ii) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares of Common Stock within ninety (90) days of termination of Continuous Service (or in the case of shares of Common Stock issued upon exercise of Options after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Participant (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code regarding "qualified small business stock"). 12. Adjustments Upon Changes In Stock. (a) If any change is made in the Common Stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum 18. number of securities subject to award to any person pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) In the event of a dissolution or liquidation of the Company, then all outstanding Stock Awards shall terminate immediately prior to such event. (c) In the event of (i) a sale, lease or other disposition of all or substantially all of the assets of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation or (iii) a reverse merger in which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then any surviving corporation or acquiring corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar stock awards (including an award to acquire the same consideration paid to the stockholders in the transaction described in this subsection 12(c) for those outstanding under the Plan. In the event any surviving corporation or acquiring corporation refuses to assume such Stock Awards or to substitute similar stock awards for those outstanding under the Plan, then the vesting of outstanding Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full, and the Stock Awards shall terminate if not exercised (if applicable) at or prior to such event. Stock Awards shall terminate if not exercised (if applicable) prior to such event. (d) After the Listing Date, in the event of an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or an Affiliate) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of Directors, then the vesting of outstanding Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full. 13. Amendment Of The Plan and Stock Awards. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) Increase the number of shares reserved for Stock Awards under the Plan; 19. (ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3 or any Nasdaq or securities exchange listing requirements. (b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. (e) The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. 14. Termination Or Suspension Of The Plan. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier.. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person to whom the Stock Award was granted. 15. Effective Date Of Plan. The Plan shall become effective upon adoption by the Board. 20. EX-10.3 6 1998 EXECUTIVE INCENTIVE PLAN Exhibit 10.3 Vitria Technology, Inc. 1998 Executive Incentive Plan Adopted October 16, 1998 Amended by the Board of Directors on December 2, 1998 Approved by the Shareholders on December 23, 1998 Termination Date: October 15, 2008 1. Purposes. (a) Eligible Option Recipients. The persons eligible to receive Options are the Employees, Directors and Officers of the Company and its Affiliates. (b) Available Options. The purpose of the Plan is to provide a means by which eligible recipients of Options may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Options: (i) Incentive Stock Options and (ii) Nonstatutory Stock Options. (c) General Purpose. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Options, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. Definitions. (a) "Affiliate" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means a Committee appointed by the Board in accordance with subsection 3(c). (e) "Common Stock" means the common stock of the Company. (f) "Company" means Vitria Technology, Inc., a California corporation. (g) "Consultant" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term "Consultant" shall not include either Directors of the Company who are not compensated by the Company for their services as Directors or Directors of the Company who are merely paid a director's fee by the Company for their services as Directors. (h) "Continuous Service" means that the Optionholder's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Optionholder's Continuous Service shall not be deemed to have terminated merely because of a change in 1 the capacity in which the Optionholder renders service to the Company or an Affiliate as an Employee or Consultant or a change in the entity for which the Optionholder renders such service, provided that there is no interruption or termination of the Optionholder's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate of the Company will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (i) "Covered Employee" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (j) "Director" means a member of the Board of Directors of the Company. (k) "Disability" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (l) "Employee" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; or (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (o) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "Listing Date" means the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system. (q) "Non-Employee Director" means a Director of the Company who either (i) is not a current Employee or Officer of the Company or its parent or a subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or a subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K and is not engaged in a business relationship as to which 2 disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (r) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (s) "Officer" means (i) before the Listing Date, any person designated by the Company as an officer and (ii) on and after the Listing Date, a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (t) "Option" means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan. (u) "Option Agreement" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (v) "Optionholder" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (w) "Outside Director" means a Director of the Company who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (x) "Plan" means this Vitria Technology, Inc. 1998 Executive Incentive Plan. (y) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (z) "Securities Act" means the Securities Act of 1933, as amended. (aa) "Ten Percent Shareholder" means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. 3. Administration. (a) Administration by Board. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) Powers of Board. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Options; when and how each Option shall be granted; what type of Option shall be granted; the provisions of each Option granted (which need not be identical), including the time or times when a 3 person shall be permitted to receive stock pursuant to an Option; and the number of shares with respect to which an Option shall be granted to each such person. (ii) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or an Option as provided in Section 11. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) Delegation to Committee. (i) General. The Board may delegate administration of the Plan to a Committee or Committees of one or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (ii) Committee Composition when Common Stock is Publicly Traded. At such time as the Common Stock is publicly traded, in the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non- Employee Directors, in accordance with Rule 16b-3. Within the scope of such authority, the Board or the Committee may (1) delegate to a committee of one or more members of the Board who are not Outside Directors the authority to grant Options to eligible persons who are either (a) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Option or (b) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or (2) delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Options to eligible persons who are not then subject to Section 16 of the Exchange Act. 4. Shares Subject to the Plan. (A) Share Reserve. Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Options shall not exceed in the aggregate Ten Million (10,000,000) shares of Common Stock less shares issued or issuable pursuant to the exercise or award of Stock Awards granted under the Company's 1995 Equity Incentive Plan on the date hereof or as such Stock Awards are issued or become issuable from time to time under such 1995 Equity Incentive Plan. (i) Until such time as the shares of the Company's Series C Preferred Stock are converted into shares of Common Stock the Reserved Amount shall consist of Nine Million Nine Hundred Two Thousand SEven Hundred Twenty- four (9,902,724) shares of Common Stock and Ninety-seven Thousand Two Hundred Seventy-six (97,276) shares of the company's Series C Preferred Stock. (ii) On and after such date that the share of the Company's Series C Preferred Stock are converted into shares of Common Stock, the entire Reserved Amount shall consist of shares of Common Stock. (iii) For a period of ten (10) years, commencing on December 31, 1999 and ending on December 31, 2008, the aggregate number of shares of stock specified in subsection 4a) hereof automatically shall be increased each December 31 (the "Calculation Date") by six and one-half percent (6.5%) of the Diluted Shares Outstanding on the Calculation Date. (iv) For purposes of subsection 4(a)(iii), "Diluted Shares Outstanding" means the number of outstanding shares of Common Stock on the Calculation Date, plus the number of shares of Common Stock issuable upon the Calculation Date assuming the conversion of all outstanding Preferred Stock and convertible notes, plus the additional number of dilutive Common Stock equivalent shares outstanding as the result of any options or warrants outstanding during the prior 12-month period, calculated using the treasury stock method. (B) Reversion of Shares to the Share Reserve. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Option shall revert to and again become available for issuance under the Plan. However, if 4 any Common Stock acquired pursuant to the exercise of an Option shall for any reason be reacquired by the Company, the reacquired stock (having already been issued) shall not revert to and again become available for reissuance under the Plan. (c) Source of Shares. The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. Eligibility. (a) Eligibility for Specific Options. Incentive Stock Options may be granted only to Employees. Nonstatutory Stock Options may be granted to Employees, Directors and Consultants. (b) Ten Percent Shareholders. No Ten Percent Shareholder shall be eligible for the grant of an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. (c) Investment Criteria Prerequisite for Eligibility. Persons who satisfy the following criteria are eligible to receive an Option pursuant to this Plan: Optionholder has either (i) preexisting personal or business relationships, with the Company or any of its Officers, Directors or controlling persons, or (ii) the capacity to protect his or her own interests in connection with the purchase of the Common Stock by virtue of the business or financial expertise of himself or herself or of professional advisors to Optionholder who are unaffiliated with and who are not compensated by the Company or any of its Affiliates, directly or indirectly, and Optionholder is purchasing for the Optionholder's own account and not with a view to or for sale in connection with any distribution of Common Stock of the Company. (d) Section 162(m) Limitation. Subject to the provisions of Section 10 relating to adjustments upon changes in stock, no employee shall be eligible to be granted Options covering more than One Million Two Hundred Thousand (1,200,000) shares of the Common Stock during any calendar year. This subsection 5(c) shall not apply prior to the Listing Date and, following the Listing Date, this subsection 5(c) shall not apply until (i) the earliest of: (1) the first material modification of the Plan (including any increase in the number of shares reserved for issuance under the Plan in accordance with Section 4); (2) the issuance of all of the shares of Common Stock reserved for issuance under the Plan; (3) the expiration of the Plan; or (4) the first meeting of shareholders at which Directors of the Company are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under Section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. 6. Option Provisions. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) Term. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date it was granted. 5 (b) Exercise Price of an Incentive Stock Option. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) Consideration. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the Company of other Common Stock, (2) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other Common Stock) with the Optionholder or (3) in any other form of legal consideration that may be acceptable to the Board; provided, however, that at any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) Transferability of an Incentive Stock Option. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (e) Transferability of a Nonstatutory Stock Option. A Nonstatutory Stock Option shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (f) Vesting Generally. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments which may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(g) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (g) Termination of Continuous Service. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months 6 following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (h) Extension of Termination Date. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (i) Disability of Optionholder. In the event an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (j) Death of Optionholder. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise the Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement) or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. (k) Early Exercise. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to an unvested share repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. (l) Right of Repurchase. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to repurchase all or any part of the vested shares acquired by the Optionholder pursuant to the exercise of the Option. (m) Right of First Refusal. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to exercise a right of first refusal following receipt of notice from the Optionholder of the intent to transfer all or any part of the shares received upon the exercise of the Option. Except as expressly provided in this subsection 6(n), such right of first refusal shall otherwise comply with any applicable provisions of the Bylaws of the Company. 7 (n) Re-Load Options. Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "Re-Load Option") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option shall (i) provide for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (ii) have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option shall be subject to the same exercise price and term provisions heretofore described for Options under the Plan. Any such Re-Load Option may be an Incentive Stock Option [or a Nonstatutory Stock Option,] as the Board may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on the exercisability of Incentive Stock Options described in subsection 9(d) and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options under subsection 5(c) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. Covenants of the Company. (a) Availability of Shares. During the terms of the Options, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Options. (b) Securities Law Compliance. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Options and to issue and sell shares of Common Stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained. 8. Use of Proceeds from Stock. Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company. 9. Miscellaneous. (a) Acceleration of Exercisability and Vesting. The Board shall have the power to accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Option stating the time at which it may first be exercised or the time during which it will vest. 8 (b) Shareholder Rights. No Optionholder shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and until such Optionholder has satisfied all requirements for exercise of the Option pursuant to its terms. (c) No Employment or other Service Rights. Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Optionholder any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Option was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) Investment Assurances. The Company may require an Optionholder, as a condition of exercising or acquiring stock under any Option, (i) to give written assurances satisfactory to the Company as to the Optionholder's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (ii) to give written assurances satisfactory to the Company stating that the Optionholder is acquiring the stock subject to the Option for the Optionholder's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (iii) the issuance of the shares upon the exercise or acquisition of stock under the Option has been registered under a then currently effective registration statement under the Securities Act or (iv) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (f) Withholding Obligations. To the extent provided by the terms of an Option Agreement, the Optionholder may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under an Option by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Optionholder by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the Optionholder as a result of the exercise or acquisition of stock under the Option; or (iii) delivering to the Company owned and unencumbered shares of the Common Stock. (g) Cancellation and Re-Grant of Options. (i) Authority to Reprice. The Board shall have the authority to effect, at any time and from time to time, (1) the repricing of any outstanding Options under the Plan and/or (2) with the 9 consent of any adversely affected holders of Options, the cancellation of any outstanding Options under the Plan and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of Common Stock. The exercise price per share shall be not less than that specified under the Plan for newly granted Options. Notwithstanding the foregoing, the Board may grant an Option with an exercise price lower than that set forth above if such Option is granted as part of a transaction to which Section 424(a) of the Code applies. (ii) Effect of Repricing under Section 162(m) of the Code. Shares subject to an Option which is amended or canceled in order to set a lower exercise price per share shall continue to be counted against the maximum award of Options permitted to be granted pursuant to subsection 5(c). The repricing of an Option under this subsection 9(g) resulting in a reduction of the exercise price shall be deemed to be a cancellation of the original Option and the grant of a substitute Option; in the event of such repricing, both the original and the substituted Options shall be counted against the maximum awards of Options permitted to be granted pursuant to subsection 5(c). The provisions of this subsection 9(g)(ii) shall be applicable only to the extent required by Section 162(m) of the Code. 10. Adjustments upon Changes in Stock. (a) Capitalization Adjustments. If any change is made in the stock subject to the Plan, or subject to any Option, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum number of securities subject to award to any person pursuant to subsection 5(c), and the outstanding Options will be appropriately adjusted in the class(es) and number of securities and price per share of stock subject to such outstanding Options. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) Change in Control--Dissolution or Liquidation. In the event of a dissolution or liquidation of the Company, then all outstanding Options shall terminate immediately prior to such event. (c) Change in Control--Asset Sale, Merger, Consolidation or Reverse Merger. In the event of: (i) a sale of all or substantially all of the assets of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation or (iii) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise then to the extent permitted by applicable law: (i) any surviving corporation shall assume any Options outstanding under the Plan or shall substitute similar Options for those outstanding under the Plan, or (ii) such Options shall continue in full force and effect. In the event any surviving corporation refuses to assume or continue such Options, or to substitute similar Options for those outstanding under the Plan, then vesting under any such awards shall be accelerated and such Options shall be terminated if not exercised prior to such event. In the event of a dissolution or liquidation of the Company, any Options outstanding under the Plan shall terminate if not exercised prior to such event. (d) Change in Control--Securities Acquisition. After the Listing Date, in the event of an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, 10 sponsored or maintained by the Company or an Affiliate) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of Directors, then with respect to Options held by Optionholders whose Continuous Service has not terminated, the vesting of such Options shall be accelerated in full. (e) Change in Control--Change in Incumbent Board. After the Listing Date, in the event that the individuals who, as of the date of the adoption of this Plan, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least fifty percent (50%) of the Board, then with respect to Options held by persons whose Continuous Service has not terminated, the vesting of such Options shall be accelerated in full. If the election, or nomination for election, by the Company's shareholders of any new Director was approved by a vote of at least fifty percent (50%) of the Incumbent Board, such new Director shall be considered as a member of the Incumbent Board. 11. Amendment of the Plan and Options. (a) Amendment of Plan. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company to the extent shareholder approval is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements. (b) Shareholder Approval. The Board may, in its sole discretion, submit any other amendment to the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) Contemplated Amendments. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) No Impairment of Rights. Rights under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing. (e) Amendment of Options. The Board at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing. 12. Termination or Suspension of the Plan. (a) Plan Term. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the shareholders of the Company, whichever is earlier. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. 11 (b) No Impairment of Rights. Suspension or termination of the Plan shall not impair rights and obligations under any Option granted while the Plan is in effect except with the written consent of the Optionholder. 13. Effective Date of Plan. The Plan shall become effective as determined by the Board, but no Option shall be exercised unless and until the Plan has been approved by the shareholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 14. Choice of Law All questions concerning the construction, validity and interpretation of this Plan shall be governed by the law of the State of California, without regard to such state's conflict of laws rules. 12 EX-10.4 7 1999 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.4 VITRIA TECHNOLOGY, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN ADOPTED BY BOARD OF DIRECTORS _______________ , 1999 APPROVED BY STOCKHOLDERS _______________ , 1999 TERMINATION DATE: NONE 1. PURPOSE. (a) The purpose of the Plan is to provide a means by which Employees of the Company and certain designated Affiliates may be given an opportunity to purchase Shares of the Company. (b) The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the services of new Employees and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Rights to purchase Shares granted under the Plan be considered options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. 2. DEFINITIONS. (a) "Affiliate" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the United States Internal Revenue Code of 1986, as amended. (d) "Committee" means a Committee appointed by the Board in accordance with subparagraph 3(c) of the Plan. (e) "Company" means Vitria Technology, Inc., a Delaware corporation. (f) "Director" means a member of the Board. (g) "Eligible Employee" means an Employee who meets the requirements set forth in the Offering for eligibility to participate in the Offering. (h) "Employee" means any person, including Officers and Directors, employed by the Company or an Affiliate of the Company. Neither service as a Director nor payment of a director's fee shall be sufficient to constitute "employment" by the Company or the Affiliate. -1- (i) "Employee Stock Purchase Plan" means a plan that grants rights intended to be options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. (j) "Exchange Act" means the United States Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" means the value of a security, as determined in good faith by the Board. If the security is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, then, except as otherwise provided in the Offering, the Fair Market Value of the security shall be the closing sales price (rounded up where necessary to the nearest whole cent) for such security (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the relevant security of the Company) on the trading day prior to the relevant determination date, as reported in The Wall Street Journal or such other source as the Board deems reliable. (l) "Non-Employee Director" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non- employee director" for purposes of Rule 16b-3. (m) "Offering" means the grant of Rights to purchase Shares under the Plan to Eligible Employees. (n) "Offering Date" means a date selected by the Board for an Offering to commence. (o) "Outside Director" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (p) "Participant" means an Eligible Employee who holds an outstanding Right granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Right granted under the Plan. -2- (q) "Plan" means this 1999 Employee Stock Purchase Plan. (r) "Purchase Date" means one or more dates established by the Board during an Offering on which Rights granted under the Plan shall be exercised and purchases of Shares carried out in accordance with such Offering. (s) "Right" means an option to purchase Shares granted pursuant to the Plan. (t) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3 as in effect with respect to the Company at the time discretion is being exercised regarding the Plan. (u) "Securities Act" means the United States Securities Act of 1933, as amended. (v) "Share" means a share of the common stock of the Company. 3. ADMINISTRATION. (a) The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subparagraph 3(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board (or the Committee) shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how Rights to purchase Shares shall be granted and the provisions of each Offering of such Rights (which need not be identical). (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan. (iii) To construe and interpret the Plan and Rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in paragraph 14. (v) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Affiliates and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan. (c) The Board may delegate administration of the Plan to a Committee of the Board composed of two (2) or more members, all of the members of which Committee may be, in the discretion of the Board, Non-Employee Directors and/or Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the -3- Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Outside Directors any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such a subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph 13 relating to adjustments upon changes in securities, the Shares that may be sold pursuant to Rights granted under the Plan shall not exceed in the aggregate One Million Five Hundred Thousand (1,500,000) Shares. If any Right granted under the Plan shall for any reason terminate without having been exercised, the Shares not purchased under such Right shall again become available for the Plan. (b) The aggregate number of Shares that may be sold pursuant to Rights granted under the Plan as specified in subparagraph 4(a) shall automatically be increased as follows: (i) For a period of ten (10) years, commencing on August 14, 2000 and ending on August 14, 2009, the aggregate number of Shares specified in subparagraph 4(a) hereof automatically shall be increased each August 14 (the "Calculation Date") by the greater of (1) two percent (2%) of the Diluted Shares Outstanding on the Calculation Date, or (2) that number of Shares that the number of Shares available for issuance under the Plan shall be to One Million Five Hundred Thousand (1,500,000) Shares. (ii) For purposes of subparagraph 4(a)(i), "Diluted Shares Outstanding" means the number of outstanding Shares on the Calculation Date, plus the number of Shares issuable upon the Calculation Date assuming the conversion of all outstanding Preferred Stock and convertible notes, plus the additional number of dilutive Common Stock equivalent Shares outstanding as the result of any options or warrants outstanding during the prior 12-month period, calculated using the treasury stock method. (iii) The automatic Share reserve increase specified in subparagraph 4(a)(i) in the aggregate may not exceed Sixteen Million Five Hundred (16,500,000) Shares over the 10-year period. (c) The Shares subject to the Plan may be unissued Shares or Shares that have been bought on the open market at prevailing market prices or otherwise. 5. GRANT OF RIGHTS; OFFERING. (a) The Board may from time to time grant or provide for the grant of Rights to purchase Shares of the Company under the Plan to Eligible Employees in an Offering on an Offering Date or Dates selected by the Board. Each Offering shall be in such form and shall -4- contain such terms and conditions as the Board shall deem appropriate, which shall comply with the requirements of Section 423(b)(5) of the Code that all Employees granted Rights to purchase Shares under the Plan shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in paragraphs 6 through 9, inclusive. (b) If a Participant has more than one Right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (i) each agreement or notice delivered by that Participant will be deemed to apply to all of his or her Rights under the Plan, and (ii) an earlier- granted Right (or a Right with a lower exercise price, if two Rights have identical grant dates) will be exercised to the fullest possible extent before a later-granted Right (or a Right with a higher exercise price if two Rights have identical grant dates) will be exercised. 6. ELIGIBILITY. (a) Rights may be granted only to Employees of the Company or, as the Board may designated as provided in subparagraph 3(b), to Employees of an Affiliate. Except as provided in subparagraph 6(b), an Employee shall not be eligible to be granted Rights under the Plan unless, on the Offering Date, such Employee has been in the employ of the Company or the Affiliate, as the case may be, for such continuous period preceding such grant as the Board may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. (b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Right under that Offering, which Right shall thereafter be deemed to be a part of that Offering. Such Right shall have the same characteristics as any Rights originally granted under that Offering, as described herein, except that: (i) the date on which such Right is granted shall be the "Offering Date" of such Right for all purposes, including determination of the exercise price of such Right; (ii) the period of the Offering with respect to such Right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she will not receive any Right under that Offering. -5- (c) No Employee shall be eligible for the grant of any Rights under the Plan if, immediately after any such Rights are granted, such Employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subparagraph 6(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding rights and options shall be treated as stock owned by such Employee. (d) An Eligible Employee may be granted Rights under the Plan only if such Rights, together with any other Rights granted under all Employee Stock Purchase Plans of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such Eligible Employee's rights to purchase Shares of the Company or any Affiliate to accrue at a rate which exceeds twenty five thousand dollars ($25,000) of the fair market value of such Shares (determined at the time such Rights are granted) for each calendar year in which such Rights are outstanding at any time. (e) The Board may provide in an Offering that Employees who are highly compensated Employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate. 7. RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, shall be granted the Right to purchase up to the number of Shares purchasable either: (i) with a percentage designated by the Board not exceeding fifteen percent (15%) of such Employee's base Earnings (as defined by the Board in each Offering) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering; or (ii) with a maximum dollar amount designated by the Board that, as the Board determines for a particular Offering, (1) shall be withheld, in whole or in part, from such Employee's Earnings (as defined by the Board in each Offering) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering and/or (2) shall be contributed, in whole or in part, by such Employee during such period. (b) The Board shall establish one or more Purchase Dates during an Offering on which Rights granted under the Plan shall be exercised and purchases of Shares carried out in accordance with such Offering. (c) In connection with each Offering made under the Plan, the Board may specify a maximum amount of Shares that may be purchased by any Participant as well as a maximum aggregate amount of Shares that may be purchased by all Participants pursuant to such Offering. -6- In addition, in connection with each Offering that contains more than one Purchase Date, the Board may specify a maximum aggregate amount of Shares which may be purchased by all Participants on any given Purchase Date under the Offering. If the aggregate purchase of Shares upon exercise of Rights granted under the Offering would exceed any such maximum aggregate amount, the Board shall make a pro rata allocation of the Shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable. (d) The purchase price of Shares acquired pursuant to Rights granted under the Plan shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the fair market value of the Shares on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the fair market value of the Shares on the Purchase Date. 8. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) An Eligible Employee may become a Participant in the Plan pursuant to an Offering by delivering a participation agreement to the Company within the time specified in the Offering, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board of such Employee's Earnings during the Offering (as defined in each Offering). The payroll deductions made for each Participant shall be credited to a bookkeeping account for such Participant under the Plan and either may be deposited with the general funds of the Company or may be deposited in a separate account in the name of, and for the benefit of, such Participant with a financial institution designated by the Company. To the extent provided in the Offering, a Participant may reduce (including to zero) or increase such payroll deductions. To the extent provided in the Offering, a Participant may begin such payroll deductions after the beginning of the Offering. A Participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the Participant has not already had the maximum permitted amount withheld during the Offering. (b) At any time during an Offering, a Participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering except as provided by the Board in the Offering. Upon such withdrawal from the Offering by a Participant, the Company shall distribute to such Participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire Shares for the Participant) under the Offering, without interest unless otherwise specified in the Offering, and such Participant's interest in that Offering shall be automatically terminated. A Participant's withdrawal from an Offering will have no effect upon such Participant's eligibility to participate in any other Offerings under the Plan but such Participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan. -7- (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating Employee's employment with the Company or a designated Affiliate for any reason (subject to any post-employment participation period required by law) or other lack of eligibility. The Company shall distribute to such terminated Employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire Shares for the terminated Employee) under the Offering, without interest unless otherwise specified in the Offering. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subparagraph 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. (d) Rights granted under the Plan shall not be transferable by a Participant otherwise than by will or the laws of descent and distribution, or by a beneficiary designation as provided in paragraph 15 and, otherwise during his or her lifetime, shall be exercisable only by the person to whom such Rights are granted. 9. EXERCISE. (a) On each Purchase Date specified therefor in the relevant Offering, each Participant's accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of Shares up to the maximum amount of Shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional Shares shall be issued upon the exercise of Rights granted under the Plan unless specifically provided for in the Offering. (b) Unless otherwise specifically provided in the Offering, the amount, if any, of accumulated payroll deductions remaining in any Participant's account after the purchase of Shares that is equal to the amount required to purchase one or more whole Shares on the final Purchase Date of the Offering shall be distributed in full to the Participant at the end of the Offering, without interest. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subparagraph 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. (c) No Rights granted under the Plan may be exercised to any extent unless the Shares to be issued upon such exercise under the Plan (including Rights granted thereunder) are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date in any Offering hereunder the Plan is not so registered or in such compliance, no Rights granted under the Plan or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the Plan is subject -8- to such an effective registration statement and such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered and in such compliance, no Rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the Offering (reduced to the extent, if any, such deductions have been used to acquire Shares) shall be distributed to the Participants, without interest unless otherwise specified in the Offering. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subparagraph 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Rights granted under the Plan, the Company shall ensure that the amount of Shares required to satisfy such Rights are available. (b) The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell Shares upon exercise of the Rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Shares under the Plan, the Company shall be relieved from any liability for failure to issue and sell Shares upon exercise of such Rights unless and until such authority is obtained. 11. USE OF PROCEEDS FROM SHARES. Proceeds from the sale of Shares pursuant to Rights granted under the Plan shall constitute general funds of the Company. 12. RIGHTS AS A STOCKHOLDER. A Participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, Shares subject to Rights granted under the Plan unless and until the Participant's Shares acquired upon exercise of Rights under the Plan are recorded in the books of the Company. 13. ADJUSTMENTS UPON CHANGES IN SECURITIES. (a) If any change is made in the Shares subject to the Plan, or subject to any Right, without the receipt of consideration by the Company (through merge consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the -9- Company), the Plan will be appropriately adjusted in the class(es) and maximum number of Shares subject to the Plan pursuant to subparagraph 4(a), and the outstanding Rights will be appropriately adjusted in the class(es), number of Shares and purchase limits of such outstanding Rights. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction that does not involve the receipt of consideration by the Company.) (b) In the event of: (i) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (ii) a merger or consolidation in which the Company is not the surviving corporation; or (iii) a reverse merger in which the Company is the surviving corporation but the Shares outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then: (1) any surviving or acquiring corporation shall assume Rights outstanding under the Plan or shall substitute similar rights (including a right to acquire the same consideration paid to Stockholders in the transaction described in this subparagraph 13(b)) for those outstanding under the Plan, or (2) in the event any surviving or acquiring corporation refuses to assume such Rights or to substitute similar rights for those outstanding under the Plan, then, as determined by the Board in its sole discretion such Rights may continue in full force and effect or the Participants' accumulated payroll deductions (exclusive of any accumulated interest which cannot be applied toward the purchase of Shares under the terms of the Offering) may be used to purchase Shares immediately prior to the transaction described above under the ongoing Offering and the Participants' Rights under the ongoing Offering thereafter terminated. 14. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 13 relating to adjustments upon changes in securities and except as to minor amendments to benefit the administration of the Plan, to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for Participants or the Company or any Affiliate, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary for the Plan to satisfy the requirements of Section 423 of the Code, Rule 16b-3 under the Exchange Act and any Nasdaq or other securities exchange listing requirements. Currently under the Code, stockholder approval within twelve (12) months before or after the adoption of the amendment is required where the amendment will: (i) Increase the amount of Shares reserved for Rights under the Plan; (ii) Modify the provisions as to eligibility for participation in the Plan to the extent such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3; or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3. -10- (b) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans and/or to bring the Plan and/or Rights granted under it into compliance therewith. (c) Rights and obligations under any Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan, except with the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulations, or except as necessary to ensure that the Plan and/or Rights granted under the Plan comply with the requirements of Section 423 of the Code. 15. DESIGNATION OF BENEFICIARY. (a) A Participant may file a written designation of a beneficiary who is to receive any Shares and/or cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to the end of an Offering but prior to delivery to the Participant of such Shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of such Participant's death during an Offering. (b) The Participant may change such designation of beneficiary at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such Shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board in its discretion may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate at the time that all of the Shares subject to the Plan's reserve, as increased and/or adjusted from time to time, have been issued under the terms of the Plan. No Rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Rights granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except as expressly provided in the Plan or with the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulation, or except as necessary to ensure that the Plan and/or Rights granted under the Plan comply with the requirements of Section 423 of the Code. -11- 17. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Rights granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted by the Board, which date may be prior to the effective date set by the Board. -12- EX-10.5 8 1998 NONQUALIFIED DEFERRED COMPENSATION PLAN EXHIBIT 10.5 DEFERRED COMPENSATION PLAN Vitria Technology, Inc. a California Corporation (hereinafter referred to as the "Corporation"), hereby establishes the Deferred Compensation Plan (the "Plan") effective as of November 1, 1998. The plan is intended to provide a mechanism whereby certain of the highly compensated and select management employees of the company may defer compensation and have such amounts, together with credited earnings, if applicable, paid out upon the participants retirement, death, disability or other termination of service with the company and upon certain other specified events. In addition the company intends that this Plan provide the eligible employees with deferred compensation benefits in addition to the benefits provided under the Vitria Technology, Inc. Savings Plan (the "401(k) Plan") in cases where the benefits under the 401(k) Plan may be limited by applicable provisions of the Internal Revenue Code of 1986 (the "Code"), as amended. The company intends that the Plan shall not be treated as "funded" plan for purposes of either the Code or the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 1. DEFINITION OF TERMS ------------------- Certain words and phrases are defined when first used in later paragraphs of this Agreement. In addition, the following words and phrases when used herein, unless the context clearly requires otherwise, shall have the following respective meanings: (a) Accrued Benefit: The sum of all Deferred Amounts and any corporate --------------- Contributions credited to the Employee's Retirement Plan Account and due and owing to the Employee or any beneficiaries pursuant to this Agreement, together with Earnings Adjustments thereto calculated as set forth in paragraph 4 hereof, minus any distributions hereunder. -1- (b) Affiliate: Any corporation, partnership, joint venture, association, or --------- similar organization or entity, the employees of which would be treated as employed by the Corporation under Section 414(b) and 414(c) of the Code. (c) Agreement: this Agreement, together with any and all amendments or --------- supplements thereto. (d) Code: The Internal Revenue Code of 1986, as amended or as it may be amended ---- from time to time. (e) Compensation: Total salary and bonus of the Employee paid or accrued by the ------------ Corporation. (f) Corporate Match: Additional amounts credited to the Employee's Retirement --------------- Account by the Corporation the timing and amount of which is subject to the Corporations discretion. (g) Deferred Amounts: The portion of Compensation the employee has elected to ---------------- defer. (h) Early Retirement Date: The date the Employee attains Sixty (60) years of --------------------- age. (i) Effective Date: The date of the execution of this Agreement. -------------- (j) Employee: An eligible highly compensated and or a key employee of the -------- company selected by the Company to participate in the plan. (k) Plan Year: The Calendar year. --------- (l) Investment Indices: The portfolios chosen by the Corporation to determine ------------------ the Earnings Adjustments to Employee's Retirement Account. -2- (m) Normal Retirement Date: The date the Employee attains sixty-five (65) years ---------------------- of age. (n) Retirement Account: Book entries maintained by the Corporation reflecting ------------------ Deferred Amounts, Corporate Contributions and Earnings Adjustments thereon; provided, however, that the existence of such book entries and the Retirement Account shall not create and shall not be deemed to create a trust of any kind, or a fiduciary relationship between the Corporation and the Employee, designated beneficiary, or other beneficiaries under this Agreement. 2. DEFERRED COMPENSATION --------------------- Commencing on the Effective Date, and continuing through the date on which the Employee's employment terminates for any reason or no reason, the Employee shall be entitled to elect to defer up to 70% of the salary Compensation that the Employee would otherwise be entitled to receive from the Corporation in each Plan Year subject to such minimum deferral amounts that may be imposed by the corporation for a given plan year. In addition, the Employee shall be entitled to elect to defer up to 100% of any bonus Compensation that the Corporation may award during or for any Plan Year. The maximum percentage of salary and bonus Compensation that can be deferred, as set forth in this paragraph, are hereinafter referred to collectively as the "Maximum Annual Deferred Sum". The amounts selected for deferral by the Employee pursuant to an Election of Deferral is referred to as the "Annual Deferral Sum". The amounts of salary and bonus Compensation actually deferred, taking into account discontinuance of deferral pursuant to a Notice of Discontinuance, are hereinafter collectively referred to as "Deferred Amounts". The Employee's Deferred Amounts shall be credited to the Employee's Retirement Account as of the dates such Deferred Amounts would, but for such deferral, be payable to the Employee. -3- 3. DEFERRAL IN PARTIAL PLAN YEAR ----------------------------- If the Effective Date of this Agreement is not the first day of a Plan Year, the Employee shall be entitled to elect to defer a portion of the Maximum Annual Deferral Sum under paragraph 2 hereof. 4. ADJUSTMENTS TO DEFERRED AMOUNTS ------------------------------- The Corporation hereby agrees that it will adjust Deferred Amounts and Corporate Contributions in the Employee's Retirement Account from and after the dates that the Deferred Amounts or Corporate Contributions are credited to the Retirement Account. Adjustments to Deferred Amounts and Corporate Matches shall accrue commencing on the date the Retirement Account first has a positive balance and shall continue up to the date Retirement Benefits, Disability Retirement Benefits, Death Benefits, or a Termination Benefit, whichever applies, deplete the Retirement Account Balance hereunder. Adjustments shall be calculated at a rate computed as if the Deferred Amounts and Corporate Contributions had been invested in whole and fractional shares of various indices identified by the Corporation. For purposes of computing these Earnings Adjustments, Deferral Accounts and corporate Contributions in the Retirement Account shall be assumed to have been invested in shares of the Investment Indices on each date the transaction is credited to the Employee's Retirement Account, at the trading price of the Investment Indices on such date or the first business day thereafter. Earnings Adjustments shall be computed as if all dividends paid on the Investment indices were reinvested in whole or fractional shares on the date paid. The Employee shall have the right, at the beginning of each quarter, to designate different Indices on which Earnings Adjustments shall be calculated, provided, however, that satisfactory notice is given ten (10) days prior to the end of the quarter. Any designation of new Investment Indices will result in the "sale" of shares in the current Investment Indices and "purchase" of alternative Investment Indices on the first day of the quarter or the first business day thereafter. -4- Earnings Adjustments will cause the value of the Retirement Account to increase or decrease in proportion to the change in value of the selected Investment Indices. 5. ELECTION TO DEFER COMPENSATION ------------------------------ The Employee may elect an Annual Deferral Sum hereunder by filing an Election of Deferral. The initial Election of Deferral must be filed within twenty (20) days of the Effective Date of this Agreement. Such initial Election of Deferral, if any, shall be effective commencing with the first day of the first month after it is filed. Thereafter, an Election of Deferral must be filed at least twenty (20) days prior to the beginning of the Plan year to which it pertains and shall be effective on the first day of the Plan Year following the filing thereof. 6. IN-SERVICE WITHDRAWALS ---------------------- At the time the Employee makes an election to defer income in accordance with Article 5 the Employee may also elect to receive a portion of the Deferred Amounts and Earnings Adjustments thereon after a period of five years. If an Employee makes such an election, then the amounts deferred under Article 5 with respect to such Plan Year, together with the Earnings Adjustment thereon, shall be paid in four substantially equal installments commencing as soon as administratively feasible in the first in the first calendar quarter of the year elected by the Employee. 7. RETIREMENT BENEFIT ------------------ The Corporation agrees that, from and after the retirement of the Employee from the service of the Corporation upon reaching his Early Retirement Date or Normal Retirement Date, the Corporation shall thereafter pay as a retirement benefit ("Retirement Benefit") to the Employee the Employee's entire Accrued Benefit, payable in substantially equal annual installments of up to fifteen (15) years, or in a lump sum, as elected by the Employee in the Employee's election of Deferral, commencing with the first day of the quarter following the Employee's retirement. -5- 8. DISABILITY RETIREMENT --------------------- In the event of an Employee's total and permanent disability while participating in the Plan, as determined by the Corporation, the employee will be treated as a terminated participant pursuant to section 10 below. 9. DEATH BENEFIT ------------- In the event of the Employee's death while benefits are still owed under this plan, the Corporation shall pay the Accrued Benefit in the Employee's Retirement Account as of the date of death in one lump sum payout to the Employee's designated beneficiary, in accordance with the last such designation received by the Corporation from the Employee prior to death. If no such designation has been received by the Corporation from the Employee prior to death, said payments shall be made to the Employee's then living spouse; if the Employee is not survived by a spouse, then said payments shall be made to the then living children of the Employee, if any, in equal shares, and if none, any balance thereof in one lump sum; to the estate of the Employee. Such payments shall be made on the first day of the month following the Employee's death. 10. TERMINATION BENEFIT ------------------- In the event of the Employee's termination of employment with the Corporation before Early Retirement Date for any reason, the Corporation shall pay to the Employee, as compensation for services rendered prior to such termination, a single sum equal to the total Deferred Amounts, subject to earnings adjustments, plus the vested portion of the Corporate match, subject to earnings adjustments. 11. CALL PROVISION -------------- In lieu of receiving a distribution of the Employee's Retirement Account at the time and in the manner otherwise specified in this agreement, an Employee may elect to receive the entire -6- Retirement Account shall be reduced by 15% as a penalty for early distribution and the amount of his Retirement Account as of the last day of the month prior to the receipt by the Company of the Employee's election under this section, reduced by the 15% penalty amount, shall be paid to the Employee in a cash lump sum within 30 days after receipt by the Company of the Employee's election. An Employee who makes such an election shall no longer be eligible to participate in the Plan. All elections under this section shall be made in writing, shall be effective when delivered to the Company and shall be irrevocable once made. 12. HARDSHIP BENEFIT ---------------- In the event the Employee suffers a financial hardship (as hereinafter defined), the Corporation may, if it deems advisable in its sole and absolute discretion, distribute to or utilize on behalf of the Employee as a hardship benefit (the "Hardship Benefit"), any portion of the Employee's Retirement Account up to, but not in excess of, the Termination Benefit to which the Employee would have been entitled as of the date the Hardship Benefit is distributed or utilized. Any Hardship Benefit shall be distributed or utilized at such times as the Corporation shall determine, and the Accrued Benefit in the Employee's Retirement Account shall be reduced by the amount so distributed and/or utilized. Financial Hardship shall mean dire financial need of the Employee caused by temporary or permanent disability or incapacity, medical expenses, a material reduction in family income, or other determination, as the Corporation may deem appropriate. 13. OFFSET FOR OBLIGATIONS TO CORPORATION ------------------------------------- If, at such time as the Employee becomes entitled to benefit payments hereunder, the Employee has any debt, obligation or other liability representing an amount owed to the Corporation or an Affiliate of the Corporation, and if such debt, obligation, or other liability is due and owing at the time benefit payments are payable hereunder, the Corporation may offset the amount owed it or an Affiliate against the amount of benefits otherwise distributable hereunder. 14. BENEFICIARY DESIGNATION ----------------------- -7- The Employee shall have the right, at any time, to submit in substantially the form attached hereto as Exhibit A, a written designation of primary and secondary beneficiaries to whom payment under this Agreement shall be made in the event of the Employee's death prior to complete distribution of the benefits due and payable under the Agreement. Each beneficiary designation shall become effective only when receipt thereof as acknowledged in writing by the Corporation. 15. NO TRUST CREATED ---------------- Nothing contained in this Agreement, and no action taken pursuant to its provisions by either party hereto shall create, or be construed to create, a trust of any kind, or a fiduciary relationship between the Corporation and the Employee, the designated beneficiary, other beneficiaries of the Employee or any other person. 16. BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS; ---------------------------------------------------- UNSECURED GENERAL CREDITOR STATUS OF EMPLOYEE - --------------------------------------------- a. The payments to the Employee or the designated beneficiary or any other beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Corporation; no person shall have any interest in any such assets by virtue of the provisions of this Agreement. The Corporation's obligation hereunder shall be an unfunded an unsecured promise to pay money in the future. To the extent that any person acquires a right to receive payments from the Corporation under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Corporation; no such person shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Corporation. b. In the event that, in its discretion, the Corporation purchases an insurance policy or policies insuring the life of the Employee (or any other property), to allow the Corporation to recover the cost of providing benefits, in whole or in part, hereunder, neither the Employee, his or her designated beneficiary nor any other beneficiary shall have any rights whatsoever therein or in the proceeds therefrom. The Corporation shall be the sole owner and beneficiary of any -8- such insurance policy and shall possess and any exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for the Employee or any other person nor as collateral security for any obligation of the Corporation hereunder. 17. NO CONTRACT OF EMPLOYMENT ------------------------- Nothing contained herein shall be construed to be a contract of employment for any term of years, nor as conferring upon the Employee the right to continue to be employed by the Corporation in his or her present capacity, or in any capacity. It is expressly understood by the parties hereto that this Agreement relates to the payment of deferred compensation for the Employee's services, payable after termination of his or her employment with the Corporation, and is not intended to be an employment contract. 18. BENEFITS NOT TRANSFERABLE ------------------------- Neither the Employee, designated beneficiary nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder. No such amounts shall be subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, nor shall such amounts be transferable by operation of law in the event of bankruptcy, insolvency or death of the Employee, designated beneficiary, or any other beneficiary hereunder. 19. DETERMINATION OF BENEFITS ------------------------- a. Claim. ------ Any person who believes that he/she is being denied a benefit to which he or she is entitled under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Corporation, setting forth his or her claim. The request must be addressed to the President of the Corporation at its then principal place of business. b. Claim Decision. --------------- -9- Upon receipt of a claim, the Corporation shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Corporation may, however, extend the reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Corporation shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth: (a) The specific reason or reasons for such denial; (b) The specific reference to pertinent provisions of this Agreement on which such denial is based; (c) A description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary; (d) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (e) The time limits for requesting a review under the subsection (C) and for review under subsection (d) hereof. c. Request for Review. ------------------- Within sixty (60) days after the receipt by the Claimant of the written opinions described above, the Claimant may request in writing that the Secretary of the Corporation review the determination of the Corporation. Such request must be addressed to the Secretary of the Corporation, at its then principal place of business. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Corporation. If the Claimant does not request a review of the Corporation's determination by the Secretary of the Corporation within such sixty (60) day period, he or she shall be barred an estopped from challenging the Corporation's determination. d. Review of Decision. ------------------- -10- Within sixty (60) days after the Secretary's receipt of a request for review, he or she will review the Corporation's determination. After considering all material presented by the Claimant, the Secretary will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Secretary will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. 20. AMENDMENT --------- The Company may amend this plan at any time and from time to time, but no amendment shall reduce any benefit that has accrued on the effective date of the amendment subject to Earnings Adjustments as otherwise set forth herein. 21. INUREMENT --------- This Agreement shall be binding upon and inure to the benefit of the Corporation and its successors and assigns, and the Employee, successors, heirs, executors, administrators and beneficiaries. 22. NOTICE ------ Any notice, consent or demand required or permitted to be given under the provisions of this Agreement shall be in writing, and shall be signed by the party giving or making the same. If such notice, consent or demand is mailed to a party hereto, it shall be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of the Corporation. The date of such mailing shall be deemed the date of notice, consent or demand. Either party may change the address to which notice is to be sent by giving notice of the change of address in the manner aforesaid. -11- 23. GOVERNING LAW - --- ------------- This Agreement and the rights of the parties hereunder, shall be governed by and construed in accordance with the laws of the State of California. Dated: ___________________ ATTEST: Vitria Technology, Inc. By: ______________________ By: _________________________ Title: ______________________ -12- EX-10.6 9 STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE EXHIBIT 10.6 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET (Do not use this form for Multi-Tenant Property) 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, January 28, 1997, is made by and between Portola Land Company ("Lessor") and Vitria Technology Incorporated ("Lessee"), (collectively, the "Parties," or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lesser under the terms of this Lease, and commonly known by the street address 500 Ellis Street, Mountain View, located in the County of Santa Clara, State of California, and generally described as (describe briefly the nature of the property) approximately 18,100 square feet in a freestanding single story office/R&D building ("Premises"). (See Paragraph 2 for further provisions.) 1.3 Term: Six (6) years and one (1) months ("Original Term") commencing April 1, 1997 ("Commencement Date") and ending April 30, 2003 ("Expiration Date"). (See Paragraph 3 for further provisions.) 1.4 Early Possession: N/A ("Early Possession Date"). (See Paragraphs 3.2 and 3.3. for further provisions) 1.5 Base Rent: See Addendum _______ per month ("Base Rent"), payable on the 1st day of each month commencing see Addendum (See Paragraph 4 for further provisions.) [_] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid upon Occupancy: $30,770 as Base Rent for the period May 1, 1997 - May 31, 1997; Base Rent for the period of April 1, 199__ -- April 30 1997 shall be rent-free. 1.7 Security Deposit: $61,540.00 ("Security Deposit"). (See Paragraph 5 for further provisions.) 1.8 Permitted Use: Office, Research, Development and Storage of communication and application servers. (See Paragraph 6 for further provisions.) 1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 Real Estate Brokers: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): Cornish & Carey Commercial [X] represents both Lessor and Lessee. (See Paragraph 15 for further provisions.) 1.11 Guarantor: The obligations of the Lessee under this Lease are to be guaranteed by N/A ("Guarantor"). (See Paragraph 37 for further provisions.) 1.12 Addenda: Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 57 and Exhibit A, all of which constitute a part of this Lease. 2. Premises. 2.1 Letting: Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning and heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non- compliance with said warranty exists as of the Commencement Date, Lesser shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable law as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matters, and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 1. 3.3 Delay in Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within thirty (30) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to the period to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor sufficient to maintain the same ratio between the security deposit and the base rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. Upon Lessee's completion of tenant improvements, Lessor, at Lessor's sole discretion, may refund one month of the security deposit provided Lessee is not in default, Lessor will . . . 6. Use. 6.1 Permitted Use. Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted purpose for which the premises are to be used or occupied, so long as the same will not impair the structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the premises so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including but not limited to the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party or persons entering or occupying the Premises concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, 2. restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Law. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Law," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance or storage tanks, now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy, Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a) shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or to be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance, Repairs, Utility Installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expanse and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), ceilings, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair subject to addendum. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 Lessor's Obligations. Except for the warranties and agreements of Lessor contained in the Addendum Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of any needed repairs. 7.3 Utility Installations, Trade Fixtures, Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee-Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessee has the right to choose the licensed contractor to perform any improvement work to the building base. 3. (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership, Removal, Surrender and Restoration. (a) Ownership. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good service practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 82(a) above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) Rental Value. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, real property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable to any deductible amount in the event of such loss. (c) Adjacent Premises. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 4. (d) Tenant's Improvements. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 Indemnity. Except for Lessor's negligence and/or breach of this Lease, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage--Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required the complete said repairs. In the event, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available. Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 5. 9.3 Partial Damage--Uninsured Loss. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period") (i) exercising such option, and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of damage described in Paragraph 9.2 (Partial Damage- Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums and other charges, if any, payable by Lessee hereunder for the period during which such damage or its repair, or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)) shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lender and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is caused it to be present (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds of assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a). 9.8 Termination - Advance Payments. Upon termination of this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover a period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) Advance Payment. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys 6. paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a) at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 Definition of "Real Property Taxes." As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes to all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor if any of Lessee's said personal property shall be assessed with Lessor's real property. Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b) 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor of all charges jointly metered with other premises. 12. Assignment and Subletting. See Addendum Paragraph 55. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36, except as set forth in the Addendum. (d) An assignment or subletting of Lessee's interest in this Lease other than a Permitted Transfer without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index- oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. 7. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease. Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease, (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "Default" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults and where a grace period for cure after notice is specified herein the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3. (b) Except as expressly otherwise provided in this Lease, the future by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) or (i) if compliance with Applicable Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessees obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, completed with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by lessee of any general arrangement or assignment for the benefit of creditors, (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. (S)101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor; (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty; (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing; (iv) a guarantor's refusal to honor the guaranty; or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of 8. recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence 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%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grade period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951 4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the L essee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary. Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises or more than twenty ______ ___________ land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining except that the Base Rent reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on ________. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building _________________________________ the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor ________ such award shall be made as compensation for dimunition in value of the leasehold or for the taking of the fee or as severance damaged provided however that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of _________ the event that this Lease is not terminated by reason of such condemnation Lessor shall to the extent of its net severance damages received the legal and other expenses incurred by Lessor in the condemnation matter repair any damage to the Premises caused by such condemnation _____________ extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any _______________________ net severance damages required to complete such repair. 15. Broker's Fee. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Broker's jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers (or in the event there is no separate written agreement between Lessor and said Brokers, the sum of $____________________) for brokerage services rendered by said Brokers to Lessor in this transaction. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. Tenancy Statement. 16.1 Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 9. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, of the building of which the Premises are a part, Lessee and a Guarantor's of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee tittle to the Premises or if there is a sublease of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease. Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of a liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than changes, not received Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty- first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deeme4d to be rent. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to the Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. Notices. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing and delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt or of if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition here ___. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preced__ Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor, Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of ______ Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessor has not right to retain possession of the Premises or any party thereof beyond the expiration or earlier termination of the Lease. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effects; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county of which the Premises are located. 30. Subordination; Attornment; Non-Disturbances. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and sub ordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice to the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Optio____ granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 10. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquire ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease. Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-distribution agreement") from the Lender that lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. This agreement contained in this Paragraph 30 shall be effective without the execution of any further documents, provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may bed reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorney's Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permitted to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Features and Alterations). Unless otherwise expressly agreed herein. Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the premises, including the roof, as do not reasonably interfere with the conduct of Lessee's business. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lessor estate __ the Premises; provided, however, lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lessor interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to a___ act by or for the other party, such consent shall not be unreasonably withheld or delayed, Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for an___ Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation thereto Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require the __ Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgement that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify here__ any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. *In the event Lessor shall not have responded within ten (10) days, Lessor's consent shall be deemed given. 37. Guarantor. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be __ the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporation Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signature of the persons authorized to sing on its behalf, (b) current financial statements of Guarantor as may from time to time by requested by Lessor, (c) a Tenancy Statement, or (d( written confirmation that the guaranty is still in effect. 38. Quite Possession. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 11. 39. Options. 39.1 Definition. As used in this Paragraph 39 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Options Personal To Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph __ hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease by any manner, by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provisions in the grant of Option to the contrary (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee) or (iii) during the time Lessee is in Breach of the Lease, or (iv) in the event that lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1 whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provision of an Option shall terminate and be of no further fore or effect notwithstanding lessee's due and timely exercise of the Option, if, after such exercise and during the terms of this Lease (i) Lessee fails to pay to Lessor monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice __________ or (ii) Lessor _____ to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period whether or ____________ Lessee commits a Breach of this lease. 40. Multiple Buildings. If the Premises are part of a group of buildings controlled by lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do no unreasonably interfere with the use of the Premises by Lessee. lessee agrees to assign any documents reasonably requested by lessor to effectuate any such easement rights, education, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnerships, Lessee shall, within thirty (3) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. Multiple Parties. Except as otherwise expressly provided therein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities names herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE 12. SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at: Palo Alto Executed at:___________________________ on February 5, 1997 on February 4, 1997 By LESSOR: Portola Land Company By Lessee: Vitria Technology Incorporated ______________________________________ _______________________________________ ______________________________________ _______________________________________ By: /s/ William J. Hurwick By: /s/ Jo Mei Chang Name Printed: William J. Hurwick Name Printed: Ms. Jo Mei Chang Title: Partner Title: President & CEO By: /s/ Allan E. Brown By:___________________________________ Name Printed: Allan E. Brown Name Printed:_________________________ Title: General Partner Title:________________________________ Address:______________________________ Address:______________________________ ______________________________________ ______________________________________ Tel. No.( ) Tel. No.( ) ______________________________ ______________________________ Fax No: ( ) Fax No: ( ) ______________________________ ______________________________ 13. Lease Addendum ADDENDUM TO THE LEASE DATED JANUARY 28, 1997, BY AND BETWEEN PORTOLA LAND COMPANY, LESSOR, AND VITRIA TECHNOLOGY INCORPORATED, LESSEE, FOR THE PREMISES LOCATED AT 500 ELLIS STREET, MOUNTAIN VIEW, CALIFORNIA. THIS LEASE ADDENDUM SHALL OVERRULE AND TAKE PRECEDENCE OVER ANY CONFLICT WITH THE MASTER LEASE DATED JANUARY 28, 1997. 49. Compliance with Building Code: Notwithstanding anything to the contrary contained in this Lease, Lessee shall have no obligation to comply with any laws relating to Hazardous Substances unless Lessee shall have caused such Hazardous substances to be present on the Premises. Notwithstanding anything to the contrary contained in this Lease, Lessee shall not be responsible for compliance with any Applicable Law where such compliance is not related specifically to Lessee's use and occupancy of the Premises. For example, but not by way of limitation, if any governmental authority should require the Building or the Premises to be structurally strengthened against earthquake and such measures are imposed as a general requirement applicable to all tenants rather than as a condition to Lessee's specific use or occupancy of the premises, such work shall be performed by and at sole cost of Lessor. 50. Rent Schedule:
Months/Dates NNN Base Rent/Sq. Ft./Mo. NNN Base Monthly Rent 04/01/97 - 04/30/97 0 0 05/01/97 - 04/30/98 $1.70 $30,770 05/01/98 - 04/30/99 $1.76 $31,856 05/01/99 - 04/30/00 $1.82 $32,942 05/01/00 - 04/30/01 $1.88 $34,028 05/01/01 - 04/30/02 $1.94 $35,114 05/01/02 - 04/30/03 $2.00 $36,200
51. NNN Expense: Lessee shall pay for real estate taxes, insurance including earthquake coverage, landscape maintenance, HVAC maintenance and all utilities and janitorial services provided to the Premises. Lessee shall be responsible for paying a portion of the cost of the replacement of capital items (HVAC equipment, parking lot), amortized over the useful life of the equipment. 52. Roof Maintenance: Lessee shall be responsible for all roof maintenance repair costs (other than Lessee caused) during the Lease term. Replacement of roof if needed shall also be Lessor's sole cost and expense. 53. Improvements to Premises: Lessor, at Lessor's sole cost and expense shall warrant that all electric, HVAC, and plumbing shall be in working order on the Commencement Date and shall pay for repairing them, at its sole costs and expense, if such warranty is inaccurate. Lessor shall be responsible for any costs of replacing HVAC equipment during the first twelve (12) months of the Lease, if necessary. Lessor, at Lessor's expense, shall also repaint exterior of the building a neutral color. Additionally, Lessor, at Lessor's cost, shall replace all missing or defective ceiling tiles. Except as set forth in this Lease and Addendum, Lessee will assume space in an "as is" condition. If Lessee, at any time or times during the term of this Lease, shall desire to make any alterations, or improvements on the Premises, or any part of parts thereof, the same shall be constructed without cost or expense to Lessor, in accordance with the requirements of all laws, ordinances, codes, orders, rules, and regulations of all governmental authorities having jurisdiction over the Premises. In particular, Lessee shall have the right to modify the building interiors. Should any modifications require a building permit, such work shall be done by a licensed contractor. Premises shall be returned to lessor in "clean" condition. 54. Hazardous Materials Indemnification: Lessor shall indemnify, defend and hold Lessee, its agents, employees and lenders, harmless from and against any and all losses, costs, claims, damages, liabilities and causes of action including attorney's fees and costs and consultants' fees arising out of or in any way connected with any Hazardous Substance located on the Premises including the soils and groundwaters thereof, except those caused to be on the Premises by Lessee. Lessee is only responsible for Hazardous Substances which Lessee, its agents, employees and lenders have brought directly to the Premises. Lessor's obligations under this provision shall survive the expiration or early termination of the Lease. Notwithstanding anything to the contrary contained in this Lease, Lessee shall have no obligation to comply with any laws relating to Hazardous Substances unless Lessee shall have caused such Hazardous Substances to be present on the Premises. 55. Free from Liens: Lessee shall keep the premises and the property in which the premises are situated, free from any liens arising out of any work performed, materials furnished, or obligations incurred by Lessee. 55. Sublease/Assignment: Lessee shall have the right to assign or sublease the premises, subject to Lessor's approval, which shall not be unreasonably withheld. Any bonus rents resulting from the subleasing shall be split 50/50 between Lessor and Lessee after subtracting the cost of Sublease commissions. Notwithstanding the foregoing, Lessee may assign or sublet pursuant to any of the following (each a "Permitted Transfer"): transfer, assignment or subletting of the Premises (or any portion thereof) to any entity which controls, is controlled by, or is under common control with Lessee; to any entity which results from a merger of or consolidation with Lessee; or to any entity which acquires substantially all of the assets of lessee, as a going concern, with respect to the business that is being conducted in the Premises; any transfer of the beneficial ownership or effective voting control of Lessee from the person(s) having effective voting 1. control as of the date of Lessee's execution of this Lease, where such transfer occurs in connection with any bona fide financing or capitalization for the benefit of Lessee. 57. Real Estate Leasing Commissions: Lessor to pay Cornish & Carey Commercial the leasing commission per listed schedule. It is noted that the agents of Cornish & Carey Commercial involved in this Lease transaction are acting as both Brokers and Principals. 2. EX-10.7 10 SUBLEASE BY AND BETWEEN APPLIED MATERIALS EXHIBIT 10.7 SUBLEASE OAKMEAD WEST BUILDINGS PROJECT BUILDING C 945 STEWART DRIVE Between APPLIED MATERIALS, INC. (Sublandlord) And VITRIA TECHNOLOGY, INC. (Subtenant) Table Of Contents
Page 1. Sublease Agreement........................................ 3 2. Rent...................................................... 4 3. Construction Of Interior Improvements And Possession...... 8 4. Services And Utilities.................................... 9 5. Alterations............................................... 9 6. Use Of Premises........................................... 12 7. Governmental Requirements And Building Rules.............. 14 8. Repair And Maintenance.................................... 14 9. Waiver Of Claims; Indemnification; Insurance.............. 15 10. Fire And Other Casualty................................... 18 11. Eminent Domain............................................ 19 12. Rights Reserved To Landlord And Sublandlord............... 19 13. Subtenant's Default....................................... 21 14. Sublandlord Remedies...................................... 21 15. Surrender................................................. 23 16. Holdover.................................................. 24 17. Subordination To Ground Leases And Mortgages.............. 24 18. Assignment And Sublease................................... 25 19. Conveyance By Sublandlord Or Landlord..................... 27 20. Estoppel Certificate...................................... 27 21. Financial Statements...................................... 27 22. Lease Deposit............................................. 28 23. Force Majeure............................................. 28 24. Notices................................................... 28 25. Quiet Possession.......................................... 29 26. Real Estate Broker........................................ 29 27. Miscellaneous............................................. 30 28. Unrelated Business Income................................. 32 29. Hazardous Substances...................................... 32 30. Exculpation............................................... 34
Table Of Contents (Continued)
Page 31. Sublandlord Obligations................................... 34 32. Sublandlord's Representations And Warranties.............. 34 33. Subtenant Cure Right...................................... 35 34. Landlord Consent.......................................... 35
ii SUBLEASE This Sublease (the "Sublease") is made as of April 6th, 1999 (dated for reference purposes only and referred to herein as the "Effective Date") between Applied Materials, Inc., a Delaware corporation (the "Sublandlord") and Vitria Technology, Inc., a California corporation ("Subtenant"). The term "Project" means the seven (7) buildings ("Buildings") and other improvements commonly known as the "Oakmead West" located on the land (the "Land") in Sunnyvale, California, as more particularly described on EXHIBIT A. "Premises" or "Building" means the building designated 945 Stewart Drive or Building C. Sublandlord is lessee of the Project pursuant to the Lease dated September 9, 1997 ("Master Lease") between Sublandlord as Tenant and CarrAmerica Realty Corporation as Landlord. The following schedule (the "Schedule") is an integral part of this Sublease. Terms defined in this Schedule shall have the same meaning throughout the Sublease. Schedule 1. Subtenant: Vitria Technology, Inc. 2. Premises: Building C (the "Building"), 945 Stewart Drive, Sunnyvale, California, as described in EXHIBIT A attached hereto. 3. Rentable Square Footage of the Premises: 63,781 sq. ft. 4. Subtenant's Proportionate Share: 100% for Operating Costs and Taxes allocated to the Building and 14.97% for Operating Costs and Taxes charged to the Project but not allocated to specific Buildings by Landlord. 5. Lease Deposit: $83,135.10 due upon execution of this Sublease, representing advance payment of the first month's rent ("Advance Rent Deposit"), plus a security deposit in cash in the amount of twice the last month's rent - ---- ($283,773.10) ("Security Deposit"). 6. Permitted Use: Office; storage and shipping of equipment and parts; assembly (using parts manufactured elsewhere), repair and testing of machinery and equipment; research, testing and demonstration laboratory; and ancillary uses permitted under applicable laws. 7. Subtenant's Real Estate Broker for this Lease: CB Richard Ellis 8. Sublandlord's Real Estate Broker for this Lease: Wayne Mascia Associates 9. Tenant Improvement Allowance: $1,594,525.00 Base Allowance plus an Additional Allowance of up to $446,467. 10. Commencement Date: Approximately August 1, 1999; See Paragraph 1.A. 1 11. Term: Commencing on the Commencement Date and expiring August 31, 2003 ("Termination Date"). 12. Guarantor: None 13. Base Rent: Monthly/Square Foot prior to Monthly Months Amortization Base Rent ------ ------------ --------- 1-6 $ 1.85 * ** $ 85,135.50* ** 6-12 1.85** 129,130.35** 13-24 1.90** 132,319.40** 25-36 1.95** 135,508.45** 37-48 2.00** 138,697.50** 49 2.05** 141,886.55** * Base Rent for months one (1) - six (6) is calculated upon 40,000 sq.ft. of the Premises. ** The total monthly Base Rent reflects $7.00 per square foot of the Additional Allowance utilized for Tenant Improvements (amortized at ten percent (10%) over 49 months). The portion of the monthly Base Rent in the amount of $11,135.50 to amortize the Additional Allowance is charged to the actual square footage of the Premises in months 1-6. 14. Master Lease: Lease dated September 9, 1997 between Applied Materials, Inc. as Tenant and CarrAmerica Realty Corporation as Landlord 15. Landlord or Master Landlord: CarrAmerica Realty Corporation 2 1. Sublease Agreement. On the terms stated in this Sublease, Sublandlord subleases the Premises to Subtenant, and Subtenant leases the Premises from Sublandlord, for the Term beginning on the Commencement Date and ending on the Termination Date unless sooner terminated pursuant to this Sublease. A. Commencement Date. The Commencement Date shall the date established pursuant to this section, and the Sublease shall expire on the Termination Date set forth in the Schedule. Subject to Section 1B below, the Commencement Date shall be the earliest occurring of the following: (i) The date of Substantial Completion of the Tenant Improvements, as such term is defined in the Work Letter Agreement attached hereto as EXHIBIT C ("Work Letter Agreement"); or (ii) August 1, 1999. B. Subtenant Delays. If the Commencement Date has not occurred on or before August 1, 1999 due to Subtenant delays, the Commencement Date shall be the date on which the Commencement Date would have occurred but for Subtenant Delays. Subtenant agrees that if Sublandlord is unable to deliver possession of the Premises to Subtenant by August 1, 1999 (the anticipated Commencement Date of the Sublease term), this Sublease shall not be void or voidable, nor shall Sublandlord be liable to Subtenant for any loss or damage resulting therefrom, but in such event the obligation to pay Rent shall be suspended from the anticipated Commencement Date until the actual Commencement Date except to the extent such delay is due to the fault of Subtenant. Delays "due to the fault of Subtenant" shall be as set forth in Paragraph 15 of the Work Letter Agreement and shall also include interference with Sublandlord's work caused by Subtenant or Subtenants employees or contractors. If the Commencement Date has not occurred on or before November 1, 1999 ("First Termination Date"), Subtenant may terminate this Sublease by written notice to Sublandlord on or before November 15, 1999; provided, however, that the First Termination Date shall be extended by a period of time equal to any delays due to the fault of Subtenant or due to causes beyond the reasonable control of Sublandlord ("force majeure") such as rain, flooding, fire or other casualty, labor disputes, civil disturbance, war, war-like operations, invasions, rebellion, hostilities, sabotage, governmental regulations or control, inability to obtain materials, services or governmental permits despite diligent efforts to do so, or acts of God. If the Commencement Date has not occurred by February 1, 2000 ("Final Delivery Date"), through no fault of the terminating party, either party may terminate this Sublease by written notice to the other on or before February 15, 2000. If this Sublease is terminated pursuant to either of the two (2) preceding sentences, Sublandlord shall return the Advance Rent Deposit and the Security Deposit within ten (10) business days. C. Early Occupancy. During the period beginning thirty (30) days prior to the anticipated Commencement Date (the "Early Occupancy Period"), provided that Subtenant's occupancy does not interfere with or cause delays to Sublandlord's construction obligations, Subtenant shall be permitted to enter the Building upon reasonable notice to Sublandlord and its general contractor for the sole purpose of installation of its benchwork, equipment calibration, network cabling, telecommunications, furniture systems, and other installations necessary for the conduct of Subtenant's business and use adjacent parking and loading areas in connection 3 therewith. Notwithstanding any other provision herein to the contrary, Subtenant's occupancy of the Building during the Early Occupancy Period shall be subject to all of the terms, covenants and conditions of this Sublease (including Subtenant's obligations regarding indemnity and insurance), provided, however, that Subtenant's obligation to pay Rent during the Early Occupancy Period shall be waived. In any event, Subtenant shall be responsible for any additional utility charges incurred by Landlord or Sublandlord which is caused by Subtenant's use of the Building during the Early Occupancy Period. 2. Rent. A. Types of Rent. Subtenant shall pay the following Rent in the form of a check (or via wire transfer) to Sublandlord pursuant to instructions to be given by Sublandlord to Subtenant prior to the Commencement Date. (1) Base Rent in monthly installments in advance, the first monthly installment due on or prior to the first day of the second (2nd) month following the Commencement Date (the Advance Rent Deposit shall be applied against the first month's Base Rent), and thereafter on or before the first day of each month of the Term in the amount set forth on the Schedule, as adjusted. (2) Operating Costs Share Rent in an amount equal to (a) $4,800.00 annual management fee charged by Sublandlord, plus (b) Subtenant's Proportionate Share of the Landlord Operating Costs for the applicable fiscal year of the Sublease, charged to Sublandlord by Landlord ("Landlord Operating Costs"). Operating Costs Share Rent shall be due monthly in advance in an estimated amount commencing with the Commencement Date, and thereafter on or before the first day of each month of the Term. Definitions of Landlord's Operating Costs and Subtenant's Proportionate Share, and the method for billing and payment of Operating Costs Share Rent are set forth in Sections 2B, 2C and 2D. (3) Tax Share Rent in an amount equal to Taxes for the applicable fiscal year of this Sublease allocated to the Premises, paid semi- annually as set forth in Section 2B(1) below. A definition of Taxes and the method for billing and payment of Tax Share Rent are set forth in Sections 2B, 2C and 2D. (4) Additional Rent in the amount of all costs, expenses, liabilities, and amounts which Subtenant is required to pay under this Sublease, excluding Base Rent, Operating Costs Share Rent, and Tax Share Rent, but including any interest for late payment of any item of Rent. (5) Rent as used in this Sublease means Base Rent, Operating Costs Share Rent, Tax Share Rent, and Additional Rent. Subtenant's agreement to pay Rent is an independent covenant, with no right of setoff, deduction or counterclaim of any kind. B. Payment of Operating Costs Share Rent and Tax Share Rent. (1) Payment of Estimated Operating Costs Share Rent and Tax Share Rent. Pursuant to the Master Lease, Landlord shall estimate the Landlord Operating Costs and Taxes (defined in Section 2A(2) by reference to the term "Operating Costs" defined in 4 the Master Lease, which definition shall be used hereinafter) by April 1 of each fiscal year, or as soon as reasonably possible thereafter. Landlord may revise these estimates whenever it obtains more accurate information, such as an increase in utility or maintenance costs for the Project common areas; provided in no event shall the estimate be revised more than once in any calendar year. Sublandlord shall deliver such estimates to Subtenant promptly upon receipt from Landlord. Within ten (10) days after receiving the original or revised estimate from Sublandlord, Subtenant shall pay Sublandlord one-twelfth (1/12th) of Subtenant's Proportionate Share of this estimate, multiplied by the number of months that have elapsed in the applicable fiscal year to the date of such payment including the current month, minus payments previously made by Subtenant for the months elapsed. On the first day of each month thereafter, Subtenant shall pay Sublandlord one-twelfth (1/12th) of Subtenant's Proportionate Share of this estimate, until a new estimate becomes applicable. Notwithstanding the foregoing, Landlord's estimate excludes the portion of the Taxes payable semi- annually to the County of Santa Clara pursuant to property tax bills for the Project (the "Property Tax Bills"). With respect to Taxes payable in connection with Property Tax Bills, Sublandlord shall deliver copies of such bills to Subtenant at least thirty (30) days prior to the Delinquency Date set forth therein, and Subtenant shall pay to Sublandlord, at least fifteen (15) days prior to the Delinquency Date, Subtenant's Proportionate Share of the amount payable thereunder. Any interest or penalties payable by Sublandlord as a result of Subtenant's failure to timely pay such Taxes to Sublandlord shall be deemed Additional Rent payable by Subtenant hereunder. (2) Correction of Operating Costs Share Rent. Sublandlord shall deliver to Subtenant a report for the previous fiscal year (the "Operating Costs Report") promptly after receipt from Landlord, which pursuant to the Master Lease shall be April 1 of each year, or as soon as reasonably possible thereafter, setting forth (a) the actual Operating Costs incurred and charged to Sublandlord, (b) the amount of Operating Costs Share Rent due from Subtenant, and (c) the amount of Operating Costs Share Rent paid by Subtenant. Within thirty (30) days after such delivery, Subtenant shall pay to Sublandlord the amount due minus the amount paid. If the amount paid exceeds the amount due (including credit for any refunds from Landlord to Sublandlord as correction of Operating Costs Share Rent), Sublandlord shall apply the excess to Subtenant's payments of Operating Costs Share Rent next coming due. (3) Correction of Tax Share Rent. Sublandlord shall deliver to Subtenant a report for the previous fiscal year (the "Tax Report") by April 1 of each year, or as soon as reasonably possible thereafter, setting forth (a) the actual Taxes, (b) the amount of Tax Share Rent due from Subtenant, and (c) the amount of Tax Share Rent paid by Subtenant. Within thirty (30) days after such delivery, Subtenant shall pay to Sublandlord the amount due from Subtenant minus the amount paid by Subtenant. If the amount paid exceeds the amount due, Sublandlord shall apply any excess as a credit against Subtenant's payments of Tax Share Rent next coming due. C. Definitions. (1) Included Operating Costs. "Landlord Operating Costs" means all Operating Costs as defined in the Master Lease. 5 (2) Taxes. "Taxes" means any and all taxes, assessments and charges of any kind, general or special, ordinary or extraordinary, levied against the Project, which Landlord or Sublandlord shall pay or become obligated to pay in connection with the ownership, leasing, renting, management, use, occupancy, control or operation of the Project or of the personal property, fixtures, machinery, equipment, systems and apparatus used in connection therewith. Taxes shall include real estate taxes, personal property taxes, sewer rents, water rents, special or general assessments, transit taxes, ad valorem taxes, and any tax levied on the rents hereunder or the interest of Landlord or Sublandlord under this Sublease (the "Rent Tax"). Taxes shall also include all -------- fees and other costs and expenses paid by Landlord in seeking a refund or reduction of any Taxes, whether or not the Landlord is ultimately successful; provided that the amount paid by Landlord in any calendar year shall not exceed the greater of (i) $5,000, or (ii) thirty five percent (35%) of the annual savings achieved during that taxable year as a result of such refund or reassessment. Taxes shall also include any assessments or fees paid to any business park owners association, or similar entity, which are imposed against the Project pursuant to any Covenants, Conditions and Restrictions ("CC&R's") ------ recorded against the Land and any installments of principal and interest required to pay annual debt service for any existing or future general or special assessments for public improvements, services or benefits, and any increases resulting from reassessments imposed in connection with any change in ownership or new construction. For any year, the amount to be included in Taxes (a) from taxes or assessments payable in installments, shall be the amount of the installments (with any interest) due and payable during such year, and (b) from all other Taxes, shall at Landlord's election be the amount accrued, assessed, or otherwise imposed for such year or the amount due and payable in such year. Any refund or other adjustment to any Taxes by the taxing authority shall apply during the year in which the adjustment is made. Taxes shall not include any net income (except Rent Tax), capital, stock, succession, transfer, franchise, gift, estate or inheritance tax, except to the extent that such tax shall be imposed in lieu of any portion of Taxes. (4) Lease Year. "Lease Year" means each consecutive twelve-month period beginning with the Commencement Date, prorated for partial years. (5) Fiscal Year. "Fiscal Year" means the calendar year, except that the first fiscal year and the last fiscal year of the Term may be a partial calendar year. (6) "Project Common Areas" means the areas and facilities within the Project, exclusive of the Buildings and their interiors, provided and designated by Landlord for the general use of the tenants of the Project, including plazas, benches, landscape areas, parking areas, sidewalks, service areas, and trash disposal facilities, subject to the reasonable rules and regulations promulgated from time to time by Landlord. D. Computation of Base Rent and Rent Adjustments. (1) Prorations. If this Sublease begins on a day other than the first day of a month, the Base Rent, Operating Costs Share Rent and Tax Share Rent shall be prorated for such partial month based on the actual number of days in such month. If this Sublease begins 6 on a day other than the first day, or ends on a day other than the last day, of the fiscal year, Operating Costs Share Rent and Tax Share Rent shall be prorated for the applicable fiscal year. (2) Default Interest. Any sum due from Subtenant to Sublandlord or Landlord not paid when due shall bear interest from the date due until paid at a rate ("Interest Rate") equal to the lesser of twelve percent (12%) per annum or the maximum rate permitted by law. (3) Rent Adjustments. The square footage of the Building set forth in the Schedule is conclusively deemed to be the actual square footage thereof, without regard to any subsequent remeasurement of the Building. If any Operating Costs paid in one fiscal year relates to more than one fiscal year, Landlord may proportionately allocate such Operating Costs among the related fiscal years. (4) Books and Records. Pursuant to the Master Lease, Landlord shall maintain books and records reflecting the Operating Costs and Taxes in accordance with sound accounting and management practices. Sublandlord shall maintain books and records reflecting the Landlord Operating Costs and Taxes charged to and paid by Sublandlord. Subtenant and its certified public accountant shall have the right to inspect Sublandlord's books and records regarding such matters at Sublandlord's offices in Santa Clara, California during the ninety (90) days following the delivery of the Operating Costs Report. If Sublandlord makes such inspection of Landlord's books and records at Subtenant's request, Subtenant shall reimburse Sublandlord for its out-of-pocket costs in connection therewith within thirty (30) days after invoice therefor. Sublandlord may, at its sole discretion, and upon reasonable request from Subtenant shall, exercise any right Sublandlord may have to inspect Landlord's books and records under the Master Lease. Subtenant shall use good faith, reasonable efforts and due diligence to keep confidential the results of any such inspection of which Subtenant is informed. Unless Subtenant sends to Sublandlord any written exception to either such report within thirty (30) days prior to expiration of said ninety (90) day period, such report shall be deemed final and accepted by Subtenant. Subtenant shall pay the amount shown on both reports in the manner prescribed in this Sublease, whether or not Subtenant takes any such written exception, without any prejudice to such exception. If Subtenant makes a timely exception, Sublandlord, on behalf of Subtenant, shall exercise its right, with Landlord, to choose an independent certified public accountant or another firm with at least five (5) years of experience in auditing the books and records of commercial office projects to issue a final and conclusive resolution of Subtenant's exception. Subtenant shall pay the cost of such certification unless Landlord is required to pay such cost pursuant to the Master Lease. (5) Miscellaneous. So long as Subtenant is in default of any obligation under this Sublease, Subtenant shall not be entitled to any refund of any amount from Sublandlord or Landlord. If this Sublease is terminated for any reason prior to the annual determination of Operating Costs Share Rent or Tax Share Rent, either party shall pay the full amount due to the other within fifteen (15) days after Sublandlord's notice to Subtenant of the amount when it is determined (including credit for any refunds from Landlord to Sublandlord as correction of Operating Costs Share Rent). Sublandlord may commingle any payments made with respect to Operating Costs Share Rent or Tax Share Rent, without payment of interest. Any costs charged to Sublandlord pursuant to Section 8A of the Master Lease due to the negligence, 7 willful misconduct or breach of the Master Lease by Sublandlord or for damage caused in the performance of any work by Sublandlord, shall not be included in Operating Costs charged to Subtenant. 3. Construction Of Interior Improvements And Possession. A. Building Shell. As of the date hereof, Subtenant has received and approved final drawings, plans and specifications (the "Shell Final Plans") for the Building and the improvements described in 3.A.(1) below (the "Shell Upgrade Plans"). (1) The "Building Shell" shall mean the Building structure, exterior walls, glass, floor slab, utilities (phone, gas, electric, plumbing, fire, and water) to the Building, and roof, and shall include the parking lot, landscaping and the base for the street monument sign. Landlord is responsible for bringing phone, electrical, gas and plumbing service to the Building (i.e., stubbed but not distributed) and for installing the main fire sprinkler trunks (i.e., installed but not distributed or "dropped"). The Building Shell does not include any elevators, stairs, HVAC, roof screens or thermal insulation. Notwithstanding the foregoing, Landlord has installed all elevators, and Sublandlord has installed the improvements listed on EXHIBIT E (the "Shell Upgrades"). (2) Sublandlord represents that: i. The Building Shell (including the related landscaping and hard scape), elevator, and the Shell Upgrades have been constructed in accordance the Shell Final Plans and Shell Upgrade Plans delivered to and approved by Subtenant. ii. The Building Shell and elevator and Shell Upgrades have been designed and constructed in accordance with applicable Building codes and laws, including the Americans With Disabilities Act ("ADA") as interpreted by the applicable governmental authority which issues the building permit. iii. The Building Shell and elevator and Shell Upgrades have been constructed in a good and workmanlike manner, and of materials in accordance with specifications delivered to and approved by Subtenant. iv. To the best of Sublandlord's actual knowledge, the Building and its in-place operating systems are in good working order and condition. Notwithstanding anything to the contrary herein, Sublandlord's warranties in (i) through (iii) herein with respect to the Building Shell and elevator are not warranties independent from Landlord's warranties under the Master Lease, and Sublandlord's sole obligation under this section, and Subtenant's sole remedy for breach of such warranties, shall be that Sublandlord shall diligently pursue its remedies against Landlord for breach of its warranties under the Master Lease and shall provide to Subtenant any benefit of recovery from Landlord. Sublandlord shall cooperate with Subtenant in enforcing for Subtenant's benefit any warranties available to Sublandlord covering the Tenant Improvements, Building Shell, elevators, and Shell Upgrades. 8 B. Construction of Interior Improvements. Except for Sublandlord's obligation to install the Tenant Improvements in accordance with the Work Letter Agreement, Sublandlord is leasing the Premises to Subtenant "as is" and subject to the warranties set forth in Section 3A(2) above, without any obligation to alter, remodel, improve, or decorate any part of the Premises or Project. Sublandlord shall cause the Tenant Improvements to be completed in accordance with the terms, conditions and limitations set forth in the Work Letter Agreement. The Tenant Improvement Allowance shall be in the amount stated in the Schedule, subject to all terms and conditions of the Work Letter Agreement. C. Subtenant's Possession/Condition of Premises and Project. Sublandlord shall deliver the Premises on the Commencement Date broom-clean and free of debris or construction materials. Subtenant's taking possession of any portion of the Premises shall be conclusive evidence that the Premises were in good order, repair and condition, subject only to those "punch list items" noted in writing to Sublandlord within the thirty (30) day period immediately following the date on which Subtenant takes possession of such portion of the Premises. 4. Services And Utilities. As of the Commencement Date (and, if applicable, during the Early Occupancy Period), Subtenant shall promptly pay, as the same become due, all charges for water, gas, electricity, telephone, sewer service, waste pick-up and any other utilities, materials and services furnished directly to or used by Subtenant on or about the Premises during the Term, including without limitation, (i) meter, use and/or connection fees, hook-up fees, or standby fees (excluding any connection fees or hook-up fees which relate to making the existing electrical, gas, and water service available to the Premises as of the Commencement Date), and (ii) penalties for discontinued interrupted service. If any utility service is not separately metered to the Premises, then Subtenant shall pay Subtenant's proportionate share of the cost of such utility service with all others served by the service not separately metered. However, if Sublandlord or Landlord reasonably determine that Subtenant is using a disproportionate amount of any utility service not separately metered, then Landlord or Sublandlord at its election may (i) periodically charge Subtenant, as Additional Rent, a sum equal to Landlord's or Sublandlord's reasonable estimate of the cost of Subtenant's excess use of such utility service, or (ii) install, at Subtenant's expense, a separate meter to measure the utility service supplied to the Premises. Any interruption or cessation of utilities resulting from any causes, including any entry for repairs pursuant to this Sublease, and any renovation, redecoration or rehabilitation of any area of the Project shall not render Sublandlord or Landlord liable for damages to either person or property or for interruption or loss to Subtenant's business, nor be construed as an eviction of Subtenant, nor work an abatement of any portion of Rent, nor relieve Subtenant from fulfillment of any covenant or agreement hereof; provided, however, in the event that an interruption of the Project services causes the Premises to be untenantable for a period of at least ten (10) consecutive business days, monthly Rent shall be abated proportionately. 5. Alterations. A. Landlord's Consent and Conditions. Subtenant shall not make any improvements or alterations to the Premises (the "Work") without in each instance submitting plans and specifications for the Work to Landlord and Sublandlord and obtaining Landlord's and Sublandlord's prior written consent, which shall not be unreasonably withheld, unless (a) the 9 cost thereof is less than $50,000 per occurrence, (b) such Work does not impact the base structural components or systems of the Building, (c) such Work will not impact any other tenant's premises, and (d) such Work is not visible from outside the Building. Provided that Sublandlord receives all necessary information and plans from Subtenant, Sublandlord agrees to respond to Subtenant's request for Sublandlord's prior written consent to such alterations within seven (7) business days in the case of Work costing between $50,000 and $100,000, and within ten (10) business days for Work costing over $100,000. For purposes of the $50,000 and $100,000 thresholds, Subtenant may exclude costs associated with performing alterations which are solely cosmetic in nature, such as recarpeting and repainting the Premises. However, even if Sublandlord's or Landlord's prior written consent is not required, Subtenant shall provide Sublandlord and Landlord with prior written notice at least seven (7) days in advance of commencing the Work so that Sublandlord and Landlord may post and record a notice of nonresponsibility or other notices deemed appropriate before the commencement of such Work. Subtenant shall pay Landlord's and Sublandlord's actual out-of-pocket costs incurred for reviewing of all of the plans and all other items submitted by Subtenant. Landlord and/or Sublandlord will be deemed to be acting reasonably in withholding its consent for any Work which (a) impacts the base structural components or systems of the Building, and (b) impacts any other tenant's premises. Subtenant shall pay for the cost of all Work, including the cost of any and all approvals, permits, fees and other charges which may be required as a condition of performing such Work. Upon completion all Work shall become the property of Landlord, except for Subtenant's trade fixtures and for items which Landlord requires Subtenant to remove at Subtenant's cost at the termination of the Sublease pursuant to Section 5E. The following requirements shall apply to all Work: (1) Prior to commencement, Subtenant shall furnish to Sublandlord and Landlord building permits, certificates of insurance satisfactory to Landlord and Sublandlord, and, at Landlord's and Sublandlord's reasonable request, security for payment of all costs. (2) Subtenant shall perform all Work so as to maintain peace and harmony among other contractors serving the Project and shall avoid interference with other work to be performed or services to be rendered in the Project. (3) The Work shall be performed in a good and workmanlike manner, meeting the standard for construction and quality of materials in the Building, and shall comply with all insurance requirements and all applicable governmental laws, ordinances and regulations ("Governmental Requirements"). (4) Subtenant shall perform all Work so as to minimize or prevent disruption to other tenants of the Project, and Subtenant shall comply with all reasonable requests of Landlord or Sublandlord in response to complaints from other tenants. 10 (5) Subtenant shall perform all Work in compliance with any "Policies, Rules and Procedures for Construction Projects" which may be in effect at the time the Work is performed. (6) Subtenant shall permit Landlord and Sublandlord to observe all Work. (7) Upon completion, Subtenant shall furnish Landlord and Sublandlord with contractor's affidavits and full and final statutory waivers of liens covering all labor and materials, as-built plans and specifications, and all other close-out documentation related to the Work, including any other information required under any "Policies, Rules and Procedures for Construction Projects" which may be in effect at such time. B. Damage to Systems. If any part of the mechanical, electrical or other systems in the Premises (e.g., HVAC, life safety or automatic fire extinguisher/sprinkler system) shall be damaged during the performance of the Work, Subtenant shall promptly notify Sublandlord, and Sublandlord, or Landlord at its election, shall repair such damage at Subtenant's expense. Landlord may also at any reasonable time make any repairs or alterations which Landlord deems necessary for the safety or protection of the Project, or which Landlord is required to make by any court or pursuant to any Governmental Requirement. The cost of any repairs made by Landlord or Sublandlord on account of Subtenant's default, or on account of the mis-use or neglect by Subtenant or its invitees, contractors or agents anywhere in the Project, shall become Additional Rent payable by Subtenant on demand. C. No Liens. Subtenant has no authority to cause or permit any lien or encumbrance of any kind to affect Landlord's or Sublandlord's interests in the Building or the Project; any such lien or encumbrance shall attach to Subtenant's interest only. If any mechanic's lien shall be filed or claim of lien made for work or materials furnished to Subtenant, then Subtenant shall at its expense within ten (10) days thereafter either discharge or contest the lien or claim. If Subtenant contests the lien or claim, then Subtenant shall (i) within such ten (10) day period, provide Landlord or Sublandlord adequate security for the lien or claim, (ii) contest the lien or claim in good faith by appropriate proceedings that operate to stay its enforcement, and (iii) pay promptly any final adverse judgment entered in any such proceeding. If Subtenant does not comply with these requirements, Landlord or Sublandlord may discharge the lien or claim, and the amount paid, as well as attorney's fees and other expenses incurred by Landlord or Sublandlord, as the case may be, shall become Additional Rent payable by Subtenant on demand. D. Ownership of Improvements. All Work as defined in this Section 5, Building hardware, equipment and machinery serving the Premises, and all other improvements and all fixtures except trade fixtures, constructed in the Premises by either Landlord, Sublandlord or Subtenant, (i) shall become Landlord's property upon installation without compensation to Subtenant, unless Landlord consents otherwise in writing, and (ii) shall at Landlord's option (which shall be stated at the time Landlord and Sublandlord consent to such Work) either (a) be surrendered to Landlord with the Premises at the termination of the Sublease or of Subtenant's right to possession, or (b) be removed in accordance with Subsection 5E below (unless Landlord and Sublandlord at the time each gives its consent to the performance of such construction 11 expressly waives in writing the right to require such removal). Notwithstanding the foregoing, all Tenant Improvements installed by Sublandlord and financed in whole or in part by Landlord or Sublandlord from the Improvement Allowance described in the Schedule shall be the property of Landlord, Sublandlord, and Subtenant during the term of this Sublease in the proportions that each has financed the cost thereof, and shall become the property of Landlord upon expiration of this Sublease. In the event that this Sublease is terminated prior to the scheduled expiration date due to a default by Subtenant, Sublandlord shall have the right to remove all Work, other than the Tenant Improvements to be constructed in accordance with the Work Letter Agreement ("Initial Tenant Improvements") at Subtenant's expense. E. Removal Upon Termination. Upon the termination of this Sublease or Subtenant's right of possession, Subtenant shall remove from the Premises its trade fixtures, furniture, moveable equipment and other personal property, any improvements which Landlord or Sublandlord elects shall be removed by Subtenant pursuant to Section 5D, and any improvements to any portion of the Project other than the Premises made by or on behalf of Subtenant. If Subtenant does not timely remove such property, then Subtenant shall be conclusively presumed to have, at Sublandlord's election (i) conveyed such property to Sublandlord without compensation or (ii) abandoned such property, and Sublandlord may dispose of or store any part thereof in any manner at Subtenant's sole cost, without waiving Sublandlord's right to claim from Subtenant all expenses arising out of Subtenant's failure to remove the property, and without liability to Subtenant or any other person. Neither Landlord nor Sublandlord shall have any duty to be a bailee of any such personal property. If Sublandlord elects abandonment, Subtenant shall pay to Sublandlord, upon demand, any expenses incurred for disposition. Notwithstanding the foregoing, Subtenant shall have no obligation to remove the Initial Tenant Improvements. 6. Use Of Premises . A. Limitation on Use. Subtenant shall use the Premises only for the Permitted Use stated in the Schedule. Subtenant shall not allow any use of the Premises which will negatively affect the cost of coverage of Landlord's or Sublandlord's insurance on the Project, unless Subtenant pays any additional premiums as a result of such use. Subtenant shall not allow any inflammable or explosive liquids or materials to be kept on the Premises, other than those materials reasonably required for Subtenant's Permitted Use under this Lease; provided that such materials are handled in strict accordance with all applicable governmental requirements. Subtenant shall not allow any use of the Premises which would cause the value or utility of any part of the Premises to diminish or would interfere with any other tenant or with the operation of the Project by Landlord or Sublandlord. Subtenant shall not permit any nuisance or waste upon the Premises, or allow any offensive noise or odor in or around the Premises. At the end of each business day, or more frequently if necessary, Subtenant shall deposit all garbage and other trash (excluding any inflammable, explosive and/or hazardous materials) in trash bins or containers approved by Landlord in locations designated by Landlord from time to time. If any governmental authority shall deem the Premises to be a "place of public accommodation" under the Americans with Disabilities Act or any other comparable law as a result of Subtenant's peculiar use, Subtenant shall either modify its use to cause such authority to rescind its designation or be responsible for any alterations, structural or otherwise, required to be made to the Building under such laws. 12 B. Signs. Subtenant shall not place on any portion of the Premises any sign, placard, lettering, banner, displays or other advertising or communicative material which is visible from the exterior of the Building without the prior written approval of Landlord or Sublandlord. Sublandlord hereby agrees that so long as Subtenant leases one-hundred percent (100%) of the leasable space in the Building that Subtenant shall have the right (i) to place its standard name and logo sign on a Landlord-installed street monument base (as described in the Shell Final Plans) in front of the Building and, subject to Landlord's and Sublandlord's reasonable approval, (ii) to place its name and divisional occupant in an appropriate location on the Building. Any approved signs shall strictly conform to all Governmental Requirements, any CC&R's recorded against the Project, and any sign criteria which may be established by Landlord and in effect at the time, and shall be installed (and removed upon the Termination Date) at Subtenant's expense. Subtenant, at its sole cost and expense, shall maintain such signs in good condition and repair, including the repair of any damage caused to the Building and/or Project upon the removal of such signs). C. Parking. Subtenant shall have the non-exclusive use of two hundred fifty-five (255) parking spaces in the Project's parking facilities upon terms and conditions as may from time to time be established by Landlord. Subtenant agrees not to overburden the parking facilities (i.e., use more than its pro rata share of the unallocated parking stalls available) and agrees to cooperate with Landlord and other tenants in the Project in the use of the parking facilities. Under the Master Lease, Landlord has reserved the right in its discretion to determine whether the parking facilities are becoming crowded and to allocate and assign parking spaces among Subtenant and the other tenants in the Project. Neither Landlord nor Sublandlord shall be liable to Subtenant, nor shall this Sublease be affected, if any parking is impaired by moratorium, initiative, referendum, law, ordinance, regulation or order passed, issued or made by any governmental or quasi-governmental body. D. Prohibition Against Use of Roof and Structure of Building. Subtenant shall be prohibited from using any all or any portion of the roof of the Building or any portion of the structure of the Building during the Term of this Sublease for any purposes (including without limitation for the installation, maintenance and repair of a satellite dish and/or other telecommunications equipment), without the prior written consent of Landlord and Sublandlord, which consent Landlord and Sublandlord may withhold in their reasonable discretion. Notwithstanding the foregoing, Subtenant shall have the right to penetrate the roof, subject to all of the requirements for Work as set forth in Section 5A (e.g., submission of plans for Landlord's and Sublandlord's prior written consent), and to install antennae or satellite dishes for communication purposes, subject to Landlord's and Sublandlord's reasonable consent and Subtenant's compliance with all applicable Governmental Requirements and any reasonable installation and screening requirements imposed by Landlord or Sublandlord. Subtenant shall be solely responsible for repairing any damage to the roof and or Building caused by Subtenant's installation, operation or removal of such communications equipment. Upon the termination of this Sublease for any reason, Subtenant, at its sole cost and expense, shall remove the communications equipment from the Building and repair any damage cause to the roof or Building during such removal. E. Outside Area. Subject to Landlord's approval of location and design and ancillary Work requirements, Subtenant may install outside tables and chairs, the materials and 13 design of which are consistent with design and materials of the Project, outside the Building on the side opposite the main entrance on Stewart Drive; this installation may involve rearrangement of landscaping, hardscape, and parking. 7. Governmental Requirements And Building Rules. Subtenant shall comply with all Governmental Requirements applying to its use of the Premises. Subtenant shall also comply with all reasonable rules for the Project which may be established and amended from time to time by Landlord or Sublandlord. The present rules and regulations promulgated by Landlord are contained in EXHIBIT B. Failure by another tenant to comply with the rules or failure by Landlord or Sublandlord to enforce them shall not relieve Subtenant of its obligation to comply with the rules or make Landlord or Sublandlord responsible to Subtenant in any way. Sublandlord shall use reasonable efforts to cause Landlord to apply the rules and regulations uniformly with respect to Subtenant and tenants in the Project. In the event of alterations and repairs performed by Subtenant, Subtenant shall comply with the provisions of Section 5 of this Sublease and any applicable "Policies, Rules and Regulations for Construction Projects" which may be established by Landlord and in effect at the time. 8. Repair And Maintenance. A. Landlord's Obligations. Pursuant to the terms of the Master Lease, Landlord is obligated to keep in good order, condition and repair (i) the structural parts of the Building, which structural parts include only the foundation and subflooring of the Building and the structural condition of the roof (including the roof membrane), and the exterior walls of the Building (but excluding the interior surfaces of exterior walls and exterior and interior of all windows, doors, ceiling and plateglass which shall be maintained and repaired by Subtenant), (ii) the Building elevator, and (iii) the Project Common Areas, including all utilities and related utility lines and pipes outside of the Building ("Landlord's Maintenance Obligations"), and the costs incurred by Landlord to perform the foregoing obligations with respect to the Building to the extent they are deemed "Operating Costs" (as defined in Section 2C) shall be passed through to Subtenant, except that any damage to any of the foregoing caused by the negligence or willful acts or omissions of Subtenant or of Subtenant's agents, employees or invitees, or by reason of the failure of Subtenant to perform or comply with any terms of this Sublease, or caused by Subtenant or Subtenant's agents, employees or contractors during the performance of any work may be repaired by Sublandlord, solely at Subtenant's expense, or at Sublandlord's election, such repairs shall be made by Subtenant, at Subtenant's expense, with contractors approved by Landlord and Sublandlord. As between Sublandlord and Subtenant, Sublandlord shall be responsible for performance of Landlord's Maintenance Obligations if Landlord fails to do so and shall be entitled to charge Subtenant the cost of such work to the same extent as Landlord under the Master Lease and on the terms and conditions of this Sublease. At Sublandlord's election, except in case of roof repairs, which shall be commenced within five (5) days after notice to Sublandlord, or emergency repairs which shall be commenced immediately, Sublandlord may first demand in writing that Landlord perform any work required to be done by Landlord with respect to Landlord's Maintenance Obligations, and use reasonable efforts to obtain Landlord performance. Subtenant agrees to exercise reasonable efforts to give Landlord and Sublandlord prompt notification of the need for any repairs or maintenance; provided that such notification shall not affect Landlord's obligation to perform periodic inspections of the Project during the Lease Term. Subtenant waives the provisions of Sections 1941 and 1942 of 14 the California Civil Code and any similar or successor law regarding Subtenant's right to make repairs and deduct the expenses of such repairs from the Rent due under this Sublease. B. Subtenant's Obligations. Subtenant shall at all times and at its own expense clean, keep and maintain in good order, condition and repair every part of the Premises (including Subtenant's trade fixtures and personal property) which is not within Landlord's Maintenance Obligation pursuant to Section 8A. Subtenant's repair and maintenance obligations shall include, without limitation, all plumbing and sewage facilities within the Premises, fixtures, interior walls and ceiling, floors, windows (including repairing, resealing, cleaning and replacing, as necessary, of exterior windows), doors, entrances, plateglass, showcases, skylights, all electrical facilities and equipment, including lighting fixtures, lamps, fans and any exhaust equipment and systems, electrical motors and all other appliances and equipment of every kind and nature located in, upon or about the Premises. Subtenant shall also be responsible for all pest control within the Premises and for all trash removal for the Premises. Subtenant shall obtain at its expense HVAC systems preventive maintenance contracts with bimonthly or monthly service in accordance with manufacturer recommendations, which shall be subject to the reasonable prior written approval of Landlord, and which shall provide for and include replacement of filters, oiling and lubricating of machinery, parts replacement, adjustment of drive belts, oil changes and other preventive maintenance, including annual maintenance of duct work, interior unit drains and caulking at sheet metal, and recaulking of jacks and vents on an annual basis. Subtenant shall have the benefit of all warranties available to Landlord or Sublandlord regarding the equipment in such HVAC systems. Alternatively, Landlord may elect to perform all repairs and maintenance itself, at Subtenant's expense, to the Building's mechanical, electrical or other systems in the Premises (e.g., HVAC, life safety and automatic fire extinguisher/sprinkler systems). Landlord or Sublandlord may also perform any maintenance or repairs, at Subtenant's expense, to the extent Subtenant fails to perform such maintenance or repairs, after notice and opportunity to cure such failure, as required herein. 9. Waiver Of Claims; Indemnification; Insurance. A. Waiver of Claims. To the extent permitted by law, Subtenant waives any claims it may have against Sublandlord or their officers, directors, employees or agents for business interruption or damage to property sustained by Subtenant as the result of any act or omission of Sublandlord, its agents, employees or invitees. To the extent permitted by law, Sublandlord waives any claims it may have against Subtenant or its officers, directors, employees or agents for loss of rents or damage to property sustained by Sublandlord as the result of any act or omission of Subtenant, its agents, employees or invitees. Notwithstanding anything to the contrary in this Sublease, except for obligations arising under Section 9B below, Sublandlord and Subtenant hereby release each other from any claims against the other for injury or death to persons or damage to property occurring in, on or about the Premises or the Project, and to the fixtures, personal property, improvements, and alterations of either Sublandlord or Subtenant in or on the Premises or the Project that are caused by or result from any risks coverable by insurance policies required by this Sublease or that are actually covered by insurance carried by either party, regardless of the negligence of the party causing the harm. Each party shall notify the carrier of its insurance of the existence of this waiver and shall cause each insurance policy obtained by it to provide that the carrier waives all right of recovery by way of subrogation against the other party in connection with any damage covered by any policy. 15 B. Indemnification. Subtenant shall indemnify, defend and hold harmless Sublandlord and Landlord and their officers, directors, employees and agents against any claim by any third party for injury to any person or damage to or loss of any property occurring in the Project and arising from the use of the Premises or from any other act or omission or negligence of Subtenant, its employees, agents or invitees, or Subtenant's breach of its obligations under this Sublease, provided that Subtenant's obligations under this paragraph shall not apply to a claim to the extent it is due to the negligence or intentional misconduct of Landlord or Landlord's breach of its obligations under the Master Lease or due to Sublandlord's negligence or willful misconduct or breach of this Sublease. Subtenant's obligations under this section shall survive the termination of this Sublease. Sublandlord shall indemnify, defend and hold harmless Subtenant and its officers, directors, employees and agents against any claim by any third party for injury to any person or damage to or loss of any property occurring in the Project caused by the negligence or intentional misconduct of Sublandlord or any of Sublandlord's employees or agents, or Sublandlord's breach of its obligations under this Sublease, provided that Sublandlord's obligation under this paragraph shall not apply to a claim to the extent it is due to Subtenants's negligence or willful misconduct or breach of this Sublease. Subtenant's obligations under this section shall survive the termination of this Sublease. C. Subtenant's Insurance. Subtenant shall maintain insurance as follows, with such other terms, coverages and insurers, as Landlord or Sublandlord shall reasonably require from time to time: (1) Commercial general liability insurance, with (a) contractual liability including the indemnification provisions contained in this Sublease, (b) a severability of interest endorsement, (c) limits of not less than Two Million Dollars ($2,000,000) combined single limit per occurrence and not less than Two Million Dollars ($2,000,000) in the aggregate for bodily injury, sickness or death, and property damage, and umbrella coverage of not less than Five Million Dollars ($5,000,000). (2) Property Insurance against "All Risks" of physical loss covering the replacement cost of the Tenant Improvements and all other improvements and fixtures installed by Subtenant and personal property. Subtenant waives all rights of subrogation, and Subtenant's property insurance shall include a waiver of subrogation in favor of Landlord and Sublandlord. (3) Workers' compensation or similar insurance in form and amounts required by law, and Employer's Liability with not less than the following limits: Each Accident $1,000,000 Disease--Policy Limit $1,000,000 Disease--Each Employee $1,000,000 Such insurance shall contain a waiver of subrogation provision in favor of Landlord and Sublandlord and their agents. 16 Subtenant's insurance shall be primary and not contributory to that carried by Sublandlord, or Landlord, its agents, or mortgagee, if any. Sublandlord its building manager or agent, Landlord, Landlord's building manager or agent, mortgagee and ground lessor shall be named as additional insureds as respects to insurance required of the Subtenant in Sections 9C(1) and 9C(2) (under Section 9C(2) with respect only to Tenant Improvements). The company or companies writing any insurance which Subtenant is required to maintain under this Sublease, as well as the form of such insurance, shall at all times be subject to Landlord's written approval. Such insurance companies shall have a A.M. Best rating of A VI or better. (4) Subtenant shall cause any general contractor of Subtenant performing Work on the Premises to maintain insurance as follows, with such other terms, coverages and insurers, as Landlord shall reasonably require from time to time: a. Commercial General Liability Insurance, including contractor's liability coverage, contractual liability coverage, completed operations coverage, broad form property damage endorsement, and contractor's protective liability coverage, to afford protection with limits, for each occurrence, of not less than One Million Dollars ($1,000,000) with respect to personal injury, death or property damage. Such policy or policies shall also cover any Work which is performed by subcontractors hired by the general contractor. b. Workers' compensation or similar insurance in form and amounts required by law, and Employer's Liability with not less than the following limits: Each Accident $ 1,000,000 Disease--Policy Limit $ 1,000,000 Disease--Each Employee $ 1,000,000 Such insurance shall contain a waiver of subrogation provision in favor of Sublandlord, Landlord and their agents. Subtenant's contractor's insurance shall be primary and not contributory to that carried by Subtenant, Sublandlord, or Landlord, its agents or mortgagees. Subtenant, Sublandlord and Landlord, and if any, Landlord's building manager or agent, mortgagee or ground lessor shall be named as additional insured on Subtenant's contractor's insurance policies. D. Insurance Certificates. Subtenant shall deliver to Landlord and Sublandlord certificates evidencing all insurance required to be maintained by Subtenant by the earlier of (a) Subtenant's entry of the Building pursuant to Section 1C, or (b) five (5) days prior to the Commencement Date, and thereafter five (5) days prior to the renewal date for such policies thereafter. Each certificate will provide for thirty (30) days prior written notice of cancellation to Landlord, Sublandlord and Subtenant. E. Landlord's Insurance. Pursuant to the Master Lease, Landlord shall maintain "All-Risk" property insurance at full replacement cost, including loss of rents for twelve (12) months (including taxes and insurance), on the Building, and commercial general liability insurance policies of not less that Five Million Dollars ($5,000,000.00) covering the 17 common areas of the Project, each with such terms, coverages and conditions as are normally carried by reasonably prudent owners of properties similar to the Project, including coverage for personal injury, property damage and contractual liability endorsement. F. Waiver of Subrogation. With respect to property and worker's compensation insurance, Sublandlord and Subtenant mutually waive all rights of subrogation, and the respective "All-Risk" coverage property insurance policies and worker's compensation carried by Sublandlord and Subtenant shall contain enforceable waiver of subrogation endorsements. 10. Fire And Other Casualty. A. Termination. If a fire or other casualty causes substantial damage to the Building, pursuant to the terms of the Master Lease, Landlord shall engage a registered architect to certify within one (1) month of the casualty to both Landlord and Sublandlord the amount of time needed to restore the Building to tenantability, using standard working methods without the payment of overtime and other premiums. Sublandlord shall deliver a copy of such notice to Subtenant upon receipt. If the time needed exceeds twelve (12) months from the beginning of the restoration, or two (2) months therefrom if the restoration would begin during the last twelve (12) months of the Sublease, then either Sublandlord or Subtenant may terminate this Sublease by notice to the other party within ten (10) days after the notifying party's receipt of the architect's certificate. If sufficient insurance proceeds will not be available to Landlord to cover the cost of any restoration to the Building or the Premises, because (i) the casualty was not required to be insured against by the Master Lease and was not actually insured, or (ii) of insolvency or financial condition of Landlord's insurance carrier, Landlord may terminate the Master Lease and this Sublease by written notice to Sublandlord. Any termination pursuant to this Section 10A shall be effective thirty (30) days from the date of such termination notice and Rent shall be paid by Subtenant to that date, with an abatement for any portion of the space which has been untenantable after the casualty. B. Restoration. If a casualty causes damage to the Building but this Sublease is not terminated for any reason, then subject to the rights of any mortgagees or ground lessors, pursuant to the Master Lease, Landlord shall obtain the applicable insurance proceeds and diligently restore the Building subject to current Governmental Requirements. Landlord's obligation, should it elect or be obligated to repair or rebuild, shall be limited to the Building Shell, and provided the Building Shell has been substantially completed no later than one hundred eighty (180) days after the casualty, Subtenant shall, at Subtenant's expense, replace or fully repair its damaged improvements (including any Tenant Improvements constructed within the Building Shell), personal property and fixtures. Subtenant may terminate this Sublease if the Building Shell Repair is not substantially complete within one hundred eighty (180) days. Rent shall be abated on a per diem basis during the restoration for any portion of the Premises which is untenantable. Subtenant shall not be entitled to any compensation or damages from Landlord or Sublandlord for loss of the use of the Premises, damage to Subtenant's personal property and trade fixtures or any inconvenience occasioned by such damage, repair or restoration. Subtenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law hereinafter enacted. 18 11. Eminent Domain. If a part of the Project is taken by eminent domain or deed in lieu thereof which is so substantial that the Building cannot reasonably be used by Subtenant for the operation of its business, then either party may terminate this Sublease effective as of the date of the taking. Rent shall abate from the date of the taking in proportion to any part of the Premises taken. If there is a temporary taking of a part of the Project which is so substantial that the Building cannot reasonably be used by Subtenant for the operation of its business, then Rent shall abate from the date of the taking in proportion to any part of the Premises taken. The entire award for a taking of any kind shall be paid to Landlord, and Subtenant shall have no right to share in the award, except (i) for the portion of any award based on the value of the Tenant Improvements financed by Subtenant in excess of the Tenant Improvement Allowance; provided, however, that nothing contained herein shall be deemed to give Landlord or Sublandlord any interest in or require Subtenant to assign to Landlord or Sublandlord any separate award made to Subtenant for the taking of Subtenant's personal property and trade fixtures, or its relocation costs, and (ii) in the event of a temporary taking in which there was no Rent abatement under this Sublease, then Subtenant shall be entitled to any portion of the award which was intended to compensate Sublandlord for lost rent during the period of the temporary taking. All obligations accrued to the date of the taking shall be performed by each party. 12. Rights Reserved To Landlord And Sublandlord. Landlord and Sublandlord may exercise at any time any of the following rights respecting the operation of the Project without liability to Subtenant of any kind: A. Name. To change the name of the Building or the Project; provided, however, that so long as Subtenant occupies more than fifty percent (50%) of the Building, then Sublandlord may not change, and will not consent to a change of, the name of such Building without Subtenant's prior consent, which consent shall not be unreasonably withheld or delayed. B. Signs. To install, modify and/or maintain necessary and appropriate signs on the exterior and in the interior of the Building or on the Project, and to approve prior to installation, any of Subtenant's signs in the Premises visible from the exterior of the Building, provided that such installation by Sublandlord shall not diminish the signage permitted Subtenant by this Sublease. C. Window Treatments. To approve, at its discretion, prior to installation, any shades, blinds, ventilators or window treatments of any kind, as well as any lighting within the Premises that may be visible from the exterior of the Building. D. Keys. To retain and use passkeys to enter the Premises or any door within the Premises in accordance with Section 12E. Subtenant shall not alter or add any lock or bolt. E. Access. To have access to the Premises with twenty four hour prior notice and in accordance with Subtenant's reasonable security program procedures (except in the case of an emergency in which case Landlord shall have the right to immediate access) to inspect the Premises, and to perform its obligations, or make repairs, alterations, additions or improvements, as permitted by the Master Lease or this Sublease. 19 F. Preparation for Reoccupancy. To decorate, remodel, repair, alter or otherwise prepare the Premises for reoccupancy at any time after Subtenant abandons the Premises in default of this Sublease, without relieving Subtenant of any obligation to pay Rent. G. Heavy Articles. To approve the weight, size, placement and time and manner of movement within the Building of any safe, central filing system or other heavy article of Subtenant's property. Subtenant shall move its property entirely at its own risk. H. Show Premises. To show the Premises to prospective purchasers, lenders, mortgagees, investors, or rating agencies at any reasonable time, or prospective tenants during the last twelve (12) months of the Term; provided that Landlord or Sublandlord, as the case may be, gives prior notice to Subtenant, does not materially interfere with Subtenant's use of the Premises, and complies with Subtenant's security program. I. Use of Lockbox. To designate a lockbox collection agent for collections of amounts due Landlord or Sublandlord. In that case, the date of payment of Rent or other sums shall be the date of the agent's receipt of such payment or the date of actual collection if payment is made in the form of a negotiable instrument thereafter dishonored upon presentment. However, if Subtenant is in default beyond any applicable cure period, Sublandlord may reject any payment for all purposes as of the date of receipt or actual collection by mailing to Subtenant within 21 days after such receipt or collection a check equal to the amount sent by Subtenant. J. Repairs and Alterations. To make repairs or alterations to the Project and in doing so transport any required material through the Premises, to close entrances, doors, corridors, elevator and other facilities in the Project, to open any ceiling in the Premises, or to temporarily suspend services or use of common areas in the Building, provided in the case of Sublandlord, it uses reasonable efforts to avoid unreasonable interference with Subtenant's use. Without limiting the foregoing, Sublandlord shall have the right to access the Building for the installation and/or alteration of the conduit connections among the Buildings within the Project. Landlord or Sublandlord, as the case may be, may perform any such repairs or alterations during ordinary business hours, except that Subtenant may require any work in the Premises to be done after business hours if Subtenant pays Landlord or Sublandlord, as the case may be, for overtime and any other additional expenses incurred. Landlord may do or permit any work on any nearby building, land, street, alley or way. K. Sublandlord's Agents. If Subtenant is in default under this Sublease, possession of Subtenant's funds or negotiation of Subtenant's negotiable instrument by any of Sublandlord's agents shall not waive any breach by Subtenant or any remedies of Sublandlord under this Sublease. L. CC&R's. At any time when Subtenant is not occupying all of the Buildings in the Project, Landlord may promulgate and record a set of CC&R's which will govern the access, parking, design, signage and other rights of the tenants in the Project, so long as such CC&R's do not impose any new payment obligation on Subtenant (i.e., a dues requirement) or require Subtenant to modify any of the then existing improvements. 20 13. Subtenant's Default. Any of the following shall constitute an Event of Default by Subtenant: A. Rent Default. Subtenant fails to pay any Rent within five (5) days after notice that such payment was not paid when due, provided that Subtenant acknowledges that such notice shall be in lieu of and not in addition to any notice required to be given by Sublandlord to commence an unlawful detainer action (or similar eviction proceeding) under the then applicable law; B. Assignment/Sublease or Hazardous Substances Default. Subtenant defaults in its obligations under Section 18 Assignment and Sublease or Section 29 Hazardous Substances; C. Other Performance Default. Subtenant fails to perform any other obligation to Sublandlord under this Sublease or commits any act, or fails to perform any act, which commission or failure would constitute or cause a breach of the Master Lease, and this failure continues for thirty (30) days after written notice from Landlord or Sublandlord, except that if Subtenant begins to cure its failure within the thirty (30) day period but cannot reasonably complete its cure within such period, then, so long as Subtenant continues to diligently attempt to cure its failure, the thirty (30) day period shall be extended to one hundred twenty (120) days, or such lesser period as is reasonably necessary to complete the cure; D. Credit Default. One of the following credit defaults occurs: (1) Subtenant commences any proceeding under any law relating to bankruptcy, insolvency, reorganization or relief of debts, or seeks appointment of a receiver, trustee, custodian or other similar official for the Subtenant or for any substantial part of its property, or any such proceeding is commenced against Subtenant and either remains undismissed for a period of sixty (60) days or results in the entry of an order for relief against Subtenant which is not fully stayed within seven (7) days after entry; (2) Subtenant becomes insolvent or bankrupt, does not generally pay its debts as they become due, or admits in writing its inability to pay its debts, or makes a general assignment for the benefit of creditors; (3) Any third party obtains a levy or attachment under process of law against Subtenant's leasehold interest; and E. Abandonment Default. Subtenant abandons the Premises. 14. Sublandlord Remedies. Upon an Event of Default, Sublandlord shall have the following remedies, in addition to all other rights and remedies provided by law or otherwise provided in this Sublease, to which Sublandlord may resort cumulatively or in the alternative: A. Sublandlord may continue this Sublease in full force and effect, and this Sublease shall continue in full force and effect as long as Sublandlord does not terminate this Sublease, and Sublandlord shall have the right to collect Rent when due. 21 B. Sublandlord may enter the Premises or any part thereof and release them or any part thereof to third parties for Subtenant's account for any period, whether shorter or longer than the remaining Term. Subtenant shall be liable immediately to Sublandlord for all costs Sublandlord incurs in reletting the Premises or any part thereof, including, without limitation, broker's commissions, expenses of cleaning and redecorating the Premises required by the reletting and like costs. Subtenant shall pay to Sublandlord the Rent and other sums due under this Sublease on the date the Rent is due, less the rent and other sums received by Sublandlord from any releasing. No act by Sublandlord other than giving written notice to Subtenant shall terminate this Sublease. Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on Sublandlord's initiative to protect Sublandlord's interest under this Sublease shall not constitute a termination of Subtenant's right to possession. C. Sublandlord may terminate this Sublease by giving Subtenant written notice of termination, in which event this Sublease shall terminate on the date for termination set forth in such notice. Subtenant shall immediately vacate the Premises and deliver possession to Sublandlord, and Sublandlord may repossess the Premises and may, at Subtenant's sole cost, remove any of Subtenant's signs and any of its other property, without relinquishing its right to receive Rent or any other right against Subtenant. On termination, Sublandlord has the right to recover from Subtenant as damages: (1) The worth at the time of award of unpaid Rent and other sums due and payable which had been earned at the time of termination; plus (2) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable which after termination until the time of award exceeds the amount of such Rent loss that Subtenant proves could have been reasonably avoided; plus (3) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable for the balance of the Term after the time of award exceeds the amount of such Rent loss that Subtenant proves could be reasonably avoided; plus (4) Any other amount necessary to compensate Sublandlord for all the detriment proximately caused by Subtenant's failure to perform Subtenant's obligations under this Sublease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Sublandlord: (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus (5) At Sublandlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of California. The "worth at the time of award" of the amounts referred to in Sections 14C(1) and 14C(2) is computed by allowing interest at the maximum rate permitted by law on the unpaid rent and other sums due and payable from the termination date through the date of award. The 22 "worth at the time of award" of the amount referred to in Section 14C(3) is 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%). Subtenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other present or future law, in the event Subtenant is evicted or Landlord takes possession of the Premises by reason of any default of Subtenant hereunder. D. Sublandlord's Remedies Cumulative. All of Sublandlord's remedies under this Sublease shall be in addition to all other remedies Sublandlord may have at law or in equity. Waiver by Sublandlord of any breach of any obligation by Subtenant shall be effective only if it is in writing, and shall not be deemed a waiver of any other breach, or any subsequent breach of the same obligation. Sublandlord's acceptance of payment by Subtenant beyond any applicable cure period shall not constitute a waiver of any breach by Subtenant, and if the acceptance occurs after Sublandlord's notice to Subtenant and expiration of any applicable cure period, or termination of the Sublease or of Subtenant's right to possession, the acceptance shall not affect such notice or termination. Acceptance of payment by Sublandlord after commencement of a legal proceeding or final judgment shall not affect such proceeding or judgment. Sublandlord may advance such monies and take such other actions for Subtenant's account as reasonably may be required to cure or mitigate any default by Subtenant. Subtenant shall immediately reimburse Sublandlord for any such advance, and such sums shall bear interest at the default interest rate until paid. E. WAIVER OF TRIAL BY JURY. EACH PARTY WAIVES TRIAL BY JURY IN THE EVENT OF ANY LEGAL PROCEEDING BROUGHT BY THE OTHER IN CONNECTION WITH THIS SUBLEASE. EACH PARTY SHALL BRING ANY ACTION AGAINST THE OTHER IN CONNECTION WITH THIS SUBLEASE IN A FEDERAL OR STATE COURT LOCATED IN CALIFORNIA, CONSENTS TO THE JURISDICTION OF SUCH COURTS, AND WAIVES ANY RIGHT TO HAVE ANY PROCEEDING TRANSFERRED FROM SUCH COURTS ON THE GROUND OF IMPROPER VENUE OR INCONVENIENT FORUM. F. Litigation Costs. If either party commences litigation to enforce or interpret any provision of this Sublease, the prevailing party shall recover from the non-prevailing party its reasonable attorneys' fees and court costs. 15. Surrender. Upon the expiration or earlier termination of this Sublease for any reason, Subtenant shall surrender the Premises to Sublandlord in its condition existing as of the Commencement Date (including the Initial Tenant Improvements even if not completed as of the Commencement Date) but subject to the provisions of Section 5, normal wear and tear and damage by fire or other casualty or condemnation or repairs which are the responsibility of Landlord excepted, with all interior walls repaired and repainted if marked or damaged, all carpets shampooed and cleaned, all broken, marred or nonconforming acoustical ceiling tiles replaced, all windows washed, the plumbing and electrical systems and lighting in good order and repair, including replacement of any burned out or broken light bulb or ballasts, the HVAC equipment serviced and repaired by a reputable and licensed service firm acceptable to Landlord, and all floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Subtenant shall remove from the Premises all Subtenant's personal property and all of Subtenant's alterations 23 required to be removed pursuant to Sections 5D and 5E (but not the Initial Tenant Improvements), and restore the Premises to its condition prior to their installation. If Subtenant fails to remove any alterations and/or Subtenant's personal property, and such failure continues after the termination of this Sublease, Landlord or Sublandlord may retain or dispose of such property and all rights of Subtenant with respect to it shall cease, or Sublandlord may place all or any portion of such property in public storage for Subtenant's account. Subtenant shall be liable to Sublandlord for costs of removal of any such alterations and Subtenant's personal property and storage and transportation costs of same, and the cost of repairing and restoring the Premises, together with interest at the Interest Rate from the date of expenditure by Sublandlord. If the Premises are not so surrendered at the termination of this Sublease, Subtenant shall indemnify Sublandlord against all loss or liability, including attorneys' fees and costs, resulting from delay by Subtenant in so surrendering the Premises. 16. Holdover. Subtenant shall have no right to holdover possession of the Premises after the expiration or termination of this Sublease without Sublandlord's prior written consent which Sublandlord may withhold in its sole and absolute discretion. If, however, Subtenant retains possession of any part of the Premises after the Term, Subtenant shall become a month-to-month tenant for the entire Premises upon all of the terms of this Sublease as might be applicable to such month-to-month tenancy, except that Subtenant shall pay all of Base Rent at one hundred fifty percent (150%) of the rate in effect immediately prior to such holdover, plus Operating Costs Share Rent and Tax Share Rent, computed on a monthly basis for each full or partial month Subtenant remains in possession. Subtenant shall also pay Sublandlord all of Sublandlord's direct and consequential damages resulting from Subtenant's holdover. No acceptance of Rent or other payments by Sublandlord under these holdover provisions shall operate as a waiver of Sublandlord's right to regain possession or any other of Landlord's remedies. 17. Subordination To Ground Leases And Mortgages. A. Subordination. Landlord and Sublandlord shall have the right to cause this Sublease to be subordinate to any future ground lease or mortgage respecting Landlord's interest in the Project, and any amendments to such ground lease or mortgage, at the election of the ground lessor or mortgagee as the case may be. Subtenant shall execute and deliver, within thirty (30) days after receipt of written demand by Sublandlord or Landlord and in the form requested by Landlord or Sublandlord, provided that such form is reasonably acceptable to Subtenant, any additional documents evidencing the priority or subordination of this Sublease with respect to any such mortgage or deed of trust. B. Termination of Ground Lease or Foreclosure of Mortgage. If any ground lease is terminated or mortgage foreclosed or deed in lieu of foreclosure given and the ground lessor, mortgagee, or purchaser at a foreclosure sale shall thereby become the owner of the Project, the ground lessor or mortgagee or purchaser shall be liable as Landlord only during the time such ground lessor or mortgagee or purchaser is the owner of the Project. C. Notice and Right to Cure. The Project is subject to any ground lease and mortgage identified with name and address of ground lessor or mortgagee in EXHIBIT D to this Sublease (as the same may be amended from time to time by written notice to Subtenant). 24 Subtenant agrees to send by registered or certified mail to any ground lessor or mortgagee identified either in such Exhibit or in any later notice from Landlord to Subtenant a copy of any notice of default sent by Subtenant to Landlord or Sublandlord. If Landlord or Sublandlord fails to cure such default within the required time period under this Sublease, but ground lessor or mortgagee begins to cure within ten (10) days after such period and proceeds diligently to complete such cure, then ground lessor or mortgagee shall have such additional time as is necessary to complete such cure, including any time necessary to obtain possession if possession is necessary to cure, and Subtenant shall not begin to enforce its remedies so long as the cure is being diligently pursued. D. Definitions. As used in this Section 17, "mortgage" shall include "trust deed" and "deed of trust", and "mortgagee" shall include "trustee", "beneficiary" and the mortgagee of any ground lessee, and "ground lessor," "mortgagee," and "purchaser at a foreclosure sale" shall include, in each case, all of its successors and assigns, however remote. 18. Assignment And Sublease. A. In General. Except as permitted by Section 18F below, Subtenant shall not, without the prior consent of Landlord and Sublandlord in each case, (i) make or allow any assignment or transfer, by operation of law or otherwise, of any part of Subtenant's interest in this Sublease, (ii) grant or allow any lien or encumbrance, by operation of law or otherwise, upon any part of Subtenant's interest in this Sublease, (iii) sublet any part of the Premises, or (iv) permit anyone other than Subtenant and its employees to occupy any part of the Premises. Subtenant shall remain primarily liable for all of its obligations under this Sublease, notwithstanding any assignment or transfer. No consent granted by Landlord and Sublandlord shall be deemed to be a consent to any subsequent assignment or transfer, lien or encumbrance, sublease or occupancy. Subtenant shall pay all of Landlord's and Sublandlord's attorneys' fees and other expenses incurred in connection with any consent requested by Subtenant or in reviewing any proposed assignment or subletting. Any assignment or transfer, grant of lien or encumbrance, or sublease or occupancy without Landlord's or Sublandlord's prior written consent shall be void. B. Sublandlord's Consent. Sublandlord will not unreasonably withhold its consent to any proposed assignment or subletting. It shall be reasonable for Landlord or Sublandlord to withhold its consent to any assignment or sublease if (i) Subtenant is in default under this Sublease, (ii) on the part of Landlord, the proposed assignee or sublessee is a tenant in the Project or an affiliate of such a tenant or a party that Landlord has identified as a prospective tenant in the Project, (iii) the financial responsibility, nature of business, and character of the proposed assignee or subtenant are not all reasonably satisfactory to Landlord or Sublandlord, (iv) in the reasonable judgment of Landlord or Sublandlord the purpose for which the assignee or subtenant intends to use the Premises (or a portion thereof) is inconsistent with the character of the Project as a first class business park or would violate the terms of this Sublease or the Master Lease, or (v) the proposed assignee or subtenant is a government entity. The foregoing shall not exclude any other reasonable basis for Landlord or Sublandlord to withhold its consent. C. Procedure. Subtenant shall notify Landlord and Sublandlord of any proposed assignment or sub-sublease at least thirty (30) days prior to its proposed effective date. 25 The notice shall include the name and address of the proposed assignee or sub- subtenant, its corporate affiliates in the case of a corporation and its partners in a case of a partnership, and sufficient information to permit Landlord and Sublandlord to determine the financial responsibility and character of the proposed assignee or sub-subtenant. As a condition to any effective assignment of this Sublease, the assignee shall execute and deliver in form satisfactory to Sublandlord prior to the effective date of the assignment, an assumption of all of the obligations of Subtenant under this Sublease. As a condition to any effective sub-sublease, sub-subtenant shall execute and deliver in form satisfactory to Sublandlord prior to the effective date of the sublease, an agreement to comply with all of Subtenant's applicable obligations under this Sublease, and at Sublandlord's option, an agreement (except for the economic obligations which sub-subtenant will undertake directly to Subtenant) to attorn to Sublandlord under the terms of the sublease in the event this Sublease terminates before the sub-sublease expires. D. Excess Payments. If Subtenant shall assign this Sublease or sub- sublet any part of the Premises for consideration in excess of the pro-rata portion of Rent applicable to the space subject to the assignment or sub-sublet, then Subtenant shall pay to Sublandlord as Additional Rent fifty percent (50%) of any such excess immediately upon receipt; provided that Subtenant shall be first entitled to recover the reasonable costs actually incurred by Subtenant in connection with the sub-sublet for leasing commissions, interior improvements and attorneys' fees. E. Recapture Rights. (1) If at any time during the Term of this Sublease, Subtenant desires to sub-sublease all or a portion of the Premises consisting of one floor or more in the Building (the "Proposed Sub-Sublease Space") to an entity other than a Subtenant Affiliate as defined in Section 18F, Subtenant shall notify Sublandlord of its intention ("Subtenant's Notice"), including proposed terms and conditions for such sub-sublease if such Subtenant's Notice is given pursuant to Section 18E.3 of this Sublease. (2) If such proposed sub-sublease is for substantially the balance of the term of this Sublease, Sublandlord shall have seven (7) days after receipt of Subtenant's Notice to notify Subtenant in writing of Sublandlord's election to terminate this Sublease with respect to the Proposed Sub-Sublease Space. If, however, Sublandlord fails to notify Subtenant of Sublandlord's election to terminate this Sublease, Sublandlord shall be deemed to have waived its right to recapture the Proposed Sub-Sublease Space at such time and Subtenant shall have the right to lease the Proposed Sub-Sublease Space to the third party without further notice to Sublandlord. For purposes of this provision, for "substantially the balance of the term of this Sublease" shall mean that less than six (6) months remain of the term of the Sublease after expiration of the sub-sublease. If Sublandlord gives notice of its election to terminate this Sublease with respect to such Sub-Sublease Space, Subtenant shall have three (3) days to give notice revoking the Subtenant Notice. (3) If the Proposed Sub-sublease Space is not subject to "recapture" under 18.E.2, Sublandlord shall have seven (7) days after receipt of Subtenant's Notice to notify Subtenant in writing of Sublandlord's election to lease the Proposed Sub-Sublease Space on the terms stated in Subtenant's Notice. If Sublandlord notifies Subtenant within such seven-day 26 period of Sublandlord's desire to lease the Proposed Sub-Sublease Space, Subtenant and Sublandlord shall enter into a lease on the proposed terms an conditions stated in Subtenant's Notice. If, however, Sublandlord fails to notify Subtenant of Sublandlord's election to lease the Proposed Sub-Sublease Space within such seven-day period or, if Subtenant and Sublandlord, through no fault of Subtenant, fail to execute a lease within thirty (30) days after the date of Sublandlord's notice to Subtenant, Sublandlord shall be deemed to have waived its right to lease the Proposed Sub-Sublease Space at such time and Subtenant shall have the right to lease the Proposed Sub-Sublease Space to the third party on substantially the terms stated in Subtenant's Notice without further notice to Sublandlord. F. Assignments to Affiliates. If no default on the part of Subtenant has occurred and is continuing, Subtenant may assign this Sublease or sub-sublet any portion of the Premises to a parent or subsidiary of Subtenant, or to an entity into which Subtenant is merged or consolidated or to an entity to which substantially all of Subtenant's assets are transferred (collectively, "Subtenant Affiliate"), without first obtaining Sublandlord's written consent, if Subtenant notifies Sublandlord at least ten (10) business days prior to the proposed transaction, providing information satisfactory to Sublandlord in order to determine the net worth both of the successor entity and of Subtenant immediately prior to such assignment, and showing the creditworthiness of the successor to be, in the reasonable judgment of Sublandlord's treasury department, adequate to support its obligations under this Sublease. 19. Conveyance By Sublandlord Or Landlord. If Landlord or Sublandlord shall at any time transfer its interest in the Project or this Sublease, Landlord or Sublandlord, as the case may be, shall be released of any obligations occurring after such transfer, except the obligation to return to Subtenant any security deposit not delivered to its transferee, and Subtenant shall look solely to Landlord's or Sublandlord's successors, as the case may be, for performance of such obligations. This Sublease shall not be affected by any such transfer. 20. Estoppel Certificate. Each party shall, within ten (10) days of receiving a request from the other party, execute, acknowledge in recordable form, and deliver to the other party or its designee a certificate stating, subject to a specific statement of any applicable exceptions, that the Sublease as amended to date is in full force and effect, that the Subtenant is paying Rent and other charges on a current basis, and that to the best of the knowledge of the certifying party, the other party has committed no uncured defaults and has no offsets or claims. The certifying party may also be required to state the date of commencement of payment of Rent, the Commencement Date, the Termination Date, the Base Rent, the current Operating Costs Share Rent and Tax Share Rent estimates, the status of any improvements required to be completed by Sublandlord, and the amount of any security deposit. Failure to deliver such statement within the time required shall be conclusive evidence against the non- certifying party that this Sublease, with any amendments identified by the requesting party, is in full force and effect, that there are no uncured defaults by the requesting party, that not more than one month's Rent has been paid in advance, and that the non-certifying party has no claims or offsets against the requesting party. 21. Financial Statements. Within ten (10) days after Sublandlord's written request therefor, Subtenant shall deliver to Sublandlord copies of Subtenant's most recent financial statements. Sublandlord shall keep confidential any such information which is not 27 public. Unless Subtenant is then in default under this Sublease, Sublandlord shall not have the right to request such data more than two times per year. 22. Lease Deposit. A. Advance Rent Deposit. Subtenant shall deposit with Sublandlord on the date Subtenant executes and delivers this Sublease to Sublandlord the cash sum of Eighty-Five Thousand One Hundred Thirty-Five and 50/100ths Dollars ($85,135.50) ("Advance Rent Deposit"). The Advance Rent Deposit shall be applied by Sublandlord against the first month's Base Rent payable hereunder. B. Security Deposit. Upon execution of this Sublease, Subtenant shall deposit with Sublandlord the cash sum of two times the last month's rent (Two Hundred Eighty-Three Thousand Seven Hundred Seventy-Three and 10/100ths Dollars ($283,773.10) (the "Security Deposit"). The Security Deposit shall be security for Subtenant's faithful performance of Subtenant's obligations hereunder. If Subtenant fails to pay Rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Sublease beyond any applicable cure periods, Sublandlord may use, apply or retain all or any portion of the Security Deposit for the payment of any Rent or other charge in default beyond any applicable cure periods or for the payment of any other sum to which Sublandlord may become obligated by reason of Subtenant's default beyond any applicable cure periods, or to compensate Sublandlord for any loss or damage which Sublandlord may suffer thereby. If Sublandlord so uses or applies all or any portion of the Security Deposit, Subtenant shall within ten (10) days after written demand therefor deposit cash with Sublandlord in an amount sufficient to restore the Security Deposit to the full amount hereinabove stated and Subtenant's failure to do so shall be a breach of this Sublease. Sublandlord shall not be required to keep the Security Deposit separate from its general accounts. If Subtenant performs all of Subtenant's obligations hereunder, said deposit or so much thereof as had not theretofore been applied by Sublandlord, shall be returned without payment of interest for its use, to Subtenant (or, at Sublandlord's option, to the last assignee, if any, of Subtenant's interest hereunder) within ten (10) days after the expiration of the term hereof or ten (10) days after the date Subtenant has vacated the Premises, whichever is later. 23. Force Majeure. Neither Sublandlord or Subtenant shall be in default under this Sublease to the extent that party is unable to perform any of its obligations on account of any strike or labor problem, equipment, material, supplies or energy shortages (i.e., such items cannot be obtained at normal costs within a reasonable time because of limited availability), governmental pre-emption or prescription, national emergency, or any other cause of any kind beyond the reasonable control of the party required to act (provided that the foregoing shall not apply to any monetary obligation) ("Force Majeure"). 24. Notices. All notices, consents, approvals and similar communications to be given by one party to the other under this Sublease, shall be given in writing, mailed or personally delivered as follows: 28 A. Sublandlord. To Sublandlord as follows: Applied Materials, Inc. Global Real Estate and Facilities 3050 Bowers Avenue, M/S 2753 Santa Clara, California 95054 Attention: Real Estate Manager or to such other person at such other address as Sublandlord may designate by notice to Subtenant. B. Subtenant. To Subtenant as follows: After Commencement Date Before Commencement Date ----------------------- ------------------------ Vitria Technology, Inc. Vitria Technology, Inc. 945 Stewart Drive, Suite B 500 Ellis Street Sunnyvale, CA 94086 Mountain View, CA 94043 Attn: Chief Financial Officer Attn: Chief Financial Officer or to such other person at such other address as Subtenant may designate by notice to Sublandlord. Mailed notices shall be sent by United States certified or registered mail, or by a reputable national overnight courier service, postage prepaid. Mailed notices shall be deemed to have been given on the earlier of actual delivery or three (3) business days after posting in the United States mail in the case of registered or certified mail, and one business day in the case of overnight courier. Sublandlord shall provide copies of any notices to or from Landlord alleging defaults under the Master Lease, promptly after transmission or receipt, as the case may be. 25. Quiet Possession. So long as Subtenant shall perform all of its obligations under this Sublease, Subtenant shall enjoy peaceful and quiet possession of the Premises, subject to all of the terms of this Sublease. 26. Real Estate Broker. Subtenant and Sublandlord each represent that it has not dealt with any real estate broker with respect to this Sublease except for the brokers listed in the Schedule, and no other broker is in any way entitled to any broker's fee or other payment in connection with this Sublease. Subtenant and Sublandlord shall each indemnify and defend the other against any claims by any other broker or third party for any payment of any kind in connection with this Sublease whose claim is based upon the acts or agreements of the indemnifying party. Sublandlord shall pay the brokers identified in the Schedule a commission pursuant to a separate agreement to be entered into between Sublandlord and such brokers. 29 27. Miscellaneous. A. Successors and Assigns. Subject to the limits on Subtenant's assignment contained in Section 18, the provisions of this Sublease shall be binding upon and inure to the benefit of all successors and assigns of Sublandlord and Subtenant. B. Date Payments Are Due. Except for payments to be made by Subtenant under this Sublease which are due upon demand, Subtenant shall pay to Sublandlord any amount for which Sublandlord renders a statement of account within thirty (30) days of Subtenant's receipt of Sublandlord's statement. C. Meaning of "Sublandlord," "Landlord", "Re-Entry," "including" and "Affiliate". The term "Sublandlord" means only the owner of the Sublandlord's interest in this Sublease from time to time. The term "Landlord" means only the owner of the Project and the lessor's interest in the Master Lease from time to time. The words "re-entry" and "re-enter" are not restricted to their technical legal meaning. The words "including" and similar words shall mean "without limitation." The word "affiliate" shall mean a person or entity controlling, controlled by or under common control with the applicable entity. "Control" shall mean the power directly or indirectly, by contract or otherwise, to direct the management and policies of the applicable entity. D. Time of the Essence. Time is of the essence of each provision of this Sublease. E. No Option. This document shall not be effective for any purpose until it has been executed and delivered by both parties. F. Severability. The unenforceability of any provision of this Sublease shall not affect any other provision. G. Governing Law. This Sublease shall be governed in all respects by the laws of the state in which the Project is located, without regard to the principles of conflicts of laws. H. No Oral Modification. No modification of this Sublease shall be effective unless it is a written modification signed by both parties. I. Sublandlord's Right to Cure. If Sublandlord breaches any of its obligations under this Sublease, Subtenant shall notify Sublandlord in writing and shall take no action respecting such breach so long as Sublandlord promptly begins to cure the breach and diligently pursues such cure to its completion. Sublandlord may cure any default by Subtenant; any expenses incurred shall become Additional Rent due from Subtenant on demand by Sublandlord. J. Captions. The captions used in this Sublease shall have no effect on the construction of this Sublease. 30 K. Authority. Sublandlord and Subtenant each represents to the other that it has full power and authority to execute and perform this Sublease. L. Sublandlord's Enforcement of Remedies. Sublandlord may enforce any of its remedies under this Sublease either in its own name or through an agent. M. Entire Agreement. This Sublease, together with all Exhibits, constitutes the entire agreement between the parties. No representations or agreements of any kind have been made by either party which are not contained in this Sublease. N. Sublandlord's Title. Landlord's title and Sublandlord's interest under the Master Lease shall always be paramount to the interest of Subtenant, and nothing in this Sublease shall empower Subtenant to do anything which might in any way impair Landlord's title or Sublandlord's interest under the Master Lease. O. Light and Air Rights. Neither Landlord nor Sublandlord has granted by this Sublease any rights to light and air in connection with Project. P. Singular and Plural. Wherever appropriate in this Sublease, a singular term shall be construed to mean the plural where necessary, and a plural term the singular. For example, if at any time two parties shall constitute Sublandlord or Subtenant, then the relevant term shall refer to both parties together. Q. Exclusivity. Sublandlord does not grant to Subtenant in this Sublease any exclusive right except the right to occupy its Premises. R. No Construction Against Drafting Party. The rule of construction that ambiguities are resolved against the drafting party shall not apply to this Sublease. S. Survival. All obligations of Sublandlord and Subtenant under this Sublease shall survive the termination of this Sublease. T. Rent Not Based on Income. No Rent or other payment in respect of the Premises shall be based in any way upon net income or profits from the Premises. Subtenant may not enter into or permit any sublease or license or other agreement in connection with the Premises which provides for a rental or other payment based on net income or profit. U. Building Manager and Service Providers. Sublandlord may perform any of its obligations under this Sublease through its employees or third parties hired by the Sublandlord. V. Late Charge and Interest on Late Payments. Without limiting the provisions of Section 13A, if Subtenant fails to pay any installment of Rent or other charge to be paid by Subtenant pursuant to this Sublease within five (5) business days after the same became due and payable (collectively referred to herein as a "Late Payment"), then Subtenant shall pay a late charge equal to the greater of five percent (5%) of the amount of such Late Payment or $250 ("Late Charge"). In addition, interest shall be paid by Subtenant to Sublandlord on any Late Payments of Rent from the date due until paid at the rate provided in Section 2D(2) ("Late 31 Interest"). Such Late Charge and Late Interest shall constitute Additional Rent due and payable by Subtenant to Sublandlord upon the date of payment of the Late Payment. Notwithstanding the foregoing, Subtenant shall not be liable for any Late Charge or Late Interest for the first two (2) Late Payments during any calendar year so long as Sublandlord receives such Late Payment within five (5) days of Subtenant's receipt of Sublandlord's written notice for the same. If Sublandlord does not receive Subtenant's Late Payment within such five (5) day period, then Subtenant shall also be liable for the Late Charge and Late Interest as described above. W. Consents and Approvals. Any consent or approval provided for in this Sublease by Sublandlord or Subtenant shall not be unreasonably withheld, conditioned, or delayed. 28. Unrelated Business Income. If Landlord is advised by its counsel at any time that any part of the payments by Subtenant to Landlord under this Sublease may be characterized as unrelated business income under the United States Internal Revenue Code and its regulations, then Subtenant shall enter into any amendment proposed by Landlord to avoid such income, so long as the amendment does not require Subtenant to make more payments or accept fewer services from Landlord than this Sublease provides. 29. Hazardous Substances. A. Subtenant's Environmental Indemnity. Subtenant shall not cause or permit any Hazardous Substances to be brought upon, stored, or used in, on or under the Project other than such quantities of Hazardous Substances as are customary and reasonably necessary for the conduct of the Permitted Uses listed in the Schedule to this Sublease, and which are listed in the Hazardous Materials Inventory Sheets (collectively, the "HMIS") to be attached hereto as EXHIBIT F after approval by Landlord and Sublandlord, unless Landlord and Sublandlord have consented in writing to the storage or use of such Hazardous Substances, which consent shall not be unreasonably withheld by Sublandlord. Subtenant shall also provide Landlord and Sublandlord with copies of all documents or information provided to or documents, information or permits received from applicable governmental agencies to the extent they relate to the use, transportation, disposal or storage of Hazardous Substances at the Premises, including any HMIS's, Material Safety Data Sheets, discharge permits, Hazardous Materials Management Plans and transportation manifests. Subtenant shall not cause or permit any Hazardous Substances to be produced, discharged or disposed of in, on or under the Project by Subtenant, its agents, employees, contractors, or invitees. Any handling, transportation, storage, treatment, disposal or use of any Hazardous Substances in or about the Project by Subtenant, its agents, employees, contractors or invitees shall strictly comply with all applicable Governmental Requirements. Subtenant shall indemnify, defend and hold Landlord and Sublandlord harmless from and against any liabilities, claims, damages, penalties, fines, attorneys' fees and court costs, remediation costs, investigation costs and any other expenses which result from or arise out of the use, storage, treatment, transportation, release, or disposal of any Hazardous Substances on or about the Project by Subtenant, its agents, employees, contractors or invitees. Sublandlord shall notify Subtenant in writing promptly upon receipt of notice of any claim to which the indemnification set forth herein may apply. Sublandlord shall reasonably cooperate with Subtenant in the course of Subtenant's defense and indemnification as provided hereunder. 32 Subtenant shall have the right to settle any claim to which this paragraph may apply, subject to Sublandlord's consent, which shall not be unreasonably withheld. B. "Hazardous Substances" means any hazardous or toxic substances, materials or waste which are or become regulated by any local government authority, the state in which the Project is located or the United States government, including those substances described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., any other applicable federal, state or local law, and the regulations adopted under these laws. C. Pre-existing Contamination. Subtenant hereby acknowledges that Sublandlord has informed Subtenant that certain chlorinated volatile organic compounds are present in the groundwater under the Land as of the date of this Sublease. Subtenant hereby covenants for the benefit of Landlord and Sublandlord that it will not use or store any chlorinated volatile organic compounds on the Premises or within the Project. Subtenant agrees and acknowledges that: (i) neither Sublandlord nor any of Sublandlord's representatives have made any representations or warranties about the environmental condition of the Land or the accuracy or completeness of any environmental reports made available to Subtenant regarding the Land; (ii) it has had ample time and access to the Land, to review the environmental condition of the Land and to conduct any tests which Subtenant may deem desirable in connection with this Sublease; (iii) it is sophisticated, knowledgeable and experienced in the analysis of environmental matters and that Subtenant has entered into this Sublease with the intention of making and relying upon its own (or its experts') investigation of the environmental condition of the Land; and (iv) Subtenant is not relying upon any representations or warranties purportedly made by Sublandlord or anyone acting or claiming to act on Landlord's behalf concerning the Land. D. Sublandlord's Environmental Indemnity. Subject to the terms, conditions and limitations set forth below and except to the extent such contamination was caused, exacerbated, or contributed to by Subtenant, or Subtenant's employees, agents, contractors or invitees, Sublandlord shall indemnify Subtenant from and against (a) any liability, claims, damages, penalties, fines, attorneys' fees and costs, remediation costs, investigation costs and other expenses arising from any use, storage, treatment, transportation, release or disposal of Hazardous Substances on or about the Project by Sublandlord, its agents, contractors, employees or invitees, and (b) all costs ("Response Costs") to respond to any order of any applicable state or federal agencies relating to the remediation, removal, disposal or monitoring ("Compliance Order" relating to any contamination) (i) of the soil or groundwater of the Project existing as of the Effective Date (the "Pre-existing Contamination"), or (ii) any hydraulic oil released to the Land during the Term as a direct result of the installation, maintenance or operation of the elevator in the Building. For purposes of the preceding sentence, the term "Sublandlord's contractors" excludes Landlord under the Master Lease. Sublandlord's liability under the foregoing indemnity (i) is personal to Subtenant and Subtenant Affiliates (after assignment to such Subtenant Affiliate) and may not be assigned to or relied upon by any other third party without Sublandlord's prior written consent, which may be withheld in Sublandlord's sole and absolute discretion, (ii) is limited to Subtenant's actual, out of pocket costs incurred in 33 complying with any Compliance Order, and to reasonable consultants fees and costs and reasonable attorneys' fees and costs incurred in defending against a proposed Compliance Order, so long as Sublandlord may select the attorney to defend Subtenant and have sole authority to make all settlement and other decisions in regard to the proceedings, including the decision whether to challenge the Compliance Order (and any related order or action) by appeal or court challenge, and (iii) specifically excludes any claims, costs, damages or losses for personal injury, property damage, punitive damages, damage to business, lost profits or consequential damages incurred by Subtenant or any third party. Sublandlord shall have no liability under the foregoing indemnity with respect to the Pre-existing Contamination if Subtenant causes or permits the use, storage, handling, or disposal of chlorinated volatile organic compounds on, in or under the Project. 30. Exculpation. Landlord shall have no personal liability under this Sublease. Sublandlord's liability under this Sublease; limited to the greater of (1) its interest in the Master Lease and subleases pursuant thereto, or (2) Five Million Dollars ($5,000,000.00). In no event shall any officer, director, employee, agent, shareholder, partner, member or beneficiary of Landlord or Sublandlord be personally liable for any of Landlord's or Sublandlord's obligations hereunder. The foregoing limitation shall not limit Sublandlord's liability pursuant to the indemnity obligation under Sections 9B and 29D (collectively the "Indemnity Obligations"). 31. Sublandlord Obligations. Sublandlord shall use commercially reasonably efforts to cause Landlord under the Master Lease to perform all of the obligations of Landlord thereunder to the extent said obligations apply to the Premises and Subtenant's use of the Project Common Areas. Sublandlord shall not, without Subtenant's prior written consent, which shall not be unreasonably withheld, amend, modify, revise or terminate the Master Lease in any way that would either materially negatively affect Subtenant's rights or position under the Sublease or materially increase Subtenant's duties or obligations under the Sublease. In addition, Sublandlord shall not waive any provisions under the Master Lease or make any elections, exercise any right or remedy or give any consent or approval under the Master Lease which would either materially and negatively affect Subtenant's rights or position under this Sublease or materially increase Subtenant's duties or obligations under this Sublease without, in each instance, Subtenant's prior written consent, which shall not be unreasonably withheld. 32. Sublandlord's Representations And Warranties. Sublandlord represents and warrants with respect to the Premises that: (a) the Master Lease is in full force and effect, and there exists under the Master Lease no default or event of default by either Landlord or Sublandlord, nor has there occurred any event which, with the giving of notice or passage of time or both, could constitute such a default or event of default; (b) the copy of the Master Lease attached hereto as EXHIBIT H is a true and complete copy of the Master Lease, and the Master Lease has not been amended except as set forth therein; (c) Sublandlord has not received any notice of pending or threatened actions, suits or proceedings before any court or administrative agency against Sublandlord or against Landlord or third parties which could, in the aggregate, adversely affect the Premises or any part thereof; and (d) Sublandlord has not received any notice of pending condemnation or similar proceeding affecting the Project or any portion thereof, and Sublandlord has no knowledge that any such action is contemplated. 34 33. Subtenant Cure Right. In the event that Sublandlord fails to perform or observe any of Sublandlord's obligations under the Master Lease or fails to perform Sublandlord's stated obligations under this Sublease, then Subtenant may give Sublandlord notice specifying in what manner Sublandlord has defaulted, and if such default shall not be cured by Sublandlord within thirty (30) days thereafter (except that if such default cannot be cured within such thirty (30) day period, this period shall be extended for an additional reasonable time, provided that Sublandlord commences to cure such default within such thirty (30) day period and proceeds diligently thereafter to effect such cure as quickly as practicable), then Subtenant shall be entitled to cure such default and Subtenant's reasonable expenses in so doing shall be due upon demand. Subtenant shall not be required, however, to wait the entire cure period described herein if earlier action is required to comply with the Master Lease or with any governmental regulations. 34. Landlord Consent. This Sublease and Sublandlord's and Subtenant's obligations hereunder are conditioned upon the written consent of Landlord. Sublandlord shall use diligent efforts to obtain the consent from Landlord as soon as practicable. If Sublandlord fails to obtain the consent within thirty (30) days after execution of this Sublease by Subtenant, then either party may terminate this Sublease by giving the other party written notice thereof at any time prior to Subtenant's receipt of the consent, and Sublandlord shall promptly return the Lease Deposit to Subtenant. In Witness Whereof, the parties hereto have executed this Sublease. SUBTENANT: SUBLANDLORD: VITRIA TECHNOLOGY, INC., APPLIED MATERIALS, INC., A CALIFORNIA CORPORATION A DELAWARE CORPORATION By: /s/ Paul R. Auvil By: /s/ Thomas M. _________ -------------------------- ---------------------------- Print Name: Paul R. Auvil Print Name: Thomas M. ________ ------------------ -------------------- Print Title: Chief Financial Officer Print Title: ------------------------ By: /s/ Jo Mei Chang By: ----------------- --------------------------------- Print Name: Jo Mei Chang Print Name: ------------------------- ------------------------- Print Title: President CEO Print Title: ------------------------ 35 Exhibit A DESCRIPTION OF PROJECT AND PREMISES/BUILDINGS (attach diagram of Project and approximate footprint of Buildings) Exhibit B RULES AND REGULATIONS I. Tenant shall not place anything, or allow anything to be placed near the glass of any window, door, partition or wall which may, in Landlord's judgment, appear unsightly from outside of the Project. II. The Project directory, if any, shall be used by Landlord to display names and locations of tenants in the Project. No tenant shall use or make any changes to such directories without Landlord's prior written consent. III. The sidewalks, halls, passages, exits, entrances, elevator and stairways shall not be obstructed by Tenant or used by Tenant for any purposes other than for ingress to and egress from the Premises, unless Tenant is the sole occupant of the Building. Tenant shall lend its full cooperation to keep such areas free from all obstruction and in a clean and sightly condition and shall move all supplies, furniture and equipment as soon as received directly to the Premises and move all such items and waste being taken from the Premises (other than waste customarily removed by employees of the Building) directly to the shipping platform at or about the time arranged for removal therefrom. Neither Tenant nor any employee or invitee of Tenant shall go upon the roof of the Project. IV. The toilet rooms, urinals, wash bowls and other apparatuses shall not be used for any purposes other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein, and to the extent caused by Tenant or its employees or invitees, the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by Tenant. V. Tenant shall not install or operate any refrigerating, heating or air conditioning apparatus, or carry on any mechanical business without the prior written consent of Landlord; use the Premises for housing, lodging or sleeping purposes. Tenant shall not occupy or use the Premises or permit the Premises to be occupied or used for any purpose, act or thing which is in violation of any Governmental Requirement or which may be dangerous to persons or property. VI. Tenant shall not use any method of heating or air conditioning other than that supplied or approved by Landlord. VII. Without the prior written consent of Landlord, Tenant shall not use the name of the Project or any exterior picture of the Project in connection with, or in promoting or advertising the business of, Tenant, except Tenant may use the address of the Project as the address of its business. VIII. Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage, which may arise from a cause other than Landlord's negligence, which includes keeping doors locked and other means of entry to the Premises closed and secured. IX. No bicycle (except in those areas which may be designated for bicycles by Landlord) or other vehicle and no animals or pets shall be allowed in the Premises, halls, freight docks, or any 1 other parts of the Building except that blind persons may be accompanied by "seeing eye" dogs. Unless Tenant is the sole occupant of the Building, Tenant shall not make or permit any noise, vibration or odor to emanate from the Premises, or do anything therein tending to create, or maintain, a nuisance, or do any act tending to injure the reputation of the Building. X. Tenant shall not do or permit the manufacture or sale of any fermented, intoxicating or alcoholic beverages without obtaining written consent of Landlord. XI. Tenant shall not disturb the quiet enjoyment of any other tenant, if any, in the Building and/or Project. XII. No equipment, mechanical ventilators, awnings, special shades or other forms of window covering shall be permitted outside the windows of the Premises without the prior written consent of Landlord, and then only at the expense and risk of Tenant, and they shall be of such shape, color, material, quality, design and make as may be approved by Landlord. XIII. Tenant shall not during the term of this Sublease canvas or solicit other tenants of the Building for any purpose. XIV. Tenant shall not install or operate any phonograph, musical or sound- producing instrument or device, radio receiver or transmitter, TV receiver or transmitter, or similar device, without in each instance the prior written approval of Landlord. The use thereof, if permitted, shall be subject to control by Landlord to the end that others shall not be disturbed. XV. Tenant shall promptly remove all rubbish and waste from the Premises. XVI. Tenant shall not exhibit, sell or offer for sale, rent or exchange in the Premises or at the Project any article, thing or service, except those ordinarily embraced within the Permitted Uses of the Premises specified in the Schedule of this Sublease, without the prior written consent of Landlord. XVII. Tenant shall not overload any floors in the Premises or any public corridors or elevator in the Building. XVIII. Whenever Landlord's consent, approval or satisfaction is required under these Rules, then unless otherwise stated, any such consent, approval or satisfaction must be obtained in advance, such consent or approval may be granted or withheld in Landlord's reasonable discretion, and Landlord's satisfaction shall be determined in its reasonable judgment. 2 Exhibit C WORK LETTER AGREEMENT This Exhibit C Work Letter Agreement ("Work Letter") is attached to and made a part of that certain Sublease (the "Sublease") between Applied Materials, Inc. a Delaware corporation ("Sublandlord) and Vitria Technology, Inc., a California corporation ("Subtenant"). Terms used in this Work Letter that are defined in the Sublease shall have the same meaning as provided in the Sublease. The purpose of this Work Letter is to set forth the agreement between Sublandlord and Subtenant with respect to the construction and installation of the Tenant Improvements to be installed on the Premises. 1. Improvement. Sublandlord shall improve the Premises in accordance with plans and specifications approved by Landlord, Sublandlord, and Subtenant (such improvements are referred to herein as the "Tenant Improvements") and in accordance with this Work Letter and subject to the requirements of the Lease between Landlord and Sublandlord and its Exhibit C Tenant Improvement Agreement ("Master Lease"). 2. Tenant Improvements. For purposes of this Work Letter and the Sublease, Tenant Improvements shall not include the Building Shell and Sublandlord Upgrades as defined in the Sublease. The Tenant Improvements shall include, but not be limited to, the following: a. sprinkler drops and heads below drop ceiling; b. roof mounted HVAC, including main trunk lines, secondary distribution lines and controls; c. ceilings; d. lighting; e. building insulation; f. interior walls and partitions; g. plumbing h. painting; i. floor covering; j. interior doors; k. all venting, including exhaust lines and hoods; l. electrical secondary system from transformer (including underground pull section and conductors), panels, main switchboard, switches, and distributions; m. gas distribution; n. telephone switch room, panel, distribution system; o. electrical rooms, phone, rooms, and mechanical rooms; p. Building common area improvements (including lobbies, corridors, bathrooms, janitorial closet, base HVAC system and secondary concrete and steel exit stairs;) q. emergency generators; r. window coverings; s. interior and exterior signage; and t. special data and communications systems. 3. Schematic Plan. Sublandlord and Subtenant have each approved the schematic space plans for the Premises dated April 2, 1999 (the "Schematic Plan") prepared by Liz Gibbons of CAS Architects ("Sublandlord's Space Planner"). 4. Design Development Drawings. On or before April 9, 1999, Subtenant shall provide Sublandlord's Space Planner or Architect with all information reasonably required in order to prepare design development drawings and specifications (the "Design Development Drawings") showing the specific Tenant Improvements which Subtenant desires to have Sublandlord construct in the Premises in order to complete. Subtenant shall contract directly for design of interior finishes and details ("Upgrade Finish Designs"). The Design Development Drawings shall be based upon the Schematic Plan. The information which Subtenant is to convey to Sublandlord's Space Planner within the five (5) business day period shall include all information regarding Subtenant's proposed use of the Premises and the character of the Tenant Improvements necessary to develop the Design Development Drawings, including such general information as number and general size and types of offices, computer rooms, conference rooms, storage areas office equipment rooms, lunch or break rooms, laboratories, lobby size and layout, and specific information, including upgrades from Building Standards (defined in Paragraph 8), and shall, without limitation, including the following: a. type of all partitions; b. type of all doors, including hardware; c. type of glass partitions, windows and doors, including framing; d. requirements and type of Subtenant's telephone equipment, including Subtenant's telephone company approval and, if required, all governmental approvals therefor, e. requirements and type of electrical outlets (including, without limitation, floor monuments), switches, telephone outlets and lighting; 2 (f) requirements and type of special electrical outlets for Subtenant's equipment with special electrical requirements, including manufacturer's specifications for use and operation; (g) weight per square foot and description of any equipment exceeding fifty (50) pounds per square foot; (h) all special air conditioning or ventilation requirements; (i) floor covering types and colors; (j) wall covering and base types and colors; (k) paint types and colors; (l) requirement and type of plumbing and kitchen equipment; (m) all millwork and built-in equipment with size, hook-up requirements and finishes approved by Subtenant; (n) all bracing and support of special walls and dimensions; (o) height and type of ceiling, if different from Building Standard; (p) special purpose rooms including, without limitation, computer rooms, kitchens, and laboratories, and notation if services of special technical consultants will be required; (q) any special fire sprinkler equipment and its location; (r) Subtenant's security requirements; (s) special cabling, data, and communication equipment requirements; and (t) such other detail as Sublandlord's Space Planner shall reasonably request. All Design Development Drawings shall be subject to Sublandlord's written approval which approval shall not be unreasonably withheld so long as such Design Development Drawings are consistent with and represent a logical evolution of the Schematic Plan. If Sublandlord disapproves Subtenant's Design Development Drawings, Sublandlord shall promptly inform Subtenant of such disapproval and the grounds therefor. Subtenant shall have three (3) business days thereafter to deliver to Sublandlord's Space Planner any information necessary to revise the Design Development Drawings. Subtenant shall have three (3) business days after receipt to notify Sublandlord of its approval or disapproval of the Design Development Drawings. If Subtenant fails to disapprove the proposed Design Development Drawings within such three (3) business day period, Subtenant shall be deemed to have approved such proposed Design Development Drawings. If Subtenant disapproves the proposed Design Development Drawings, it shall concurrently deliver to Sublandlord its written proposal for required changes and the parties shall negotiate in good faith to reach agreement on the Design Development Drawings. 3 5. Work Cost Estimate. Following approval of the Design Development Drawings, Sublandlord shall submit to Subtenant a written estimate of the costs of the Tenant Improvements work (the "Work Cost Estimate"). Within two (2) business days after receipt of such estimate, Subtenant shall either approve the Work Cost Estimate, or disapprove specific items and submit to Sublandlord's Space Planner information necessary to prepare revisions of the Design Development Drawings to reflect the deletion of and/or substitution of such disapproved items. Any such deletions and/or substitutions shall be subject to Sublandlord's approval as hereinabove required. Following approval of the revised Design Development Drawings, Sublandlord shall submit to Subtenant a revised Work Cost Estimate. Failure of Subtenant to disapprove any items on a Work Cost Estimate within two (2) business days after receipt shall be deemed approval of such Work Cost Estimate by Subtenant. Subtenant acknowledges that the Work Cost Estimate is an estimate of the Tenant Improvement Costs, and that the contingency amount specified therein may not be sufficient to provide for all changes in the Tenant improvements and/or other unforeseen costs and expenses arising after Subtenant's approval thereof. Subtenant acknowledges that any request by Subtenant for above-standard improvements, as well as all change orders, will, more likely than not, result in the Tenant Improvements Costs exceeding the Improvements Allowance. 6. Construction Drawings. Following approval of the Schematic Plan and Work Cost Estimate, CAS Architects ("Landlord's Architect")shall prepare detailed drawings sufficient for construction of the Tenant Improvements ("Construction Drawings"). Subtenant shall contract directly for design of the plumbing, electrical, and HVAC systems on a "design/build" basis and Finish Upgrade Designs, and the Construction Drawings may include only specifications for these systems. Sublandlord shall also deliver to Subtenant with the Construction Drawings an updated Work Cost Estimate ("Updated Work Cost Estimate") based upon the Construction Drawings. Subtenant shall have three (3) business days after receipt of the Construction Drawings and Updated Work Cost Estimate to approve or disapprove the Construction Drawings and Updated Work Cost Estimate. If Subtenant disapproves the Construction Drawings or updated Work Cost Estimate, Subtenant and Sublandlord shall have two (2) business days to resolve the disapproval. 7. Time Schedule. Preparation and approval of the Design Development Drawings and Construction Documents shall proceed as indicated below and each action completed by Subtenant on or before the date herein specified. Action Due Date - ------ -------- A: By Subtenant: a) Submission of information to Five (5) business days after approval of Sublandlord's Space Planner. Schematic Plan. b) Submission, if necessary, of Three (3) business days after receipt of information to redesign Design Sublandlord's notice of disapproval. Development Drawings. c) Delivery of written notice Three (3) business days after receipt. approving or 4 disapproving Design Development Drawings. (d) Delivery of written notice Two (2) business days after receipt. approving or disapproving Work Cost Estimate. (e) Delivery of written notice Three (3) business days after receipt. approving or disapproving Construction Drawings. (f) Resolution of any disapproval of Two (2) business days after Subtenant Construction Drawings. Disapproval. (g) Delivery of design criteria for On or before April 6, 1999. plumbing, Electrical, and HVAC systems. (h) Delivery of Final Plans and On or before April 19, 1999. Specifications for plumbing, electrical, and HVAC systems and Final Upgrade Finish Designs. B: By: Sublandlord: (a) Delivery of written notice Within five (5) days after delivery of approving or disapproving Final Plans Final Plans for plumbing, electrical, and Specifications and Final Upgrade and HVAC system and Final Upgrade Finish Designs plans for plumbing, Finish Designs. electrical, and HVAC systems. 8. Construction. Following approval of the Construction Drawings, Sublandlord shall enter into a contract with South Bay Construction Company ("Contractor") for construction of the Tenant Improvements ("Construction Contract"). The Construction Contract be a guaranteed maximum price contract in the amount of the approved Updated Work Cost Estimate, with allowances for the design/build systems. The Construction Contract shall require that Contractor provide a minimum warranty of one year with respect to the Tenant Improvements and require that the Contractor provide a replacement warranty with the same coverage for any existing warranty covering the Building Shell or other improvements invalidated by work performed by the Contractor. Except as specified in the Construction Drawings, the Tenant Improvements will be constructed using Building-standard materials and procedures ("Building Standards") as more particularly described in Schedule "1" attached hereto and incorporated herein by reference. All Tenant Improvements shall be completed in a good and workmanlike manner and in compliance with the Master Lease. All materials and equipment incorporated into the Tenant Improvements (i) will be new and free of defects, (ii) will conform to all applicable codes, (iii) will conform to the approved final Construction Drawings approved by Sublandlord and Subtenant, including all changes or modifications thereto approved by Sublandlord and Subtenant, and (iv) comply with requirements of the Master Lease. 5 Sublandlord shall be responsible for obtaining all necessary permits and approvals (including the building and occupancy permits) and other authorizations from governmental agencies needed in connection with the Tenant Improvements. The costs of all such permits and approvals required in connection with the Tenant Improvements, including inspection and other building fees required to obtain the permits for the Tenant Improvements, shall be included as part of the costs of the Tenant Improvements. 9. Project Management. Sublandlord shall enter into a contract with South Bay Construction ("Project Manager") for project management for the design preparation and construction process. 10. Change Orders. Any changes to the Construction Drawings subsequent to Sublandlord's and Subtenant's approval thereof which are requested by Subtenant, required by any governmental agency, or proposed for any other reason whatsoever shall be incorporated into the work only by means of a change order ("Change Order"). All proposed Change Orders shall be forwarded to Sublandlord for approval and costing. Sublandlord shall have two (2) business days for approval or disapproval. Sublandlord shall not unreasonably withhold or delay consent to any Change Order proposed by Subtenant, and Subtenant shall not unreasonably withhold or delay consent to a Change Order proposed by Sublandlord. Subtenant shall be given a written cost estimate and time required for the completion of such Change Order, and Subtenant shall have two (2) business days for approval or disapproval. The cost of any Change Order which would not otherwise be covered by the Improvements Allowance shall be paid by Subtenant in full with the next subsequent installment of Subtenant's Construction Cost Share (defined in Section 11 below). No revisions to the approved Construction Drawings shall be made by either Sublandlord or Subtenant unless approved in writing by both parties. Sublandlord or Subtenant agrees to make all changes required by any public agency to conform with governmental regulations. Any costs related to such changes shall be added to the Tenant Improvements Cost. Costs related to changes shall include, without limitation, any architectural or design fees, and the Contractor's price for effecting the change. 11. Improvements Allowance. Sublandlord shall provide an allowance for the planning and construction of the Tenant Improvements in the amount of One Million Five Hundred Ninety-Four Thousand Five Hundred Twenty-Five Dollars ($1,594,525.00) ("Base Allowance"). In addition, Sublandlord shall provide an additional improvement allowance (Additional Allowance") of Seven Dollars ($7.00) per square foot of the Premises for a total Additional Allowance of up to Four Hundred Sixty-Six Thousand Four Hundred Sixty-Seven Dollars ($446,467.00). The Additional Allowance shall be fully amortized over the term of the Sublease at an interest rate of ten percent (10%) per annum as an element of Base Rent. The Base Allowance and the Additional Allowance shall be referred to collectively as the "Improvements Allowance". The Improvements Allowance shall be the maximum contribution by Sublandlord for the Tenant Improvements Cost, as defined in Paragraph 12. If the Tenant improvements Cost as specified in the Construction Contract exceeds the Improvements Allowance, Subtenant shall pay the amount by which the Tenant Improvements Cost exceeds the Improvements Allowance ("Subtenant's Construction Cost Share). Subtenant shall deliver to Sublandlord in cash twenty-five percent (25%) of any Subtenant's Construction Cost Share prior to commencement of construction. Subtenant shall pay the balance of Subtenant's Construction Cost Share in two (2) monthly installments of twenty-five percent (25%) each, and a final installment upon Substantial 6 Completion. Sublandlord shall bill Subtenant for such installments plus any excess of the cost of the plumbing, electrical, and HVAC systems in excess of the allowances in the Construction Contract, and payment shall be due ten (10) days after Sublandlord's billing therefor. Any unpaid amount shall bear interest from the date due at the Interest Rate specified in the Sublease. The Improvements Allowance shall not be used for payment of any costs of procuring, constructing or installing in the Premises any of Subtenant's personal property, including furnishings, fixtures, and equipment. 12. Improvements Cost. The improvement cost ("Tenant Improvements Cost") to be paid by Sublandlord from the Improvements Allowance shall include, but not be limited to: (a) All costs, including all Sublandlord's Architect and Space Planner fees, of the Schematic Plan, Design Development Drawings, Construction Drawings and specifications for the Tenant Improvements, including as-built drawings, and engineering costs for mechanical, electrical and plumbing design and for State of California energy utilization calculations under title 24 legislation, including any fees resulting from Change Orders requested by Subtenant or required by any government agency; (b) All costs of obtaining building permits and other necessary authorizations from the City of Sunnyvale and other governmental agencies; (c) All costs of constructing and installing the Tenant Improvements paid to Contractor pursuant to the Construction Contract, including, but not limited to, the construction fee for overhead and profit and the cost of all on-site project management, supervisory and administrative staff, office, equipment and temporary services rendered by the Contractor in connection with construction of the Tenant Improvements; (d) Sewer, water, or other utility or municipal connection fees, in accordance with Section 4 of the Sublease; (e) The fee for the Project Manager as provided in Paragraph 9; and (f) The fee for Subtenant's design contractor for the plumbing, electrical, and HVAC systems and Finish Upgrade Designs. The Tenant Improvements Cost shall not include nor shall any portion of the Improvements Allowance be used for (i) charges and expenses for Change Orders that have not been approved by Subtenant, (ii) costs resulting from any breach of contract by Contractor or any of its subcontractors or by Architect or any design or construction defects, (iii) costs for which Sublandlord received reimbursement from others (including, without limitation, insurers and warrantors), (iv) the cost of bringing the exterior of the Premises and surrounding area into compliance with applicable Governmental Regulations, and (v) costs resulting from a casualty or act of God. 13. Termination. If the Sublease is terminated prior to the Commencement Date due to the default of Subtenant pursuant to this agreement or the Sublease, Subtenant shall pay to Sublandlord, within thirty (30) days of receipt of a statement therefor, any costs incurred by Sublandlord through the date of termination in connection with the Tenant Improvements. Any 7 extra costs incurred due to the casualty shall not be included as part of the Tenant Improvements Cost. 14. Rink of Loss. The risk of loss of the Premises before the Commencement Date (as defined in the Sublease) shall be borne by Sublandlord. At all times prior to the Commencement Date, Sublandlord, at its sole cost and expense, shall maintain contingent liability and broad form "builder's risk" insurance with coverage in an amount equal to the replacement cost of the Tenant Improvements. If the Premises are damaged or destroyed prior to the Commencement Date, and if the Premises, in the reasonable opinion of Sublandlord's Architect, cannot be substantially completed prior to February 1,2000, Subtenant shall have the right to terminate the Sublease. If the Premises are damaged or destroyed and the Sublease is not terminated pursuant to the tam of the Sublease, then Sublandlord shall promptly and diligently complete construction of the Tenant Improvements in accordance with the Lease and this Work Letter. 15. Commencement Date Determination. "Substantial Completion" shall mean the state of completion existing when (i) the Tenant Improvements (exclusive of custom features, such as entrance stair, water feature, and boardroom upgrades) have been completed in accordance with the approved final Construction Drawings, as certified by Sublandlord's Architect and Sublandlord's Contractor, (ii) all utilities are hooked up and available for use, and (iii) Subtenant may lawfully occupy the Premises. Substantial Completion shall be deemed to have occurred notwithstanding a requirement on the part of Sublandlord to complete "punch list" or similar corrective work. The date of Substantial Completion of the Tenant Improvements shall be fixed by Sublandlord's Project Manager. The Commencement Date shall be the earlier of: (a) the date of Substantial Completion of the Tenant Improvements, or (b) August 1, 1999. If Substantial Completion of the Tenant Improvements is delayed as a result of: a. Subtenant's failure to submit the information necessary for the preparation of the Design Development Drawings or Construction Drawings within the time periods called for; b. Subtenant's failure to deliver preliminary or final plans and specifications for the plumbing, electrical, and HVAC systems or Finish Upgrade Designs; c. Subtenant's change(s) in the Construction Drawings after such dates; d. Subtenant's failure to either approve the Design Development Drawings, Work Cost Estimate, Construction Drawings, or Updated Work Cost Estimate, or Change Orders, to submit revisions, or to resolve disapproval within the times prescribed; e. Subtenant's specification of materials other than Building Standard materials or relocation of Building Core from Building Standard location, which increase the construction period or result in delay; f. special permit requirements for Subtenant's operations and improvements; 8 (g) Subtenant's failure to deliver the twenty-five percent (25%) of Subtenant's share of Tenant Improvement Cost prior to the scheduled date for commencement of work or to timely pay any other installment of Subtenant's Construction Cost Share; and (h) any other delays requested or caused by the acts or omissions of Subtenant, its agents, employees, consultants or designers, including Subtenant's activities in the Premises during the Early Occupancy Period provided for in Section 1 of the Sublease. (all of the foregoing being referred to herein collectively as "Subtenant's Delay"), or as a result of: x. Sublandlord's failure to approve or disapprove a Change Order within the time prescribed; or y. Sublandlord's failure to approve or disapprove Final Plans and specifications for the plumbing, electrical, and HVAC systems or Finish Upgrade Designs prepared by Subtenant's designer within the times prescribed (the foregoing being referred to collectively as "Sublandlord Delay") then the Commencement Date shall be the earlier of: (1) August 1, 1999 plus the number of days equal to the days of Sublandlord Delay less the number of days equal to the days of Subtenant Delay; or (2) the date upon which Subtenant commences business operations in the Premises. In calculating days of Subtenant Delay or Sublandlord Delay, credit shall be given (i.e., deduction made) for subsequent actions or approvals faster than the schedule requires and which regain time lost due to previous delay. For example, if Subtenant is responsible for three days of delay on an occasion, but on a subsequent occasion takes only one day when two is allowed and one day of schedule is regained, then the number of days of Subtenant Delay would be two (2) days. 16. Acceptance of Possession. As soon as the Tenant Improvements are Substantially Complete (exclusive of custom features, such as entrance stair, water feature, and boardroom upgrades) and Sublandlord has given Subtenant reasonable prior written notice of the time and date therefor, Sublandlord and Subtenant shall together walk through and inspect the Premises. After such inspection has been completed, each party shall sign an acceptance agreement, which shall (i) include a list of all "punch list" items which the parties agree are to be corrected by Sublandlord, and (ii) shall state the Commencement Date as provided above. Sublandlord shall use reasonable efforts to complete and/or repair such "punch list" items within thirty (30) days after executing the acceptance agreement. After completion of the custom features, Sublandlord and Subtenant shall prepare a punch list for these elements. The parties' preparation of such a "punch list" and execution of an acceptance agreement shall be deemed an acceptance by Subtenant of the Premises as complete and free from defects except as noted in the punch list, but shall not in any way affect the following warranty obligations of Sublandlord: Notwithstanding anything to the contrary in the Sublease, effective upon delivery of the Premises to Subtenant, Sublandlord does hereby warrant (i) that the Tenant Improvements were 9 constructed in accordance with all applicable Governmental Requirements, (ii) that the Tenant Improvements were constructed in accordance with the approved final Construction Drawings and in a good and workmanlike manner, (iii) that all material and equipment installed in the Premises conformed to the approved final Construction Drawings, was new and otherwise of good quality and was installed in accordance with all vendor's and manufacturer's specifications, instructions and requirements, and (iv) that all material and equipment installed in the Premises has been paid for and is free of liens, security interests or chattel mortgages. All construction, product and equipment warranties and guarantees obtained by Sublandlord shall, to the extent obtainable, provide that such warranties and guarantees shall also run to the benefit of Subtenant and its successors and assigns. Subtenant shall have the benefit of any construction, product and equipment warranties and guarantees in favor of Sublandlord that would assist Subtenant in correcting defects and in discharging any of Subtenant's obligations regarding the repair and maintenance of the Premises. Upon written request by Subtenant, Sublandlord shall inform Subtenant of all written construction, product and equipment warranties and guarantees in favor of Sublandlord which affect the Premises. Notwithstanding anything to the contrary contained in the Sublease, Subtenant's acceptance of the Premises shall not be deemed a waiver of the foregoing warranty, and Sublandlord shall promptly repair all violations of the warranty set forth in this paragraph at its sole cost and expense. SUBTENANT: SUBLANDLORD: Vitria Technology, Inc., Applied Materials, Inc., a California corporation a Delaware corporation By: /s/ Paul R. Auvil By: /s/ Thomas R. ---------- -------------------------------- --------------------------------- Name: Paul R. Auvil Name: Thomas R. -------- ------------------------------ ------------------------------- Title: Chief Financial Officer Title: ----------------------------- ------------------------------- By: /s/ Jo Mei Chang By: -------------------------------- --------------------------------- Print Name: Jo Mei Chang Print Name: ------------------------ ------------------------- Title: President & CEO Title: ----------------------------- ------------------------------ 10 Schedule "1" to Exhibit C BUILDING STANDARD IMPROVEMENTS Unless otherwise agreed by both Subtenant and Sublandlord, the following materials, or comparable substitute materials, shall be used by Sublandlord in completing the Improvements for the Premises. Drywall Partitions: Building-standard interior partitions to consist of 3 5/8" metal studs, with one layer 5/8" gypsum board each side. All partitions to be taped and prepared for light texture paint finish. Door: Interior door assembly to be paint grade wood- veneer, solid-core doors, 3 feet wide by 7' height. Door Frame: Hollow metal knock-down, painted building- standard color. Door Hardware: Chrome lever handle latchset, three pair butt hinges. Entry Door Assembly: Door assembly to be determined, frame and lockset included. Ceiling Grid System: Mechanically suspended, 2' x 4' Armstrong "Prelude" building-standard grid throughout the Premises. Ceiling Tiles: Armstrong 2' x 4' mineral-fiber acoustical lay- in "Cortega" tiles. Light Fixtures, Recessed, ceiling-mounted, 2' x 4' fluorescent fixture with three lamps and prismatic lens, installed in building-standard acoustic ceiling. Wall Switches: Switching to be dual rocker switch to meet Title 24 requirements, controlling building standard fixtures. Wall Duplex Outlet: Duplex power receptacle mounted at standard Height (18" A.F.F. mounted vertically) in drywall partition with normal circuiting from core low voltage panel. Wall Telephone Data Outlet: Telephone/data outlet to be dry-wall ring mounted at standard height (18"A.F.F. mounted vertically) in drywall partition with pull string to above ceiling. Paint: Building-standard paint to consist of one coat of stipple acrylic latex selected from building color samples. Base: Building-standard base 4" high, resilient rubber selected from building sample colors. 11 Resilient Tile: Building-standard resilient tile will be provided in lieu of carpeting where required, selected from building sample colors. Carpet: Building-standard carpet, 26 ounces per square yard, selected from building sample colors. Window Treatment: Building-standard horizontal mini-blinds typical at all exterior windows. HVAC: Individual, custom-designed, roof mounted package or heat-pump unit with one thermostatic control per zone. Sprinkler System: Semi-recessed sprinkler heads in white escutcheon, installed in building-standard ceiling tiles. 12 Exhibit D MORTGAGES CURRENTLY AFFECTING THE PROJECT [None] Exhibit E SHELL UPGRADES
AMAT AMAT Approved Date CQ# Description Status Cost Approved Remarks - --- ----------- ------ -------- -------- ------- 1004 toilet mm blk outs completed 7,200 2/4/98 Installed as requested 1005 undgr drainage sewer completed 107,467 2/4/98 Scope incl vending/janitor closet, add't sewer undrg, clean outs 1006 reception desk comm conduit completed 3,739 12/19/98 Communication and electrical conduit to reception desks 1009 ungr comm conduit completed 71,601 12/19/98 Scope incl. 6-4" addtl conduit w/jnct box to DeGuine N&S Campus 1011 upgrd rf joists for mech. eqmt. completed 8,964 12/19/98 Upgrades roof joist sizes within mechanical screen area 1014 elevator oil leak monitoring completed 7,578 4/3/98 AMAT requirement 1020 second flr infills Bldgs A&D completed 64,987 4/3/98 Changed lobby locations for Bldgs A&D 1025 elevator eqpmt (7) bldg completed 530,428 4/3/98 Installed elevators per HPC core plans, incls. Machine Rooms, sound deading, secondary machinery containment, & ventilation 1026 add't stairs - 2 per building completed 183,036 4/3/98 Scope for 14 stairs incl stringers, treads, infill, temporary handrail steel handrails per drawings left in each building for future use 1028 infrastr for grease interceptor completed 15,516 2/4/98 Install additional underground sewer south and east of Bldg G 1030 site conduit for 4000amp completed 27,638 2/4/98 Install 2 additional 6" conduits on north side of North Campus for future upgrade of electrical service to 4,000 amps per bldg. 1033 blk out slab at Bldg F for CET completed 9,078 1/7/98 Included pour of concrete if not clean rooms and Bldg G for Kitchen left open 1039 extr dr panic hardware completed 41,039 4/1/98 Per discussions with Tobbi Beck from Security 1040 power assist drs at main entries completed 40,513 4/1/98 Per discussions with Tobbi Beck from Security 1051 site security upgrades completed 40,393 4/1/98 Per discussions with Tobbi Beck from Security 1055 electrical room 7 bldgs completed 20,987 4/3/98 Enclose all Elect. Rms, per code. Split costs with CarrAmerica CarrA addit A/E fees for shell & site completed 14,250 4/3/98 Additional services for all shell changes and site changes requested by AMAT Total Change Order Costs 1,194,414
Exhibit F LIST OF HAZARDOUS SUBSTANCES AND QUANTITIES USED BY TENANT Customary types and quantities of office supplies and cleaning materials. Exhibit G MASTER LEASE [To Be Attached] EX-23.1 11 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated June 22, 1999, relating to the financial statements of Vitria Technology Inc., which appears in such Prospectus. We also consent to the references to us under the heading "Experts" in such Prospectus. PricewaterhouseCoopers LLP San Jose, California June 22, 1999 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 3-MOS DEC-31-1998 MAR-31-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 MAR-31-1999 12,792 11,444 0 0 6,306 5,706 (333) (451) 0 0 18,945 16,988 1,270 1,570 (303) (462) 5,973 5,255 6,609 6,217 0 0 0 0 11 11 15 16 13,365 11,996 20,000 18,240 7,627 5,209 7,627 5,209 2,905 1,606 14,597 6,443 0 0 350 118 0 0 (9,569) (2,711) (9,569) (2,711) (9,569) (2,711) 0 0 0 0 0 0 (9,569) (2,711) (0.80) (0.21) (0.80) (0.21) Unaudited
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