<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1996
REGISTRATION NO. 333-06349
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DOCUMENT SCIENCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 33-0485994
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
6333 GREENWICH DRIVE
SUITE 100
SAN DIEGO, CA 92122
(619) 625-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
TONY N. DOMIT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DOCUMENT SCIENCES CORPORATION
6333 GREENWICH DRIVE
SUITE 100
SAN DIEGO, CA 92122
(619) 625-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MARK A. BERTELSEN, ESQ. GREGORY M. GALLO, ESQ.
KATHLEEN B. BLOCH, ESQ. DOUGLAS J. REIN, ESQ.
BETSEY SUE, ESQ. JEFFREY T. BAGLIO, ESQ.
DON S. WILLIAMS, ESQ. NOEL C. HOWE, ESQ.
WILSON SONSINI GOODRICH & ROSATI GRAY CARY WARE & FREIDENRICH
650 PAGE MILL ROAD 4365 EXECUTIVE DRIVE, SUITE 1600
PALO ALTO, CA 94304 SAN DIEGO, CA 92121
(415) 493-9300 (619) 677-1400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
DOCUMENT SCIENCES CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
- ------------------------------------------------ -------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Facing Page of Registration Statement;
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges....... Prospectus Summary; The Company; Risk
Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Principal and Selling Stockholders
8. Plan of Distribution....................... Outside Front and Inside Front Cover Pages;
Underwriting
9. Description of Securities to be
Registered............................... Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information with Respect to the
Registrant............................... Outside Front and Inside Front Cover Pages;
Prospectus Summary; The Company; Risk
Factors; Dividend Policy; Capitalization;
Selected Financial Information;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling
Stockholders; Description of Capital
Stock; Shares Eligible for Future Sale;
Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Inapplicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 13, 1996
[DOCUMENT SCIENCES LOGO]
- --------------------------------------------------------------------------------
2,300,000 SHARES
COMMON STOCK
- --------------------------------------------------------------------------------
Of the 2,300,000 shares of Common Stock being offered hereby, 1,837,500
shares are being sold by Document Sciences Corporation ("Document Sciences"
or the "Company") and 462,500 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling
Stockholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial public offering
price will be between $8.00 and $10.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied for quotation of its Common Stock on
the Nasdaq National Market under the symbol DOCX.
FOR INFORMATION CONCERNING CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE UNDERWRITING PROCEEDS TO SELLING
TO PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per share $ $ $ $
Total(3) $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company has granted the several Underwriters an option to purchase up
to an additional 345,000 shares of Common Stock to cover over-allotments.
If all such shares are purchased, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to the
approval of certain legal matters by counsel and certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify such offer
and to reject orders in whole or in part. It is expected that delivery of the
shares of Common Stock will be made in New York, New York against payment
therefor on or about , 1996.
DEUTSCHE MORGAN GRENFELL SOUNDVIEW FINANCIAL GROUP, INC.
The date of this Prospectus is , 1996
<PAGE> 4
LOGO
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by an independent public
accounting firm, and make available to its stockholders quarterly reports for
the first three quarters of each year containing interim unaudited financial
information.
Autograph, CompuBuild, CompuSet, CompuMerge, CompuPrep, CompuSeries,
CompuView Navigator, DVS and View on Demand are trademarks of the Company. All
other brand names or trademarks appearing in this Prospectus are the property of
their respective holders.
This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results or experience could differ significantly from those discussed 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 those discussed elsewhere in this Prospectus.
<PAGE> 5
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and consolidated financial statements and notes
thereto appearing elsewhere in this Prospectus. The Common Stock offered
hereby involves a high degree of risk. See "Risk Factors."
THE COMPANY
Document Sciences Corporation develops, markets and supports a family
of document automation software products and services used in high volume
electronic publishing applications. Document automation has become
increasingly important as more companies realize the benefits of
automating the high volume production of individually customized documents
that require the precise layout of information such as financial data,
marketing text and graphs. Autograph, the Company's document automation
software architecture, enables personalized and customized publishing
solutions for many industries including insurance, managed healthcare,
financial services, telecommunications, manufacturing/distribution,
government agencies and commercial print service bureaus. The Company's
products enable an important form of communication between organizations
and customers by employing enterprise database assets to produce
high-quality documents that are ready to print on demand and distribute in
high volume. Additionally, the Company's core technology can be extended
to provide electronic document automation solutions for the Internet,
intranets and commercial on-line services. CompuSet, Autograph's flagship
product, is licensed by approximately 400 customers worldwide who
collectively produce an estimated one billion customized pages per month.
The fully portable Autograph platform enables cost-effective,
just-in-time, on-demand, high volume publishing that is fully automated,
capable of quality document composition, and flexible for end-user
customization. The Company's products are used in a wide array of
computing environments from client/server to large computer systems.
Document Sciences' objective is to be the leading worldwide supplier
of document automation software and services. The Company sells its
products domestically principally through a direct sales force, and
internationally principally through distributors and value added resellers
and, to a lesser extent, through its direct sales force. The Company
expects to invest significantly in sales, marketing, professional services
and development infrastructure. The Company's end user customers include
Aetna Life Insurance Co., The Prudential Life Insurance Company of
America, Foundation Health, Compaq Computer Corporation, Bell Atlantic
Services, Inc., Morgan Grenfell Asset Management, Ace Hardware Corporation
and CAM-NET Communications Network Inc. The Company was incorporated in
Delaware in October 1991 as a wholly-owned subsidiary of Xerox Corporation
("Xerox"), which currently owns approximately 84% of the Company's
outstanding Common Stock. Upon completion of this offering, Xerox will
continue to own approximately 65% of the Company's outstanding Common
Stock.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............................. 2,300,000 shares, including
1,837,500 shares by the Company and
462,500 shares by the Selling Stockholders
Common Stock outstanding after the offering...... 10,374,657 shares(1)
Use of proceeds.................................. For general corporate purposes, including working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol........... DOCX
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -------------------
1992(2) 1993 1994 1995 1995 1996
------- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:(3)
Total revenues................................................. $1,567 $3,491 $7,171 $10,512 $4,164 $6,350
Gross profit................................................... 1,331 3,052 6,439 9,368 3,708 5,470
Income (loss) from operations.................................. (268 ) 720 1,354 1,685 290 400
Net income (loss).............................................. (174 ) 413 712 1,052 188 246
Pro forma net income (loss) per share(4)....................... $ (.02 ) $ .06 $ .08 $ .12 $ .02 $ .03
Shares used to compute pro forma net income (loss) per share... 7,416 7,416 8,382 8,418 8,382 9,017
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
DECEMBER 31, ------------------------------------------------
1995 ACTUAL PRO FORMA(5) AS ADJUSTED(6)
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:(3)
Cash and cash equivalents................................ $1,271 $1,466 $1,466 $ 16,246
Working capital.......................................... 1,353 1,040 1,040 15,820
Total assets............................................. 6,289 7,102 7,102 21,882
Obligations under capital leases, less current portion... 99 145 145 145
Series A Redeemable Preferred Stock...................... 1,251 1,417 -- --
Total stockholders' equity............................... 856 976 2,393 17,173
</TABLE>
- ---------------
(1) Based on shares outstanding as of June 30, 1996. Excludes 373,368
shares of Common Stock issuable upon exercise of options outstanding.
See "Management -- Employee Benefit Plans," "Description of Capital
Stock," and Note 7 of Notes to Consolidated Financial Statements.
(2) The Company was incorporated on October 18, 1991, and had
insignificant activities from inception through December 31, 1991.
(3) See Note 9 of Notes to Consolidated Financial Statements for
information concerning transactions with affiliates.
(4) Assumes the repayment of the current income tax payable to Xerox out
of the proceeds of this offering, and assumes as outstanding the pro
forma shares outstanding plus 153,567 shares of the shares being
offered by the Company hereby which represent the shares deemed to be
sold to fund such repayment. See "Use of Proceeds" and Note 1 of Notes
to Consolidated Financial Statements.
(5) Reflects the conversion of all outstanding shares of Series A
Redeemable Preferred Stock into Common Stock at a conversion ratio of
1.19 to 1, before giving effect to adjustment for the 3-for-1 stock
split. See "Management -- Certain Transactions."
(6) Adjusted to give effect to the sale of 1,837,500 shares of Common
Stock by the Company at an assumed initial public offering price of
$9.00 per share and the application of the net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
Except as set forth in the Consolidated Financial Statements or as
otherwise indicated, all information in this Prospectus (i) reflects the
3-for-1 split of the Company's Common Stock to be effected prior to the
closing of this offering, (ii) reflects the conversion, at a ratio of 1.19
to 1 before giving effect to adjustment for the 3-for-1 stock split, of
all of the Company's outstanding shares of Series A Redeemable Preferred
Stock into shares of Common Stock, which will occur automatically upon the
closing of this offering, and (iii) assumes that the Underwriters'
over-allotment option is not exercised. See "Description of Capital
Stock," "Underwriting" and Note 7 of Notes to Consolidated Financial
Statements.
- --------------------------------------------------------------------------------
3
<PAGE> 6
THE COMPANY
Document Sciences Corporation ("Document Sciences" or the "Company")
develops, markets and supports a family of document automation software products
and services used in high volume electronic publishing applications. Document
automation has become increasingly important as more companies realize the
benefits of automating the high volume production of individually customized
documents that require the precise layout of information such as financial data,
marketing text and graphs. Autograph, the Company's document automation software
architecture, enables personalized and customized publishing solutions for many
industries including insurance, managed healthcare, financial services,
telecommunications, manufacturing/distribution, government agencies and
commercial print service bureaus. The Company's products enable an important
form of communication between organizations and customers by employing
enterprise database assets to produce high-quality documents that are ready to
print on demand and distribute in high volume. Additionally, the Company's core
technology can be extended to provide electronic document automation solutions
for the Internet, intranets and commercial on-line services. CompuSet,
Autograph's flagship product, is licensed by approximately 400 customers
worldwide who collectively produce an estimated one billion customized pages per
month. The fully portable Autograph platform enables cost-effective,
just-in-time, on-demand, high volume publishing that is fully automated, capable
of quality document composition, and flexible for end-user customization. The
Company's products are used in a wide array of computing environments from
client/server to large computer systems.
The market for document automation software is growing rapidly as companies
recognize the need to increase document effectiveness through high quality
composition and assembly. Document automation capitalizes on the investments
corporations have made in traditional mainframe and newer client/server
computing platforms. Growth in the paper-based portion of the market is also
fueled by the increasing popularity of lower-cost midrange electronic printers
and the continuing cost/performance improvements in computing and communications
technologies. Organizations are producing increasing amounts of data and
information and consequently are demanding more effective documents and
delivery. The effectiveness includes customized and personalized content, more
robust documents, and improved forms of document delivery. In addition, in many
current and future applications, the fundamental nature of the document is
shifting from static paper-based documents to more robust interactive electronic
documents published on the Internet, intranets and commercial on-line services.
The Company's objective is to be the leading worldwide supplier of document
automation software and services. The Company's strategy includes extending its
technology leadership, leveraging its installed base of customers, expanding its
distribution channels, expanding professional services, and expanding into
electronic documents including the Internet, intranets and commercial on-line
services. The Company expects to continue to invest significantly in sales,
marketing, professional services, and development infrastructure. The Company
sells its products domestically principally through a direct sales force, and
internationally principally through distributors and value added resellers
("VARs") and, to a lesser extent, through its direct sales force. The Company
derived approximately 14%, 26%, 42% and 30% of its total revenues from export
sales, including sales through its foreign subsidiary, in 1993, 1994, 1995 and
the first half of 1996, respectively. The Company's sales and marketing
organization targets vertical industry segments that require document automation
and high volume document personalization and customization. The Company's end
user customers include Aetna Life Insurance Co., The Prudential Life Insurance
Company of America, Foundation Health, Compaq Computer Corporation, Bell
Atlantic Services, Inc., Morgan Grenfell Asset Management, Ace Hardware
Corporation and CAM-NET Communications Network Inc.
The Company was incorporated in Delaware in October 1991 as a wholly-owned
subsidiary of Xerox Corporation ("Xerox"), which currently owns approximately
84% of the Company's outstanding Common Stock. Upon completion of this offering,
Xerox will continue to own approximately 65% of the Company's outstanding Common
Stock (63% if the Underwriters' over-allotment option is exercised in full). The
Company acquired certain technology from Xerox pursuant to a Transfer and
License Agreement in July 1992. See "Certain Transactions." All references in
this Prospectus to "Document Sciences" or the "Company" refer to Document
Sciences Corporation and its consolidated subsidiary. The Company's executive
offices are located at 6333 Greenwich Drive, Suite 100, San Diego, California
92122, and its telephone number is (619) 625-2000.
4
<PAGE> 7
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the Common
Stock offered hereby. This Prospectus contains forward-looking statements, and
actual results could differ materially from those projected in the
forward-looking statements as a result of numerous factors, including the
factors set forth below and elsewhere in this Prospectus.
Limited Operating History. The Company was incorporated in October 1991 as
a wholly-owned subsidiary of Xerox, and Xerox currently owns approximately 84%
of the Company's outstanding shares of Common Stock. The Company's limited
operating history makes the prediction of future operating results difficult,
and the Company's operating history during prior periods cannot necessarily be
regarded as indicative of the Company's prospects as an independent company,
especially in light of the Company's investments in sales, marketing,
professional services and development infrastructure. Accordingly, although the
Company has experienced revenue growth in recent years, there can be no
assurance that the Company will sustain such growth in revenues, if any, or that
the Company will remain profitable on a quarterly or annual basis.
Uncertainty of Future Operating Results; Fluctuations in Quarterly
Operating Results. The Company's total revenues and operating results can vary,
sometimes substantially, from quarter to quarter and are expected to vary
significantly in the future. The Company's revenues and operating results are
difficult to forecast. Future results will depend upon many factors, including
the demand for the Company's products, the level of product and price
competition, the length of the Company's sales cycle, the size and timing of
individual license transactions, the delay or deferral of customer
implementations, the budget cycles of the Company's customers, the level of
commissions on the sale of Xerox printers under the strategic marketing alliance
between the Company and Xerox, the Company's success in expanding its direct
sales force and indirect distribution channels, the timing of new product
introductions and product enhancements by the Company and its competitors, the
mix of products and services sold, levels of international sales, activities of
and acquisitions by competitors, the timing of new hires, changes in foreign
currency exchange rates, the ability of the Company to develop and market new
products and control costs and general domestic and international economic
conditions. In addition, the Company's sales generally reflect a relatively high
amount of revenues per order, and the loss or delay of individual orders,
therefore, could have a significant impact on the revenues and quarterly
operating results of the Company. Moreover, the timing of license revenue is
difficult to predict because of the length of the Company's sales cycle, which
is typically three to twelve months from the initial customer contact.
The Company's initial software license products generally are shipped as
orders are received. As a result, initial license fee revenues are substantially
dependent on orders booked and shipped in that quarter. Because the Company's
operating expenses are based on anticipated revenue levels and because a high
percentage of the Company's expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter and could
result in losses. To the extent such expenses precede increased revenues, the
Company's operating results would be materially adversely affected.
The Company's business has experienced and is expected to continue to
experience seasonality, in part due to customer purchasing patterns and the
Company's expense patterns. The Company believes that fourth quarter revenues
are positively impacted by year-end capital purchases by large corporate
customers and strong fourth quarter sales of printers by Xerox (which may
generate sales of the Company's products), as well as the Company's sales
compensation plans. As reflected in the fourth quarter of 1995, these seasonal
factors have historically resulted in fourth quarter revenues being
substantially higher than revenues in the preceding three quarters, as well as
being higher than revenues in each of the first two quarters of the next year.
In addition, a significant amount of the Company's revenues occur predominantly
in the third month of each fiscal quarter and tend to be concentrated in the
latter half of the third month.
5
<PAGE> 8
As a result of these factors, revenues for any quarter are subject to
significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Furthermore, due
to all of the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. See "Risk Factors -- Expansion of
Sales and Distribution Channels," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
Control by Xerox. Upon completion of this offering, Xerox will own
approximately 65% of the outstanding shares of Common Stock of the Company (63%
if the Underwriters' over-allotment option is exercised in full). Xerox has not
expressed to the Company any present intention to sell additional shares of the
Company's Common Stock following completion of the offering. Consequently, Xerox
will control the Company, be able to elect the entire Board of Directors of the
Company and continue to have significant input into the Company's operations. In
addition, Xerox will be able to determine the outcome of all corporate actions
requiring stockholder approval, including potential mergers, acquisitions,
consolidations and sales of all or substantially all of the assets of the
Company. The voting power of Xerox could have the effect of delaying or
preventing a change in control of the Company, and may prevent or discourage
tender offers for the Company's Common Stock at a premium price by another
person or entity. At present, Xerox affiliates hold three of the six seats on
the Company's Board of Directors. See "Risk Factors -- Reliance on Relationships
with Xerox; Lack of Independent Sales and Marketing Channels," "Principal and
Selling Stockholders" and "Certain Transactions."
Reliance on Relationships with Xerox; Lack of Independent Sales and
Marketing Channels. The Company currently has, and will continue to have after
this offering, a variety of contractual and informal relationships with Xerox
and affiliates of Xerox, including a Strategic Marketing Alliance Agreement, a
Transfer and License Agreement and various distribution agreements. The Company
relies on these relationships and agreements for a significant portion of its
total revenues. In 1994, 1995 and the first half of 1996, total revenues derived
from relationships with Xerox and affiliates of Xerox accounted for
approximately $1.9 million, $3.9 million and $1.3 million, representing 27%, 37%
and 20% of the Company's total revenues, respectively. In addition, through
December 31, 1995 substantially all of the Company's domestic license revenues
were dependent on sales leads generated as a result of the Company's
relationship with Xerox and a substantial portion of the Company's international
revenues were made through distributors and distribution channels affiliated
with Xerox. Further, the commissions received by the Company from sales of Xerox
printers under the strategic marketing alliance, which were $490,400, $752,000
and $586,600 in 1994, 1995 and the first half of 1996, respectively, have little
or no associated costs, have contributed a substantial portion of the Company's
income from operations and net income for certain prior operating periods, have
had a high degree of inconsistency from quarter to quarter and are difficult to
estimate. Failure to continue to receive such commissions would have a material
adverse effect on the Company's business, operating results and financial
condition. Although neither Xerox nor its affiliated entities has expressed to
the Company any intention to terminate their respective agreements with the
Company, these agreements generally may be terminated on no more than 90 days'
notice. Accordingly, there can be no assurance that Xerox or its affiliates will
continue these relationships or, if they do, that they will be on terms
favorable to the Company. Furthermore, there can be no assurance that existing
and potential customers will not be deterred by the existence of these
relationships or by the historical ties between the Company and Xerox and its
affiliates. Following consummation of this offering, though it intends to
continue its existing relationships with Xerox, the Company's strategy is to
lessen its dependence on Xerox. However, there can be no assurance that the
Company will be able to do so and, because of the Company's current level of
dependence on Xerox there can be no assurance that the Company's transition to a
more independent company will not adversely affect its business, financial
condition or results of operations. The failure by the Company to maintain these
relationships, particularly with Xerox and
6
<PAGE> 9
its affiliates, or to establish new relationships in the future, could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Risk Factors -- Expansion of Sales and
Distribution Channels" and "Certain Transactions."
Xerox has strategic alliances and other business relationships with other
companies who supply software and services used in high volume electronic
publishing applications and who now or in the future may be a competitor of the
Company. Xerox could in the future expand these relationships or enter into
additional ones, and as a result the Company's business could be materially
adversely affected. There can be no assurance that Xerox or one of its
affiliated companies will not engage in business directly competitive with the
Company. Xerox owns approximately 34% of Image Sciences, a direct competitor of
the Company. In addition, Xerox has on-going internal development activities
which could in the future lead to products that compete with the Company. See
"Business -- Competition" and "Certain Transactions."
Expansion of Sales and Distribution Channels. The Company has
substantially increased expenditures in support of its strategy to expand its
global marketing, sales and customer support infrastructure in order to expand
the market for the Company's products by providing direct sales and support
services and increased channel distribution throughout the major markets of the
world. Through this expansion, the Company hopes to lessen its dependence on
Xerox and certain Xerox affiliates. In addition, the Company intends to increase
both its product offerings and markets through marketing, sales and distribution
and development relationships with other companies. The Company intends to
increase the number of these strategic relationships as well as form alliances
with system integrators and consultants. Whether the Company can successfully
generate its own sales leads, introduce new products and enter into new markets
will depend on its ability to expand its direct sales and support services,
expand its indirect channel distribution, and increase its relationships and
alliances with other companies. As a result of its planned expansion, the
Company has and will continue to incur significant costs to build such corporate
infrastructure ahead of anticipated revenues, and any failure to achieve growth
in revenues in excess of increased expenses would have a material adverse affect
on the Company's business, operating results and financial condition. There can
be no assurance that the Company will be able to successfully expand its direct
sales and support services force, expand its indirect channel distribution, or
establish or maintain successful third party relationships. Any failure to do so
will have a material adverse effect on the Company's business, operating results
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Sales and Marketing."
Dependence on Success of New Products and Expansion of Professional
Services. The Company's Autograph architecture has been applied mainly to
document automation applications producing paper based documents. The Company
believes its core technology can be extended to address applications requiring
the delivery of customized and personalized electronic documents over electronic
networks such as the Internet, intranets or commercial on-line services.
The Company has recently introduced Document Viewing Service (DVS), an
optional on-line viewer for electronic documents produced by document automation
applications, and Document Library Services (DLS), an optional document
management tool. The Company began shipping DVS in October 1995, and DLS is
currently in limited release, with certain configurations still in beta testing.
Prior to the quarter ended June 30, 1996, revenues derived from license fees of
DVS and DLS have not been material as a percentage of revenues. In addition, the
Company is increasing its focus on the consulting services component of its
Professional Services to assist customers in the planning and implementation of
enterprise-wide, mission critical document automation applications. The Company
has directed a significant amount of its product development expenditures to the
on-going development of DVS and DLS and plans to devote a significant amount of
future sales and marketing resources to the full commercial introduction of DVS
and DLS.
7
<PAGE> 10
The Company believes that the long-term growth of license and service
revenue will be dependent, in part upon the success of DVS, DLS and the
expansion of Professional Services. The Company has limited experience in
developing new products, and DVS and DLS have not been widely deployed. Because
of such limited experience, there can be no assurance that DVS and DLS will not
require substantial software enhancements or modifications to satisfy
performance requirements of clients or to correct design defects. Further, there
can be no assurance that the Company will be successful in expanding its
consulting services as part of its Professional Services. If the Company fails
to fully deploy its DVS and DLS products, or if clients experience significant
problems with implementation of the software or are otherwise dissatisfied with
the functionality or performance of DVS and DLS, or if DVS or DLS fails to
achieve market acceptance for any reason, or if the Company fails to
successfully expand its Professional Services, the Company's business, operating
results and financial condition will be materially adversely affected. See
"Business -- Products."
Lengthy Sales and Implementation Cycles. The license of the Company's
software products is often an enterprise-wide decision by prospective customers
and generally requires the Company to engage in a lengthy sales cycle, typically
between three and twelve months, to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's products.
In addition, the implementation of the Company's products by customers involves
a significant commitment of resources by such customers over an extended period
of time, and is commonly associated with substantial customer business process
reengineering efforts. For these and other reasons, the sales and customer
implementation cycles are subject to a number of significant delays over which
the Company has little or no control. Delay in the sale or customer
implementation of a limited number of license transactions could have a material
adverse effect on the Company's business and results of operations and cause the
Company's operating results to vary significantly from quarter to quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Sales and Marketing."
Product Concentration. The Company currently derives substantially all of
its license revenues from licenses of CompuSet and related CompuSet option
products and from fees for services related to the CompuSet software. As a
result, factors adversely affecting the pricing of or demand for CompuSet and
related products, such as competition from other products, negative publicity or
obsolesce of the hardware or software environments in which the Company's
products run, could have a material adverse effect on the Company's business,
operating results and financial condition. The Company's financial performance
will continue to depend, in significant part, on the successful development,
introduction and customer acceptance of new and enhanced versions of the
CompuSet software and related products. There can be no assurance that the
Company will continue to be successful in developing and marketing CompuSet
products and related services. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business -- Products" and
"-- Research and Development."
Industry Concentration. Licenses to end users in the insurance and
commercial print services industries for 1994, 1995 and the first half of 1996
accounted for 65%, 61% and 55%, respectively, of total revenues. The future
success of the Company will depend on its ability to continue to successfully
market its products in such industries, and to successfully market its products
in other industries. The failure of the Company to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Dependence on New Products and Product Enhancements. The Company's future
business, operating results and financial condition will continue to depend upon
its ability to develop new products that address the future needs of its target
markets and to respond to emerging industry standards and practices. The Company
believes that its core technology can be extended to the Internet, intranets and
commercial on-line services, and has only recently begun initial development
activity in this area. There can be no assurance that the Company will be
successful in developing, introducing and marketing new products or product
enhancements, including new products or the
8
<PAGE> 11
extension of existing products for the Internet, intranets and commercial
on-line services, on a timely and cost effective basis, if at all, or that its
new products and product enhancements, will adequately meet the requirements of
the marketplace or achieve market acceptance. Delays in the commencement of
commercial shipments of new products or enhancements, including DVS and DLS, may
result in client dissatisfaction and delay or loss of product revenues. If the
Company is unable, for technological or other reasons, to develop and introduce
new products or enhancements of existing products in a timely manner in response
to changing market conditions or client requirements, or if new products or new
versions of existing products do not achieve market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected. In order to provide its customers with integrated product solutions,
the Company's future success will also depend in part upon its ability to
maintain and enhance relationships with its technology partners, such as
Computer Associates and Data Retrieval. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Products" and "-- Research and Development."
International Operations. Revenues from export sales, including sales
through its foreign subsidiary accounted for 26%, 42% and 30% of the Company's
total revenues in 1994, 1995 and the first half of 1996, respectively. The
Company's wholly owned subsidiary, Document Sciences Europe, markets and
supports the Company's products in Europe. The Company licenses its products in
Europe through value added resellers and to a lesser extent, direct sales. The
value added resellers are principally Xerox affiliates who re-market the
Company's products. In Australia and Canada, the Company distributes its
products through Fuji Xerox Co., Ltd. and Xerox Canada, Limited, respectively.
Revenues generated by these Xerox affiliates were $1.3 million, $3.1 million and
$675,900 in 1994, 1995 and the first half of 1996, respectively. In 1994 and
1995, a substantial portion of the Company's revenues from export sales were
generated through entities affiliated with Xerox. In order to successfully
expand export sales, the Company must establish additional foreign operations,
hire additional personnel and develop relationships with additional
international resellers. To the extent that the Company is unable to do so in a
timely manner, the Company's growth, if any, in international export sales will
be limited, and the Company's business, operating results and financial
condition could be materially adversely affected. In addition, there can be no
assurance that the Company will be able to maintain or increase international
market demand for its products. Additional risks inherent in the Company's
international business activities generally include currency fluctuations,
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs of and the Company's limited experience in localizing products for foreign
countries, lack of acceptance of localized products in foreign countries, longer
accounts receivable payment cycles, difficulties in managing international
operations, potentially adverse tax consequences including restrictions on the
repatriation of earnings, and the burdens of complying with a wide variety of
foreign laws. A portion of the Company's business is conducted in currencies
other than the U.S. dollar, primarily the French franc. Although to date
exchange rate fluctuations have not had a significant impact on the Company,
fluctuations in the value of the currencies in which the Company conducts its
business relative to the U.S. dollar could cause currency transaction gains and
losses in future periods. The Company does not currently engage in currency
hedging transactions, and there can be no assurance that fluctuations in the
currency exchange rates in the future will not have a material adverse impact on
international revenues and thus the Company's business, operating results or
financial condition. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international operations and,
consequently, the Company's results of operations. See "Risk Factors -- Control
by Xerox," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Sales and Marketing," "Certain
Transactions" and Notes 3 and 9 of Notes to Consolidated Financial Statements.
Dependence on Emerging Markets for Document Automation Software. The
market for document automation software is relatively new, intensely
competitive, highly fragmented, underdeveloped and subject to rapid change.
Marketing and sales techniques in the document automation
9
<PAGE> 12
software marketplace, as well as the bases for competition, are not well
established. There can be no assurance that the market for document automation
software will develop or that, if it does develop, organizations will adopt the
Company's products. The Company has spent, and intends to continue to spend,
significant resources educating potential customers about the benefits of its
products. However, there can be no assurance that such expenditures will enable
the Company's products to achieve further market acceptance, and if the document
automation software market fails to develop or develops more slowly than the
Company currently anticipates, the Company's business, operating results and
financial condition would be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- The Document Sciences Strategy."
In addition, the commercial market for document automation of electronic
documents designed for use with the Internet, intranets and commercial on-line
services has only recently begun to develop, and the success of the Company's
products designed for this market will depend, in part, on their compatibility
with such services. It is difficult to predict with any assurance whether the
Internet, intranets and commercial on-line services will prove to be a viable
commercial marketplace or whether the demand for related products and services
will increase or decrease in the future. Since the increased commercial use of
the Internet, intranets and commercial on-line services could require
substantial modification and customization of certain of the Company's products
and services and the introduction of new products and services, there can be no
assurance that the Company will be able to effectively or successfully compete
in this emerging market.
Intense Competition. The market for the Company's document automation
products is intensely competitive, subject to rapid change and significantly
affected by new product introductions and other market activities of industry
participants. The Company's software products are targeted at document intensive
organizations that require the ability to produce large quantities of customized
and personalized documents in paper or electronic form. The Company faces direct
and indirect competition from a broad range of competitors who offer a variety
of products and solutions to the Company's current and potential customers. The
Company's principal competition currently comes from (i) systems developed
in-house by the internal MIS departments of large organizations, (ii) direct
competition in a number of its vertical markets, including Image Sciences, which
is partially owned by Xerox, and FormMaker Software, Inc. in the insurance
industry, M&I DataServices, Inc. in banking and financial services and Group 1
Software, Inc. in commercial direct mailing, and (iii) direct competitors such
as IBM's Direct Composition Facility (DCF) and Group 1 Software's recently
introduced DOC1 product. The Company faces market resistance from the large
installed base of systems because of the reluctance of these customers to commit
the time and effort necessary to convert their document automation processes to
the Company's document automation software. Several of the Company's competitors
have longer operating histories, significant greater financial, technical,
marketing and other resources than the Company, greater name recognition and a
larger installed base of customers.
It is also possible that the Company will face competition from new
competitors. These include large independent software companies offering
personal computer-based application software solutions, such as Microsoft
Corporation and Adobe Corporation, and from large corporations providing
database management software solutions, such as Oracle Corporation. In addition,
Xerox, either directly or through affiliated entities, could compete with the
Company. Moreover, as the market for document automation software develops, a
number of these or other companies with significantly greater resources than the
Company could attempt to enter or increase their presence in the Company's
market either independently or by acquiring or forming strategic alliances with
competitors of the Company or to otherwise increase their focus on the industry.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's current and
prospective customers, and it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Increased competition
10
<PAGE> 13
may result in price reductions, reduced gross margins and loss of market share,
any of which could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. See "Business -- Competition."
Management of Change; Dependence Upon Key Personnel. The Company has
recently experienced a period of growth in total revenues. The Company's ability
to compete effectively and to manage future change will require the Company to
continue to improve its financial and management controls, reporting systems and
procedures on a timely basis and to expand, train and manage its employee work
force. There can be no assurance that the Company will be able to do so
successfully. The Company's failure to do so could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company's future performance depends in significant part upon the continued
service of its key technical, sales and senior management personnel, none of
whom are parties to employment agreements with the Company. The loss of the
services of one or more of the Company's executive officers could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's future success also depends on its continuing
ability to attract and retain highly-qualified product development, sales and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to retain its key employees or
that it will be able to attract, assimilate or retain other highly qualified
product development, sales and managerial personnel in the future. See "Risk
Factors -- Control by Xerox," "Business -- Sales and Marketing" and
"Management."
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success is dependent, in part, upon its ability to protect its proprietary
technology. The Company relies primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. The Company presently has
no patents or patent applications pending. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as do the laws of
the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. The Company is
not aware that any of its products infringe the proprietary rights of third
parties. There can be no assurance, however, that third parties will not claim
infringement by the Company with respect to current or future products. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time-
consuming, result in costly litigation, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition. In addition, the
Company also relies on software that it licenses from third parties, including
software that is integrated with internally developed software and used
primarily in the Company's DLS product, to perform key functions. There can be
no assurances that such firms will remain in business, that they will continue
to support their products or that their products will otherwise continue to be
available to the Company on commercially reasonable terms. The loss or inability
to maintain any of these software licenses could result in delays or reductions
in product shipments until equivalent software
11
<PAGE> 14
can be developed, identified, licensed and integrated, which would adversely
affect the Company's business, operating results and financial condition. See
"Business -- Intellectual Property and Other Proprietary Rights."
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. However, it is possible that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim or claim arising as a result of professional
services rendered by the Company brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Risk of Product Defects. Software products as complex as those offered by
the Company, particularly the Company's new DVS and DLS products, may contain
undetected defects or errors when first introduced or as new versions are
released. As a result, the Company could in the future lose or delay recognition
of revenues as a result of software errors or defects. In addition, the
Company's products are typically intended for use in applications that may be
critical to a customer's business. As a result, the Company expects that its
customers and potential customers have a greater sensitivity to product defects
than the market for software products generally. Although the Company's business
has not been adversely affected by any such errors to date, there can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of revenue or delay in
market acceptance, diversion of development resources, damage to the Company's
reputation, or increased service and warranty costs, any of which would have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Business -- Research and Development."
No Prior Public Market for Common Stock; Possible Volatility of Stock
Price. Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. The initial public
offering price will be determined by negotiations between the Company, the
Selling Stockholders and the representatives of the Underwriters. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The trading price of the Company's Common
Stock could be subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant orders, changes in
earning estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, general conditions in the software
and computer industries and other events or factors. In addition, the stock
market in general has experienced extreme price and volume fluctuations which
have affected the market price for many companies in industries similar or
related to that of the Company and which have been unrelated to the operating
performance of these companies. These market fluctuations may adversely affect
the market price of the Company's Common Stock.
Anti-takeover Effects of Certificate of Incorporation, Bylaws and Delaware
Law. Upon the closing of this offering, the Company's Board of Directors will
have the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The Preferred Stock could be issued with voting, liquidation,
dividend and other rights superior to those of the Common Stock. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company has no
current plans to issue any shares of Preferred Stock. Further, certain
12
<PAGE> 15
provisions of the Company's Amended and Restated Bylaws and of Delaware law
could delay or make more difficult a merger, tender offer or proxy contest
involving the Company. See "Description of Capital Stock."
Shares Eligible for Future Sale. Sales of a substantial number of shares
of Common Stock in the public market following this offering could adversely
affect the market price of the Common Stock. See "Management -- Employee Benefit
Plans," "Description of Capital Stock" and "Shares Eligible for Future Sale."
Uncertainty as to Use of Proceeds. The principal purposes of this offering
are to strengthen the Company's equity capital base, obtain additional working
capital, create a public market for the Common Stock, facilitate future access
by the Company to public capital markets and retire the Company's current income
tax liability to Xerox. The Company expects to use the net proceeds of the
offering for general corporate purposes, including working capital and expansion
of the Company's product development and sales, marketing and customer support
organizations. A portion of the net proceeds may also be used to acquire or
invest in complementary businesses, products or otherwise to obtain the right to
use complementary technologies which broaden or enhance the Company's current
product offerings. There are no current agreements or negotiations with respect
to any acquisitions, investments or other transactions. As of this date of this
Prospectus, other than as set forth above, the Company has no specific plans as
to the use of the net proceeds from this offering, and will have broad
discretion in the application of the proceeds. Pending any such uses, the net
proceeds will be invested in interest-bearing securities. See "Use of Proceeds."
Immediate and Substantial Dilution. Purchasers of the Common Stock offered
hereby will suffer immediate and substantial dilution in the net tangible book
value per share of the Common Stock from the initial public offering price. To
the extent outstanding options to purchase the Company's Common Stock are
exercised, there will be further dilution. See "Dilution."
13
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,837,500 shares of
Common Stock offered by the Company hereby, at an assumed initial public
offering price of $9.00 per share, are estimated to be approximately $14,780,000
($17,668,000 if the Underwriters' over-allotment option is exercised in full),
after deducting the estimated underwriting discount and estimated offering
expenses. In addition, the Company will retire its current tax liability to
Xerox in the amount of $1,382,100 for the period from the Company's inception
through December 31, 1995. See "Certain Transactions -- Tax Sharing Agreement."
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders. See "Principal and Selling Stockholders."
The primary purposes of this offering are to strengthen the Company's
equity capital base, obtain additional working capital, create a public market
for the Common Stock, facilitate future access to public capital markets and
retire the Company's current income tax liability to Xerox.
The Company intends to use the net proceeds of this offering primarily for
general corporate purposes, including working capital and expansion of the
Company's product development and sales, marketing and customer support
organizations. The amounts actually expended by the Company for working capital
purposes may vary significantly depending upon a number of factors, including
future revenues, the amount of cash generated by the Company's operations, the
success of the Company's expansion of its sales and distribution channels and
the progress of the Company's product development efforts.
In addition the Company may from time to time consider acquisitions of
complementary technologies, products or businesses that will broaden or enhance
the Company's current product offerings. However, the Company has no specific
agreements or commitments, and is not currently engaged in any negotiations for
any such acquisition. Pending such uses, the net proceeds will be invested in
short-term, interest-bearing, investment grade securities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. Under the terms of the
Company's bank line of credit, the Company may not pay any dividends on its
capital stock without the bank's prior written consent. See Note 4 of Notes to
Consolidated Financial Statements.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth at June 30, 1996 (i) the actual
capitalization of the Company after giving effect to the 3-for-1 split of the
Company's Common Stock, (ii) the pro forma capitalization of the Company after
giving effect to the conversion, on a 1.19 to 1 basis prior to giving effect to
the stock split, of all outstanding shares of Series A Redeemable Preferred
Stock into Common Stock upon the closing of this offering and the change in the
authorized number of shares of Preferred Stock and Common Stock and (iii) the
pro forma capitalization of the Company as adjusted to give effect to the sale
of the Common Stock offered by the Company hereby at an assumed initial public
offering price of $9.00 per share (after deducting estimated underwriting
discount and estimated offering expenses).
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Obligations under capital leases, less current portion(1)..... $ 145 $ 145 $ 145
------ ------ -------
Series A Redeemable Preferred Stock, $.001 par value,
2,000,000 shares authorized, issued and outstanding actual,
no shares issued and outstanding pro forma and as
adjusted(2)................................................. 1,417 -- --
Stockholders' equity:
Preferred Stock, $.001 par value, 2,000,000 shares
authorized, no shares issued and outstanding, pro forma
and as adjusted.......................................... -- -- --
Common Stock, $.001 par value, 3,000,000 shares authorized
1,397,157 shares issued and outstanding actual;
30,000,000 shares authorized, 8,537,157 shares issued and
outstanding pro forma, and 10,374,657 shares issued and
outstanding as adjusted(3)............................... 1 8 10
Additional paid-in capital.................................. 557 1,967 16,745
Deferred compensation....................................... (406) (406) (406)
Retained earnings........................................... 824 824 824
------ ------ -------
Total stockholders' equity............................... 976 2,393 17,173
------ ------ -------
Total capitalization................................ $2,538 $2,538 $17,318
====== ====== =======
</TABLE>
- ---------------
(1) See Note 5 of Notes to Consolidated Financial Statements.
(2) See Note 6 of Notes to Consolidated Financial Statements.
(3) Excludes (i) 373,368 shares of Common Stock issuable upon the exercise of
options outstanding as of June 30, 1996 with a weighted average exercise
price of $.37 per share, and (ii) an aggregate of 623,475 shares of Common
Stock available as of June 30, 1996 for future grant under the Company's
equity incentive plans. See "Management -- Employee Benefit Plans" and Note
7 of Notes to Consolidated Financial Statements.
15
<PAGE> 18
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996,
was approximately $1,965,100, or $.23 per share of Common Stock. Pro forma net
tangible book value per share is determined by dividing the amount of the
Company's tangible net worth (total tangible assets less total liabilities) by
the number of shares of Common Stock outstanding, after giving effect to the
anticipated conversion of all outstanding shares of Series A Redeemable
Preferred Stock into Common Stock upon the closing of this offering. After
giving effect to the sale by the Company of 1,837,500 shares of Common Stock
offered hereby at an assumed initial public offering price of $9.00 per share
(after deducting estimated underwriting discounts, estimated offering expenses
and payment to Xerox of the Company's current income tax liability in the amount
of $1,382,100 for the period from inception through December 31, 1995), and the
application of the estimated net proceeds therefrom, the pro forma net tangible
book value, as adjusted, of the Company as of June 30, 1996 would have been
approximately $15,362,900, or $1.48 per share based on 10,374,657 shares of
Common Stock to be outstanding after the offering. This represents an immediate
increase in such pro forma net tangible book value of $1.25 per share to
existing stockholders and an immediate dilution of $7.52 per share to new
investors purchasing shares of Common Stock in this offering. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $ 9.00
Pro forma net tangible book value per share as of
June 30, 1996(1)............................................... $ .23
Increase in pro forma net tangible book value per share
attributable to new investors(1)............................... 1.25
------
Pro forma net tangible book value per share after this
offering(1).................................................... 1.48
------
Dilution per share of Common Stock to new investors(1)........... $ 7.52
======
</TABLE>
- ---------------
(1) Assuming the exercise of options to purchase 373,368 shares of the Company's
Common Stock outstanding at June 30, 1996, (i) pro forma net tangible book
value per share as of June 30, 1996 would equal $.22, (ii) pro forma net
tangible book value per share after the offering would equal $1.43, (iii)
the increase in pro forma net tangible book value per share attributable to
new investors would equal $1.21, and (iv) dilution per share of Common Stock
to the new investors would equal $7.57.
The following table summarizes on a pro forma basis as of June 30, 1996,
the differences between the number of shares purchased from the Company,
assuming conversion of all outstanding shares of Preferred Stock into Common
Stock, the total consideration paid and the average price paid per share by the
existing holders of Common Stock and by the new investors at an assumed initial
public offering price of $9.00 per share (before deduction of estimated
underwriting discounts and estimated offering expenses):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED(1) CONSIDERATION(1) AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE(1)
---------- ------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)....... 8,537,157 82% $ 118,462 1% $ .01
New investors(2)............... 1,837,500 18 16,537,500 99% 9.00
------- ----- -------- ---- -
Total.......................... 10,374,657 100% $16,655,962 100%
======= ===== ======== =====
</TABLE>
- ---------------
(1) Assuming the exercise of options to purchase 373,368 shares of the Company's
Common Stock outstanding at June 30, 1996, after the offering: (i) shares
purchased by existing stockholders would total 8,910,525 (approximately 83%
of total shares purchased) and shares purchased by new investors will total
1,837,500 (approximately 17% of total shares purchased); (ii) consideration
paid by existing stockholders would amount to $256,608 (approximately 2% of
total consideration paid) and consideration paid by new investors would
total $16,537,500 (approximately 98% of total consideration paid); and
(iii) average price per share
16
<PAGE> 19
paid by existing stockholders would equal $.03 and average price per share
paid by new investors will equal $9.00.
(2) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 8,074,657 shares or approximately
78% of the total shares of Common Stock outstanding after this offering and
will increase the number of shares held by new investors to 2,300,000 shares
or approximately 22% of the total shares of Common Stock outstanding after
this offering. Assuming the exercise of options to purchase 373,368 shares
of the Company's Common Stock outstanding at June 30, 1996, after the
offering, sales by the Selling Stockholders in this offering would cause
such percentages to be 79% and 21%, respectively.
The foregoing tables and calculations assume no exercise of options
outstanding as of June 30, 1996. At June 30, 1996 there were 373,368 shares of
Common Stock reserved for issuance upon exercise of outstanding options at a
weighted average exercise price of approximately $.37 per share, and an
additional 623,475 shares were reserved for issuance in connection with future
grants under the 1995 Stock Incentive Plan. To the extent that outstanding
options are exercised or shares reserved for future grant of options under the
1995 Stock Incentive Plan are issued, there will be further dilution to new
investors. See "Management -- Employee Benefit Plans" and Note 7 of Notes to
Consolidated Financial Statements.
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data presented below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this Prospectus. The consolidated
statement of income data for each of the three years in the period ended
December 31, 1995 and the consolidated balance sheet data at December 31, 1994
and 1995 are derived from the consolidated financial statements audited by Ernst
& Young LLP, independent auditors, which are included elsewhere in this
Prospectus. The consolidated statement of income data for the year ended
December 31, 1992 and the consolidated balance sheet data at December 31, 1992
and 1993 are also derived from consolidated financial statements audited by
Ernst & Young LLP which are not included in this Prospectus. The consolidated
statements of income for the six-month periods ended June 30, 1995 and 1996 and
the consolidated balance sheet data at June 30, 1996 are derived from unaudited
consolidated financial statements. In the opinion of management, the unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statement and contain all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company's results of operations for such periods and financial condition at such
dates. The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year or future
periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ------------------
1992(1) 1993 1994 1995 1995 1996
------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA(2):
Revenues:
Initial license fees......................................... $ 585 $ 1,980 $ 4,426 $ 6,299 $ 2,492 $ 3,503
Annual renewal license and support fees...................... 628 980 1,521 1,942 894 1,100
Services and other........................................... 354 531 1,224 2,271 778 1,747
------ ------ ------ ------- ------ ------
Total revenues......................................... 1,567 3,491 7,171 10,512 4,164 6,350
------ ------ ------ ------- ------ ------
Cost of revenues:
Initial license fees......................................... 24 145 273 351 98 314
Annual renewal license and support fees...................... 149 217 267 369 179 245
Services and other........................................... 63 77 192 424 179 321
------ ------ ------ ------- ------ ------
Total cost of revenues................................. 236 439 732 1,144 456 880
------ ------ ------ ------- ------ ------
Gross profit................................................... 1,331 3,052 6,439 9,368 3,708 5,470
------ ------ ------ ------- ------ ------
Operating expenses:
Research and development..................................... 408 401 1,045 1,748 819 1,085
Selling and marketing........................................ 581 935 2,765 4,415 1,866 3,249
General and administrative................................... 610 996 1,275 1,520 733 736
------ ------ ------ ------- ------ ------
Total operating expenses............................... 1,599 2,332 5,085 7,683 3,418 5,070
------ ------ ------ ------- ------ ------
Income (loss) from operations.................................. (268) 720 1,354 1,685 290 400
Interest income (expense), net................................. (1) (23) (9) 5 9 16
------ ------ ------ ------- ------ ------
Income before provision (credit) for income taxes.............. (269) 697 1,345 1,690 299 416
Provision (credit) for income taxes............................ (95) 284 633 638 111 170
------ ------ ------ ------- ------ ------
Net income (loss).............................................. $ (174) $ 413 $ 712 $ 1,052 $ 188 $ 246
====== ====== ====== ======= ====== ======
Pro forma net income (loss) per share(3)....................... $ (.02) $ .06 $ .09 $ .13 $ .02 $ .03
====== ====== ====== ======= ====== ======
Shares used to compute pro forma net income (loss) per
share(3)..................................................... 7,290 7,290 8,256 8,292 8,256 8,891
====== ====== ====== ======= ====== ======
Supplemental pro forma net income (loss) per share(4).......... $ (.02) $ .06 $ .08 $ .12 $ .02 $ .03
====== ====== ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- JUNE 30,
1992 1993 1994 1995 1996
------ -------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(2):
Cash and cash equivalents................................................. $ 1 $ 112 $ 584 $ 1,271 $ 1,466
Working capital (deficit) (319) 84 537 1,353 1,040
Total assets.............................................................. 744 1,805 4,209 6,289 7,102
Obligations under capital leases, less current portion.................... 10 18 20 99 145
Series A Redeemable Preferred Stock....................................... 252 585 918 1,251 1,417
Total stockholders' equity (deficit)...................................... (388) (308) 71 856 976
</TABLE>
- ---------------
(1) The Company was incorporated on October 18, 1991, and had insignificant
commercial activities from inception through December 31, 1991.
(2) See Note 9 of Notes to Consolidated Financial Statements for information
concerning transactions with affiliates.
(3) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net income per share.
(4) Assumes the repayment of the current income tax payable to affiliate out of
the proceeds of this offering, and assumes as outstanding the pro forma
shares outstanding plus 153,567 shares of the shares being offered by the
Company hereby which represent the shares deemed to be sold to fund such
repayment. See "Use of Proceeds" and Note 1 of Notes to Consolidated
Financial Statements.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's revenues and results of operations are difficult to forecast
and could differ materially from those discussed in the forward-looking
statements contained in this Prospectus as a result of a number of factors,
including, without limitation, those discussed under "Risk Factors" above.
OVERVIEW
Document Sciences develops, markets and supports a family of document
automation software and services used in high volume electronic publishing
applications. The Company's revenues are divided into three categories: initial
license fees, annual renewal license and support fees, and services and other
revenues. Initial license fees are comprised principally of license fees for the
first year of use of the Company's products by end user customers. Annual
renewal license and support fees are comprised principally of mandatory fees
paid by customers annually for continued use and support of the licensed
products. Services and other revenues are comprised principally of fees for
consulting, application development and training services performed by the
Company as well as fees received from Xerox in connection with the sale of
certain Xerox printer products. The Company recognizes revenue in accordance
with AICPA Statement of Position on Software Revenue Recognition No. 91-1.
Initial license revenue is recognized upon shipment of the product to customers
if no significant Company obligations remain and collection of the receivable is
deemed probable. The portion of the initial license revenue which represents the
software support for the first year is deferred and recognized ratably over the
contract period. Annual renewal license and support revenue is deferred and
recognized ratably over the contract period. Revenues from commissions paid by
Xerox in connection with the sale of Xerox printer products are recognized upon
installation of the printer products. Revenues generated from consulting and
training services are recognized as the related services are performed. See Note
1 of Notes to Consolidated Financial Statements.
Revenues from the Company's CompuSet software and related products
comprised approximately 100%, 100%, 97% and 85% of initial license fees for
years 1993, 1994, 1995 and the first half of 1996, respectively. The Company
expects that its CompuSet products will continue to account for a substantial
majority of initial license fee revenue for the foreseeable future.
The Company's business has experienced and is expected to continue to
experience seasonality, in part due to customer purchasing patterns and the
Company's expense patterns. The Company believes that fourth quarter revenues
are positively impacted by year-end capital purchases by large corporate
customers, and strong fourth quarter sales of printers by Xerox (which may
generate sales of the Company's products, as well as commissions to the
Company), as well as the Company's sales compensation plans. These seasonal
factors typically result in fourth quarter revenues being substantially higher
than revenues in each of the preceding three quarters, as well as being higher
than revenues in each of the first two quarters of the next year. In addition, a
significant amount of the Company's revenues occur predominantly in the third
month of each fiscal quarter and tend to be concentrated in the latter half of
that third month.
The Company has substantially increased expenditures in support of its
strategy to expand its global marketing, sales and customer support
infrastructure in order to expand the market for the Company's products by
providing direct sales and support services and increased channel distribution
throughout the major markets of the world. Through this expansion, the Company
hopes to lessen its dependence on Xerox Corporation and certain Xerox
affiliates. In addition, the Company's strategy is to increase both its product
offerings and markets through marketing, sales and distribution, and its product
development relationships with other companies. The Company intends to increase
the number of these strategic relationships as well as form alliances with
system integrators and consultants. Whether the Company can successfully
generate its own sales leads,
19
<PAGE> 22
introduce new products and enter into new markets will depend on its ability to
expand its direct sales and support services, expand its indirect channel
distribution, and increase its relationships and alliances with other companies.
As a result of its planned expansion, the Company has and will continue to incur
significant costs to build such corporate infrastructure ahead of anticipated
revenues, and any failure to achieve growth in revenues would have a material
adverse affect on the Company's business, operating results and financial
condition. See "Risk Factors -- Expansion of Sales and Distribution Channels."
The license of the Company's software products is often an enterprise-wide
decision by prospective customers and generally requires the Company to engage
in a lengthy sales cycle, typically between three and twelve months, to provide
a significant level of education to prospective customers regarding the use and
benefits of the Company's projects. In addition, the implementation by customers
of the Company's products involves a significant commitment of resources by such
customers over an extended period of time and is commonly associated with
substantial customer reengineering efforts. For these and other reasons, the
sales and customer implementation cycles are subject to a number of significant
delays over which the Company has little or no control. Delay in the sale or
customer implementation of a limited number of license transactions could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company sells its products principally through a direct sales force
domestically, and internationally principally through distributors and value
added resellers ("VARS") and, to a lesser extent, through its direct sales
force. The Company derived approximately 14%, 26%, 42% and 30% of its total
revenues from export sales, including sales through its foreign subsidiary, in
1993, 1994, 1995 and the first half of 1996, respectively. International
revenues reflect the start-up and expansion of the Company's international
operations. The Company's international business is subject to various risks
common to international activities, including currency fluctuations. Revenues
and expenses of the Company's international operations are translated at the
average exchange rate in effect during the period. Although to date exchange
rate fluctuations have not had a significant impact on the Company, fluctuations
in the value of the currencies in which the Company conducts its business
relative to the U.S. dollar could cause currency transaction gains and losses in
future periods. Such fluctuations could affect the Company's operating results
and financial condition. The Company does not currently engage in currency
hedging transactions. See Notes 3 and 9 of Notes to Consolidated Financial
Statements.
The Company and Xerox maintain a strategic marketing alliance agreement
under which the parties have agreed to pay each other fees on referrals that
lead to the successful licensing or sales of each other's products. The
Company's revenues from the strategic marketing alliance, principally
commissions from sales of Xerox printers, were $490,400, $752,000 and $586,600
in 1994, 1995 and the first half of 1996, respectively, and payments to Xerox
under this agreement were $113,500, $167,200 and $67,300 in 1994, 1995 and the
first half of 1996, respectively. The commissions received by the Company from
sales of Xerox printers under the strategic marketing alliance have little
associated costs, have had a high degree of inconsistency from quarter to
quarter and are difficult to estimate. Failure to continue to receive such
commissions would have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company has entered
into distributorship agreements with various Xerox foreign affiliates to re-
market the Company's products internationally. The Company's revenues from such
distributorship agreements related to the licensing, maintenance and support of
the Company's products were $1.3 million, $3.1 million and $675,900 in 1994,
1995 and the first half of 1996, respectively. When initial licenses of the
Company's software products are installed with Xerox products, from time to time
Xerox bills and collects for the licensed software on behalf of the Company.
Funds collected and remitted by Xerox to the Company for these end user software
products were $835,200 in 1994, $1.2 million in 1995 and $821,600 in the first
half of 1996. See Note 9 of Notes to Consolidated Financial Statements. Although
neither Xerox nor its affiliated entities has expressed to the
20
<PAGE> 23
Company any intention to terminate their respective agreements with the Company,
these agreements generally may be terminated on no more than 90 days' notice.
Accordingly, there can be no assurance that Xerox or its affiliates will
continue these relationships or, if they do, that they will be on terms
favorable to the Company.
RESULTS FROM OPERATIONS
The following table sets forth the percentage of total revenues for certain
items in the Company's consolidated statement of income for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ --------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Initial license fees.............................. 57 % 62 % 60 % 60 % 55 %
Annual renewal license and support fees........... 28 21 18 21 17
Services and other................................ 15 17 22 19 28
--- --- --- --- ---
Total revenues............................ 100 100 100 100 100
--- --- --- --- ---
Cost of revenues:
Initial license fees.............................. 4 3 3 3 5
Annual renewal license and support fees........... 6 4 4 4 4
Services and other................................ 3 3 4 4 5
--- --- --- --- ---
Total cost of revenues.................... 13 10 11 11 14
--- --- --- --- ---
Gross profit........................................ 87 90 89 89 86
--- --- --- --- ---
Operating expenses:
Research and development.......................... 11 14 17 20 17
Selling and marketing............................. 27 39 42 45 51
General and administrative........................ 28 18 14 17 12
--- --- --- --- ---
Total operating expenses.................. 66 71 73 82 80
--- --- --- --- ---
Income from operations.............................. 21 19 16 7 6
Interest income (expense), net...................... (1 ) -- -- -- --
--- --- --- --- ---
Income before provision for income taxes............ 20 19 16 7 6
Provision for income taxes.......................... 8 9 6 2 2
--- --- --- --- ---
Net income................................ 12 % 10 % 10 % 5 % 4 %
=== === === === ===
</TABLE>
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenues
Total revenues were $3.5 million in 1993, $7.2 million in 1994, and $10.5
million in 1995, representing increases from the prior year of 105% in 1994 and
47% in 1995. The increases were primarily attributable to increases in revenues
from initial licenses of software and growth in services and other revenue. In
addition, the Company's revenues from export sales and sales through its foreign
subsidiary increased from 14% of total revenues in 1993 to 26% in 1994 and 42%
in 1995.
Initial license fees. Initial license revenues increased 124% from $2.0
million in 1993 to $4.4 million in 1994 and 42% to $6.3 million in 1995,
representing 57%, 62% and 60% of total revenues in the respective years. The
increase in initial licenses of software was due principally to sales to new
customers and expansion of the Company's indirect distribution channel,
especially the value added reseller channel in Europe, and to a lesser extent to
the release in October 1993 of the Windows-based CompuSeries products.
Annual renewal license and support fees. Revenues from annual renewal
license and support fees increased 55% from $980,700 in 1993 to $1.5 million in
1994, and by 28% to $1.9 million in 1995. The increase was principally due to
expansion in the installed base of the users of the Company's
21
<PAGE> 24
software products. As a percentage of total revenues, annual renewal license and
support fees have decreased from approximately 28% in 1993 to 21% in 1994 and
18% in 1995. This decrease is principally due to the strong increase in initial
license revenues in 1994 and 1995 and, to a lesser extent, to licenses of
CompuSeries products in 1994 and 1995 when such products did not carry a
follow-on annual license obligation.
Services and other. Revenues from services and other increased 131% from
$530,900 in 1993 to $1.2 million in 1994, and 86% to $2.3 million in 1995 and
have increased as a percentage of total revenues from 15% in 1993 to 17% in 1994
and 22% in 1995. The increase in revenues was the result of increasing demand
from customers for consulting services due principally to the increased number
of new customer licenses of the Company's software generating increased demand
for services, and the increase in commissions from $198,600 in 1993 to $490,400
and $752,000 in 1994 and 1995, respectively, under the strategic marketing
alliance from the sale of Xerox printers.
Cost of Revenues
Total cost of revenues have remained relatively constant at 10% to 13% of
total revenues during the last three fiscal years.
Cost of initial license fees. Cost of initial license fees of software
includes documentation, reproduction costs, product packaging, packaging design,
product media, employment costs for training, installation and distribution
personnel. The cost of initial licenses has ranged between 5% to 7% of initial
license revenues during the last three years. The cost of third party software
has been insignificant to date; however, these costs will increase in the future
to the extent that the Company integrates third party software into its Document
Library software products and to the extent that the Document Library software
products become a significant component of initial license revenue. Also
included in the cost of initial license revenues in 1993, 1994 and 1995 was
amortization of capitalized software development costs of $36,600, $103,500 and
$136,100, respectively.
Cost of annual renewal license and support fees. Cost of annual renewal
license and support fees consists principally of the employment-related costs
for the Company's technical support staff, which performs technical software
support services. These costs have increased on an absolute dollar basis from
1993 to 1995 due principally to increases in the Company's technical support
staff. As a percentage of annual renewal license and support fees revenues,
these costs were 22%, 18% and 19% in 1993, 1994 and 1995, respectively,
reflecting significantly increased technical support staff in 1995.
Cost of services and other. Cost of services and other consists
principally of the employment-related costs for the Company's staff of product
consultants and trainers. There are little or no costs related to commissions
from the sale of Xerox printers under the strategic marketing alliance. These
costs have ranged between 15% and 19% of services and other revenues during the
last three years. The increase in these costs in absolute dollars and as a
percentage of services and other revenues resulted principally from the
additional staffing required to perform the Company's professional services.
Operating Expenses
Research and development. Research and development expenses consist
primarily of personnel costs associated with developing new products, enhancing
existing products, testing software products and developing product
documentation as well as other costs directly related to product development.
The Company expenses all costs for research and development of new products
until technological feasibility has been assured. Thereafter, costs of
production are capitalized until general release of the product. The Company
capitalized $74,900, $164,000 and $291,000 in 1993, 1994 and 1995, respectively.
The capitalized costs of software production are amortized using the greater of
the amount computed using the ratio of current product revenues to estimated
total product revenues or the straight-line method over the remaining estimated
economic lives of the
22
<PAGE> 25
products. Research and development expenses increased 161% from $401,000 in 1993
to $1.0 million in 1994 and 67% to $1.7 million in 1995, representing 11%, 14%
and 17% of total revenues in these periods, respectively. The increase in these
expenses over this period resulted principally from the increase in the number
of engineering and technical employees and related costs. Engineering and
technical employees increased from 6 in 1993 to 15 in 1994 to 22 in 1995.
Selling and marketing. Selling and marketing expenses consist primarily of
salaries, commissions, marketing programs and related costs for pre- and
post-sales activity. These expenses increased 196% from $935,000 in 1993 to $2.8
million in 1994 and 60% to $4.4 million in 1995, representing 27%, 39% and 42%
of total revenues in these years, respectively. The growth of these expenses was
due principally to increases in domestic sales and sales support personnel and
related costs, as well as to increases in commissions associated with increased
revenues and increases in expenses for seminars, trade shows, advertising and
other marketing programs. The increase in these expenses as a percentage of
total revenues reflects additional personnel, from 13 in 1993 to 25 in 1994 and
55 in 1995, and expanded marketing programs necessary to address new sales
opportunities and to support an expanded customer base. See "Risk Factors --
Expansion of Sales and Distribution Channels."
General and administrative. General and administrative expenses consist of
employment-related costs for finance, administration and human resources, and
general corporate management and services. These expenses increased 28% from
$996,000 in 1993 to $1.3 million in 1994, and 19% to $1.5 million in 1995,
representing 28%, 18% and 14% of total revenues in 1993, 1994 and 1995,
respectively. The increase in these expenses in absolute dollars from 1993 to
1995 was due principally to growth in the Company's finance and administrative
operations necessary to support business growth. The decrease as a percentage of
total revenues reflects the benefits of economies of scale.
Interest Income (Expense), Net
Interest income (expense), net is primarily composed of interest income
from cash and cash equivalents, offset by financing charges related to equipment
leases and other debt. The Company generally invests cash not required for
immediate working capital needs in United States Government treasury bills,
money market accounts and other investment-grade securities. The amount of
interest income fluctuates based upon the amount of funds available for
investment and the prevailing interest rates.
Provision for Income Taxes
The Company's effective tax rate was 41% in 1993, 47% in 1994 and 38% in
1995. The effective tax rates were based on the federal and state statutory
rates. The effective income tax rate for 1994 increased as a result of operating
losses incurred by the Company's foreign subsidiary. The tax benefits
attributable to these losses cannot be recognized as the realization of such
benefits is uncertain. From its inception to December 31, 1995, the Company's
taxes were included in the consolidated tax returns of Xerox. For reporting
purposes, the Company recognizes income tax expense on pretax income at the tax
rates in effect as if the Company were filing tax returns on a stand-alone
basis. The Company intends to repay its income tax liability to Xerox from the
proceeds of the initial public offering. At such time as Xerox owns less than
80% of the Common Stock of the Company, the Company will not be part of the
consolidated tax returns of Xerox. See "-- Liquidity and Capital Resources,"
"Certain Transactions" and Note 8 of Notes to Consolidated Financial Statements.
SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996
Revenues
Total revenues increased 53% from $4.2 million in the first half of 1995 to
$6.3 million for the same period in 1996. Revenues from initial license fees,
annual license renewal and support fees
23
<PAGE> 26
and services and other increased 41%, 23% and 125%, respectively, from the first
half of 1995 to the first half of 1996, representing 55%, 17% and 28%
respectively, of total revenues. This growth in revenues reflected increases in
licenses of the Company's software products to new customers and additional
licenses to existing customers, annual renewal license fees from an expanded
installed customer base, increases in customer requirements for consulting
services, and the Company's increased focus on providing such services. The
Company also had significantly increased revenues from commissions from the sale
of Xerox printers, which are included in services and other, from $157,700 in
the first half of 1995 to $586,600 for the same period in 1996. In the
comparative periods, the Company's total revenues from Xerox and affiliates of
Xerox declined from $1.5 million in the first half of 1995 to $1.4 million in
the first half of 1996, due principally to substantially reduced sales through
Fuji Xerox Co. Ltd. in Australia and Xerox Canada Ltd. in Canada and, to a
lesser extent, to reduced European revenues from Xerox affiliates. These
decreases were substantially offset by the increased revenues from commissions
on sales of Xerox printers. In addition, the Company's revenues from European
VARs not affiliated with Xerox increased substantially in the first half of 1996
from the first half of 1995. The Company also recognized revenues from the
initial licenses of its DLS and DVS products in the first half of 1996.
Cost of Revenues
Total cost of revenues increased from $456,900 in the first half of 1995 to
$879,800 for the same period in 1996, representing 11% and 14% of total revenues
in the respective periods. These costs increased principally as a result of
expansion of technical support personnel necessary to support the expansion of
the installed customer base of the Company's software products as well as to
increase the level and quality of the technical support provided.
Cost of initial license fees. The cost of initial licenses increased from
$98,300 in the first half of 1995 to $313,700 for the same period in 1996,
representing approximately 4% and 9% of initial license revenues in the
respective periods. This increase was principally due to the changes in mix and
initial shipments of the DLS software, which has higher costs due to the use of
third party software.
Cost of annual renewal license and support fees. These costs increased
from $179,700 in the first half of 1995 to $244,600 in the same period in 1996,
representing approximately 20% and 22%, respectively, of annual renewal license
and support fee revenues in the comparative periods. These costs increased
principally as a result of expansion of technical support personnel necessary to
support the expansion of the installed customer base of the Company's software
products and to increase the level and quality of the technical support
provided.
Cost of services and other. These costs increased from $178,900 in the
first half of 1995 to $321,600 for the same period in 1996, representing 23% and
18%, respectively, of services and other revenues in the respective periods. The
increase in absolute dollars resulted principally from expansion of the
consulting personnel and the increase in the generally high levels of salaries
of the consulting personnel. The decrease as a percentage of related revenue was
the result of the higher percentage of commissions from the sale of Xerox
printers relative to the services revenue, since the cost of services and other
does not include any material expense associated with commissions from the sale
of Xerox printers. The cost of services for both the first half of 1995 and 1996
was 28% of services revenue.
Operating Expenses
Research and development. Research and development expenses increased from
$819,400 in the first half of 1995 to $1.1 million for the same period in 1996,
representing 20% and 17% of total revenues in the respective half year periods.
The increase in absolute dollars was the result of increases in the number of
engineering and technical employees and related costs which the Company incurred
to support the increased focus on product enhancements and product design.
24
<PAGE> 27
Selling and marketing. These expenses increased from $1.9 million in the
first half of 1995 to $3.2 million for the same period in 1996, representing 45%
and 51%, respectively, of total revenues in the respective periods. The increase
was due to higher personnel costs as a result of an increase in headcount from
48 to 68, higher travel costs, expanded marketing activities and the design and
implementation of professional services methodology, all in support of the
Company's strategy to expand its worldwide marketing, sales and customer support
infrastructure. See "Risk Factors -- Expansion of Sales and Distribution
Channels."
General and administrative. These expenses increased from $732,300 in the
first half of 1995 to $735,600 for the same period in 1996, representing 17% and
12%, respectively, of total revenue in the respective periods. These costs
remained relatively constant in absolute dollars and decreased significantly as
a percentage of total revenues reflecting the benefits of economies of scale.
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited consolidated financial
information by quarter for each of the six quarters through the quarter ended
June 30, 1996. This quarterly information has been prepared on a consistent
basis with the audited consolidated financial statements appearing elsewhere in
this Prospectus and, in the opinion of management, all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the unaudited quarterly results when read
in conjunction with the audited consolidated financial statements and related
notes thereto. The operating results for any quarter are not necessarily
indicative of results for any future period. See "Risk Factors -- Uncertainty of
Future Operating Results; Fluctuations in Quarterly Operating Results."
25
<PAGE> 28
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------
1995 1996
-------------------------------------------- -------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Initial license fees......................... $ 1,287 $ 1,205 $1,238 $ 2,568 $ 1,564 $ 1,939
Annual renewal license and support fees...... 430 464 514 534 545 555
Services and other........................... 273 505 539 954 579 1,168
------ ------ ------ ------ ------ ------
Total revenues....................... 1,990 2,174 2,291 4,056 2,688 3,662
------ ------ ------ ------ ------ ------
Cost of revenues:
Initial license fees......................... 55 43 34 217 86 228
Annual renewal license and support fees...... 82 97 86 104 134 111
Services and other........................... 75 104 115 130 139 182
------ ------ ------ ------ ------ ------
Total cost of revenues............... 212 244 235 451 359 521
------ ------ ------ ------ ------ ------
Gross profit................................... 1,778 1,930 2,056 3,605 2,329 3,141
------ ------ ------ ------ ------ ------
Operating expenses:
Research and development..................... 373 446 512 417 506 579
Selling and marketing........................ 803 1,063 1,058 1,491 1,462 1,787
General and administrative................... 342 391 387 401 341 395
------ ------ ------ ------ ------ ------
Total operating expenses............. 1,518 1,900 1,957 2,309 2,309 2,761
------ ------ ------ ------ ------ ------
Income from operations......................... 260 30 99 1,296 20 380
Interest income (expense), net................. 2 7 -- (4) 5 11
------ ------ ------ ------ ------ ------
Income before provision for income taxes....... 262 37 99 1,292 25 391
Provision for income taxes..................... 97 14 37 490 9 161
------ ------ ------ ------ ------ ------
Net income..................................... $ 165 $ 23 $ 62 $ 802 $ 16 $ 230
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------
1995 1996
-------------------------------------------- -------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Initial license fees......................... 65% 56% 54% 63% 58% 53%
Annual renewal license and support fees...... 21 21 22 13 20 15
Services and other........................... 14 23 24 24 22 32
------ ------ ------ ------ ------ ------
Total revenues....................... 100 100 100 100 100 100
------ ------ ------ ------ ------ ------
Cost of revenues:
Initial license fees......................... 3 2 1 5 3 6
Annual renewal license and support fees...... 4 4 4 3 5 3
Services and other........................... 4 5 5 3 5 5
------ ------ ------ ------ ------ ------
Total cost of revenues............... 11 11 10 11 13 14
------ ------ ------ ------ ------ ------
Gross profit................................... 89 89 90 89 87 86
------ ------ ------ ------ ------ ------
Operating expenses:
Research and development..................... 19 20 22 10 19 16
Selling and marketing........................ 40 49 46 37 54 49
General and administrative................... 17 18 17 10 13 11
------ ------ ------ ------ ------ ------
Total operating expenses............. 76 87 85 57 86 76
------ ------ ------ ------ ------ ------
Income from operations......................... 13 2 5 32 1 10
Interest income (expense), net................. -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Income before provision for income taxes....... 13 2 5 32 1 10
Provision for income taxes..................... 5 1 1 12 -- 4
------ ------ ------ ------ ------ ------
Net income..................................... 8% 1% 4% 20% 1% 6%
====== ====== ====== ====== ====== ======
</TABLE>
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<PAGE> 29
The Company's total revenues and operating results can vary, sometimes
substantially, from quarter to quarter and are expected to vary significantly in
the future. The Company's revenues and operating results are difficult to
forecast. Future results will depend upon many factors, including the demand for
the Company's products, the level of product and price competition, the length
of the Company's sales cycle, the size and timing of individual license
transactions, the delay or deferral of customer implementations, the budget
cycles of the Company's customers, the Company's success in expanding its direct
sales force and indirect distribution channels, the timing of new product
introductions and product enhancements by the Company and its competitors, the
mix of products and services sold, levels of international sales, activities of
and acquisitions by competitors, the timing of new hires, changes in foreign
currency exchange rates, the ability of the Company to develop and market new
products and control costs, and general domestic and international economic
conditions. In addition, the Company's sales generally reflect a relatively high
amount of revenues per order, and the loss or delay of individual orders,
therefore, could have a significant impact on the revenues and quarterly
operating results of the Company. Moreover, the timing of license revenue is
difficult to predict because of the length of the Company's sales cycle, which
is typically three to twelve months from the initial customer contact. In
addition, a significant amount of the Company's revenues occur predominantly in
the third month of each fiscal quarter and tend to be concentrated in the latter
half of that third month.
The Company's business has experienced and is expected to continue to
experience seasonality, in part due to customer purchasing patterns and the
Company's expense patterns. The Company believes that fourth quarter revenues
are positively impacted by year-end capital purchases by large corporate
customers and strong fourth quarter sales of printers by Xerox (which may
generate sales of the Company's products), as well as the Company's sales
compensation plans. As reflected in the fourth quarter of 1995, these seasonal
factors have historically resulted in fourth quarter revenues being
substantially higher than revenues in the preceding three quarters, as well as
being higher than revenues in each of the first two quarters of the next year.
In addition, in the second and third quarters of 1995 and the first and second
quarters of 1996, the Company's operating profitability was substantially
dependent on commissions received from the sale of Xerox printers.
The Company's sales generally reflect a relatively high amount of revenues
per order. The loss or delay of individual orders, therefore, could have a more
significant impact on the revenues and quarterly results of the Company than on
those of companies with higher sales volumes and lower revenues per order. The
Company's software products generally are shipped as orders are received, and
revenues are recognized upon shipment of the products, provided no significant
vendor obligation exists and collection of the related receivable is deemed
probable. As a result, initial license revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter. The timing of receipt of
initial license revenue is difficult to predict because of the length of the
Company's sales cycle, which is typically three to twelve months from the
initial contact. Because the Company's operating expenses are based on
anticipated revenue trends and because a high percentage of the Company's
expenses are relatively fixed, a delay in the recognition of revenue from a
limited number of initial license transactions could cause significant
variations in operating results from quarter to quarter and could result in
losses. To the extent such expenses precede, or are not subsequently followed
by, increased revenues, the Company's operating results would be materially
adversely affected. Further, the Company has experienced variability in quarter-
to-quarter operating expenses. This variability in research and development
expenses is due principally to the timing of completion of software development
projects and the allocation of the time of technical personnel who are
periodically assigned to such development projects. In addition, the Company's
selling and marketing expenses have increased significantly over the last six
quarters, reflecting a significant increase in the Company's sales, marketing
and customer support infrastructure designed to increase revenues. If such
revenue increase does not occur, the Company's operating results will be
materially adversely affected.
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<PAGE> 30
Due to the foregoing factors, revenues and operating results for any
quarter are subject to significant variation, and the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Further, it is possible that in some future quarter or quarters the Company's
operating results will be less than the expectations of public market analysts
and investors. In such event, the price of the Company's Common Stock would
likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through cash flow
from operations, bank lines of credit and long-term capital leases. The Company
has a line of credit with a commercial bank under which the Company may borrow
up to a total of $750,000, secured by substantially all assets of the Company at
the bank's prime rate of interest plus 1%. The Company currently has no
borrowings outstanding under the line of credit. The Company has entered into a
letter of intent to replace such line of credit with a new line of credit from a
commercial bank under which the Company may borrow up to $2,500,000 at the
bank's prime rate. This line of credit will be secured by substantially all
assets of the Company.
The Company generated $90,000, $1.3 million, $1.2 million and $614,100 from
operations in 1993, 1994, 1995 and the first half of 1996, respectively. These
amounts are principally the result of income from operations and increases in
deferred revenue partially offset by growth in accounts receivable, due to
increased revenue. In addition, Xerox paid the Company's current income taxes of
$136,000, $653,700 and $591,400 in 1993, 1994 and 1995, respectively, which the
Company has not been required to settle in cash, which has positively affected
cash generated from operating activities in such periods. Beginning January 1,
1996, the Company will be responsible for the payment of its income taxes, which
will affect cash generated from operations. The Company's investing activities
used cash of $95,400 in 1993, $411,300 in 1994, $588,900 in 1995 and $391,800 in
the first half of 1996. The principal investments have been in purchases of
property and equipment and computer software costs. See "Use of Proceeds."
The Company's financing activities provided $27,200 in 1995 and $116,800 in
1993. In 1995, cash was provided by issuance of common stock pursuant to
exercise of stock options offset by payments of capital lease obligations. In
1993, cash was provided by borrowings under the Company's line of credit offset
by payments of capital lease obligations. In 1994, cash used for financing
activities was $374,400. In this period, cash was used to repay net borrowings
under the Company's line of credit and capital lease obligations. In the first
half of 1996, cash used for financing activities was $27,600. In this period,
cash was used primarily to repay capital lease obligations.
At June 30, 1996, the Company had cash and cash equivalents of $1.5
million. The Company believes that the net proceeds from the sale of Common
Stock in this offering together with existing cash balances, anticipated cash
flow from operations, and its line of credit, will be sufficient to meet its
capital requirements for at least the next twelve months. The Company intends to
invest the Company's cash in excess of cash required for current operations in
short-term, investment grade securities.
28
<PAGE> 31
BUSINESS
Document Sciences Corporation develops, markets and supports a family of
document automation software products and services used in high volume
electronic publishing applications. Document automation has become increasingly
important as more companies realize the benefits of automating the high volume
production of individually customized documents that require the precise layout
of information such as financial data, marketing text and graphs. Autograph, the
Company's document automation software architecture, enables personalized and
customized publishing solutions for many industries including insurance, managed
healthcare, financial services, telecommunications, manufacturing/distribution,
government and commercial print services. The Company's products enable an
important form of communication between organizations and customers by employing
enterprise database assets to produce high-quality documents that are ready to
print on demand and distribute in high volume. Additionally, the Company's core
technology is being applied to provide electronic document automation solutions
for the Internet, intranets and commercial on-line services. CompuSet,
Autograph's flagship product, is licensed by approximately 400 customers
worldwide who collectively produce an estimated one billion customized pages per
month. The fully portable Autograph platform enables cost-effective,
just-in-time, on-demand, high volume publishing that is fully automated, capable
of quality document composition, and flexible for end-user customization. The
Company's products are used in a wide array of computing environments from
client/server to large computer systems.
INDUSTRY BACKGROUND
In today's highly competitive and cost conscious marketplace, document
automation is becoming increasingly critical to organizations with large numbers
of customer and document distribution needs. The Company believes producing and
processing business documents may cost up to 15% of a document intensive
organization's revenue. Document automation can reduce labor, inventory, and
distribution costs often found in other forms of publishing. For many companies,
the document is the primary manifestation of the company's products or services.
For example, insurance companies communicate to their policy holders principally
through their insurance policy documents. The insurance company's policy and
periodic premium bill represents its products and services. The production of
these documents through powerful document automation processes can dramatically
improve the company's image in the eyes of its customers. In addition, the role
of the document is becoming increasingly important in helping companies provide
new products and services to their customers. Examples are financial statements
that provide periodic performance reports, suggested investment strategies, and
highly personalized marketing messages integrated into the statements. Using
these documents as cross-marketing tools incorporating information from database
marketing and data mining processes can result in improved customer acquisition
and retention.
Many organizations that rely on documents to communicate with their
customers are seeking solutions which can provide highly customized and
personalized documents. Some markets require documents to be produced in large
quantities and with strong visual appeal. These organizations typically produce
large quantities of documents which are uniquely tailored to each individual
customer, such as insurance policies, financial statements, bills, and high
quality specialized direct mailings. Traditionally, these types of documents
have been created using a variety of in-house software systems augmented with
manual processes, which can be time consuming, costly and inflexible, and then
output to high speed and large volume electronic printers. Introduced by Xerox
and IBM in the late 1970s, electronic printers provide cost and productivity
advantages as well as the ability to produce robust documents in comparison to
the previous generation of high speed electromechanical impact printers.
Nevertheless, in markets requiring personalized and customized documents, high
volume electronic printers are often underutilized when not operated in
conjunction with document automation software.
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<PAGE> 32
To fully utilize electronic printers and economically produce documents,
organizations must address four processes: information creation, information
management, information formatting, and information presentation and output.
These processes, together with their primary forms or functions, are shown
below.
ELECTRONIC PUBLISHING PROCESS
CHART
Many organizations must manage these processes across a variety of
organizational units and computing systems. Companies producing documents in
large quantities must also consider the cost trade-offs between highly
customized and personalized documents versus reproducing standard documents.
Organizations seek to implement flexible document automation processes in order
to produce customized documents in large quantities without the high costs of
traditional production methods. Document automation enables cost effective
production of large volumes of highly personalized and customized documents,
often at production costs similar to mass produced standard documents.
Some organizations that have produced large quantities of customized and
personalized paper documents for communications and information distribution are
exploring alternative and emerging technologies. These emerging document
distribution technologies include CD-ROM, the Internet, intranets, and
commercial on-line services. For example, many organizations are replacing
printed internal documents with electronic postings on enterprise local area
networks (LANs) or intranets. In addition, many companies are beginning to
communicate externally through global electronic networks such as the Internet.
For example, according to a recent industry report, the worldwide installed base
of intranet servers is estimated to grow from 63,500 in 1995 to 8.8 million in
2000, and the worldwide installed base of intranet client browsers is estimated
to grow from 6.4 million in 1995 to 111.9 million in 2000. For some
applications, the cost of implementing and maintaining these document
distribution alternatives is offset by the elimination or reduction of
paper-based document production and distribution. In addition to cost savings,
these technologies enable organizations to provide higher quality and more
robust interactive documents than their paper based counterparts. These
technologies can lead to more effective communications and improved customer
satisfaction, retention, and acquisition.
The market for document automation software is growing rapidly as companies
recognize the need to increase document effectiveness through high quality
composition and assembly. Document automation capitalizes on the investments
companies have made in traditional mainframe and newer client/server computing
platforms. Growth in the paper-based portion of the market is also fueled by the
increasing popularity of lower-cost midrange electronic printers and the
continuing cost/performance improvements in computing and communications
technologies. Organizations are producing increasing amounts of data and
information and consequently are demanding more effective documents and
delivery. The improvements in effectiveness can result from customized and
personalized content, more robust documents, and improved forms of document
delivery. In addition, in many current and future applications, the fundamental
nature of the document is shifting from static paper-based documents to more
robust interactive electronic documents published on the Internet, intranets and
commercial on-line services.
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<PAGE> 33
THE DOCUMENT SCIENCES SOLUTION
Document Sciences provides an integrated family of products and services
which address the enterprise need for document automation across mainframe and
client/server computing environments. The Company's software products and
services enable cost-effective composition and assembly of highly customized and
personalized documents rapidly and in very large quantities. The Company's
products comprise its Autograph document automation software architecture.
Document Sciences' products provide the following key business benefits for
a variety of document automation applications:
High Speed Personalization and Customization. The Company's products
enable large volumes of highly personalized and customized documents to be
composed and assembled faster than by interactive publishing methods and most
other types of current electronic publishing. For example, using CompuSet, more
than 50 complex personalized and customized pages per second can be composed and
assembled using data and information in corporate databases. The customer
satisfaction benefits of personalized and customized documents can be
substantial and can often provide the company's customers with a competitive
advantage.
Just-in-Time, On-Demand Processing. The Company's products are suited to
just-in-time, on-demand environments where customized and personalized documents
must be produced rapidly and in large quantities. Applications can be developed
which operate in both high-volume batch processing environments as well as
transaction initiated settings. Autograph's ability to support both environments
benefits the customer by providing the enterprise with a single document
automation solution which addresses on-demand publishing for both paper based
and electronic document distribution.
Portable, open and scaleable. The Company's software products operate
identically on a large number of computing and software operating systems, and
are easily migrated across heterogeneous computing environments. For example,
the Company's software products and applications operating on IBM mainframe
hardware and software products can be easily moved to industry standard Unix or
PC platforms with little or no modifications. In addition, Autograph supports
high speed electronic printers from Xerox, IBM, OCE (which has recently acquired
the electronic printer business of Siemens Nixdorf), and Hewlett-Packard, which
together account for a large majority of the world's installed base.
Lower Cost. The Company's software products enable significant cost
savings over traditional forms of document development, production and
archiving. Due to their automation capabilities, the Company's products require
less labor for certain applications when compared to other types of electronic
publishing such as interactive or desktop publishing. The on-demand production
capabilities of Autograph help reduce storage, inventory and obsolescence costs.
Document archiving systems that utilize the Company's electronic viewing
products can achieve significant cost savings compared to paper, microfiche, and
microfilm forms of archiving.
THE DOCUMENT SCIENCES STRATEGY
The Company's objective is to be the leading worldwide supplier of document
automation software and services. Autograph, the Company's document automation
software architecture, enables many industries including insurance, managed
health care, financial services, telecommunications, government agencies and
commercial print service bureaus to provide high volume customized and
personalized communication for their customers. The Company's strategy includes
extending its technology leadership, leveraging its installed base of customers,
expanding its distribution channels, expanding professional services and
expanding into electronic documents including the Internet, intranets and
commercial on-line services. The Company expects to invest significantly in
sales, marketing, professional services and product development infrastructure.
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<PAGE> 34
Maintain and Extend Technology Leadership. The Company's technology
strategy is to continue to enhance its industry leading Autograph architecture
with the addition of new products, features, functions, and performance
improvements. The Company intends to enhance Autograph by extending
connectivity, support and compatibility with products and services provided by
complementary suppliers in the industry. The Company intends to continue porting
its software products to additional computing platforms as market needs develop.
Continuing investments will be made in graphical user interfaces for document
design, prototyping and system operation. The Company intends to extend and
modify its core document automation technology to provide support for paperless
document production and distribution. Paperless document production and
distribution include on-line viewing, customized documents prepared for
distribution on optical media such as CD-ROMs, and electronic documents accessed
and delivered via the Internet, intranets and commercial on-line services.
Leverage the Company's Installed Base. The Company has a large installed
base of customers within its targeted markets in the United States, Canada,
Europe, and Australia. In many cases, the Company's customers are expanding or
upgrading their document automation needs, which provides a market for
additional products from the Company. Recently introduced and planned products
and services can also be provided to the Company's current customers as
follow-on sales activities. The Company also intends to leverage this installed
base by utilizing it to facilitate the introduction of major new products into
the market, such as products and services for providing electronic document
distribution over the Internet, intranets and commercial on-line services. The
Company's strategy is to increase its account penetration horizontally and
across multiple departments through Autograph's "sell high, sell wide"
enterprise-wide sales strategy, by further up-market penetration through the
integration and delivery of the total solutions selling process, and by
down-market penetration through increasing product ease of use.
Leverage the Electronic Printing Installed Base. The Company believes that
the worldwide installed base of high speed electronic printers is under utilized
due to the lack of widespread use of high-end document automation software
products. The Company intends to leverage this opportunity by marketing the
benefits of document automation to the high speed electronic printing installed
base which has already made extensive investments in computing and printing
hardware.
Expand Distribution Channels. The Company currently markets and supports
its products in the United States, Canada, Western Europe, and Australia. It
intends to expand marketing, selling and support capacity in its existing
territories as well as expansion into territories not currently served. The
Company intends to expand its direct sales organization in the United States
with additional sales representatives and infrastructure. International sales
are accomplished primarily through indirect sales channels such as value added
resellers (VARs). The Company intends to expand direct sales channels in certain
markets. Both the domestic and international sales activities will continue to
be enhanced through strategic marketing relationships with suppliers of
complementary products and services.
Expand Professional Services. The Company's strategy is to position itself
as a document automation solution provider. Consulting services are currently
focused on assisting in the sale of high margin initial software licenses by
providing project management and application development. The Company intends to
expand consulting services to assist existing customers with the application of
new products offered by the Company. The Company believes this marketing
strategy will provide opportunities to expand the Company's services to include
document design, systems design and integration. In addition to consulting
services, the Company currently offers introductory-level customer education,
which is bundled with CompuSet initial licenses. Additional and advanced
training is provided at the Company's headquarters in San Diego and at customer
sites for additional fees. The Company intends to expand its curriculum to
provide advanced and specialized customer education in response to the unique
needs of certain customers. The Company believes that expanded Professional
Services will enable customers to deploy the Company's document automation
products more rapidly and effectively and will enable the Company to become a
solutions provider, accelerate the development of new products and earn
recurring revenue.
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<PAGE> 35
Expand into Electronic Documents. To date, the Company's Autograph
architecture has been applied mainly to document automation applications
producing paper-based documents. The Company believes that its core technology
can be extended to the Internet, intranets and commercial on-line services, and
has recently begun initial development activity in this area. The short-term
strategy is to engage this emerging opportunity with two complementary
initiatives. First, the Company intends to work closely to define product
requirements with existing customers, many of whom have expressed interest in
using the Internet in their document automation solutions. Second, the Company
intends to develop incremental extensions to Autograph which can be readily
incorporated by current customers into existing document automation products
provided by the Company. These enhancements may provide support for Common
Gateway Interface (CGI) data capture in the Internet environment, support for
embedding links in the composed documents including Universal Resource Locators
(URLs) and multi-media links, and support for Portable Document Format (PDF)
from Adobe.
CUSTOMER CASE STUDIES
Representative examples of customers who are using the Company's products
to address their business production publishing needs are:
Insurance Services
Autograph architecture components such as CompuSet are used by insurance
companies worldwide. These include life insurance providers, property and
casualty insurers, as well as health insurers such as Blue Cross plans and
managed care providers such as HMOs. Autograph products have been used to
automate the production of insurance policies, insurance benefit booklets,
variable annuity statements, as well as personalized correspondence such as
renewal letters and claims processing documents.
A large life insurance company uses Autograph products for automated
insurance policy production. Prior to adopting Autograph, the insurer's process
required manual assembly using policy forms produced by an outside printer. The
number of these policy forms ranges well into the thousands since they vary for
each insurance product type, jurisdiction, and language. Because offset printing
costs necessitate large quantities, the thousands of pre-printed forms were kept
in a large and expensive warehouse facility. With Autograph, the insurer was
able to produce personalized life insurance policies for its clients, and
eliminate the warehouse expenses through on-demand electronic printing. In
addition, the high labor costs and errors inherent in manual document handling
have been minimized through document automation.
Financial and Banking Services
Personalized communications through document automation is rapidly becoming
a key differentiator for many financial and banking services companies as direct
person-to-person contact becomes reduced or eliminated. Reengineering the
document applications is also an opportunity to improve the quality and
readability through the use of composition and dynamic graphics.
Morgan Grenfell Asset Management (MGAM), headquartered in London, is one of
the largest asset management firms in Europe and uses Autograph products to
enhance the quality of its client communications as part of its total service
offering. MGAM was an early adopter of document automation technology and
realized the importance of generating personalized client reports enriched with
data-driven graphics. As part of the Autograph implementation, MGAM clients can
request specific reports which are produced immediately and printed on-demand.
In addition, the Autograph product suite is used to produce quarterly reports
with highly detailed and personalized information, as well as customized
presentation booklets that are distributed during client reviews.
A worldwide management and employee benefits consulting firm uses the
Autograph architecture to produce personalized employee benefit statements. As
part of a strategy to help its clients
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<PAGE> 36
communicate with their employees, the firm produces a comprehensive employee
benefit suite of documents. Through Autograph document automation, the firm's
clients can effectively communicate the importance of retirement planning to the
clients' employees, and dynamically illustrate how each employee can take
advantage of client-sponsored benefit programs. The firm believes that this
level of personalization and the use of dynamic composition and data-driven
graphics increases employee satisfaction and participation in their retirement
options.
Commercial Print Services
Commercial print service bureaus have been at the forefront of developing
many document automation applications. Such bureaus include large automated
document factories capable of producing upwards of 100 million customized and
personalized pages per month, specialized consulting firms providing unique
document products, and many regional and local electronic printing operations
that cater to smaller mid-size businesses. The flexibility of the Autograph
architecture is ideally suited to such clients, which must produce many varying
document types and provide a superior product for competitive reasons.
International Billing Services, Inc. (IBS), a wholly-owned subsidiary of
USCS International, Inc., and a large provider of outsourced statement
presentment services in the United States, has begun using Autograph as an
important component of its processes. By incorporating Autograph into its
highly-automated statement production centers, IBS has been able to shorten the
time needed to convert new customers to its processes. IBS is also exploring the
use of Autograph to enhance the flexibility of its statement creation services
and to produce richer, more information-oriented documents which are tailored to
each individual customer.
The versatility of Autograph products has allowed Security Mailing
Corporation, a regional document automation provider in Australia that services
the Asia Pacific banking and financial services sectors, to produce a wide
variety of document formats for its many clients. This flexibility insures that
each client is able to differentiate itself from its competitors and achieve the
desired level of document quality and personalization. Security Mailing
Corporation has also extended its services by incorporating Autograph's Document
Viewing capabilities into its offering. As a result, its clients can integrate
electronic document archival and retrieval directly into their customer service
processes. The ability to create hardcopy client documents as well as exact
electronic duplicates for use in customer service applications provides Security
Mailing Corporation with an advantage over competing bureaus that cannot provide
electronic document options.
Communications Industry
An emerging market for Autograph is in the communications arena. The advent
of new technologies is forcing many communications companies such as telephone,
cellular and cable providers to reengineer their own client communications. The
design of these new communications requires flexibility to support increasingly
complex product options and personalization for cross-marketing opportunities.
CAM-NET Communications Network Inc. (CWKTF), one of Canada's top five
long-distance companies, uses the Autograph architecture to produce its
corporate information and billing documents. As CAM-NET grew in the early
1990's, the company realized that it needed a state-of-the-art billing system
that would meet the needs of its expanding customer base, as well as provide a
competitive advantage through improved client communications. By adopting
Autograph products, CAM-NET has provided fully automated bill production, and
has dramatically improved the design, appearance and effectiveness of its
billing documents. Simultaneously, Autograph has increased its processing
capacity by 200 percent. Autograph has also improved CAM-NET's client
satisfaction, by allowing its customers to choose their preferred billing
structure and format -- by area code, by frequently-called numbers, by
personalized billing code, as well as many other options.
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Manufacturing and Distribution
Autograph document automation is also well suited for long document
applications by enabling customization of long documents to reduce document size
and improve document effectiveness.
Ace Hardware Corporation, a dealer-owned multi-billion dollar Fortune 500
wholesale cooperative with more than 5,000 stores located in all 50 states and
55 foreign countries, has been using Autograph products such as CompuSet since
the early 1980's. This has enabled Ace Hardware to fully automate the creation
of its nine-volume product catalog for its membership, including pagination and
indexing, as well as inclusion of over 30,000 images. Because of regional
product offerings, customized catalogs are created for each of its 15 regional
retail support centers. In total, nearly 70,000 industrial items are composed
into over 98,000 CompuSet-generated pages. With CompuSet, Ace Hardware was able
to reduce turnaround time, particularly in the initial layout of the document,
which previously had been done with an expensive manual cut and paste process.
CUSTOMERS
The Company's products are currently licensed to approximately 400 end user
customers in a broad range of industries worldwide including insurance, managed
health care, commercial print services, telecommunication, utilities,
manufacturing, distribution, retail, publishing companies as well as
governmental agencies. The following is a representative list of the Company's
end user customers, each of which is currently paying license fees for the use
of the Company's products.
<TABLE>
<S> <C> <C>
INSURANCE COMMERCIAL PRINT SERVICES BANKING/FINANCE
Aetna Life Insurance Co. Groupe IST Inc. Allmerica Financial, Inc.
Basler Versicherungs Hewitt Associates LLC Banque Nationale de Paris
Gesellschaft International Billing Services, Canada Trust Company and
Chubb & Son, Inc. Inc. The Canada Trustco
Le Gan Moore Communication Services Mortgage Company
Metropolitan Life Insurance Output Technologies Inc. Capital One Bank
Company Paperstream CIBC Insurance
The Prudential Life Insurance R R Donnelley & Sons Merrill Lynch, Pierce, Fenner
Company of America Standard Register & Smith Incorporated
State Farm Insurance Company Thomson Publications Australia Janus Capital Corp.
Sun Alliance Holdings Limited P/L Oppenheimer
United Services Automobile Primerica Life
Association Insurance Company and
Affiliates
Rothschild Australia Ltd.
Signet Bancard Corp.
Wells Fargo Bank
MANAGED CARE/HEALTH CARE MANUFACTURING/DISTRIBUTION TELECOMMUNICATIONS/TRANSPORTATION
Several Blue Cross/Blue Ace Hardware Corporation Bell Atlantic Services, Inc.
Shield Plans American Honda Motor CAM-NET Communications, Inc.
Cleveland Clinic Foundation Co., Inc. Chessie Computer Services,
Cost Care, Inc. Canadian Tire Corporation, Inc.
Foundation Health Limited Federal Express Corporation
Harvard Community Health Caterpillar Inc. France Telecom
Plans Circuit City Stores Official Airline Guides
HealthNet Compaq Computer Corporation (Business Men's Assurance
MaxiCare Health Plans, Inc. eR3 (Video International) Company of America)
Giant of Landover Inc. U.S. West Marketing
Thrifty Payless Inc. Resources Group
Westinghouse Electric
Corporation
</TABLE>
PRODUCTS
The Company's software products are included in its Autograph architecture,
which currently addresses three major functional areas: Document Composition and
Assembly, Document Management, and Document Viewing, as described below. All of
the Company's software products can be complemented by Professional Services.
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<PAGE> 38
AUTOGRAPH ARCHITECTURE
[GRAPHIC]
The list price for an initial license fee for CompuSet, the Company's core
product, is currently $65,000 for an initial mainframe installation and ranges
down to $35,000 for an initial single PC; options currently range from $1,000 to
$50,000. The Company licenses its products for one year, after which an annual
renewal fee, usually in an amount equal to 15% of the initial license fee, is
required for continued use. A typical new sale is currently about $75,000 for
software licenses and approximately $25,000 for professional services.
Document Composition and Assembly
Composition and Assembly. CompuSet, the Company's flagship product,
automates document composition and assembly using data and information in
corporate databases. It is the Company's core technology. CompuSet software
consists of a rule-based language and a composition engine that provide high
speed composition and assembly of complex documents with high typographic and
aesthetic levels of quality. Information content is marked with CompuSet tags
which, in turn, are defined in logically separate style specifications. Without
requiring real-time user interaction, the composition engine then transforms the
tagged data and information into finished electronic documents that can be
composed and assembled at rates in excess of 50 pages per second, depending on
computing configuration and complexity of the document. Document construction
facilities are extensive, including the full support of dynamic data driven
graphics generation.
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<PAGE> 39
CompuSet operates on a range of computers and operating systems including
mainframes, workstations, network servers and personal computers.
Data Capture and Setup. Data capture and setup products include CompuPrep
and a number of Importers, and prepare data and information for subsequent
composition and assembly by CompuSet. CompuPrep is an optional tool that enables
users to capture and tag raw data and information from a variety of sources,
including corporate databases, for subsequent processing by CompuSet. It is a
high level language that describes the data environment, related data processing
and the tagging instructions for CompuSet. Importers accept externally generated
document objects, including text, static graphics and scanned images, and
convert them into formats compatible with CompuSet. The Importers support Adobe
PostScript, Xerox Metacode and TIFF standard for scanned images.
Document Output and Merge. Emitters transform CompuSet's output into a
number of popular Page Description Languages (PDLs) for printing and viewing.
The PDLs provide instructions for rendering text, forms, bitmaps, and graphics
into documents. The PDL formats currently supported are Xerox Metacode, IBM AFP,
Adobe PostScript and HP PCL5. This part of the architecture is extensible and
new Emitters can be provided as required. For example, the Company expects to
provide support for PDF from Adobe during 1997.
Application Development Tools. CompuSeries applications development tools
run on Microsoft Windows and simplify document design and application
prototyping. CompuSeries currently consists of several modules. CompuSpec is a
tool for defining document formatting rules. Formatting specifications which are
selected from a menu are associated with tags which are referenced in the
document data. The results of the selected formatting specifications are
visually displayed in a preview window. CompuBuild uses a PC version of
CompuSet, combined with an editor to manipulate the tagged document data.
CompuBuild supports all the dynamic functions and features of the CompuSet
production engine. CompuMerge is a tool used to specify the placement of
variable data into fixed document components such as in form-fill applications.
CompuView Proof is a document proofing tool used to preview the document layout
on the computer screen prior to printing. These tools are currently being
integrated into a single Windows application, called CompuSeries II.
Document Management
Document Management tools provide client/server solutions for the creation,
revision and management of document components used in the Company's document
automation solutions. It consists of the Document Library Service (DLS) and
Desktop Document Manager (DDM). DLS manages the document component creation
process required by complex variable documents. In addition, DLS can be used to
define complex assembly rules required for interactive or fully automated
document composition and assembly with CompuSet. DLS uses a client/server
architecture for accessing data and files on a mainframe or network server.
Desktop Document Manager (DDM) is the client component of DLS and manages text
objects created with Microsoft Word. Text objects are tracked and managed in a
multi-author environment by providing access security, revision control and
approval levels. DDM also provides a criteria-based document object selection
capability for customized or personalized documents. These criteria are then
used by DLS to generate a CompuSet-ready tagged data file. The customized or
personalized document assembly can be directed to occur in a high-volume fashion
on the server or in a just-in-time, on-demand fashion on the local DDM PC. DLS
is in a controlled release with a small number of customers.
Document Viewing
Document Viewing enables on-line viewing and archiving of electronic
documents produced by document automation applications. It consists of the
Document Viewing Service (DVS) and CompuView Navigator. DVS uses a client/server
architecture for the creation and access of electronic document files. DVS is
available for a variety of mainframe, Unix and PC platforms. The
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<PAGE> 40
electronic document files are generated in a format called CCIF, which is
optimized for fast, memory-efficient viewing, transport and storage. CCIF files
can then be viewed by CompuView Navigator. CCIF files consist of three major
components: a PDL rendition of the pages for WYSIWYG viewing; various indices
for locating documents; and reusable document elements. CCIF files can also be
distributed, archived or printed through document distribution and archiving
systems offered by third party software developers that have integrated
CompuView Navigator. CompuView Navigator is a Windows application for viewing
CCIF files. The view of the document is virtually identical to the printed
document. CompuView Navigator may also be integrated with third party document
retrieval systems. The Company introduced the DVS in October 1995 and has had
limited installations to date.
The following process flow diagram describes each Autograph product within
the context of product functionality and the enterprise. It also includes
possible future Internet extensions, some of which are not currently under
active development. The Company believes that its core technology can be
extended to the Internet, intranets and commercial on-line services and has
recently begun initial development activity in this area, although there can be
no assurance that such development activity will result in commercially
successful products. See "Business -- Research and Development."
[PROCESS FLOW DIAGRAM]
PROFESSIONAL SERVICES
In addition to its software products, the Company provides a comprehensive
suite of services which can assist customers in the implementation of enterprise
wide and mission critical document automation applications. Professional
Services include on-site software installation, customer training programs,
telephone support programs and consulting services. Consulting services are
currently focusing on assisting in the sale of high margin initial software
licenses by providing
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<PAGE> 41
project management and application development. Eventually, the Company intends
to expand Professional Services to include document design, systems design and
integration. In addition to consulting services, the Company currently offers
introductory-level customer education, which is bundled with CompuSet initial
licenses. Additional and advanced classes are provided for additional fees at
the Company's headquarters in San Diego and at customer sites. The Company
intends to expand its curriculum to provide advanced and specialized customer
education in response to the unique needs of certain customers. The Company
believes that expanded Professional Services will enable customers to deploy the
Company's document automation products more rapidly and effectively, and assist
the Company in the development of new products and provide recurring revenue.
The Professional Services organization employed a professional and support staff
of 36 as of June 30, 1996.
SALES AND MARKETING
The Company's sales and marketing organization targets vertical industry
segments that require document automation and high volume document
personalization and customization. The Company currently licenses its products
using a combination of direct sales and alternate channels. In the United
States, the Company markets its products through a direct sales force. Sales
representatives are provided with pre-sales technical support by regional
application specialists. Sales representatives and the regional application
specialists are located in Atlanta, Austin, Chicago, Cleveland, Dallas,
Minneapolis, New York City, Pittsburgh, Richmond, San Antonio, San Diego, San
Francisco, Seattle and Washington, D.C. The Company distributes its products
through VAR relationships with Xerox Canada, Limited in Canada and Fuji Xerox
Co., Ltd. in Australia. The Company's subsidiary, Document Sciences Europe,
markets and supports the Company's products in Europe by providing channel
management, technical support, fee based services, and defining European market
and product requirements. The Company licenses its products in Europe through
VARs and, to a lesser extent, direct sales. The VARs are principally Rank Xerox
Ltd. and other Xerox affiliates who remarket the Company's products. The
Company's revenues from such arrangements were $1.3 million, $3.1 million and
$675,900 in 1994, 1995 and the first half of 1996, respectively. The sales,
marketing and customer support organization currently employs a professional and
support staff of 68.
The Company intends to expand its sales and marketing organization to
provide direct sales and support services throughout the world. Such planned
expansion will occur by first addressing the unique product requirements of a
region followed by developing indirect sales channels to market in the region.
As the Company is able to increase its market presence, it may then augment its
alternate channels with a direct sales capability. See "Risk
Factors -- Expansion of Sales and Distribution Channels."
In addition, the Company intends to increase both its product offerings and
markets through marketing, sales and distribution and development relationships
with other companies. Current relationships include formal and informal
marketing and sales alliances with Xerox, IBM, Siemens Nixdorf, Computer
Associates, New Dimension, RSD, Data/Ware Development, and Data Retrieval. These
relationships provide sales leads for the Company's products and have extended
the Company's sales coverage and networking capabilities.
COMPETITION
The market for the Company's document automation products is intensely
competitive, subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's software products are targeted at document intensive organizations
that require the ability to produce large quantities of customized and
personalized documents in paper or electronic form. The Company faces direct and
indirect competition from a broad range of competitors who offer a variety of
products and solutions to the Company's current and potential customers. The
Company's principal competition currently comes from (i) systems
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<PAGE> 42
developed in-house by the internal MIS departments of large organizations, (ii)
direct competition in a number of its vertical markets, including Image
Sciences, which is partially owned by Xerox, and FormMaker Software, Inc. in the
insurance industry, M&I Data Services, Inc. in banking and financial services
and Group 1 Software, Inc. in commercial direct mailing, and (iii) direct
competitors such as IBM's Direct Composition Facility (DCF) and Group 1's
recently introduced DOC1 product. The Company faces market resistance from the
large installed base of legacy systems because of the reluctance of these
customers to commit the time and effort necessary to convert their document
automation processes to the Company's document automation software. Several of
the Company's competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources than the Company, greater
name recognition and a larger installed base of customers.
It is also possible that the Company will face competition from new
competitors. These include large independent software companies offering
personal computer-based application software solutions, such as Microsoft
Corporation and Adobe Corporation, and from large corporations providing
database management software solutions, such as Oracle Corporation. In addition,
Xerox, either directly or through affiliated entities, could compete with the
Company. Moreover, as the market for document automation software develops, a
number of these or other companies with significantly greater resources than the
Company could attempt to enter or increase their presence in the Company's
market either independently or by acquiring or forming strategic alliances with
competitors of the Company or to otherwise increase their focus on the industry.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's current and
prospective customers, and it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, operating results and financial
condition.
The Company believes that the principal competitive factors affecting its
market include products performance and functionality, ease of use, scalability,
operation across multiple computer and operating system platforms, product and
company reputation, client service and support, and price. Although the Company
believes that it currently competes favorably with respect to such factors,
there can be no assurance that the Company will be able to maintain its
competitive position against current and future competitors or that the Company
will be successful in the face of increasing competition from new products or
solutions introduced by existing competitors or by new companies entering the
market. Further, there can be no assurance that the Company can maintain its
position against current and future competitors, especially those with greater
financial, marketing, service, support, technical and other resources than the
Company.
RESEARCH AND DEVELOPMENT
In general, the Company's strategy is to build products that augment and
extend the document composition and assembly capabilities of its core products.
Initially, product development investments were primarily focused on completing
the Autograph architecture, which included delivering products for document
viewing as well as adding support for additional print environments. In
addition, there was a substantial investment in product maintenance and in
software integration, testing, and documentation. The Company supplements its
product development efforts by reviewing customer feedback on existing products
and working with customers and potential customers to anticipate future product
needs.
To date, the Company's Autograph architecture has been applied mainly to
document automation applications producing paper based documents. The Company
believes that its core technology
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can be extended to provide document automation for the Internet, intranets, and
commercial on-line services. The short-term strategy is to engage this emerging
opportunity with two complementary initiatives. First, the Company intends to
work closely to define product requirements with existing customers, many of
whom have expressed interest in using the Internet in their document automation
solutions. Second, the Company intends to develop incremental extensions to
Autograph which can be incorporated by current customers into existing document
automation products provided by the Company. The Company believes that its core
technology can be extended to the Internet, intranets and commercial on-line
services, and has only recently begun initial development activity in this area.
There can be no assurance that the Company will be successful in developing,
introducing and marketing new products on a timely and cost-effective basis, if
at all, or that new products will achieve market acceptance. See "Risk
Factors -- Dependence on New Products and Product Enhancements."
The development organization is composed of self-directed teams, in which
representatives from various disciplines within the Company collectively take
responsibility for the development and delivery of each new feature or product.
The development process includes early review of prototypes and demonstrations
to incorporate customer feedback and provide an opportunity for management
review. A formal sequence of project phases organizes the development and review
process for each team. The Company has a formal release planning process for an
annual maintenance release, and delivers interim versions as needed to support
its customers. The development organization maintains a database of all customer
and internal requests which forms the basis for release planning.
The Company expects to continue to enhance its existing products and to
develop new products, particularly as they relate to electronic publishing
applications. Research and development expenditures have grown substantially
since the Company's inception. Such expenditures were $400,800 in 1993, $1.0
million in 1994, $1.7 million in 1995 and $1.1 million in the first half of
1996. These amounts do not include product support activities. The development
organization has grown from 4 people in 1993, to 12 in 1994, 21 in 1995 and 27
at June 30, 1996. The Company employs independent contractors as needed to
supplement the permanent development staff.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is dependent, in part, on its ability to protect its
proprietary technology. The Company relies primarily on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect its proprietary rights. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. The Company
presently has no patents or patent applications pending. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology. The Company is not aware that any of its products
infringes the proprietary rights of third parties. There can be no assurance,
however, that third parties will not claim infringement by the Company with
respect to current or future products. The Company expects that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agree-
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ments. Such royalty or licensing agreements, if required, may not be available
on terms acceptable to the Company or at all, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
In addition, the Company also relies on certain software that it licenses
from third parties, including software that is integrated with internally
developed software and used in the Company's products to perform key functions.
There can be no assurances that such firms will remain in business, that they
will continue to support their products or that their products will otherwise
continue to be available to the Company on commercially reasonable terms. The
loss or inability to maintain any of these software licenses could result in
delays or reductions in product shipments until equivalent software can be
developed, identified, licensed and integrated, which would adversely affect the
Company's business, operating results and financial condition.
EMPLOYEES
As of June 30, 1996 the Company had 105 employees including 68 in sales,
marketing and customer support, 27 in research and development, and 10 in
finance and administration. None of the Company's employees is represented by a
labor union. The Company has experienced no work stoppages and believes its
relationship with its employees is good. Competition for qualified personnel in
the industry in which the Company competes is intensive. The Company believes
that its future success will depend in part on its continued ability to attract,
hire, and retain qualified personnel.
FACILITIES
The Company's principal administrative, sales, marketing, training, and
research and development facilities occupy approximately 15,000 square feet in
San Diego, California, pursuant to a lease which expires on January 31, 2000. In
addition, the Company's subsidiary in France occupies approximately 3,500 square
feet of office space with a renewable lease expiring in February 1999. Sales
representatives and field technical support personnel operate from their homes.
The Company believes its current facilities are adequate to meet its needs
through the next six months. The Company is exploring various alternatives to
house its planned expansion, and believes that additional facilities would be
available on acceptable terms.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company, and
their ages as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Tony N. Domit............................. 58 President, Chief Executive Officer and
Director
Alfred G. Altomare, Jr. .................. 52 Vice President, Consulting
Barbara E. Amantea........................ 51 Vice President, Chief Financial Officer,
Treasurer and Secretary
Thomas Anthony............................ 61 Vice President, Sales
Peter L. Bradshaw......................... 41 Vice President, Development
Daniel J. Fregeau......................... 39 Vice President, Marketing
Judith A. O'Reilly........................ 53 Managing Director, Document Sciences
Europe
E. Mark Palandri, Ph.D. .................. 57 Chief Scientist
Robert V. Adams(2)........................ 64 Chairman of the Board
Thomas L. Ringer(1)....................... 65 Director
Colin J. O'Brien(1)....................... 57 Director
James J. Costello(2)...................... 50 Director
Barton L. Faber........................... 49 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Tony N. Domit, a Company founder, has served as President and Chief
Executive Officer since the Company's inception in October 1991. Previously, he
was an Executive Consultant with Xerox Technology Ventures. From 1990 to 1991,
Mr. Domit was President and CEO of Advanced Workstations Products, Inc., a
wholly-owned Xerox subsidiary. Prior to AWPI, Mr. Domit was employed by Xerox
Corporation for 22 years in a variety of Vice Presidential and managerial
positions primarily in the areas of product development and marketing. His
Xerox-related experiences were in the Company's electronic printing, publishing,
workstation and networking businesses. Prior to Xerox, Mr. Domit was an engineer
with Scientific Data Systems, Ampex Computer Products, and Litton Industries.
Barbara E. Amantea has served as Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary since the Company's inception in 1991. Prior
to the formation of the Company, Ms. Amantea served for nine months as a
financial consultant with Xerox Technology Ventures. From 1990 to 1991, Ms.
Amantea was Chief Financial Officer of Advanced Workstation Products, Inc., a
wholly-owned subsidiary of Xerox Corporation. From 1988 to 1990, Ms. Amantea was
Chief Financial Officer of Segue Software, Inc., a provider of automated testing
software. From 1977 to 1987, Ms. Amantea was Controller and Corporate Secretary
to Interactive Systems Corporation, a developer and supplier of UNIX operating
systems, which was subsequently acquired by Kodak Corporation.
Daniel J. Fregeau has served as Vice President, Marketing since 1994. From
1992 to 1994, Mr. Fregeau served as Vice President, Sales for the Company. Prior
to joining the Company, Mr. Fregeau was Marketing Manager for the Networking
Division of Sears Business Centers, San Diego, from 1990 to 1992. Mr. Fregeau
was a founder and principal of MicroAge in San Diego from 1988 to 1990. From
1982 to 1988, Mr. Fregeau held several positions with Xerox Corporation's
Electronic Publishing Business Unit including Manager of Systems Engineering and
Integration,
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Technical Program Manager, and Project Manager. While at Xerox, Mr. Fregeau
designed and directed the development of several publishing products and was a
key contributor to the launch of the XICS (now CompuSet) product in the U.S. and
Canada.
Judith A. O'Reilly, a Company founder, has served as Managing Director of
Document Sciences Europe since its inception in 1993. Prior to the formation of
Document Sciences Europe, Ms. O'Reilly was Director of Customer Support from
1992 to 1993. From 1982 to 1992, Ms. O'Reilly held several positions in
development, product delivery and marketing at Xerox. Prior to joining Xerox,
Ms. O'Reilly was an applications developer for companies in the publishing,
manufacturing, and food sectors.
Alfred G. Altomare has served as Vice President, Consulting since January,
1996. Prior to joining the Company, Mr. Altomare was founder and principal of
Mariner Associates, a business consulting firm, from 1993 to 1996. From 1990 to
1993, Mr. Altomare was Vice President/General Manager, Indirect Channel
Operations of ICL Retail Systems. Prior to joining ICL, Mr. Altomare was Vice
President, Consulting at Gartner Group from 1989 to 1990. From 1985 to 1989, he
was founder and principal of VAR Strategies Group. Mr. Altomare was Principal
and Senior Vice President, Sales and Marketing for InfoCorp/Gartner Group (now
Infocorp/Computer Intelligence) from July 1982 to March 1985. Mr. Altomare
previously held a variety of sales, marketing and training positions with IBM.
Dr. E. Mark Palandri, a founder of the Company, has served as Chief
Scientist since 1992. Prior to joining the Company, Dr. Palandri held a variety
of software developer positions at Xerox Corporation from 1982 to 1992. From
1980 to 1982, Mr. Palandri worked at Composition Software Systems until its sale
to Xerox. While at CSS, Mr. Palandri began the development of CompuSet. From
1965 to 1973, Dr. Palandri worked on data handling systems in high energy
physics at the European Organization for Nuclear Research in Geneva,
Switzerland. From 1973 to 1990, Mr. Palandri was Senior Principal Research
Scientist in the Division of Computing Research in the Commonwealth Scientific
and Industrial Research Organization. Mr. Palandri holds a BS from the
University of Western Australia and a Doctorate in Applied Mathematics from
Cambridge University.
Thomas Anthony has served as Vice President, Sales since June 1994. Prior
to joining the Company, Mr. Anthony was Executive Vice President, Marketing and
Sales for Innovatech, Inc. from 1992 to 1994, Acer America from 1990 to 1992,
Sweda International from 1987 to 1990, and Frame Technologies from 1986 to 1987.
Mr. Anthony was Vice President, Sales for Altos Computer Systems from 1983 to
1986 and Vice President Marketing and Sales from 1979 to 1983 for Onyx Systems.
Prior to Onyx, Mr. Anthony was with National Semiconductor as a Vice President
and founder of the Datachecker Systems Business Unit.
Peter L. Bradshaw has served as Vice President of Development since March,
1994. Prior to joining the company, Mr. Bradshaw was manager of the Application
Software Team at Xerox from 1989 to 1994, where he was responsible for
integrating high volume printers with application software. From 1982 to 1989,
Mr. Bradshaw worked in Xerox' Workstation Business Unit where he managed the
development team responsible for the graphical user interface for the 6085
Workstation. From 1977 to 1980, Mr. Bradshaw was at Bell Telephone Laboratories
in system development. Mr. Bradshaw holds an M.S. in Computer, Information, and
Control Engineering and a B.S. in Computer Science and Mathematics from the
University of Michigan and an MBA from the Anderson Graduate School of
Management at UCLA.
Robert V. Adams has served as a director and Chairman of the Board of the
Company since 1991. Since 1989, Mr. Adams has served as President of Xerox
Technology Ventures, a venture capital unit of Xerox. Mr. Adams is also a
director of Tekelec, ENCAD, Inc. and Chairman of Documentum, Inc.
Thomas L. Ringer has been a director of the Company since 1991. Mr. Ringer
is currently Chairman of the Boards of Directors of Wedbush Corporation, Wedbush
Capital Corporation, M.S.
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Aerospace, Inc., Enterprise Solutions Limited and the Center for Innovation and
Entrepreneurship. In addition, he serves on the Boards of Directors of Wedbush
Morgan Securities, Inc. and Applied Retail Solutions.
Colin J. O'Brien has served as a director of the Company since May 1996.
Since 1992, Mr. O'Brien has been employed in various positions at Xerox and
currently serves as Vice President of Xerox and Chief Executive Officer of Xerox
New Enterprise Board. Prior to 1992, Mr. O'Brien was the founder and Chief
Executive Officer of Triax Corporation, an investment company specializing in
defense electronics companies. Prior to joining Triax Corporation, he was the
Chief Executive Officer of Times Fiber Communications Inc., a manufacturer of
fiber optic and coaxial telecommunications systems. Mr. O'Brien is also a
director of Documentum, Inc.
James J. Costello has served as a director of the Company since May 1996.
Since 1975, Mr. Costello has been employed in various positions at Xerox and
currently serves as Chief Financial Officer and Vice President of Xerox New
Enterprise Companies.
Barton L. Faber has served as a director of the Company since July 1996.
From April 1985 to June 1996, Mr. Faber held various positions with R.R.
Donnelley and currently serves as a member of the board of directors of
Alphagraphics, Inc., Dataware Technologies, Inc., GeoSystems Global Corporation
and Xeikon N.V. He is also chairman of the board of directors and a director of
Metromail. Prior to joining R.R. Donnelley, Mr. Faber held various positions
with Mobil Oil Corporation and Ramada Europe.
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board. There are no family relationships
among any directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, consisting of Robert V. Adams and
James J. Costello, recommends the selection of independent public accountants to
the Board of Directors, reviews the scope and results of the audit and other
services provided by the Company's independent auditors, and reviews the
Company's accounting practices and its systems of internal accounting controls.
The Compensation Committee, consisting of Thomas L. Ringer and Colin J.
O'Brien, reviews and approves the salaries, bonuses and other compensation
payable to the Company's executive officers and administers and makes
recommendations concerning the Company's employee benefit plans.
NON-EMPLOYEE DIRECTOR COMPENSATION
In July 1996, the Company approved a non-employee director compensation
arrangement pursuant to which the non-employee directors will be compensated as
follows: (i) $4,000 annual retainer; (ii) $1,200 for each meeting of the Board
attended; and (iii) reimbursement for certain expenses in connection with
attendance at Board and committee meetings. In addition, in February 1995,
Thomas L. Ringer was granted an option to purchase 15,750 shares of Common Stock
at an exercise price of $0.17 per share and in July 1996, Barton L. Faber was
granted an option to purchase 10,000 shares of Common Stock at an exercise price
of $10.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Company serves 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 the Company's Board of
Directors or Compensation Committee. See "Certain Transactions" for a
description of transactions between the Company and entities affiliated with
members of the Compensation Committee.
45
<PAGE> 48
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its employees and other agents to the fullest
extent permitted by Delaware law.
In addition, the Company's Amended and Restated Certificate of
Incorporation provides that, to the fullest extent permitted by Delaware law,
the Company's directors will not be liable for monetary damages for breach of
the directors' fiduciary duty of care to the Company and its stockholders. This
provision in the Amended and Restated Certificate of Incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available under Delaware law. Further, each director will continue to be subject
to liability for breach of the director's duty of loyalty to the Company, for
acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law, for acts or omissions that the director believes to
be contrary to the best interests of the Company or its stockholders, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to the
Company or its stockholders when the director was aware or should have been
aware of a risk of serious injury to the Company or its stockholders, for acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Company or its stockholders, for
improper transactions between the director and the Company and for improper
distributions to stockholders and loans to directors and officers. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Company intends to enter into agreements to indemnify its directors and
officers, in addition to indemnification provided for in the Company's Bylaws.
These agreements, among other things, indemnify the Company's directors and
officers 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 the Company, arising out of such
person's services as a director or officer of the Company, any subsidiary of the
Company or any other company or enterprise to which the person provides services
at the request of the Company. The Company believes that these provisions and
agreements are necessary to attract and retain qualified directors and officers.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any pending or threatened material
litigation that might result in a claim for such indemnification.
46
<PAGE> 49
EXECUTIVE COMPENSATION
The following table sets forth all compensation earned by the Company's
Chief Executive Officer and the five other most highly compensated executive
officers (collectively, the "Named Executive Officers") whose salary and bonus
for the fiscal year ended December 31, 1995 were in excess of $100,000 for
services rendered in all capacities to the Company and its subsidiary for that
fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- ------------------
NAME AND SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
- ----------------------------------- --------- -------- --------------------- ------------------
<S> <C> <C> <C> <C>
Tony N. Domit...................... $ 150,000 -- -- $ 6,348
President and Chief Executive
Officer
Thomas J. Anthony.................. 90,000 46,626 (2) -- 6,780
Vice President, Sales
Peter L. Bradshaw.................. 96,667 5,000 -- 3,286
Vice President of Development
Daniel J. Fregeau.................. 90,000 60,558 (2) 30,000 3,436
Vice President, Marketing
Judith A. O'Reilly................. 108,623 96,442 (2) -- 4,117
Managing Director, Document
Sciences Europe
E. Mark Palandri................... 141,567 -- 112,500 5,052
Chief Scientist
</TABLE>
- ---------------
(1) Includes $3,000 of Company contributions under its 401(k) Plan and the
balance represents life insurance premiums paid by the Company.
(2) Represents commissions earned during the fiscal year ended December 31,
1995.
OPTION GRANTS DURING 1995
The following tables set forth certain information concerning stock options
granted during the fiscal year ended December 31, 1995 to each of the Named
Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENTAGE OF PRICE APPRECIATION
UNDERLYING TOTAL OPTIONS EXERCISE FOR OPTION TERM(4)
OPTIONS GRANTED IN PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) FISCAL 1995(2) ($/SH)(3) DATE 5% 10%
- ----------------------- ------------- ------------------ --------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tony N. Domit.......... -- -- -- -- -- --
Thomas J. Anthony......
Peter L. Bradshaw...... -- -- -- -- -- --
Daniel J. Fregeau...... 30,000 13% $0.17 1/5/05 $ 3,144 $ 7,969
Judith O'Reilly........ -- -- -- -- -- --
E. Mark Palandri....... 112,500 48 0.17 1/5/05 11,792 29,883
</TABLE>
- ---------------
(1) These options are non-statutory stock options granted pursuant to a written
compensatory arrangement and vest over no more than four years.
(2) In 1995, the Company granted options to purchase an aggregate of 232,575
shares.
(3) In determining the fair market value of the Company's Common Stock, the
Board of Directors considered various factors, including the Company's
financial condition and business pros-
47
<PAGE> 50
pects, its operating results, the absence of a market for its Common Stock and
the risks normally associated with high technology companies.
(4) Potential Realizable Value is based on certain assumed rates of appreciation
pursuant to rules prescribed by the Securities and Exchange Commission (the
"SEC"). Actual gains, if any, on stock option exercises are dependent on the
future performance of the stock. There can be no assurance that the amounts
reflected in this table will be achieved. In accordance with rules
promulgated by the SEC, Potential Realizable Value is based upon the
exercise price of the options, which is substantially less than the expected
initial public offering price. If the Potential Realizable Value is
calculated based on an assumed initial public offering price of $10.00 per
share and the assumed rates of appreciation over the ten-year term of the
options, the resulting stock price at the end of the term would be $16.29
and $25.94 per share at 5% and 10%, respectively.
AGGREGATED OPTIONS EXERCISED IN 1995 AND YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options during
the year ended December 31, 1995 and the number and value of securities
underlying unexercised options held by the Named Executive Officers at December
31, 1995:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
NUMBER OF DECEMBER 31, 1995 AT DECEMBER 31, 1995($)(2)
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------- ---------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tony N. Domit.. 562,500 $ 75,000 -- -- -- --
Thomas J.
Anthony...... 21,249 -- 1,251 37,500 208 6,250
Peter L.
Bradshaw..... 25,530 -- 2,688 36,282 448 6,047
Daniel J.
Fregeau...... 60,000 8,000 26,250 18,750 6,375 3,125
Judith
O'Reilly..... 95,466 12,729 2,034 -- 610 --
E. Mark
Palandri..... 205,620 12,729 4,380 -- 1,001 --
</TABLE>
- ---------------
(1) Based on the difference between the fair market value on the date of
exercise and the exercise price.
(2) Based on the difference between the fair market value on December 31, 1995
($0.33 per share) and the exercise price.
COMPENSATORY AND SEVERANCE ARRANGEMENTS
The Company has entered into an agreement with Mr. Tony N. Domit, the
Company's Chief Executive Officer, terminable at will by either the Company or
Mr. Domit. The agreement provides for a base salary, effective March 1, 1993, of
$142,800, and a potential annual incentive bonus based on achievement of the
Company's operating plan and other mutually agreed upon objectives as evaluated
by the Board. Pursuant to the agreement, in the event Mr. Domit were terminated,
he would receive a severance payment equal to six months of his salary.
The Company has entered into an agreement with Mr. Thomas J. Anthony, the
Company's Vice President of Sales, terminable at will by either the Company or
Mr. Anthony. The agreement provides for a base salary, effective May 25, 1994,
of $90,000, and a commission equal to 0.75% of domestic booked revenue.
48
<PAGE> 51
The Company has entered into an agreement with Mr. A.G. Altomare, the
Company's Vice President of Consulting Services, terminable at will by either
the Company or Mr. Altomare. The agreement provides for a base salary, effective
January 15, 1996, of $85,000, and a commission equal to 1.5% of recognized
consulting revenue for fiscal 1996. In addition, Mr. Altomare will receive 2.75%
of profit earned on consulting revenue, not to exceed $25,000 per year. Pursuant
to such agreement, Mr. Altomare was granted an option to purchase 24,000 shares
of Common Stock at an exercise price of $0.17 per share.
The Company has entered into an agreement with Ms. Judith A. O'Reilly,
currently the Managing Director of Document Sciences Europe, terminable at will
by either the Company or Ms. O'Reilly. The agreement provides for a base salary,
effective January 2, 1992, of $86,492 and a commission based on certain foreign
revenue.
The Company has entered into an agreement with Mr. Daniel J. Fregeau, the
Company's Vice President of Marketing, terminable at will by either the Company
or Mr. Fregeau. The agreement provides for a base salary, effective January 2,
1992, of $75,000, and a commission based on worldwide revenue.
EMPLOYEE BENEFIT PLANS
1995 Stock Incentive Plan
In October 1995, the Company adopted the Company's 1995 Stock Incentive
Plan (the "1995 Plan") under which 779,250 shares were reserved for issuance
upon exercise of options and purchase rights granted to employees, directors and
consultants. The shares reserved for issuance under the 1995 Plan include 29,250
shares which were previously reserved for issuance under the Company's 1993
Stock Option Plan (the "1993 Plan"). The 1995 Plan supersedes the 1993 Plan;
provided, however, that all outstanding options previously issued under the 1993
Plan shall be exercisable according to their terms. The 1995 Plan will terminate
in June 2005, unless sooner terminated by the Board of Directors.
The 1995 Plan provides for grants of incentive stock options intended to
qualify as such under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), non-statutory stock options, and rights to purchase Common
Stock. The 1995 Plan may be administered by the Board or a committee approved by
the Board and is currently administered by the Board of Directors. Subject to
the limitations set forth in the 1995 Plan, the Board or its designated
committee has the authority to select the persons to whom grants are to be made,
to designate the number of shares to be covered by each grant, to determine
whether an option is to be an incentive stock option or a non-statutory stock
option, to establish vesting schedules, to specify the exercise price of options
and purchase rights, the type of consideration to be paid to the Company upon
exercise, and, subject to certain restrictions, to specify other terms of
options and purchase rights.
The maximum term of options granted under the 1995 Plan is ten years. The
aggregate fair market value of the stock with respect to which incentive stock
options are first exercisable in any calendar year may not exceed $100,000. No
person may be granted options and purchase rights under the 1995 Plan covering
more than 100,000 shares during any one year period. Options and purchase rights
granted under the 1995 Plan are non-transferable. Options generally expire three
months after the termination of an optionee's service to the Company. In
general, if an optionee is permanently disabled or dies during his or her
service to the Company, such person's option may be exercised up to one year
following such disability or death.
The exercise price of incentive stock options must equal at least the fair
market value of the Common Stock on the date of grant. The exercise price of
non-statutory stock options and purchase rights may be determined by the Board
or its designated committee in its discretion. The exercise price of incentive
stock options granted to any person who, at the time of grant, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock must be at
49
<PAGE> 52
least 110% of the fair market value of such stock on the date of grant; and the
term of these options cannot exceed five years.
As of June 30, 1996, the Company had outstanding options to purchase
191,217 shares of Common Stock under the 1993 Stock Option Plan and 152,151
shares of Common Stock under the 1995 Plan held by an aggregate 88 persons at a
weighted exercise price of $0.39 per share. As of June 30, 1996, options to
purchase an aggregate of 1,278,033 shares of Common Stock under the 1993 Stock
Option Plan and 3,624 shares of Common Stock under the 1995 Plan had been
exercised.
401(k) Plan
The Company contributes to an employee savings and retirement plan (the
"401(k) Plan") that is intended to be a tax-qualified plan, covering
substantially all of the Company's employees. Under the terms of the 401(k)
Plan, employees may elect to contribute up to 15% of their compensation, or the
statutorily prescribed limit, if less, to the 401(k) Plan as a savings
contribution. The Company may, in its discretion, match employee contributions,
at such rate as it determines, but no match will apply to deferrals in excess of
$3,000 or 10% of the employee's compensation. The 401(k) Plan has a profit
sharing element whereby the Company may, in its discretion, contribute annually
an amount determined by the Board of Directors. Such contributions, if any, are
allocated to the accounts of all eligible employees based on their compensation
and Company contributions to Social Security. An employee's interest in his or
her deferrals are vested when contributed. An employee's interest in matching
contributions and profit sharing contributions generally vest over 4 years from
the date of employment. The 401(k) Plan is intended to qualify under Section 401
of the Code. As such, contributions to the 401(k) Plan, and income earned on
such contributions, are intended not to be taxable to the employees until
distributed from the 401(k) Plan and contributions of the Company are intended
to be deductible when made. The 401(k) Plan has not been submitted to the
Internal Revenue Service for a determination letter on its qualified status
under the Code. If the 401(k) Plan is determined not to qualify under Section
401 of the Code, contributions to the 401(k) Plan and earnings on such
contributions would be taxable to the employees when made.
The 401(k) Plan is a single plan covering the employees of four entities
(including the Company) in which Xerox Corporation owns 80 percent or more of
the stock. Following this offering, for purposes of participation in the 401(k)
Plan, the Company will no longer be a part of the Xerox Corporation controlled
group. Accordingly, the Company intends to establish a new plan solely for the
benefit of its employees.
50
<PAGE> 53
CERTAIN TRANSACTIONS
AGREEMENTS WITH XEROX
Transfer and License Agreement
In connection with the transfer of the Company's technology from Xerox, the
Company entered into a Transfer and License Agreement with Xerox in July 1992,
to expire upon the expiration of all of the rights in the items covered thereby.
This Agreement was subsequently amended in September 1994. Pursuant to the terms
of the Agreement, as amended: (i) Xerox transferred all worldwide copyrights in
and to the predecessor product of CompuSet (the "Transferred Software") and
granted the Company a non-exclusive license to use the Xerox trade secrets in
existence as of July 1992 pertaining to the Transferred Software; (ii) the
Company granted Xerox a non-exclusive royalty-free license to use and copy the
Transferred Software for internal purposes only, and to use portions of the code
of the Transferred Software in products of Xerox; (iii) Xerox granted the
Company a non-exclusive, royalty-free license to use, modify and reproduce the
source code of XPS and EVMS, two software products comprising a small portion of
the Company's current CompuSet products, and to distribute derivatives of XPS
and EVMS in object code format; (iv) the Company granted to Xerox ownership of
all technical information not primarily related to computer software that is
generated by the Company while Xerox continues to own a majority of the
outstanding capital stock of the Company, the Company retaining a non-exclusive
license to use such technical information outside of certain eastern Asian and
Pacific Rim countries; (v) the Company granted "most favored nation" status with
respect to the purchase price of software products sold by the Company to Xerox,
Rank Xerox Ltd., Fuji Xerox Co. Ltd., companies jointly owned by Xerox and the
Rank Organization Ltd. and 40% affiliates of the foregoing; and (vi) the Company
granted Fuji Xerox Co., Ltd. a right of first negotiation with respect to
exclusive distribution of the Company's products in certain eastern Asian and
Pacific Rim countries.
Strategic Marketing Alliance Agreement
In September 1993, the Company and Xerox entered into a Strategic Marketing
Alliance Agreement, pursuant to which the Company and Xerox agreed to pay each
other commissions on certain sales of products resulting from successful
referrals from each other. The Agreement may be terminated by either Xerox or
the Company upon thirty days' written notice in certain circumstances, or upon
ninety days' written notice at any time. The Company's revenues from the
strategic marketing alliance, principally commissions from sales of Xerox
printers, were $490,400 and $752,000 in 1994 and 1995, respectively, and
payments to Xerox under the Agreement were $113,500 and $167,200 in 1994 and
1995 respectively.
Relationship with Fuji Xerox Australia
The Company has an arrangement with Fuji Xerox Co., Ltd ("Fuji Xerox")
pursuant to which Fuji Xerox distributes the Company's products in Australia and
New Zealand. For each copy of the Company's products sublicensed by Fuji Xerox,
Fuji Xerox pays the Company initial and annual fees equal to the Company's list
price minus a percentage discount based on annual volume of sublicenses of the
Company's products. Fuji Xerox provides technical support to its end users, with
periodic software upgrades provided to Fuji Xerox by the Company. The
arrangement with Fuji Xerox is terminable at will by either party.
Xerox Canada Agreement
The Company's Value Added Remarketer Agreement with Xerox Canada Limited
("Canada VAR") appoints Xerox Canada as a non-exclusive VAR in Canada for the
Company's products. Under the agreement, Xerox Canada will add value to the
products by giving technical support, assisting end users with application
development, and providing first level hot-line support. For each
51
<PAGE> 54
copy of the Company's products sublicensed by Xerox Canada, Xerox Canada pays
the Company initial and annual fees equal to the Company's suggested retail
initial and annual license fees (net of the customer training uplift built into
the price), minus a percentage discount. The Canada VAR is due to expire in
January 1997; however, it is subject to automatic renewal for successive
one-year terms unless either party gives notice at least 90 days prior to the
expiration of the then current term that it will not renew the agreement.
EUROPEAN/SUB-SAHARAN AFRICA VAR AGREEMENTS
The Company has numerous Value Added Reseller and Value Added Remarketer
agreements in Europe and South Africa, Namibia and Swaziland, many of which are
with Rank Xerox, Ltd. and other Xerox affiliates. The rights granted to the
Company's resellers under these agreements are typically non-exclusive, although
the agreements covering the territories of England, Scotland, Northern Ireland
and Wales and South Africa, Namibia and Swaziland grant the reseller exclusive
rights in its territory. In the usual circumstance, the reseller purchases the
Company's products pursuant to purchase orders and redistributes the products in
its territory, with the reseller having no right to copy the Company's products.
The reseller performs front-line technical support for its end users, and
software upgrades are periodically provided to the reseller by the Company. Each
reseller agreement runs for either a two- or three-year term, with automatic
one-year renewals unless either party gives notice of non-renewal within a
specified period prior to renewal.
TAX SHARING AGREEMENT
Xerox and the Company have entered into a Tax Sharing Agreement (the "Tax
Sharing Agreement") that provides for the allocation between Xerox and the
Company of all responsibilities, liabilities and benefits relating to taxes paid
or payable by either Xerox or the Company for all taxable periods, whether
beginning before, on, or after this offering. Prior to the consummation of this
offering, the Company has been included in the consolidated tax returns of
Xerox. The Company's share of Xerox's consolidated income tax liability for the
pre-offering period has been determined on a separate company basis computed
under Internal Revenue Code and applicable state guidelines and was $136,000,
$653,700 and $591,400 for the years ended December 31, 1993, 1994 and 1995,
respectively. The Company intends to repay such liability from the proceeds of
the initial public offering. For the period from January 1, 1996 through the
consummation of this offering, the Company's separate tax liability will also be
settled with Xerox. For the post-offering period, the Company may file combined
state income tax returns. Pursuant to the Tax Sharing Agreement, adjustments
(for example, pursuant to an Internal Revenue Service audit) made during the
post-offering period, but relating to the pre-offering period, will be settled
between the Company and Xerox.
The Company has entered into employment agreements with certain of its
executive officers. See "Management -- Employment and Severance Arrangements."
The Company intends to enter into indemnification agreements with each of its
officers and directors. See "Management -- Limitation of Liability and
Indemnification Matters." Upon completion of this offering, the Company and
Xerox intend to enter into a Stockholder Rights Agreement that will provide
Xerox with certain rights with respect to the registration of its shares of
Common Stock under the Securities Act. The Company and Xerox will also agree to
indemnify each other against certain liabilities including liabilities under the
Securities Act. See "Description of Capital Stock -- Registration Rights."
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<PAGE> 55
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's outstanding Common
Stock as of June 30, 1996, and as adjusted to reflect the sale of the Common
Stock being offered hereby by (i) each person (or group of affiliated persons)
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, (iv) all executive officers and directors of the Company as
a group, and (v) each of the Selling Stockholders. The table assumes the
conversion of all outstanding Preferred Stock into Common Stock upon the
completion of this Offering. Unless otherwise specified, the address of the
stockholder is the address of the Company as set forth herein.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED NUMBER OF SHARES OWNED AFTER
PRIOR TO OFFERING(1) BEING OFFERED OFFERING(2)
DIRECTORS, NAMED OFFICERS --------------------- ---------------- ---------------------
AND 5% STOCKHOLDERS NUMBER PERCENT NUMBER NUMBER PERCENT
- ---------------------------- --------- ------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C>
Xerox Corporation(3)........ 7,143,000 83.7% 388,500 6,754,500 65.1%
800 Long Ridge Road
Stamford, CT 06904
Tony N. Domit(4)............ 562,500 6.6 23,370 539,130 5.2
Barbara E. Amantea.......... 105,000 1.2 4,330 100,670 1.0
Thomas J. Anthony(5)........ 32,499 * -- 32,499 *
Peter L. Bradshaw(6)........ 38,967 * -- 38,967 *
Daniel J. Fregeau(7)........ 91,251 1.1 3,750 87,501 *
Judith A. O'Reilly(8)....... 97,500 1.1 4,040 93,460 *
E. Mark Palandri............ 210,000 2.5 8,660 201,340 1.9
Thomas L. Ringer(9)......... 32,155 * 9,180 22,975 *
Robert V. Adams(10)......... 7,143,000 83.7 388,500 6,754,500 65.1
Colin J. O'Brien(10)........ 7,143,000 83.7 388,500 6,754,500 65.1
James J. Costello(10)....... 7,143,000 83.7 388,500 6,754,500 65.1
Barton L. Faber............. -- * -- -- *
Richard Busch(11)........... 52,374 * 2,020 50,354 *
James Cowell................ 45,000 * 1,730 43,270 *
Michael Kramer(12).......... 62,577 * 2,600 59,977 *
John Schermerhorn(13)....... 60,000 * 2,320 57,680 *
J.J. Keil(14)............... 32,157 * 12,000 20,157 *
All Directors and Executive
Officers as a group (13
persons)(15).............. 8,312,872 96.8% 441,830 7,871,042 75.5
</TABLE>
- ---------------
* Less than 1 percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons or entities named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them. Percentage of beneficial ownership is based on
8,537,157 shares of Common Stock outstanding as of June 30, 1996 and
10,374,657 shares of Common Stock outstanding after completion of this
Offering.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of 345,000 shares of Common Stock from the Company.
(3) Mr. Adams, a director of the Company, is a principal of Xerox Technology
Ventures, a unit of Xerox Corporation. Mr. O'Brien is a director of the
Company, is a corporate Vice President of Xerox Corporation and Chief
Executive Officer of Xerox New Enterprises Companies, a unit of Xerox
Corporation. Mr. Costello is a director of the Company and Chief Financial
Officer of Xerox New Enterprises Companies, a unit of Xerox Corporation.
Mr. Adams disclaims
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<PAGE> 56
beneficial ownership of such shares held by Xerox Corporation except to the
extent of his profit sharing interests therein. Messrs. O'Brien and Costello
disclaim beneficial ownership of such shares held by Xerox Corporation.
(4) Pursuant to a trust, Mr. Domit and his spouse share voting and dispositive
powers as co-trustees with respect to 562,500 shares of Common Stock.
(5) Includes 2,499 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of June 30, 1996.
(6) Includes 13,437 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of June 30, 1996.
(7) Includes 31,251 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of June 30, 1996.
(8) Includes 2,034 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of June 30, 1996.
(9) Includes 985 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of June 30, 1996. Pursuant to a trust, Mr.
Ringer and his spouse share voting and investment powers as co-trustees
with respect to 31,170 shares of Common Stock.
(10) Represents 7,143,000 shares and 6,754,500 shares held by Xerox Corporation
prior to and after the offering, respectively. See footnote (3) above.
(11) Includes 624 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of June 30, 1996.
(12) Includes 7,077 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of June 30, 1996.
(13) Includes 1,251 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of June 30, 1996.
(14) Includes 633 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of June 30, 1996.
(15) Includes 50,208 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days of June 30, 1996 and 7,143,000 shares and
6,754,500 shares held by Xerox Corporation prior to and after the offering,
respectively. See footnote (3) above.
54
<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws is a summary and is qualified in its entirety by
the provisions of the Amended and Restated Certificate of Incorporation and
Bylaws, which have been filed as exhibits to the Company's Registration
Statement, of which this Prospectus is a part.
Upon the closing of this offering, the authorized capital stock of the
Company, after giving effect to the conversion of all outstanding Preferred
Stock into Common Stock, will consist of 30,000,000 shares of Common Stock,
$.001 par value, and 2,000,000 shares of Preferred Stock, $.001 par value.
COMMON STOCK
As of June 30, 1996 there were 8,537,157 shares of Common Stock outstanding
held of record by 30 stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preferences of any outstanding shares of
Preferred Stock, if any. Holders of Common Stock have no preemptive rights and
no right to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of the offering will be, fully paid and
nonassessable. The rights of holders of Common Stock are subject to, and may be
adversely affected by, the rights of any series of Preferred Stock which the
Company may issue in the future.
PREFERRED STOCK
Effective upon the closing of this offering, the Board of Directors will
have the authority, without further action by the stockholders, to issue up to
2,000,000 shares of Preferred Stock in one or more series, and to fix the
rights, designations, preferences, privileges, qualifications and restrictions
thereof, including dividend rights, conversion rights, voting rights, rights and
terms of redemption, liquidation preferences and sinking fund terms, any or all
of which may be greater than the rights of the Common Stock. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation. Such issuance could have the effect of decreasing the
market price of the Common Stock. The issuance of Preferred Stock may have the
effect of delaying, deterring or preventing a change in control of the Company
without any further action by the stockholders. The Company has no present plans
to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
Upon completion of this offering, the Company and Xerox intend to enter
into a Stockholder Rights Agreement providing Xerox with certain registration
rights. Under the Stockholder Rights Agreement, in the event that the Company
proposes to register any of its securities under the Securities Act, Xerox will
be entitled to notice of such registration and will be entitled to include its
shares of Common Stock in such registration, subject to certain marketing and
other limitations. Xerox will also have the right to require the Company, on no
more than three occasions, to file a registration statement under the Securities
Act in order to register its shares of Common Stock. Xerox may also require the
Company to file Form S-3 registrations with respect to its shares of
55
<PAGE> 58
Common Stock. The Company may, under certain circumstances, defer such
registration, and the underwriters involved in such registrations have the
right, subject to certain limitations, to limit the number of shares included in
such registrations.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION,
BY-LAWS AND DELAWARE LAW
GENERAL
Certain provisions of the Delaware General Corporation Law and the
Company's Certificate of Incorporation and Bylaws could have the effect of
making it more difficult for a third-party to acquire, or of discouraging a
third-party to acquire, control of the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common Stock. These provisions of Delaware law and the Company's
Certificate of Incorporation and Bylaws may also have the effect of discouraging
or preventing certain types of transactions involving an actual or threatened
change of control of the Company (including unsolicited takeover attempts), even
though such a transaction may offer the Company's stockholders the opportunity
to sell their stock at a price above the prevailing market price. The
Certificate of Incorporation allows the Company to issue Preferred Stock with
rights senior to those of the Common Stock and other rights that could adversely
affect the interests of holders of Common Stock without any further vote or
action by the stockholders. The issuance of Preferred Stock, for example, could
decrease the amount of earnings or assets available for distribution to the
holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock, as well as having the anti-takeover effect discussed
above.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which prohibits a Delaware corporation from engaging in a
"business combination" with certain persons ("Interested Stockholders") for
three years following the date any such person becomes an Interested
Stockholder. Interested Stockholders generally include (i) persons who are the
beneficial owners of 15% or more of the outstanding voting stock of the
corporation, and (ii) persons who are affiliates or associates of the
corporation and who hold 15% or more of the corporation's outstanding voting
stock at any time within three years before the date on which such person's
status as an Interested Stockholder is determined. Subject to certain
exceptions, a business combination includes, among other things, (i) mergers or
consolidations, (ii) the sale, lease, exchange, mortgage, pledge, transfer or
other disposition of assets having an aggregate market value equal to 10% or
more of either the aggregate market value of all assets of the corporation
determined on a consolidated basis or the aggregate market value of all the
outstanding stock of the corporation, (iii) transactions that result in the
issuance or transfer by the corporation of any stock of the corporation to the
Interested Stockholder, except pursuant to a transaction that effects a pro rata
distribution to all stockholders of the corporation, (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation that is owned directly or
indirectly by the Interested Stockholder, of (v) any receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Section 203 does not apply to a business combination if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approves the transaction in which the Interested Stockholder became an
Interested Stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commences, other than certain
56
<PAGE> 59
excluded shares, or (iii) following a transaction in which the person became an
Interested Stockholder, the business combination is (a) approved by the board of
directors of the corporation and (b) authorized at a regular or special meeting
of stockholders, and not by written consent, by the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock of the
corporation not owned by the Interested Stockholder.
CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Bylaws also require that special meetings of the stockholders
of the Company may be called only by the Board of Directors, the Chief Executive
Officer of the Company or by any person or persons holding shares representing
at least 20% of the outstanding capital stock. The Company's Bylaws also require
advance written notice, which must be received by the Secretary of the Company
not less than 90 days prior to the meeting, by a stockholder of a proposal or
director nomination which such stockholder desires to present at an annual or
special meeting of stockholders. The Company's Certificate of Incorporation does
not include a provision for cumulative voting in the election of directors.
Under cumulative voting, a minority stockholder holding a sufficient number of
shares may be able to ensure the election of one or more directors. The absence
of cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in the Board of Directors and, as a result, may
have the effect of deterring hostile takeover or delaying or preventing changes
in control or management of the Company.
The Company's Bylaws provide that the authorized number of directors may be
changed by an amendment to the Bylaws adopted by the Board of Directors or by
the stockholders. Vacancies in the Board of Directors may be filled either by
holders of a majority of the Company's voting stock or a majority of directors
in office, although less than a quorum.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation has been appointed as transfer agent and
registrar for the Company's Common Stock.
The Company has applied to have the Common Stock listed on the Nasdaq
National Market under the trading symbol DOCX.
57
<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale
(as described below), sales of substantial amounts of Common Stock in the public
market after such restrictions lapse could adversely affect the prevailing
market price at such time and the ability of the Company to raise equity capital
in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 10,374,657 shares of Common Stock assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options to
purchase Common Stock. Of these shares, the shares of Common Stock to be sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act (the "Affiliates"). The remaining 8,074,657 shares held by
existing stockholders of the Company were sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act and are
"restricted" securities within the meaning of Rule 144 under the Securities Act
(the "Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. As a result of the contractual restrictions described below
and the provisions of Rules 144, 144(k) and 701, the Restricted Shares will be
available for sale in the public market as follows (based on the number of
shares outstanding as of June 30, 1996): (i) no Restricted Shares will be
eligible for immediate sale upon completion of this offering, and (ii) all
Restricted Shares will be eligible for sale upon expiration of the lock-up
agreements 180 days after the date of this Prospectus (regardless of whether
certain proposed amendments to Rule 144 are adopted in the currently proposed
form prior to such date).
Upon completion of this offering, Xerox, or certain transferees, will be
entitled to certain rights with respect to the registration of 6,754,500 shares
of Common Stock under the Securities Act. See "Description of Capital
Stock -- Registration Rights." Registration of such 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.
All officers and directors, Xerox and substantially all other stockholders
and option holders of the Company have agreed not to sell, make any short sale
of, grant any option for the purchase of, or otherwise transfer or dispose of,
any shares of Common Stock or any securities convertible into or exercisable for
Common Stock held by such persons prior to the date hereof for a period of 180
days after the date of this Prospectus, without the prior written consent of
Deutsche Morgan Grenfell. When determining whether or not to release shares from
the lock-up agreements, Deutsche Morgan Grenfell will consider, among other
factors, the stockholder's reasons for requesting the release, the number of
shares for which the release is being requested and market conditions at the
time.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
shares for at least two years is entitled to sell, within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock (103,746 shares immediately after this offering) or (ii) the average
weekly trading volume of the Common Stock on the Nasdaq National Market during
the four calendar weeks preceding such sale, subject to the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. Pursuant to a recent proposal of
the
58
<PAGE> 61
Securities and Exchange Commission (the "Commission") that has not yet been
adopted, the two-year holding period described in the preceding sentence would
be reduced to one year. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, would be entitled to sell such shares under Rule 144(k) without regard to
the requirements described above. Pursuant to a recent proposal of the
Commission that has not yet been adopted, the three-year holding period
described in the preceding sentence would be reduced to two years.
Under Rule 144(k), a person who is not deemed to have been an Affiliate of
the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years
(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. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately following
completion of this offering. Under the proposed amendments to Rule 144, the
holding period applicable under Rule 144(k) would be reduced from three years to
two years. In general, under Rule 701 of the Securities Act as currently in
effect, any employee, consultant or advisor of the Company who purchased shares
from the Company in connection with a compensatory stock or option plan or
written employment agreement is eligible to resell such shares 90 days after the
effective date of this offering in reliance on Rule 144, but without compliance
with certain restrictions, including the holding period, contained in Rule 144.
Within 90 days of the date of this Prospectus, the Company intends to file
a registration statement under the Securities Act to register shares of Common
Stock reserved for issuance under its equity incentive plans, thus permitting
the resale of such shares by non-affiliates in the public market without
restriction under the Securities Act. See "Management -- Employee Benefit
Plans." Such registration statements will become effective immediately upon
filing. As of June 30, 1996, 373,368 options to purchase shares of Common Stock
were outstanding under the Company's stock option plans and agreements, none of
which are subject to the lock-up agreements described above.
59
<PAGE> 62
UNDERWRITING
The Underwriters named below, for whom Deutsche Morgan Grenfell/C. J.
Lawrence Inc., and SoundView Financial Group, Inc. are acting as representatives
(the "Representatives"), have severally agreed, subject to the terms and
conditions contained in the Underwriting Agreement (the form of which is filed
as an exhibit to the Company's Registration Statement, of which this Prospectus
is a part), to purchase from the Company and the Selling Stockholders the
respective number of shares of Common Stock indicated below opposite their
respective names. The Underwriters are committed to purchase all of the shares,
if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Deutsche Morgan Grenfell/C. J. Lawrence Inc......................
SoundView Financial Group, Inc. .................................
---------
Total.................................................. 2,300,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions.
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers
(who may include the Underwriters) a concession of not more than $ per share.
The selected dealers may reallow a concession of not more than $ to certain
other dealers. After the initial public offering, the price and concessions and
re-allowances to dealers and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part. The Underwriters do not intend to sell any of
the shares of Common Stock offered hereby to accounts for which they exercise
discretionary authority.
The Company has granted options to the Underwriters to purchase up to a
maximum of 345,000 additional shares of Common Stock to cover over-allotments,
if any, at the public offering price, less the underwriting discount set forth
on the cover page of this Prospectus. Such options may be exercised at any time
until 30 days after the date of the Underwriting Agreement. To the extent the
Underwriters exercise these options, each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the Offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain liabilities
including civil liabilities under the Securities Act of 1933, as amended, or
will contribute to payments the Underwriters may be required to make in respect
thereof.
In connection with the Offering, the Company and the directors, executive
officers and stockholders of the Company have agreed not to offer, sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the later of: (i) the date of this Prospectus; and (ii) the first date on which
shares of Common Stock hereby are offered to the public, without the prior
written consent of Deutsche Morgan Grenfell/C. J. Lawrence Inc.
60
<PAGE> 63
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company, the Selling Stockholders and the Representatives. The
principal factors to be considered in determining the public offering price
include the information set forth in this Prospectus and otherwise available to
the Representatives; the history and the prospects for the industry in which the
Company will compete; the ability of the Company's management; the prospectus
for future earnings of the Company; the present state of the Company's
development and its current financial condition; the general condition of the
securities markets at the time of the offering; and the recent market prices of,
and the demand for, publicly traded common stock of generally comparable
companies.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Gray Cary Ware & Freidenrich, A Professional
Corporation, San Diego, California.
EXPERTS
The consolidated financial statements of Document Sciences Corporation at
December 31, 1994 and 1995, and for each of the three years in the period ended
December 31, 1995, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act, and the rules and regulations promulgated thereunder,
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in the Prospectus as to the contents of
any contract or other document that is filed as an exhibit to the Registration
Statement are not necessarily complete and each such statement is qualified in
all respects by reference to the full text of such contract or document. For
further information with respect to the Company and the Common Stock, reference
is hereby made to such exhibits and schedules thereto, which may be inspected
and copied at the principal office of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Seven World
Trade Center, 13th Floor, New York, New York 10048 and at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
each such document may be obtained from the Commission at its principal office
in Washington, D.C. upon payment of the charges prescribed by the Commission.
61
<PAGE> 64
DOCUMENT SCIENCES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Income..................................................... F-4
Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity........ F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 65
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Document Sciences Corporation
We have audited the accompanying consolidated balance sheets of Document
Sciences Corporation as of December 31, 1994 and 1995, and the related
consolidated statements of income, redeemable preferred stock and stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Document
Sciences Corporation at December 31, 1994 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
July 12, 1996
F-2
<PAGE> 66
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------------- JUNE 30, JUNE 30,
1994 1995 1996 1996
---------- ---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Assets (Note 4)
Current assets:
Cash and cash equivalents (Note 2)............. $ 583,834 $1,271,120 $ 1,465,784
Accounts receivable, less allowance for
doubtful accounts of $13,613, $22,957 and
$28,939 in 1994, 1995 and 1996,
respectively................................. 1,948,591 2,152,732 2,181,087
Due from affiliates (Note 9)................... 905,200 1,612,600 1,536,329
Deferred income taxes (Note 8)................. 62,700 79,200 79,200
Other current assets........................... 140,975 164,233 184,367
---------- ---------- ----------
Total current assets................. 3,641,300 5,279,885 5,446,767
Property and equipment, net (Note 2)........... 345,005 632,225 907,996
Computer software costs, net of accumulated
amortization of $144,651, $280,719 and
$333,568 in 1994, 1995 and 1996,
respectively................................. 222,260 377,172 428,559
Deferred financing costs....................... -- -- 318,806
---------- ---------- ----------
$4,208,565 $6,289,282 $ 7,102,128
========== ========== ==========
Liabilities, redeemable preferred stock and
stockholders' equity
Current liabilities:
Accounts payable............................... $ 119,522 $ 328,609 $ 471,015
Accrued compensation........................... 936,944 444,409 522,043
Other accrued liabilities...................... 146,623 130,487 371,833
Deferred revenue............................... 1,081,715 1,596,965 1,594,357
Current income tax expense payable to
affiliate.................................... 790,700 1,382,100 1,382,100
Current portion of obligations under capital
leases (Note 5).............................. 30,249 44,100 65,223
---------- ---------- ----------
Total current liabilities............ 3,105,753 3,926,670 4,406,571
Obligations under capital leases (Note 5)...... 20,490 98,500 144,902
Deferred income taxes (Note 8)................. 93,500 157,000 157,000
Commitments and contingencies
Series A Redeemable Preferred Stock, $.001 par
value; 2,000,000 shares authorized, issued
and outstanding (no shares issued and
outstanding pro forma); (liquidation
preference of $2,000,000) (Note 6)........... 917,750 1,250,750 1,417,250 $ --
Stockholders' equity (Note 7)
Common stock, $.001 par value;
Authorized shares -- 3,000,000
Issued and outstanding shares -- 3,000,
1,311,423 and 1,397,157 in 1994, 1995
and 1996, respectively (8,537,157 shares
issued and outstanding pro forma)............ 3 1,311 1,397 8,537
Additional paid-in capital..................... 45,593 110,550 557,065 1,967,175
Deferred compensation.......................... -- -- (406,475) (406,475)
Retained earnings.............................. 25,476 744,501 824,418 824,418
---------- ---------- ----------
Total stockholders' equity........... 71,072 856,362 976,405 2,393,655
==========
---------- ----------
$4,208,565 $6,289,282 $ 7,102,128
========== ========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 67
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Notes 3 and 9):
Initial license fees (including
$439,500, $1,098,400 and
$2,518,700 from affiliates in
1993, 1994 and 1995,
respectively)................... $1,979,776 $4,425,970 $6,299,230 $2,492,407 $3,503,292
Annual renewal license and support
fees (including $144,000,
$312,800, and $461,500 from
affiliates in 1993, 1994 and
1995, respectively)............. 980,729 1,521,389 1,942,353 894,021 1,100,355
Services and other (including
$216,900, $528,000 and $934,700
from affiliates in 1993, 1994
and 1995, respectively)......... 530,922 1,223,897 2,270,460 778,051 1,746,407
---------- ---------- ---------- ---------- ----------
Total revenues............. 3,491,427 7,171,256 10,512,043 4,164,479 6,350,054
Cost of revenues:
Initial license fees............... 144,991 273,667 350,860 98,332 313,664
Annual renewal license and support
fees............................ 217,312 266,902 369,732 179,675 244,588
Services and other................. 77,583 191,865 423,888 178,854 321,572
---------- ---------- ---------- ---------- ----------
Total cost of revenues..... 439,886 732,434 1,144,480 456,861 879,824
---------- ---------- ---------- ---------- ----------
Gross profit............... 3,051,541 6,438,822 9,367,563 3,707,618 5,470,230
Operating expenses:
Research and development........... 400,796 1,044,761 1,747,194 819,371 1,085,470
Selling and marketing (including
$113,500 and $167,200 to
affiliates in 1994 and 1995,
respectively) (Note 9).......... 934,897 2,765,414 4,415,158 1,866,071 3,249,009
General and administrative......... 996,195 1,274,847 1,519,865 732,274 735,617
---------- ---------- ---------- ---------- ----------
Total operating expenses... 2,331,888 5,085,022 7,682,217 3,417,716 5,070,096
---------- ---------- ---------- ---------- ----------
Income from operations............... 719,653 1,353,800 1,685,346 289,902 400,134
Interest income (expense), net....... (22,863) (9,125) 5,079 9,227 15,839
---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes.............................. 696,790 1,344,675 1,690,425 299,129 415,973
Provision for income taxes (Note
8)................................. 283,400 632,900 638,400 110,959 169,556
---------- ---------- ---------- ---------- ----------
Net income........................... $ 413,390 $ 711,775 $1,052,025 $ 188,170 $ 246,417
========== ========== ========== ========== ==========
Pro forma net income per share....... $ .06 $ .09 $ .13 $ .02 $ .03
========== ========== ========== ========== ==========
Shares used to compute pro forma net
income per share................... 7,290,165 8,256,165 8,291,732 8,256,165 8,891,176
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 68
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
<TABLE> SERIES A
<CAPTION> REDEEMABLE
PREFERRED STOCK STOCKHOLDERS' EQUITY
----------------------- -------------------------------------------------------------------------------
DEFERRED
COMPENSATION TOTAL
COMMON STOCK ADDITIONAL RELATED TO RETAINED STOCKHOLDERS'
------------------- PAID-IN STOCK EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTIONS (DEFICIT) (DEFICIT)
--------- ---------- --------- ------ ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1992.......... 2,000,000 $ 251,750 3,000 $ 3 $ 45,593 $ -- $(433,689) $ (388,093)
Accretion on
Series A
Redeemable
Preferred
Stock........... -- 333,000 -- -- -- -- (333,000) (333,000)
Net income........ -- -- -- -- -- -- 413,390 413,390
--------- ---------- ------- ---- ---------- ---------- ---------- ----------
Balance at December
31, 1993.......... 2,000,000 584,750 3,000 3 45,593 -- (353,299) (307,703)
Accretion on
Series A
Redeemable
Preferred
Stock........... -- 333,000 -- -- -- -- (333,000) (333,000)
Net income........ -- -- -- -- -- -- 711,775 711,775
--------- ---------- ------- ---- ---------- ---------- ---------- ----------
Balance at December
31, 1994.......... 2,000,000 917,750 3,000 3 45,593 -- 25,476 71,072
Issuance of common
stock for
cash............ -- -- 1,308,423 1,308 64,957 -- -- 66,265
Accretion on
Series A
Redeemable
Preferred
Stock........... -- 333,000 -- -- -- -- (333,000) (333,000)
Net income........ -- -- -- -- -- -- 1,052,025 1,052,025
--------- ---------- ------- ---- ---------- ---------- ---------- ----------
Balance at December
31, 1995.......... 2,000,000 1,250,750 1,311,423 1,311 110,550 -- 744,501 856,362
Issuance of common
stock for cash
(unaudited)..... -- -- 85,734 86 6,515 -- -- 6,601
Accretion on
Series A
Redeemable
Preferred
Stock
(unaudited)..... -- 166,500 -- -- -- -- (166,500) (166,500)
Deferred
compensation
related to stock
options
(unaudited)..... -- -- -- -- 440,000 (440,000) -- --
Amortization of
deferred
compensation
related to stock
options
(unaudited)..... -- -- -- -- -- 33,525 -- 33,525
Net income
(unaudited)..... -- -- -- -- -- -- 246,417 246,417
--------- ---------- ------- ---- ---------- ---------- ---------- ----------
Balance at June 30,
1996
(unaudited)....... 2,000,000 $1,417,250 1,397,157 $1,397 $ 557,065 $ (406,475) $ 824,418 $ 976,405
========= ========== ========= ====== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 69
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 413,390 $ 711,775 $1,052,025 $ 188,170 $ 246,417
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 33,040 63,102 141,685 58,408 113,560
Amortization of computer software
costs................................ 36,595 103,483 136,068 16,979 52,849
Amortization of deferred compensation... -- -- -- -- 33,525
Current income tax expense payable to
affiliate............................ 136,000 653,700 591,400 116,927 --
Deferred income taxes................... 147,400 (20,800) 47,000 (5,968) --
Provision for doubtful accounts......... 10,000 3,613 9,344 16,795 5,982
Changes in operating assets and
liabilities:
Accounts receivable.................. (1,037,103) (1,461,372) (920,885) 561,574 41,934
Other current assets................. (5,568) (114,934) (23,258) 25,385 (20,134)
Accounts payable..................... 28,728 82,693 209,087 15,743 (176,400)
Accrued liabilities.................. (7,109) 892,877 (508,671) (710,887) 318,980
Deferred revenue..................... 334,587 343,777 515,250 8,111 (2,608)
----------- ----------- ---------- ---------- ----------
Net cash provided by operating
activities.............................. 89,960 1,257,914 1,249,045 291,237 614,105
INVESTING ACTIVITIES
Purchases of property and equipment....... (20,504) (247,660) (297,964) (316,098) (287,562)
Additions to computer software costs...... (74,859) (163,629) (290,980) (128,991) (104,236)
----------- ----------- ---------- ---------- ----------
Net cash used for investing activities.... (95,363) (411,289) (588,944) (445,089) (391,798)
FINANCING ACTIVITIES
Proceeds from note payable to bank........ 120,000 100,000 -- -- --
Repayments of note payable to bank........ -- (445,000) -- -- --
Principal payments under capital lease
obligations............................. (3,209) (29,379) (39,080) (22,642) (34,244)
Issuance of common stock.................. -- -- 66,265 -- 6,601
----------- ----------- ---------- ---------- ----------
Net cash provided by (used for) financing
activities.............................. 116,791 (374,379) 27,185 (22,642) (27,643)
----------- ----------- ---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents............................. 111,388 472,246 687,286 (176,494) 194,664
Cash and cash equivalents at beginning of
period.................................. 200 111,588 583,834 583,834 1,271,120
----------- ----------- ---------- ---------- ----------
Cash and cash equivalents at end of
period.................................. $ 111,588 $ 583,834 $1,271,120 $ 407,340 $1,465,784
=========== =========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid............................. $ 22,863 $ 15,800 $ 12,283 $ 3,751 $ 12,246
=========== =========== ========== ========== ==========
Capital lease obligations entered into for
property and equipment.................. $ 12,269 $ 55,592 $ 130,941 $ -- $ 101,769
=========== =========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 70
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Document Sciences Corporation (the "Company") was incorporated on October
18, 1991 in Delaware as a subsidiary of Xerox Corporation ("Xerox"). The Company
develops, markets and supports a family of document automation software products
and services used in high volume electronic publishing applications. Autograph,
the Company's document automation software architecture, enables personalized
publishing solutions for many industries including insurance, managed
healthcare, financial services, telecommunications, government agencies and
commercial print service bureaus.
The Company currently derives substantially all of its license revenues
from licenses of CompuSet, Autograph's flagship product, and related products
and from fees for services related to the CompuSet software. The Company's
financial performance will continue to depend, in significant part, on the
successful development, introduction and customer acceptance of new and enhanced
versions of the CompuSet software and related products. There can be no
assurance that the Company will continue to be successful in developing and
marketing CompuSet products and related services.
Management believes that fourth quarter revenues are positively impacted by
year-end capital purchases by large corporate customers, as well as the
Company's sales compensation plans. These seasonal factors typically result in
fourth quarter revenues being substantially higher than revenues in each of the
preceding three quarters.
The Company currently has a variety of contractual and informal
relationships with Xerox and affiliates of Xerox, including a strategic
marketing alliance agreement, a transfer and license agreement and various
distribution agreements. There can be no assurance that Xerox or its affiliates
will continue these relationships. The failure by the Company to maintain these
relationships with Xerox and its affiliates could have a material adverse effect
on the Company's financial statements.
BASIS OF PRESENTATION
In 1994, the Company established a wholly-owned subsidiary, Document
Sciences Europe, in Sophia Antipolis, France in order to market and support its
products to the European community. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiary. Significant
intercompany accounts and transactions have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The financial statements at June 30, 1996 and for the six-month periods
ended June 30, 1995 and 1996 are unaudited, but include all adjustments
(consisting only of normal recurring adjustments) which management considers
necessary for a fair statement of the financial position at such dates and the
operating results and cash flows for such periods. Results for interim periods
are not necessarily indicative of results for the entire year or any future
periods.
F-7
<PAGE> 71
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN OPERATIONS
The functional currency of the Company's France subsidiary is the French
Franc. The balance sheet accounts of the subsidiary are translated into United
States dollars at exchange rates prevailing at the balance sheet dates.
Operating results are translated at weighted average exchange rates in effect
during the year. Net unrealized translation adjustments were insignificant in
1994, 1995 and the six month period ended June 30, 1996. Foreign currency
transaction gains and losses are included in the consolidated statements of
income and were not material during the years ended December 31, 1994 and 1995
and the six month periods ended June 30, 1995 and 1996.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities when acquired of three
months or less and are stated at market. The Company evaluates the financial
strength of institutions at which significant investments are made and believes
the related credit risk is limited to an acceptable level.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and has classified its investments as available-for-sale in
accordance with that standard. Available-for-sale securities are carried at
amounts which approximate fair value. Unrealized gains and losses, net of tax,
are reported in stockholders' equity. Realized gains and losses and declines in
value judged to be other-than-temporary, if any, on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to large, multinational customers
in the United States, Europe, Canada and Australia. The Company derived 14%,
26%, 42% and 30% of its total revenues from customers outside the United States
in the years ended December 31, 1993, 1994 and 1995 and the six months ended
June 30, 1996, respectively. A significant concentration of the Company's
customers are in the insurance and commercial print service industries. No
customer has accounted for 10% or more of the Company's revenue in any one year.
Credit is extended based on an evaluation of the customer's financial
condition and a cash deposit is generally not required. The Company estimates
its potential losses on trade receivables on an ongoing basis and provides for
anticipated losses in the period in which the revenues are recognized. Credit
losses have historically been minimal and have been within management's
expectations.
F-8
<PAGE> 72
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
DEFERRED FINANCING COSTS
Costs incurred through June 30, 1996 in connection with the offering
contemplated by this Prospectus have been deferred. Such costs will be charged
against the proceeds of the offering upon completion, or expensed if the
offering is not completed.
ACCOUNTING STANDARD ON IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company adopted SFAS 121 in 1996 and the adoption had no impact on the Company's
financial statements.
COMPUTER SOFTWARE COSTS
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, costs incurred in the
research and development of new software products and significant enhancements
to existing software products are expensed as incurred until the technological
feasibility of the product has been established. After technological feasibility
has been established, direct production costs, including programming and
testing, are capitalized until general release of the product.
Capitalized software costs are amortized using the greater of the amount
computed using the ratio of current period product revenues to estimated total
product revenues or the straight-line method over the remaining estimated
economic lives of the products (generally five years). It is possible that
estimated total product revenues, the estimated economic life of the product, or
both, will be reduced in the future. As a result, the carrying amount of
capitalized software costs may be reduced in the future, which could result in
charges to the results of operations in future periods.
DEPRECIATION AND AMORTIZATION
Depreciation is provided on a straight-line method over the estimated
useful lives of the assets (generally five years). Amortization of leasehold
improvements is provided over the lesser of the remaining lease term or the
estimated useful life of the improvements.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with AICPA Statement of
Position on Software Revenue Recognition No. 91-1. Initial licensing revenue is
recognized upon shipment of the product to customers if no significant Company
obligations remain and collection of the receivable is deemed probable. The
portion of the initial licensing revenue which represents the software support
for the first year is deferred and recognized ratably over the contract period.
In subsequent years, customers pay annual license fees for continued use and
support of licensed software. Annual renewal license and support revenue is
deferred and recognized ratably over the contract period. Revenues from
commissions paid by Xerox in connection with the sale of Xerox printer products
are
F-9
<PAGE> 73
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
recognized upon installation of the printer products. Revenues generated from
consulting and training services are recognized as the related services are
performed.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is computed using the weighted average
number of common shares outstanding during the period and includes the effect of
dilutive common stock equivalents arising from stock options, using the treasury
stock method. Pursuant to the requirements of the Securities and Exchange
Commission, Common Stock issued by the Company during the twelve months
immediately preceding the initial public offering, plus the number of common
equivalent shares which became issuable during the same period pursuant to the
grant of stock options, have been included in the calculation of the shares used
in computing pro forma net income per share as if these shares were outstanding
for all periods presented using the treasury stock method. In addition, the
calculation of the shares used in computing pro forma net income per share also
includes the Series A Redeemable Preferred Stock, which will convert into Common
Stock upon completion of the initial public offering contemplated by this
Prospectus, as if they were converted into Common Stock as of the original dates
of issuance. Historical earnings per share have not been presented since such
amounts are not deemed meaningful due to the significant change in the Company's
capital structure that will occur in connection with the initial public
offering.
UNAUDITED SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
The computation of supplemental pro forma net income per share is based on
pro forma net income per share as described above, adjusted to assume the
repayment of the current income tax payable to affiliate out of the proceeds of
this offering. As a result, the shares used to compute supplemental pro forma
net income per share include 153,567 shares of the shares being offered by the
Company hereby which represent the shares deemed to be sold to fund such
repayment. Supplemental pro forma net income per share was $.06, $.08 and $.12
for the years ended December 31, 1993, 1994 and 1995, respectively, and $.02 and
$.03 for the six months ended June 30, 1995 and 1996, respectively.
STOCK OPTIONS
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which is effective for the Company's 1996 consolidated financial
statements. SFAS 123 allows companies to either account for stock-based
compensation under the new provisions or under the provisions of APB 25, but
requires pro-forma disclosure in the footnotes to the financial statements as if
the measurement provisions of SFAS 123 had been adopted. The Company intends to
continue accounting for its stock-based compensation in accordance with the
provisions of APB 25. As such, the new provisions of SFAS 123 will not impact
the financial position or results of operations of the Company.
INCOME TAXES
The Company follows the liability method of accounting for income taxes, as
set forth in SFAS No. 109.
Xerox and the Company intend to enter into a Tax Sharing Agreement that
provides for the allocation between Xerox and the Company of all
responsibilities, liabilities and benefits relating to
F-10
<PAGE> 74
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
taxes paid or payable by either Xerox or the Company for all taxable periods,
whether beginning before, on, or after this offering. Through December 31, 1995,
the Company has been included in the consolidated tax returns of Xerox. The
Company's share of Xerox's consolidated income tax liability through December
31, 1995 has been determined on a separate company basis computed under Internal
Revenue Code guidelines and was $136,000, $653,700 and $591,400 for the years
ended December 31, 1993, 1994 and 1995, respectively, which has been accounted
for as a current liability. The Company intends to repay such liability from the
proceeds of the initial public offering contemplated by this Prospectus. For the
period from January 1, 1996 through the date on which Xerox owns less than 80%
of the Common Stock of the Company, the Company's separate tax liability will be
settled with Xerox in cash. The Company intends to pay any such liabilities with
cash generated from operations. At such time as Xerox owns less than 80% of the
Common Stock of the Company, the Company will not be part of the consolidated
tax returns of Xerox and will file separate tax returns.
2. FINANCIAL STATEMENT INFORMATION
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
--------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................. $ 338,310 $ 625,591 $ 783,454
Office furniture and fixtures....... 74,015 171,399 208,325
Office equipment.................... 32,075 46,367 166,770
Leasehold improvements.............. 16,642 46,590 120,729
--------- --------- ----------
461,042 889,947 1,279,278
Less accumulated depreciation and
amortization...................... (116,037) (257,722) (371,282)
--------- --------- ----------
$ 345,005 $ 632,225 $ 907,996
========= ========= ==========
</TABLE>
Equipment acquired under capital leases totaled $66,255, $145,112 and
$221,012 (net of accumulated amortization of $16,259, $35,085 and $60,954) at
December 31, 1994 and 1995 and June 30, 1996, respectively.
INVESTMENTS
Included in cash and cash equivalents were the following debt securities
which were classified as available-for-sale:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
U.S. treasury securities.................. $ -- $398,889 $ --
U.S. government agency obligations........ 199,435 298,470 198,315
-------- -------- --------
$199,435 $697,359 $198,315
======== ======== ========
</TABLE>
As of December 31, 1994, 1995 and June 30, 1996, the difference between
amortized cost and the estimated fair value of the available-for-sale securities
was not material.
F-11
<PAGE> 75
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
3. DOMESTIC AND FOREIGN OPERATIONS
The table below summarizes the Company's domestic operations and those of
its subsidiary, Document Sciences Europe.
<TABLE>
<CAPTION>
UNITED
STATES FRANCE ELIMINATIONS TOTAL
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31,
1995
Sales to unaffiliated
customers............. $5,350,838 $1,246,305 $ -- $ 6,597,143
Sales to affiliates (Note
9).................... 1,929,300 1,985,600 -- 3,914,900
Transfers between
geographic areas...... 1,528,352 -- (1,528,352) --
---------- ---------- ----------- -----------
Revenues................. $8,808,490 $3,231,905 $(1,528,352) $10,512,043
========== ========== =========== ===========
Operating income (loss).. $1,696,153 $ (5,728) $ -- $ 1,690,425
========== ========== =========== ===========
Identifiable assets...... $4,748,787 $1,557,161 $ (16,666) $ 6,289,282
========== ========== =========== ===========
Year ended December 31,
1994
Sales to unaffiliated
customers............. $4,861,398 $ 370,658 $ -- $ 5,232,056
Sales to affiliates (Note
9).................... 1,405,800 533,400 -- 1,939,200
Transfers between
geographic areas...... 507,388 -- (507,388) --
---------- ---------- ----------- -----------
Revenues................. $6,774,586 $ 904,058 $ (507,388) $ 7,171,256
========== ========== =========== ===========
Operating income (loss).. $1,727,707 $ (383,032) $ -- $ 1,344,675
========== ========== =========== ===========
Identifiable assets...... $3,475,168 $ 750,063 $ (16,666) $ 4,208,565
========== ========== =========== ===========
</TABLE>
The Company uses affiliated distributors to sell its products in Canada,
Australia and New Zealand (See Note 9).
4. CREDIT FACILITY
The Company had an agreement with a bank to provide a working capital line
of credit which allows maximum borrowings at the lesser of $750,000 or 75% of
eligible accounts receivable (as defined). The agreement also provided for
letters of credit up to an aggregate of $100,000. Borrowings under the line of
credit are collateralized by substantially all assets of the Company and bear
interest at the bank's prime rate plus 1%. The line of credit agreement contains
certain covenants, including a limit on the amount of debt to tangible net worth
and restrictions on the payment of dividends. The line of credit is renewable
annually at the sole discretion of the bank and expired on July 5, 1996. The
Company had no outstanding borrowings or letters of credit as of December 31,
1995.
On July 8, 1996, the Company signed a letter of intent to renew the line of
credit to provide borrowings up to $2,500,000, with the line of credit to expire
in July 1997.
F-12
<PAGE> 76
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
5. LEASES
The Company leases its corporate office facilities in San Diego, California
under an operating lease, signed by Xerox, which expires in 2000. Under the
terms of the lease, effective February 1, 1997, monthly rental payments will be
increased annually by 4%. The lease provides the Company with an option to
extend the lease term for an additional three years at the base rent in effect
for the last year of the initial lease term. In addition, the Company may
exercise a one-time cancellation option effective any time after January 31,
1998 with the payment of certain penalties. The Company also leases certain
equipment under capital leases.
Annual future minimum lease payments, which include $121,400 for the effect
of the potential exercise of the cancellation option, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------ -------- --------
<S> <C> <C>
1996.............................................. $206,800 $ 58,700
1997.............................................. 214,300 46,100
1998.............................................. 177,600 41,300
1999.............................................. -- 27,500
-------- --------
$598,700 173,600
========
Less amount representing interest.................... (31,000)
--------
Present value of net minimum lease payments.......... 142,600
Less current portion................................. (44,100)
--------
Long-term portion of capital lease obligations....... $ 98,500
========
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 was
$126,441, $137,160 and $255,599, respectively. Rent expense for the six months
ended June 30, 1995 and 1996 was $114,967 and $134,317, respectively.
6. SERIES A REDEEMABLE PREFERRED STOCK
Each share of Series A Redeemable Preferred Stock is convertible into
Common Stock at the option of the holder. The initial conversion rate for the
Series A Redeemable Preferred Stock is on a one-to-one basis. The conversion
rate is subject to adjustment to take into account any dilutive issuance of
stock and will be 1.19 to 1 as a result of such dilutive issuance. The Series A
Redeemable Preferred Stock is automatically convertible into Common Stock, at
the then applicable conversion rate, upon the closing of an underwritten public
offering of shares of Common Stock of the Company for total gross offering
proceeds of not less than $5,000,000, but only if the public offering price of
the Company's Common Stock in such offering is not less than $1.00 per share.
Each share of Series A Redeemable Preferred Stock is entitled to one vote for
each common share into which it would convert. The Series A Redeemable Preferred
Stock is entitled to annual noncumulative dividends at $.017 per share, when, as
and if declared by the Board of Directors.
Upon dissolution, liquidation or winding up of the Company, before any
distribution or payment of amounts to the holders of Common Stock, the holders
of Series A Redeemable Preferred Stock are entitled to receive preference of
$.33 per share plus all declared but unpaid dividends on such shares.
F-13
<PAGE> 77
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
The holders of the Series A Redeemable Preferred Stock have an option, at
any time subsequent to March 31, 1998, to require the Company to repurchase up
to one-third of the shares at $.33 per share. In addition, one-third of the
shares can be redeemed at any time subsequent to each of March 31, 1999 and
March 31, 2000. The difference between the issuance price and the redemption
value is being amortized to retained earnings on a straight-line basis, which
approximates the interest method.
7. STOCKHOLDERS' EQUITY
STOCK SPLIT
On June 19, 1996, the Company's Board of Directors authorized a 3 for 1
stock split for all outstanding Common Stock and Series A Redeemable Preferred
Stock, subject to stockholder approval, to become effective on the date of this
Prospectus. All share and per share amounts in the accompanying consolidated
financial statements have been retroactively restated to reflect the stock
split. Upon completion of the public offering contemplated by this Prospectus,
the authorized capital stock of the Company will consist of 30,000,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock.
STOCK INCENTIVE PLANS
The Company's Stock Incentive Plans (the "Plans") provide for the issuance
of incentive and nonstatutory options to purchase Common Shares to eligible
employees, officers, directors of, and consultants to, the Company. The
Company's 1993 Stock Incentive Plan (the "1993 Plan") provided for the issuance
of up to 1,500,000 shares. In October 1995, the Board of Directors approved the
1995 Stock Incentive Plan (the "1995 Plan"), which provided for the issuance of
an additional 779,250 shares, which include 29,250 shares previously reserved
for issuance under the 1993 Plan. The 1995 Plan replaces the 1993 Plan. All
outstanding options under the 1993 Plan remain exercisable in accordance with
their original terms. Terms of the stock purchase or stock option agreements,
including vesting requirements, are determined by the Board of Directors,
subject to the provisions of the 1995 Plan. The maximum term of options granted
under the 1995 Plan is ten years. The exercise price of incentive stock options
must equal at least the fair market value on the date of grant. The exercise
price of nonstatutory stock options and stock issued under purchase rights must
equal at least 85% of the fair market value on the date of grant or time of
issuance. The Company has the option, in the event of termination of employment,
to repurchase shares issued under stock purchase agreements or upon exercise of
stock options at the lesser of the original issue price or fair market value on
the date of termination of employment.
F-14
<PAGE> 78
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
The following table summarizes stock option activity under the stock
incentive plans:
<TABLE>
<CAPTION>
WEIGHTED
OPTION AVERAGE
PRICE PRICE PER
SHARES PER SHARE SHARE
---------- ------------- ---------
<S> <C> <C> <C>
Balance as of December 31, 1992 and 1993................ 1,207,500 $ .03 $ .03
Granted............................................... 251,250 $.03 - $ .17 $ .15
Canceled.............................................. (18,000) $ .17 $ .17
--------
Balance as of December 31, 1994......................... 1,440,750 $.03 - $ .17 $ .05
Granted............................................... 232,575 $ .17 $ .17
Exercised............................................. (1,308,423) $.03 - $ .17 $ .05
Canceled.............................................. (3,000) $ .17 $ .17
--------
Balance at December 31, 1995............................ 361,902 $.03 - $ .17 $ .09
Granted (unaudited)................................... 100,500 $.67 - $8.50 $1.09
Exercised (unaudited)................................. (85,734) $.03 - $ .17 $ .08
Canceled (unaudited).................................. (3,300) $.17 - $ .67 $ .21
--------
Balance at June 30, 1996 (unaudited).................... 373,368 $.03 - $8.50 $ .37
========
</TABLE>
As of June 30, 1996, 102,618 of the options were vested and exercisable and
623,475 shares were available for future grant.
Through June 30, 1996, the Company has recorded $440,000 of deferred
compensation on options granted to employees, representing the difference
between the option grant price and the deemed fair market value of the related
shares. The Company is amortizing such amount ratably over the vesting period of
the options, generally 48 months.
8. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................... $ 89,700 $542,000 $469,700
State................................. 46,300 111,700 121,700
-------- -------- --------
136,000 653,700 591,400
Deferred (credit):
Federal............................... 126,300 (16,200) 39,500
State................................. 21,100 (4,600) 7,500
-------- -------- --------
147,400 (20,800) 47,000
-------- -------- --------
$283,400 $632,900 $638,400
======== ======== ========
</TABLE>
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-15
<PAGE> 79
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax liability -- computer software
costs........................................... $ (93,500) $(157,000)
Deferred tax assets:
Foreign operating loss carryforwards............ 134,060 136,065
Accrued vacation................................ 55,500 75,000
Provision for doubtful accounts................. 7,200 4,200
--------- ---------
Total deferred tax assets......................... 196,760 215,265
Valuation allowance............................... (134,060) (136,065)
--------- ---------
Net deferred tax assets........................... 62,700 79,200
--------- ---------
Net deferred tax liability........................ $ (30,800) $ (77,800)
========= =========
</TABLE>
A valuation allowance has been recognized to offset the deferred tax assets
attributed to foreign operating loss carryforwards, as realization of such
assets is uncertain.
The differences between the Company's income tax provision and the amounts
computed by applying the statutory federal income tax rate (34% in 1993 and 35%
in 1994 and 1995) to income before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Provision at statutory rate............. $236,909 $470,636 $591,649
Benefit of graduated rates.............. -- (13,447) (16,904)
State income taxes, net of federal
benefit............................... 44,484 69,550 83,980
Increase in valuation reserves.......... -- 134,060 2,005
Benefit of research credits............. -- (57,733) (57,547)
Permanent differences and other......... 2,007 29,834 35,217
-------- -------- --------
Provision for income taxes.............. $283,400 $632,900 $638,400
======== ======== ========
</TABLE>
9. TRANSACTIONS WITH AFFILIATES
The Company has a strategic marketing alliance with Xerox under which the
parties have agreed to pay each other fees on referrals that lead to the
successful sale or licensing of each other's products. Included in services and
other revenue in the accompanying statements of income are commissions earned
from Xerox totaling $198,600, $490,400 and $752,000 in 1993, 1994 and 1995,
respectively, and $157,700 and $586,600 for the six months ended June 30, 1995
and 1996, respectively. Commissions related to referrals from Xerox are included
in selling and marketing expense in the accompanying statements of income and
totaled $113,500 and $167,200 in 1994 and 1995, respectively. There were no such
commissions in 1993.
The Company has distribution agreements with affiliates which provide the
affiliates with the non-exclusive right to sub-license the Company's software in
Australia, New Zealand and Canada. The terms of the distributor agreements
provide that the affiliates receive a discount from the list price of the
Company's products licensed, including maintenance and support. Revenues from
the affiliates under these agreements, net of discounts, were $284,100, $796,600
and $1,088,200 in
F-16
<PAGE> 80
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1993, 1994 and 1995, respectively, and $523,300 and $136,300 for the six months
ended June 30, 1995 and 1996, respectively. Included in accounts receivable are
$121,400 and $193,500 from these revenues at December 31, 1994 and 1995,
respectively.
The Company has distribution agreements with affiliates which provide the
affiliates the non-exclusive right to sub-license the Company's software in
Europe. Revenues under these agreements totaled $198,900, $533,400 and
$1,985,600 in 1993, 1994 and 1995, respectively, and $625,100 and $539,600 for
the six months ended June 30, 1995 and 1996, respectively. Related accounts
receivable are $122,900 and $482,900 at December 31, 1994 and 1995,
respectively.
Under the terms of a separate agreement with Xerox, the Company provided
software support services for Xerox Publishing Systems' products. Included in
annual renewal license and support fees are revenues from Xerox under this
agreement of $118,800 in 1993 and 1994 and $89,100 in 1995, respectively, and
$59,400 for the six months ended June 30, 1995.
10. EMPLOYEE RETIREMENT PLAN
401(k) Plan
The Company has an employee savings and retirement plan (the "401(k) Plan")
that is intended to be tax-qualified covering substantially all of the Company's
employees. Under the terms of the 401(k) Plan, employees may elect to contribute
up to 15% of their compensation, or the statutorily prescribed limit, if less,
to the 401(k) Plan as a savings contribution. The Company may, in its
discretion, match employee contributions, at such rate as it determines, up to a
maximum of $3,000 or 10% of the employee's compensation. The 401(k) Plan has a
profit sharing element whereby the Company can contribute annually an amount
determined by the Board of Directors. An employee's interest in matching
contributions and profit sharing contributions generally vest over four years
from the date of employment.
F-17
<PAGE> 81
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. EXCEPT WHERE OTHERWISE
INDICATED, THIS PROSPECTUS SPEAKS AS OF THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
- ---------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................... 3
The Company.......................... 4
Risk Factors......................... 5
Use of Proceeds...................... 14
Dividend Policy...................... 14
Capitalization....................... 15
Dilution............................. 16
Selected Consolidated Financial
Data............................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Business............................. 29
Management........................... 43
Certain Transactions................. 51
Principal and Selling Stockholders... 53
Description of Capital Stock......... 55
Shares Eligible for Future Sale...... 58
Underwriting......................... 60
Legal Matters........................ 61
Experts.............................. 61
Additional Information............... 61
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------
LOGO
2,300,000 SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
SOUNDVIEW FINANCIAL GROUP, INC.
PROSPECTUS
, 1996
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates,
except for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee.......................................................... $ 10,945
NASD filing fee........................................................... 3,410
Nasdaq National Market Listing Application fee............................ 18,225
Blue sky qualification fees and expenses.................................. 10,000
Printing and engraving expenses........................................... 125,000
Legal fees and expenses................................................... 250,000
Accounting fees and expenses.............................................. 125,000
Transfer agent and registrar fees......................................... 10,000
Fee of Custodian for Selling Stockholders................................. 5,000
Miscellaneous............................................................. 42,420
--------
Total........................................................... $600,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Registrant's Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws include provisions to (i) eliminate the personal
liability of its directors for monetary damages resulting from breaches of their
fiduciary duty to the extent permitted by Section 102(b)(7) of the General
Corporation Law of Delaware (the "Delaware Law") and (ii) require the Registrant
to indemnify its directors and officers to the fullest extent permitted by
Section 145 of the Delaware Law, including circumstances in which
indemnification is otherwise discretionary. Pursuant to Section 145 of the
Delaware Law, a corporation generally has the power to indemnify its present and
former directors, officers, employees and agents against expenses incurred by
them in connection with any suit to which they are, or are threatened to be
made, a party by reason of their serving in such positions so long as they acted
in good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of a corporation, and with respect to any criminal
action, they had no reasonable cause to believe their conduct was unlawful. The
Registrant believes that these provisions are necessary to attract and retain
qualified persons as directors and officers. These provisions do not eliminate
liability for breach of the director's duty of loyalty to the Registrant or its
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for any transaction from which the
director derived an improper personal benefit or for any willful or negligent
payment of any unlawful dividend or any unlawful stock purchase agreement or
redemption.
The Registrant intends to enter into agreements with its directors and
executive officers that require the Registrant to indemnify such persons against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person may
be made a party by reason of the fact that such person is or was a director or
officer of the Registrant or any of its affiliated enterprises, provided such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Registrant and, with respect to
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. The indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification thereunder.
The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") or otherwise.
II-1
<PAGE> 83
The Registrant intends to obtain an insurance policy covering the officers
and directors of the Registrant with respect to certain liabilities, including
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 1, 1993 the Registrant has sold and issued the following
unregistered securities:
(1) During the period, the Registrant granted or issued upon exchange stock
options to employees, directors and consultants under its 1993 Stock Plan and
1995 Stock Incentive Plan (the "Option Plans"), and to certain key employees,
covering an aggregate of 1,875,963 shares of the Company's Common Stock, at a
weighted average exercise price of $.69. The Company has issued an aggregate of
1,394,397 shares of its Common Stock as a result of the exercise of such
options.
(2) Concurrent with the effectiveness of this Registration Statement, the
Registrant will effect a three for one stock split, whereby each share of
outstanding Common Stock will be exchanged for three shares of Common Stock. In
connection with the stock split and the automatic conversion of the Preferred
Stock upon effectiveness of this Registration Statement, each share of
outstanding Preferred Stock will become convertible into 1.19 shares of Common
Stock, each share of which will simultaneously be exchanged for three shares of
Common Stock upon the Effective Date of the Company's initial public offering.
All numbers of shares of Common Stock and Preferred Stock set forth in this
Registration Statement have been adjusted to reflect both the stock split and
the conversion of the Preferred Stock into Common Stock.
The sales and issuances of securities under the Option Plans and to key
employees in the transactions described in paragraph (1) above were deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder in that they were offered and sold either pursuant to
written compensatory benefit plans or pursuant to a written contract relating to
compensation, as provided by Rule 701.
The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. Similar legends were imposed in connection with any subsequent
sales of any such securities. All recipients either received adequate
information about the Registrant or had access, through employment or other
relationships, to such information.
With respect to the transactions described in paragraphs (1) and (2) above,
exemption from registration under the Securities Act was unnecessary in that
none of such transactions involved a "sale" of securities as such term is used
in Section 2(3) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.**
3.1 Restated Certificate of Incorporation of the Company filed May 1, 1992.**
3.2 Form of Amended and Restated Certificate of Incorporation of the Company.**
3.3 Amended and Restated Bylaws of the Company.**
</TABLE>
<TABLE>
<C> <S>
3.4 Form of Certificate of Amendment of Certificate of Incorporation of the Company.**
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Stock Certificate.**
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.**
10.1 Form of Indemnity Agreement Between the Company and each of its Officers and
Directors.**
10.2 1993 Stock Option Plan and Form of Agreement.**
10.3 1995 Stock Incentive Plan and Form of Agreement, as amended.**
10.4 Stockholder Rights Agreement dated September 1996 Between the Company and Xerox
Corporation.
10.5 Tax Sharing Agreement dated August 1996 Between the Company and Xerox Corporation.
</TABLE>
II-2
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.6 Transfer and License Agreement dated July 1, 1992, as amended in September 1994,
Between the Company and Xerox Corporation.**
10.7 Strategic Marketing Alliance Agreement dated September 1, 1993, Between the Company
and Xerox Corporation.**
10.8 Value Added Remarketer Agreement Between Xerox Canada Limited and the Company.**
10.9 Value Added Reseller Agreement Between N.V. Rank Xerox S.A. and the Company.**
10.10 Form of Professional Services Agreement.**
10.11 Form of Domestic Value Added Remarketer Agreement.**
10.12 Form of International Value Added Reseller Agreement.**
10.13 Form of Software License and Software Support Agreement.**
10.14 Lease for Company's Principal Facilities, as amended and Assignment of Lease.
10.15 Letter Agreement Between Tony Domit and the Company.**
10.16 Letter Agreement Between Thomas Anthony and the Company.**
10.17 Letter Agreement Between Judith A. O'Reilly and the Company.**
10.18 Letter Agreement Between Daniel Fregeau and the Company.**
10.19 Letter Agreement Between Alfred G. Altomare and the Company.**
10.20 Value Added Reseller Agreement Between Geneva Digital Ltd. and the Company.**
10.21 Value Added Remarketer Agreement Between Business and Business and the Company.**
11.1 Statement regarding calculation of net income (loss) per share.**
21.1 List of Subsidiaries.**
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in
Exhibit 5.1).**
24.1 Power of Attorney.**
24.2 Power of Attorney.**
</TABLE>
- ---------------
* Indicates the Exhibit to be filed by amendment.
** Indicates the Exhibit was previously filed.
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, 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 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.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act of 1933, the information omitted from the
form of prospectus as filed as part of the registration
II-3
<PAGE> 85
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective, and (2) for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, State of California, on the 13th day of September, 1996.
Document Sciences Corporation
By /s/ TONY N. DOMIT
------------------------------------
Tony N. Domit
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement on Form S-1 has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ -------------------
<S> <C> <C>
* President, Chief Executive September 13, 1996
- ---------------------------------------- Officer and Director
Tony N. Domit (Principal Executive Officer)
/s/ BARBARA E. AMANTEA Vice President, Chief September 13, 1996
- ---------------------------------------- Financial Officer and
Barbara E. Amantea Secretary (Principal Financial
and Accounting Officer)
* Chairman of the Board of September 13, 1996
- ---------------------------------------- Directors
Robert V. Adams
* Director September 13, 1996
- ----------------------------------------
Colin J. O'Brien
* Director September 13, 1996
- ----------------------------------------
James J. Costello
* Director September 13, 1996
- ----------------------------------------
Thomas L. Ringer
* Director September 13, 1996
- ----------------------------------------
Barton L. Faber
* By /s/ BARBARA E. AMANTEA
-----------------------------------
Barbara E. Amantea
Vice President, Chief Financial
Officer and Secretary
</TABLE>
II-5
<PAGE> 87
APPENDIX TO ELECTRONIC DOCUMENT FORMAT
DESCRIPTION OF GRAPHICS
Pursuant to Paragraph 625 of the EDGAR User Manual, the following is an
explanation of the differences between the foregoing document in electronic
format and the corresponding printed document on paper.
1. Location: Outside Front Cover Page of Prospectus.
Description: Document Sciences Corporation logo, which is a
registered trademark of the Company, next to which the words
"DOCUMENT SCIENCES" are printed in bold, and beneath which words are
printed the word "CORPORATION."
2. Location: Inside Front Cover Page of Prospectus.
Description: A graphic headed with the Company's logo described in
paragraph 1 above, and entitled "The Power of Personalized
Communications." The graphic depicts information from databases,
on-line transmission and document management being input through the
Company's AUTOGRAPH product family, and creating personalized
documents through printers, CD-ROMs and on-line documents. At the
foot of the graphic are the words "Personalized Communications
through Document Automation," beneath which is the Company's Internet
address, "http://www.docscience.com."
3. Location: "Business -- Industry Background."
Description: A graphic entitled "The Electronic Publishing Process."
The graphic depicts four boxes across the page with arrows between
each box, and with the boxes containing the words "Information
Creation," "Information Management," "Information Formatting" and
"Information Presentation," respectively. Beneath the "Information
Creation" box are listed the words "Computers," "Scanners" and
"Communications." Beneath the "Information Management" box are listed
the words "Database," "Document Management" and "Multiauthoring
Environments." Beneath the "Information Formatting" box are listed
the words "Selection," "Assembly" and "Composition." Beneath the
"Information Presentation" box are listed the words "Printers and
Imagesetters," "Electronic On-Line Documents," "CD-ROM" and "Web."
4. Location: "Business -- Products."
Description: A graphic with symbols depicting Document
Management, Document Composition and Assembly, Data Capture and
Setup, Application Development Tools, Document Output and Merge, and
Document Viewing.
5. Location: "Business -- Products -- Document Viewing."
Description: A graphic with symbols depicting Document Management,
Data, Text and Importers flowing into CompuSet and CompuSeries,
from which flow the Document Outputs of Printing, Archival, Document
Viewing and Web.
6. Location: Inside Back Cover Page of Prospectus
Description: A graphic headed with the Autograph Product Family logo,
which is a registered trademark of the Company. The graphic depicts
seven boxes in two columns, with three boxes on the left and four on
the right. Arrows lead vertically from one box to the next. Product
functions are displayed inside each of the boxes. A phrase located to
the immediate right of each of the boxes describes how the product
functions perform. Outside the first box is the phrase "Define the
document layout with ease and precision". Outside the second box is
the phrase "Add any desired artwork and graphics". Outside the third
box is the phrase "Manage your library of merge components". Outside
the fourth box is the phrase "and specify the variable merge fields".
Outside the fifth box is the phrase "Build the document interactively
with WYSIWYG composition". Outside the sixth box is the phrase "Use
CompuSet for high-volume and fully automated production". Outside the
seventh box is the phrase "Select and review any page of any document
on-demand with complete information in real time".
7. Location: Outside Back Cover Page of Prospectus.
Description: Document Sciences Corporation logo, described in
paragraph 1 above.
<PAGE> 88
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------ ----------------------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement**...............................................
3.1 Restated Certificate of Incorporation of the Company filed May 1, 1992**.......
3.2 Form of Amended and Restated Certificate of Incorporation of the Company**.....
3.3 Amended and Restated Bylaws of the Company**...................................
3.4 Form of Certificate of Amendment of Certificate of Incorporation of the
Company**......................................................................
4.1 Reference is made to Exhibits 3.1 and 3.2......................................
4.2 Specimen Stock Certificate**...................................................
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation**........
10.1 Form of Indemnity Agreement Between the Company and each of its Officers and
Directors**....................................................................
10.2 1993 Stock Option Plan and Form of Agreement**.................................
10.3 1995 Stock Incentive Plan and Form of Agreement, as amended**..................
10.4 Stockholder Rights Agreement dated September 1996 Between the Company and Xerox
Corporation....................................................................
10.5 Tax Sharing Agreement dated August 1996 Between the Company and Xerox
Corporation....................................................................
10.6 Transfer and License Agreement dated July 1, 1992, as amended in September
1994, Between the Company and Xerox Corporation**..............................
10.7 Strategic Marketing Alliance Agreement dated September 1, 1993, Between the
Company and Xerox Corporation**................................................
10.8 Value Added Remarketer Agreement Between Xerox Canada Limited and the
Company**......................................................................
10.9 Value Added Reseller Agreement Between N.V. Rank Xerox S.A. and the
Company**......................................................................
10.10 Form of Professional Services Agreement**......................................
10.11 Form of Domestic Value Added Remarketer Agreement**............................
10.12 Form of International Value Added Reseller Agreement**.........................
10.13 Form of Software License and Software Support Agreement**......................
10.14 Lease for Company's Principal Facilities, as amended and Assignment of Lease...
10.15 Letter Agreement Between Tony Domit and the Company**..........................
10.16 Letter Agreement Between Thomas Anthony and the Company**......................
10.17 Letter Agreement Between Judith A. O'Reilly and the Company**..................
10.18 Letter Agreement Between Daniel Fregeau and the Company**......................
10.19 Letter Agreement Between Alfred G. Altomare and the Company**..................
10.20 Value Added Reseller Agreement Between Geneva Digital Ltd. and the Company**...
10.21 Value Added Remarketer Agreement Between Business and Business and the
Company**......................................................................
11.1 Statement regarding calculation of net income (loss) per share**...............
21.1 List of Subsidiaries**.........................................................
23.1 Consent of Ernst & Young LLP...................................................
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included
in Exhibit 5.1)................................................................
24.1 Power of Attorney**............................................................
24.2 Power of Attorney**............................................................
</TABLE>
- ---------------
* Indicates the Exhibit to be filed by amendment.
** Indicates the Exhibit was previously filed.
<PAGE> 1
Exhibit 10.4
STOCKHOLDER RIGHTS AGREEMENT
This Stockholder Rights Agreement, dated as of September____, 1996 (the
"Agreement"), is made and entered into by and between Document Sciences
Corporation, a Delaware corporation (the "Company") and Xerox Corporation, a New
York corporation (the "Stockholder").
WHEREAS, the Stockholder presently owns 7,143,000 shares, or
approximately 84%, of the Company's outstanding Common Stock;
WHEREAS, the Company has filed a registration statement under the 1933
Act for the initial public offering of its Common Stock ("IPO"), and the
Stockholder has agreed and intends to sell 388,500 shares of the Company's
Common Stock in the Company's initial public offering; and
WHEREAS, the Company and the Stockholder have reached an agreement as
to the Stockholder's rights to have its Shares registered under the 1933 Act and
wish to set forth in this Agreement their agreement as to such registration
rights and as to certain other matter pertaining to the Shares;
NOW, THEREFORE, in consideration of the mutual promises and agreements
hereinafter set forth, and for other valuable consideration, the Company and the
Stockholder agree as follows:
1. DEFINITIONS. The Company's Common Stock, $.001 par value, and
any other securities of the Company convertible into or exchangeable for the
Company's Common Stock are hereinafter referred to as the "Common Stock" and the
shares of Common Stock beneficially owned by the Stockholder are hereinafter
referred to as the "Shares." For purposes of this Agreement, the terms
"beneficial ownership," "person," "affiliate," and "solicitation" shall have the
meanings ascribed to such terms in Rules 12b-2 and 13d-3 under the Securities
Exchange Act of 1934 (the "1934 Act"). Each of the terms "Securities Act" and
"1933 Act" means the Securities Act of 1933, as amended. The term "Prospectus"
means the prospectus in the form first used to confirm sales of shares of Common
Stock in the IPO. The term "SEC" means the Securities and Exchange Commission.
2. EFFECTIVE DATE. The effective date of this Agreement shall be
the date the registration statement for the IPO filed under the Securities Act
is declared effective by the SEC.
3. TERMINATION OF SECTION 4. The provisions of Article 4 (except
Section 4.4) will terminate on the date on which all of the Shares beneficially
owned by the Stockholder may be sold in a three month period without
registration under the 1933 Act.
<PAGE> 2
4. REGISTRATION RIGHTS.
4.1 Piggyback Registration.
4.1.1 In the event that the Company proposes to register
any shares of Common Stock under the 1933 Act (other than for an offering
primarily or exclusively to employees or in connection with the acquisition of
the assets or shares of, or merger or consolidation with, another corporation)
and a registration form is available for use which may also be used for the
registration of the Shares held by the Stockholder (a "Piggyback Registration"),
the Company shall notify the Stockholder at least 30 days prior to the filing of
any such registration form with the SEC, and will use its best efforts to
include in such registration all such Shares with respect to which the Company
has received written request for inclusion within 10 days after such notice.
Each such request shall contain an undertaking from the Stockholder to provide
all such information and material and to take all such actions as may be
required by the Company in order to permit the Company to comply with all
applicable federal and state securities laws.
4.1.2 The Stockholder shall pay all sales commissions or
similar selling charges with respect to Shares sold by the Stockholder pursuant
to a Piggyback Registration. The Company shall pay all registration and filing
fees, fees and expenses of compliance with federal and state securities laws,
printing expenses, messenger and delivery expenses, and fees and disbursements
of counsel and accountants for the Company and the Stockholder in connection
with a Piggyback Registration.
4.1.3 If a Piggyback Registration is an underwritten
offering and the managing underwriters advise the Company in writing that in
their opinion the number of Shares requested to be included in such Registration
exceeds the number which can be sold in such offering or will have a material
adverse effect on the price of the Common Stock to be sold, the Company will
include in such Registration (a) first, shares of Common Stock the Company
proposes to sell and (b) second, Shares that the Stockholder has requested to be
included pursuant hereto; provided, however, that without the consent of the
Stockholder, the number of Shares included shall not amount to less than 30% of
the total number of shares of Common Stock included in the registration;
provided, further, that this 30% minimum will not apply to the Company's initial
public offering (the "IPO").
4.2 Demand Registration.
4.2.1 Subject to the terms of this Section 4.2, at any time
after 365 days after the date of the Prospectus for the Company's initial public
offering, the Stockholder may request registration of Shares under the 1933 Act
(a "Demand Registration"); provided, however, that in the event that the
Company, itself, proposes to register any shares of Common Stock, such
registration shall instead be deemed to be and treated as a Piggyback
Registration under the provisions of Section 4.1 hereof. Within 20 days after
receipt by the Company of such request (a "Demand Request") (which Request shall
specify the number of Shares proposed to be registered), the Company shall
thereafter, as expeditiously as practicable, but in any event within 60 days,
(a) file with the SEC under the 1933 Act a registration statement on the
appropriate form concerning
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<PAGE> 3
all Shares specified in the Demand Request (the "Requested Shares") and (b) use
its best efforts to cause such registration statement to be declared effective.
4.2.2 The Company shall not be obligated (a) to comply with
more than three requests by the Stockholder for a Demand Registration, (b) to
file a registration statement within 12 months after the closing of the IPO or
within 6 months after the effective date of any registration statement filed by
the Company (other than for an offering primarily or exclusively to employees or
in connection with the acquisition of the assets or shares of, or merger or
consolidation with, another corporation and other than any registration
statement on Form S-3), whether pursuant to this Section 4.2 or otherwise or (c)
to include any Shares held by the Stockholder unless (i) the Stockholder shall
have promptly furnished the Company with all information and statements about or
pertaining to such Stockholder in such detail as is deemed by the Company to be
necessary or appropriate with respect to the preparation of the registration
statement and (ii) the Stockholder shall have executed all affidavits and shall
have provided all letters, documents and undertakings relating thereto as is
deemed necessary or appropriate by the Company, its counsel and/or the
underwriter(s), in connection with such registration statement, the related
filings and underwriting.
4.2.3 If a Demand Registration is an underwritten offering
and the managing underwriters advise the Company and the Stockholder in writing
that in their opinion the number of Shares to be included in such registration
exceeds the number which can be sold in such offering or will have a material
adverse effect on the price of the shares to be sold, then the amount of Shares
that may be included in such registration shall be reduced accordingly;
provided, however, that, without the consent of the Stockholder, the number of
Shares included shall not amount to less than 30% of the total number of shares
of Common Stock included in the registration. If a Demand Registration is an
underwritten offering, the Company will enter into an underwriting agreement
containing conventional representations, warranties, conditions and
indemnification provisions with any underwriter which acquires Shares from the
Stockholder.
4.2.4 If the Requested Shares sold pursuant to this
Agreement require registration or qualification with or approval of any federal
or state governmental official or authority other than registration under the
1933 Act before such Requested Shares may be sold, the Company will take all
actions reasonably required in connection with such registration or
qualification and will use its best efforts to cause any such Requested Shares
to be duly registered, qualified or approved as may be required; provided,
however, that the Company shall not be required (a) to qualify as a foreign
corporation in any jurisdiction, (b) to subject itself to taxation in any such
jurisdiction, (c) to register as a securities broker or dealer in any
jurisdiction, or (d) to modify in any material respect any business policy or
practice (including with respect to the payment of compensation or other
benefits).
4.2.5 The Company will deliver to the Stockholder such
reasonable number of copies of a definitive prospectus included in such Demand
Registration and of any revised or supplemental prospectus filed as the
Stockholder may from time to time reasonably request during the period in which
the Company is required to keep such registration statement effective. The
-3-
<PAGE> 4
Company shall file post-effective amendments or supplements to each such
registration statement for a period of not more than 120 days (extended by such
number of days as the Stockholder is requested by the Company or the
Underwriters to stand back from the market) or such shorter period as is
necessary for the distribution described in such registration statement to be
completed in order that the registration statement may be effective at all times
during such period and at all times during such period comply with various
applicable federal and state securities laws, after which time the Company may
withdraw such Requested Shares from registration to the extent not sold.
4.2.6 The Stockholder shall pay all sales commissions or
similar selling charges with respect to Shares sold pursuant to a Demand
Registration. The Company shall pay all fees and disbursements of the Company's
counsel and accountants. The registration and filing fees, fees and expenses of
compliance with federal and state securities laws, printing expenses, messenger
and delivery expenses and all other expenses incurred in connection with the
Demand Registration including fees and disbursements of Stockholder's counsel
shall be paid as follows: (i) with respect to the first demand registration, the
Company shall pay all such fees and expenses; (ii) with respect to the second
demand registration, the Company and the Stockholder shall each pay half of all
such fees and expenses; and (iii) with respect to the third demand registration,
the Stockholder shall pay all such fees and expenses.
4.3 Form S-3 Registration. In case the Company shall receive from
the Stockholder a written request that the Company effect a registration on Form
S-3 and any related qualification or compliance with respect to all or a part of
the Shares, then the Company will:
4.3.1 Registration. As soon as practicable, effect 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 the Shares as are specified in such request of; provided, however, that
the Company shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section 4.3:
(a) if Form S-3 is not available for such offering by the
Stockholder;
(b) if the Company shall furnish to the Stockholder a
certificate signed by the President or Chief Executive Officer 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 stockholders
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 no more than once during any twelve month period for a period of not
more than 120 days after receipt of the request of the Stockholder under this
Section 4.3;
(c) 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 Stockholder pursuant to this Section 4.3; or
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<PAGE> 5
(d) 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.
4.3.2 Subject to the foregoing, the Company shall file a
Form S-3 registration statement covering the Shares and other securities so
requested to be registered pursuant to this Section 4.3 as soon as practicable
after receipt of the request of the Stockholder for such registration. The
Company shall pay all expenses incurred in connection with each registration
requested pursuant to this Section 4.3, (excluding underwriters' or brokers'
discounts and commissions), including without limitation all filing,
registration and qualification, printers' and accounting fees and the reasonable
fees and disbursements of counsel for the Stockholder and counsel for the
Company.
4.3.3 Form S-3 registrations shall not be deemed to be
demand registrations as described in Section 4.2 above.
4.4 Reporting. With a view to making available to the Stockholder
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Shares to the public on Form S-3 or without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:
4.4.1 At all times after the effective date of the IPO make
and keep public information available, as those terms are understood and defined
in SEC Rule 144 under the Securities Act and Item I.A.3 of Form S-3 or any
similar or analogous rule or form;
4.4.2 File with the SEC, in a timely manner, all reports
and other documents required of the Company under the Securities Act and 1934
Act; and
4.4.3 So long as the Stockholder owns any Shares, furnish
to the Stockholder forthwith upon written request: a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144 of
the Securities Act (at any time after 90 days after the effective date of the
first registration statement filed by the Company for an offering of its
securities to the general public), and of the 1934 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 the
Stockholder may reasonably request in availing itself of any rule or regulation
of the SEC allowing it to sell any such securities without registration.
The Company agrees that upon receiving notice from the Stockholder of its
intention to avail itself of benefits of Rule 144 or any similar or analogous
rule, or of Section 4.3 above, the Company will as soon as practicable comply
with the information and reporting requirements of this Section 4.4 if, despite
the Company's best efforts to effect ongoing compliance, there shall have been
any failure or lapse in fulfilling the reporting and information requirements of
this Section.
-5-
<PAGE> 6
4.5 Assignment of Registration Rights. The rights to cause the
Company to register Common Stock pursuant to this Section 4 may be assigned by
the Stockholder to a transferee or assignee of such securities provided the
Company is, within a reasonable time after such transfer, furnished with 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; provided,
further, that such assignment shall be effective only if immediately following
such transfer the further disposition of such securities by the transferee or
assigned is restricted under the 1933 Act and the transferee or assignee shall
have agreed in writing to be bound by the terms and conditions of this
Agreement.
5. INDEMNIFICATION.
5.1.1 Notwithstanding Section 8 of the Underwriting
Agreement (the "Underwriting Agreement"), dated September __, 1996 among the
Company, the Stockholder and the other selling stockholders named in Schedule II
thereto (the "Selling Stockholders") and the several underwriters regarding
indemnification, the Company and the Stockholder agree with respect to
indemnification thereunder as follows. The Company will indemnify and hold the
Stockholder harmless against any losses, claims, damages or liabilities to which
the Stockholder may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) an untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus, the
registration statement for the IPO (the "Registration Statement") or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon 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,
(ii) any breach of any representation or warranty made by the Company in the
Underwriting Agreement or any breach by the Company of, or noncompliance by the
Company with or nonperformance or nonfulfillment by the Company of, any term,
condition, covenant, obligation, agreement, or restriction contained in the
Underwriting Agreement; [or (iii) any violation or alleged violation by the
Company of the Securities Act, the 1934 Act, any state or local "blue sky" or
securities laws or any rules or regulations promulgated under any of them, it
being agreed that indemnification under this subsection 5.1.1(iii) is a
continuing obligation and is not limited to the IPO; provided, however, that
this subsection 5.1.1(iii) shall not apply to a loss, claim, damage or liability
for which indemnity is provided under subsections 5.1.1(i) or (ii) above; and
provided further that if in the future the Company and the Stockholder enter
into a definitive indemnity and/or contribution agreement concerning a
particular transaction (such as in respect of a secondary offering) such other
agreement shall control the rights and obligations of the parties with respect
to such other transaction;] and will reimburse the Stockholder for any legal or
other expenses reasonably incurred by the Stockholder in connection with
investigating or defending any such action or claims as such expenses are
incurred; provided, however, that the Company shall not be liable for the legal
expenses of more than one counsel for the Stockholder; and provided, further,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any preliminary prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by the Stockholder expressly for use
therein.
-6-
<PAGE> 7
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by the Stockholder expressly for use
therein.
5.1.2 The Stockholder will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the Company
may become subject, under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon 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, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any preliminary prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by the Stockholder
expressly for use therein, and will reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred; provided,
however, that the liability of the Stockholder pursuant to this subsection 5.1.2
shall not exceed the product of the number of Shares sold by the Stockholder
including any option Shares and the initial public offering price of the Shares
as set forth in the Prospectus.
5.1.3 Promptly after receipt by an indemnified party under
subsection 5.1.1 or 5.1.2 above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against an indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
the indemnified party otherwise than under such subsection (unless the failure
so to notify prejudices the ability of the indemnifying party to defend the
action). The indemnifying party shall not be liable to the indemnified party
under such subsection for any legal expenses of other counsel or any other
expenses in connection with the defense thereof other than reasonable costs of
investigation, unless the indemnifying party fails to assume the defense of the
indemnified party promptly following notice with counsel reasonably satisfactory
to the indemnified party, which shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party. No indemnifying party
shall, without the written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment with
respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
5.1.4 If the indemnification provided for in this Section 5
is unavailable to or insufficient to hold harmless an indemnified party under
subsection 5.1.1 or 5.1.2 above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then
-7-
<PAGE> 8
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Stockholder on the other from, as applicable,
the offering of the Shares, or [in the case of indemnification under subsection
5.1.1(iii), another transaction (if any) in which the Stockholder receives a
monetary benefit]. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection 5.1.3 above, then the
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Stockholder on the other in connection with such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. [In the case of indemnification under subsection
5.1.1(i) and (ii) and 5.1.2,] the relative benefits received by the Company on
the one hand and the Stockholder on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares purchased
under the Underwriting Agreement (before deducting expenses) received by the
Company on the one hand and the Stockholder on the other hand. The relative
fault shall be determined by reference to, among other things, whether the
alleged violation or untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Stockholder on the other and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the
Stockholder agree that it would not be just and equitable if contributions
pursuant to this subsection 5.1.4 were determined by pro rata allocation or by
any other method of allocation which does not take account of the equitable
considerations referred to above in this subsection 5.1.4 [including the
consideration, in particular pertaining to indemnity under subsection
5.1.1(iii), that benefits are not received by the Stockholder in the case of
alleged violations by the Company.] The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection 5.1.4 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. Notwithstanding the
other terms of this subsection 5.1.4, the Stockholder's liability pursuant to
this subsection 5.1.4 shall not exceed the product of the number of Shares sold
by the Stockholder including any optional Shares and the initial public offering
price of the Shares as set forth in the Prospectus.
5.1.5 The obligations of the Company under this Section 5
shall be in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each officer and director
of the Stockholder and to each person, if any, who controls the Stockholder
within the meaning of the Securities Act; and the obligations of the Stockholder
under this Section 5 shall be in addition to any liability which the Stockholder
may otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company (including any person who, with his or her
consent, is named in the Registration Statement as about to become a director of
the Company) and to each person, if any, who controls the Company within the
meaning of the Securities Act.
-8-
<PAGE> 9
to become a director of the Company) and to each person, if any, who controls
the Company within the meaning of the Securities Act.
6. INJUNCTIVE AND OTHER RELIEF. The Company and the Stockholder
agree that in the event that the Stockholder breaches this Agreement, the
Company will be irreparably harmed and will be entitled to injunctive relief and
specific enforcement in addition to any other remedy which it may have at law or
in equity.
7. ENTIRE AGREEMENT; MODIFICATION. This Agreement sets forth the
entire agreement and understanding between the parties hereto with respect to
the subject matter hereof, and merges and supersedes any and all prior
discussions, agreements, and understandings between or among them with respect
thereto, and no party shall be bound by any condition, definition, warranty or
representation, other than those expressly set forth or provided for in this
Agreement or in any document or instrument delivered pursuant to this Agreement,
or as may be set forth in writing and signed by the party or parties to be bound
thereby on or subsequent to the date hereof. This Agreement may not be changed
or modified, except by an agreement in writing executed by the Company and the
Stockholder.
8. GOVERNING LAW. This Agreement shall be governed by Delaware
law (excluding the choice of law provisions).
9. SEVERABILITY. If any term, provision, covenant or restriction
contained in this Agreement is held by a court of competent jurisdiction to be
invalid, void, or unenforceable, then the remainder of this Agreement shall
remain operative and in full force and effect. If any provision contained in
this Agreement is invalidated or becomes inoperative because of a change in law,
the parties hereto will use their best efforts to adopt an appropriate
substitute (if any) for such provision consistent with the intent of the
parties.
10. BINDING EFFECT OF AGREEMENT. The terms of this Agreement shall
be binding on and inure to the benefit of the parties hereto and their
respective subsidiaries, parents or other affiliated entities, agents,
attorneys, heirs, executors, successors, representatives and assigns.
11. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or certified or registered mail, return receipt
requested, to the following addresses: (a) if to the Company to Document
Sciences Corporation, 6333 Greenwich Drive, Suite 100, San Diego, California
92122, Attention: President and CEO, with a copy to Mark A. Bertelsen, Wilson
Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304; and
(b) if to the Stockholder, to Xerox Corporation, P. O. Box 1600, 800 Long Ridge
Road, Stamford, Connecticut 06904, Attention: Senior Vice President and General
Counsel; or to such other person or persons or to such other address or
addresses as may be designated by one to the other.
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<PAGE> 10
12. THIRD PARTIES. Nothing in this Agreement, express or implied,
is intended to confer upon any person, other than the parties hereto and their
successors and assigns, any rights or remedies under or by reason of this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
DOCUMENT SCIENCES CORPORATION
By:
---------------------------
Tony N. Domit, President and
Chief Executive Officer
XEROX CORPORATION
By:
---------------------------
Colin J. O'Brien
Its: Vice President
-10-
<PAGE> 1
EXHIBIT 10.5
TAX SHARING AGREEMENT
This Tax Sharing Agreement (the "Agreement"), dated as of August 23,
1996, by and between Xerox Corporation, a Delaware corporation (Xerox), and
Document Sciences Corporation, a Delaware corporation (DSC), is entered into in
connection with the initial public offering (IPO) of DSC.
Whereas, Xerox on behalf of itself and its present and future
subsidiaries other than members of the DSC Group (as hereinafter defined) (the
"Xerox Group"), and DSC on behalf of itself and its present and future
subsidiaries (the "DSC Group") have determined that it is necessary and
desirable to provide for allocation between the Xerox Group (or any successor
group of which Xerox is the common parent) and the DSC Group (or any successor
group of which DSC is the common parent) of all responsibilities, liabilities,
and benefits relating to taxes paid or payable by either group for all taxable
periods, whether beginning before, on, or after the initial public offering of
DSC, and to provide for certain other matters;
NOW, THEREFORE, in consideration of the mutual agreements, provisions,
and covenants contained in this Agreement, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS SPECIFIC TO THIS CONTRACT.
As used in this Agreement, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined);
(a) Code: the Internal Revenue Code of 1986, as amended, or
similar provisions of any successor law. All references to provisions of the
Code shall include any final or temporary Treasury Regulations issued
thereunder.
(b) IPO Date: the last date on which the DSC Group members are
included in the Xerox consolidated federal income tax return.
<PAGE> 2
(c) Post-IPO Period: any Tax Period beginning after the IPO
Date, and in the case of any Tax Period that begins before and ends after the
IPO Date, the portion of such Tax Period ending after the IPO Date.
(d) Pre-IPO Period: any Tax Period ending on or before the IPO
Date, and in the case of any Tax Period that begins before and ends after the
IPO Date, the portion of such Tax Period ending on the IPO Date.
(e) Tax: any tax, or similar charge, fee, impost, levy, duty
or other assessment or charge of any kind whatsoever imposed or collected by any
governmental entity or political subdivision thereof, whether payable directly
or by withholding (including, without limitation, all federal, state, local, and
foreign gross or net income or receipts, excise, sales, use, transfer,
franchise, property, gains, value added, ad valorem, withholding, employment,
payroll, estimated, minimum, environmental, severance, license, or services
taxes, customs, or duties), together with any related liabilities, penalties,
fines, additions to tax or interest imposed by any taxing authority.
(f) Tax Benefit: either the amount by which the Tax liability
is reduced for a given Tax Period to the appropriate government or jurisdiction
or the amount by which any Tax refund available is increased for such given Tax
Period, together with any interest thereon. Interest shall include amounts
(computed at the rate in effect under Code section 6621 for any federal income
tax and at the rate provided under similar provisions of state, local, or
foreign law for any other Tax) which would have been paid if a refund of Taxes
actually had been paid, rather than applied to reduce Taxes which would
otherwise be payable.
(g) Tax Detriment: either the amount by which the Tax
liability for a given Tax Period to the appropriate government or jurisdiction
is increased or the amount by which any Tax refund available for such given Tax
Period is reduced, together with any interest thereon. Interest shall include
amounts (computed at the rate in effect under Code section 6621 for any federal
income tax and at the rate provided under similar provisions of state, local, or
foreign law for any other Tax) which would have been paid if a Tax liability
actually had been paid, rather than applied to reduce a Tax refund that
otherwise would be received.
(h) Tax Period: with respect to any Tax, the period for which
the Tax is reported as provided under the Code or other applicable law.
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(i) Tax Representative: For the Xerox Group, Russell Y.
Okasako, Vice President of Taxes, whose address and contact information is Xerox
Corporation, 800 Long Ridge Road, P.O. Box 1600, Stamford, Connecticut 06904,
(203) 968-3953. For the DSC Group, Barbara E. Amantea, Chief Financial Officer,
whose address and contact information is Document Sciences Corporation, 6333
Greenwich Drive, Suite 100, San Diego, California 92122.
(j) Tax Return: any report of any Taxes due, any information
return with respect to Taxes, or similar report, statement, declaration, or
document required to be filed under the Code or other applicable law, any claim
for refund of Taxes paid, and any amendments or supplements to any of the
foregoing.
ARTICLE 2
FILING OF TAX RETURNS
2.1 PRE-IPO PERIOD INCOME TAX RETURNS.
(a) Federal Income Tax Returns. The income and other tax items
of the DSC Group for any Pre-IPO Period shall be included in Xerox's
consolidated federal income Tax Return. Xerox shall prepare and timely file all
consolidated federal income Tax Returns for such Tax Periods.
(b) Other Income Tax Returns. Xerox shall prepare and timely
file any consolidated or combined state, local, or foreign income or franchise
Tax Return that includes both a Xerox Group member and a DSC Group member for
any Pre-IPO Period. DSC shall prepare and timely file any stand alone state,
local, or foreign income or franchise Tax Returns for any DSC Group member for
any Pre-IPO Period.
2.2 POST-IPO PERIOD INCOME TAX RETURNS. DSC shall be responsible
for preparing and timely filing all federal, state, local, and foreign income or
franchise Tax Returns for each DSC Group member for Post-IPO Periods. However,
if the Tax Representative of the Xerox Group or the California Franchise Tax
Board determines that the Xerox Group and DSC Group should jointly file a
unitary California combined return of franchise or income tax for a Post-IPO
Period, then Xerox shall be responsible for preparing such Tax Return. In
addition, any other income or franchise Tax Return that includes both a Xerox
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Group member and a DSC Group member for any Post-IPO Period shall be prepared
and filed by Xerox.
2.3 OTHER TAX RETURNS. All Tax Returns not covered by Article 2.1
or 2.2 of this Agreement shall be prepared and filed by DSC for the DSC Group
and by Xerox for the Xerox Group. However, any Tax Return that includes both a
Xerox Group member and a DSC Group member shall be prepared and filed by Xerox.
ARTICLE 3
PAYMENT OF TAXES
3.1 PAYMENT OF TAXES IN GENERAL.
(a) Except as otherwise provided in this Article 3 of this
Agreement, Xerox shall pay, and shall indemnify and hold harmless each DSC Group
member from and against, all Taxes attributable to the Xerox Group, whether
heretofore or hereafter arising or incurred. Xerox shall be entitled to any
reduction in or refund of Taxes for which it is responsible pursuant to the
preceding sentence (except any reduction in or refund of Taxes resulting from
carrybacks of DSC as described in Article 3.4 of this Agreement).
(b) Except as otherwise provided in this Article 3 of this
Agreement, DSC shall pay, and shall indemnify and hold harmless each Xerox Group
member from and against, (i) all Taxes that are attributable to any DSC Group
member for any Pre-IPO Period and (ii) all Taxes that are attributable to any
DSC Group member for any Post-IPO Period.
(c) If a member of the Xerox Group or the DSC Group receives a
refund of Taxes to which the other group is entitled under this Article 3 of
this Agreement, then such member shall remit such refund to the other group by
sending such refund within 30 days of receipt to Xerox or DSC, as the case may
be.
3.2 DETERMINATION OF TAX PAYMENTS.
(a) Combined or Consolidated Taxes. DSC shall pay Xerox for
the DSC Group's share of any Tax liability and the actual net tax benefit
realized by the DSC Group from utilizing the Xerox Group's losses, tax credits,
and other tax attributes reflected on any Xerox consolidated or combined Tax
Return for all
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Pre-IPO Periods and Post-IPO Periods (as described in Article 3.2(a)(i) of this
Agreement). Conversely, Xerox shall pay DSC for the actual net tax benefit
realized by the Xerox Group from utilizing the DSC Group's losses, tax credits,
and other tax attributes reflected on any Xerox consolidated or combined Tax
Return for all Pre-IPO Periods and Post-IPO Periods (as described in Article
3.2(a)(ii) of this Agreement). Such payments shall be based on the DSC Group's
income, gains, deductions, losses, credits, and other tax attributes ("DSC Tax
Items") to the extent the DSC Tax Items were included in Xerox's consolidated or
combined Tax Returns as filed or finally adjusted. Except as otherwise
specifically provided in this Agreement, the computation of the DSC Group's
share of such consolidated or combined Tax liability shall not reflect any
limitations it would have suffered or benefits it would have realized on a stand
alone, separate return basis (e.g., DSC shall not independently receive the
benefit of any graduated Tax brackets that it would have received on a stand
alone, separate return basis; DSC's R&D tax credit shall not be independently
computed on a stand alone, separate return basis, but rather shall be determined
as a portion of the consolidated or combined R&D tax credit). Furthermore, the
Tax payments required under this Article 3.2 shall be computed in accordance
with all elections, accounting methods, conventions, and legal positions adopted
by Xerox (e.g., a "water's edge" election by Xerox for California Tax purposes
requires the DSC Group's share of any Tax liability to be determined on the
basis of the "water's edge" method; Xerox's R&D calculation on a unitary basis
for California Tax purposes requires the DSC Group's R&D calculation to be based
on the same unitary basis).
(i) DSC's Payment.
(A) The DSC Group's share of any Xerox consolidated
or combined Tax liability for a given Tax Period shall be equal to the excess of
the actual consolidated or combined Tax liability over the amount which would
have been computed by excluding the DSC Tax Items. To reflect the DSC Group's
tax benefit from using the Xerox Group's tax attributes, however, DSC's payment
to Xerox shall not be less than the amount of the consolidated or combined Tax
liability that would have been computed by including only the DSC Tax Items on
the consolidated or combined Tax Return.
(B) The amount of DSC's Payment otherwise computed
under Article 3.2(a)(i)(A) above shall be reduced, but not below zero, by the
amount of any tax benefit that DSC would have been able to realize by carrying
over to the Tax Period in issue losses generated by DSC in other Pre-IPO Tax
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Periods, subject to the carryover limitations set forth under applicable law;
provided, however, that no reduction shall be made under this paragraph to the
extent DSC has received a payment from Xerox under Article 3.2(a)(ii) below for
use of such losses.
(C) DSC shall pay the amount determined under
paragraphs (A) and (B) above directly to Xerox within 30 days of the receipt of
written notification from Xerox of the payment amount (however, DSC shall not be
required to pay such amount earlier than the due date of the Tax Return for such
Tax Period that gives rise to the DSC payment under paragraphs (A) and (B)
above), which shall be adjusted to reflect a credit for any respective estimated
Tax paid by DSC to Xerox for such Tax Period.
(ii) Xerox's Payment.
(A) Xerox's tax benefit payment to DSC shall be equal
to the excess of the consolidated or combined Tax liability which would have
been computed by excluding the DSC Tax Items over the actual consolidated or
combined Tax liability for the Tax Period.
(B) The amount of Xerox's Payment otherwise computed
under Article 3.2(a)(ii)(A) above shall be reduced, but not below zero by the
amount of any tax benefit that is derived by the Xerox Group's from DSC Group
losses that are in excess of the DSC Group's cumulative taxable income (computed
on a stand alone basis) through the Tax Period preceding the Tax Period in which
the loss is used or generated, whichever is later.
(C) The amount of Xerox's Payment otherwise computed
under Article 3.2(a)(ii)(A) and (B) above shall not exceed the cumulative amount
of DSC's Payments made under Article 3.2(a)(i) above reduced by any Xerox
Payments made with respect to prior Tax Periods under this Article 3.2(a)(ii).
(D) Xerox shall pay such amount determined under
paragraphs (A), (B) and (C) above directly to DSC within 30 days of Xerox's
computation of the payment amount. Such payment amount shall be adjusted as
necessary to reflect any respective estimated Tax paid by DSC to Xerox for such
Tax Period.
(b) DSC Tax Attribute Payment. Notwithstanding any other
provision in this Agreement, DSC shall reimburse Xerox for any reduction in
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DSC's amount payable under Article 3.2(a)(i) of this Agreement or for any tax
benefit payment that DSC received under Article 3.2(a)(ii) of this Agreement for
any Pre-IPO Period tax attribute (e.g., losses, minimum tax credit, other tax
credits) attributable to DSC that is available for use by the DSC Group in a
post-IPO Period. DSC shall pay such amount directly to Xerox within 30 days of
the receipt of written notification from Xerox of the payment amount.
(c) Estimated Taxes. DSC shall provide to Xerox the Tax data
of the DSC Group necessary to determine the DSC Group's share of any estimated
consolidated or combined Tax so that Xerox can compute and allocate its
estimated Tax liability in a timely manner. DSC's share of the estimated Tax
payments shall be computed in a manner consistent with the respective allocation
method specified in Article 3.2 (a) of this Agreement. DSC shall pay to Xerox
the DSC Group's share of the estimated Tax within 30 days of the receipt of
written notification from Xerox of such amount (however, DSC shall not be
required to pay such amount earlier than the due date of the estimated Tax
payment).
(d) Pre-IPO Stand Alone Taxes. If not otherwise paid directly
by DSC or a DSC Group member, DSC shall pay Xerox for the DSC Group's Tax
liability reflected on any stand alone Tax Returns of the DSC Group members for
any Pre-IPO Period. Such payments shall be adjusted to reflect credit for any
respective estimated Taxes paid by DSC to Xerox for such Tax Period. DSC shall
make such payments to Xerox within 30 days of the receipt of written
notification from Xerox of the payment amount (however, DSC shall not be
required to pay such amount earlier than the due date of the Tax Return for such
Tax Period that gives rise to the DSC payment under this paragraph).
3.3 ADJUSTMENTS TO TAX LIABILITY AND TAX ATTRIBUTES.
(a) Consolidated or Combined Tax Returns. If any consolidated
or combined Tax liability is adjusted for any Tax Period (whether by amended
return, claim for refund, audit, or otherwise), the liability of DSC and Xerox
shall be recomputed under Article 3.2 of this Agreement to give effect to such
adjustments. If such recomputation results in an increase in the DSC Group's
share of the consolidated or combined Tax or a reduction in the tax benefit
Xerox received from the DSC Group's tax attributes, then DSC shall pay Xerox
such increase in Tax or reduction in tax benefit. If such recomputation results
in a decrease in the DSC Group's share of the consolidated or combined Tax or an
increase in the tax benefit Xerox received from the DSC Group's tax attributes,
then Xerox shall pay DSC such reduction in Tax or increase in tax benefit. Such
payments by Xerox or
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DSC, as the case may be, shall include interest (computed at the rate in effect
under Code section 6621 for any federal income tax and at the rate provided
under similar provisions of state, local, or foreign law for any other Tax),
determined as though the recomputed amount of the DSC Group Tax liability were
the only adjustment to the consolidated or combined Tax liability for any Tax
Period. Such payments shall be made by Xerox or DSC, as the case may be, within
30 days of the adjustment.
(b) Stand Alone Tax Returns. DSC shall pay any increase in Tax
and be entitled to any refund in Tax arising from any adjustment (whether by
amended return, claim for refund, audit, or otherwise) to any stand alone Tax
Return for the DSC Group in any Pre-IPO Period or Post-IPO Period.
(c) Utilization of Pre-IPO Period Tax Items. If the DSC Group
and the Xerox Group both have a loss or tax credit that arises in the same
Pre-IPO Tax Period that may be carried over or carried back to another Tax
Period, then any tax items attributable to the Xerox Group shall be taken into
account first.
3.4 CARRYBACKS FROM POST-IPO PERIODS TO PRE-IPO PERIODS.
(a) Any loss, credit, or other tax item attributable to the
DSC Group and arising in a Post-IPO Period may be carried back to a consolidated
or combined Tax Return of the Xerox Group for a Pre-IPO Period (the "Carryback
Tax Period") as permitted under the Code or other applicable law. Xerox shall
cooperate with any DSC Group member to the extent reasonably necessary and to
the extent not deemed detrimental to Xerox by the Tax Representative of the
Xerox Group (including, without limitation, amending any return and filing any
claim for refund) for such member to realize the Tax Benefit of carrying such
loss, credit, or other item back to such Carryback Tax Period. However, any
loss, credit, or other tax item attributable to the Xerox Group that arises in a
Post-IPO Period that may be carried back to the same Carryback Tax Period as the
DSC Group tax item, shall be carried back and taken into account first before
carrying back any tax item from the DSC Group to the same Carryback Tax Period.
Xerox shall remit to DSC any actual refund or reduction in Tax resulting from
such carryback; provided, however, that the amount payable in respect of any
such refund shall be (1) reduced by the amount of any Taxes incurred by any
Xerox Group member as a result of the accrual or receipt of the refund and (2)
limited to the actual reduction in the aggregate Tax to the government entity or
jurisdiction resulting from the carryback to such Carryback Tax Period (e.g., no
payment is owed to DSC to the extent the carryback reduces the Xerox Group's
regular
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income tax and results in the imposition of the alternative minimum tax under
Code section 55 for such Tax Period). Xerox shall pay DSC such amount within 30
days of Xerox's receipt of the refund or reduction in Tax.
(b) If any carryback of a DSC Group tax item does not result
in a Tax Benefit in the Carryback Tax Period, but does result in a Tax Benefit
in a different Tax Period ("Utilization Period"), then Xerox shall pay DSC the
amount of any actual refund or reduction in Tax for the Utilization Period,
subject to the limitations and other provisions of Article 3.4(a) of this
Agreement (treating the Utilization Period as if it were the Carryback Tax
Period). Such payment shall include interest (computed at the rate in effect
under Code section 6621 for any federal income and at the rate provided under
similar provisions of state, local, or foreign law (for any other Tax),
including amounts which would have been paid if a refund of Taxes actually had
been paid, rather than applied to reduce Taxes which would otherwise be payable.
Xerox shall pay DSC within 30 days of the receipt of the refund or reduction in
Tax.
ARTICLE 4
COOPERATION
4.1 COOPERATION IN GENERAL.
(a) DSC's Obligations. DSC and each member of the DSC Group
shall fully cooperate with Xerox and its representatives, in a prompt and timely
manner (pursuant to any time schedules provided by the Xerox Group's Tax
Representative), in connection with the preparation and filing of, and any
inquiry, audit, examination, investigation, dispute, or litigation involving any
Tax Return filed or required to be filed by or for any member of the Xerox Group
for any Pre-IPO Tax Period or any combined or consolidated Tax Return that
includes both a DSC Group member and a Xerox Group member filed or required to
be filed by Xerox for any Post-IPO Period ("Xerox Tax Action"). Such cooperation
shall include, but not be limited to, (i) the execution and delivery to Xerox by
the appropriate DSC Group member of any power of attorney or other necessary
document to allow Xerox and its counsel to represent DSC or any DSC Group member
in connection with a Xerox Tax Action and (ii) making available to Xerox, during
normal business hours, and within sixty (60) days of any request therefor, all
books, records, and information (which books, records, and information may be
copied by Xerox), and the assistance of all officers and employees, reasonably
necessary or useful in connection with any Xerox Tax
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Action, including the preparation of any Tax Return that includes members of
both the Xerox Group and the DSC Group for any Pre-IPO or Post-IPO Period.
(b) Xerox's Obligations. Xerox and each member of the Xerox
Group shall fully cooperate with DSC and its representatives, in a prompt and
timely manner, in connection with the preparation and filing of, any inquiry,
audit, examination, investigation, dispute, or litigation involving any stand
alone Tax Return filed or required to be filed by or for any member of the DSC
Group for any Pre-IPO Period ("DSC Tax Action"). Such cooperation shall include,
but not be limited to (i) the execution and delivery to DSC by the appropriate
Xerox Group member of any power of attorney or other necessary document to allow
DSC and its counsel to represent Xerox in connection with a DSC Tax Action and
(ii) making available to DSC, during normal business hours, and within sixty
(60) days of any request therefor, all books, records, and information (which
books, records, and information may be copied by DSC), and the assistance of all
officers and employees, reasonably necessary in connection with any DSC Tax
Action.
(c) So long as the DSC Group is included in the consolidated
financial statements of Xerox, DSC shall timely provide, pursuant to any time
schedules provided by the Xerox Group's Tax Representative, the necessary
financial information of the DSC Group to Xerox so that Xerox may prepare a
consolidated tax provision to meet its deadlines.
(d) Remedy for Failure to Comply. DSC shall indemnify Xerox
for any actual loss (including any Taxes and out-of-pocket costs of resolving
administrative disputes and litigation with the taxing authorities) suffered by
Xerox due to any failure of DSC to comply (in accordance with Article 4.1(a) or
(c) of this Agreement) with requests by Xerox for the execution or delivery of
documents or for information held by DSC. Xerox shall indemnify DSC for any
actual loss (including any Taxes and out-of-pocket costs of resolving
administrative disputes and litigation with the taxing authorities) suffered by
DSC due to any failure of Xerox to comply (in accordance with Article 4.1(b) of
this Agreement) with requests by DSC for the execution or delivery of documents
or for information held by Xerox.
(e) Retention of Books and Records. DSC agrees to retain all
Tax Returns, related schedules, and workpapers, and all material records and
other relevant documents ("Tax Records") (i) for all Pre-IPO Tax Periods and
(ii) for all Post-IPO Period Tax Returns that include both a Xerox Group member
and DSC Group member, until the expiration of any applicable statute of
limitations and as
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otherwise required by law. Notwithstanding the foregoing, DSC shall retain all
Tax Records until such time that Xerox consents to the disposition of such Tax
Records, which consent shall not be unreasonably withheld. If such records are
willfully or negligently destroyed or permitted to be destroyed after the date
of this Agreement without Xerox's consent, then DSC shall indemnify Xerox for
any actual loss (including any Taxes and out-of-pocket costs of resolving
administrative disputes and litigation with the taxing authorities) suffered
from the inability to produce the records.
4.2 NOTICE, DEFENSE, AND SETTLEMENT OF TAX CLAIMS.
(a) If a member of the Xerox Group or DSC Group receives
written notice of a deficiency, contest, audit, or other proceeding with respect
to a proposed Tax liability for which a member of the other group is liable
under this Agreement (including liability hereunder to indemnify or reimburse a
member of the other group), then the recipient shall notify the other group of
such matter by sending written notice thereof to Xerox or DSC, as the case may
be, within 10 days. Xerox and DSC shall cooperate to contest and defend any such
proposed Tax liability. The corporation that is liable under applicable law for
such proposed Tax liability (without regard to this Agreement) shall not settle,
compromise, or otherwise agree to pay such liability without the consent of the
corporation that is liable for such Tax under this Agreement. However, DSC's
consent shall be deemed to have been granted unless it provides Xerox with an
opinion of independent tax counsel of national reputation that its position is
more likely than not correct within 30 days of DSC's receipt of notice from
Xerox of its proposed settlement or compromise. Xerox must agree or disagree
with DSC's proposed settlement or compromise of any proposed Tax liability (for
which DSC is liable under applicable law) within 30 days of Xerox's receipt of
notice from DSC of such proposed settlement or compromise.
(b) Xerox shall be responsible for responding to any notice of
deficiency, contest, audit, or other proceedings with respect to a proposed Tax
liability of a consolidated or combined federal, state, local, or foreign Tax
Return that includes both a Xerox Group member and a DSC Group member for any
Pre-IPO Period or Post-IPO Period. DSC shall be responsible for responding to
any notice of deficiency, contest, audit, or other proceedings with respect to
any proposed Tax liability of a stand alone Tax Return of any DSC Group member
for any Pre-IPO Period or Post-IPO Period.
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4.3 CONFIDENTIALITY. Members of both the Xerox Group and the DSC Group
understand the confidential nature of financial information disclosed in Tax
Returns and the related supporting documentation. Each of Xerox and DSC hereby
agree not to release any Tax and supporting documentation or information with
respect to the other party to any outside party (including taxing authorities)
without the consent of the Tax Representative of the other party, except (i) as
required by law to release such information or documentation or (ii) to DSC's or
Xerox's tax professionals (accountants and attorneys), auditors, and tax
advisers for use in preparation of their respective Tax Returns and financial
statements.
ARTICLE 5
RESOLUTION OF DISPUTES
Any dispute or ambiguity concerning the amount of any payment provided
for under this Agreement shall be resolved, in a manner consistent with the
principles and procedures set forth in this Agreement, by an internationally
recognized accounting firm (so-called "Big-Six" accounting firm) jointly
selected by the parties hereto. The judgment of such accounting firm shall be
conclusive and binding upon each of the parties to this Agreement. The
accounting firm's fee shall be borne wholly by the party whose position does not
prevail in the dispute.
ARTICLE 6
GENERAL
6.1 WAIVER. Any waiver by any party of any default by the other
hereunder shall not be deemed to be a continuing waiver of such default or a
waiver of any other default or of any of the terms and conditions of this
Agreement.
6.2 AMENDMENTS. The terms and conditions of this Agreement may not be
superseded, modified, or amended except in writing stating that it is such a
modification and signed by an authorized representative of each party hereto.
6.3 GOVERNING LAW; FORUM SELECTION. This Agreement shall be governed by
the laws of the State of California, U.S.A., without reference to conflict of
laws principles. All disputes arising out of this Agreement shall be subject to
the exclusive jurisdiction and venue of the California state courts (or, if
there is exclusive federal jurisdiction, the United States District Court for
the Southern District of California), and the parties consent to the personal
and exclusive jurisdiction and venue of these courts.
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6.4 EXPENSES. Unless otherwise expressly provided in this Agreement,
each party shall bear any and all expenses arising from their respective
obligations under this Agreement.
6.5 COMPLETE AGREEMENT. This Agreement constitutes the entire agreement
between the parties as to the subject matter hereof, and supersedes and replaces
all prior or contemporaneous agreements, written or oral, regarding such subject
matter.
6.6 BINDING AGREEMENT. This Agreement is being entered into by Xerox
and DSC on behalf of themselves and each member of the Xerox Group and DSC
Group, respectively. This Agreement shall bind each member of the Xerox Group
and the DSC Group, and shall continue to bind each such member whether or not it
remains affiliated with Xerox or DSC, respectively, and shall be deemed to have
been readopted and affirmed on behalf of any corporation which becomes a member
of the Xerox Group or DSC Group in the future. Xerox and DSC shall, upon the
written request of the other, cause any of their respective Group members to
ratify and execute this Agreement. This Agreement shall be binding upon, and
shall inure to the benefit of each party hereto, its respective successors and
assigns, and each member of the Xerox Group and the DSC Group not a party
hereto. However, no assignment shall relieve any party's obligations hereunder
without the written consent of the other party.
6.7 NOTICES. Any notice which any party desires or is obligated to give
to the other shall be given in writing or by facsimile or telex and sent to the
Tax Representative at the appropriate address set forth above, or to such other
address as the party to receive the notice may have last designated in writing
in the manner herein provided. Except as otherwise expressly provided herein,
notice shall be deemed to have been received on the earlier of the date when
actually received or ten (10) days after being deposited in the mail, postage
prepaid, registered or certified mail, or within one (1) day if by facsimile or
telex, promptly confirmed in writing, properly addressed to the parties.
(a) Business Day. If the last day for providing any notice,
communication, information, or payment hereunder is a Saturday, Sunday, or legal
holiday, such due date shall be extended to the next business day.
6.8 HEADINGS; COUNTERPARTS. Headings to Sections of this Agreement are
to facilitate reference only, do not form a part of this Agreement, and shall
not
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in any way affect the interpretation hereof. This Agreement may be executed in
two (2) or more English language counterparts or duplicate originals, all of
which shall be regarded as one and the same instrument, and which shall be the
official and governing version in the interpretation of this Agreement.
6.9 PARTIAL INVALIDITY. If any provision in this Agreement shall be
found or be held to be invalid or unenforceable in any jurisdiction in which
this Agreement is being performed, then the meaning of said provision shall be
construed, to the extent feasible, so as to render the provision enforceable,
and if no feasible interpretation would save such provision, it shall be severed
from the remainder of this Agreement which shall remain in full force and
effect. In such event, the parties shall negotiate, in good faith, a substitute,
valid and enforceable provision which most nearly effects the parties' intent in
entering into this Agreement.
6.10 FORCE MAJEURE. Nonperformance of either party shall be excused to
the extent that performance is rendered impossible by strike, fire, flood,
governmental acts or orders or restrictions, failure of suppliers, or any other
reason where failure to perform is beyond the reasonable control of and is not
caused by the negligence of the nonperforming party.
6.11 TERM. This Agreement shall commence upon execution and shall
continue in effect until otherwise agreed to in writing by Xerox and DSC, or
their successors.
6.12 FORM OF PAYMENTS; LATE PAYMENTS. Any payment owed by one party to
another under this Agreement shall be made in the currency in which the Tax to
which such payment relates is assessed by the respective Tax authority, and
shall be paid in immediately available funds and in such other manner as the
party to whom such payments is owed may reasonably request. Any payment required
by this Agreement that is not made when due shall bear interest at prime, plus
one percent (1%) from the due date of the payment to the date paid.
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IN WITNESS WHEREOF, Xerox and DSC have caused this Agreement to be duly
executed by their respective officers, each of whom is duly authorized, as of
the date first above written.
XEROX CORPORATION DOCUMENT SCIENCES CORPORATION
By: /s/ Colin J. O'Brien By: /s/ Tony N. Domit
---------------------------- ---------------------------
Title: Vice President Title: President and
Chief Executive Officer
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EXHIBIT 10.14
THIS LEASE, dated for reference purposes, the 20th day of December, 1991
between Governor Park Plaza Associates a Limited Partnership, having its
principal office at 6333 Greenwich Drive, Ste. 110, San Diego, California, and
having a Federal Tax Identification Number of #33-0142066 (hereinafter referred
to as "Landlord"), and XEROX CORPORATION, a New York corporation, having its
principal office at 800 Long Ridge Road, Stamford, Connecticut 06904
(hereinafter referred to as "Tenant").
WITNESSETH:
1. DESCRIPTION
Landlord has constructed a development on certain land, as shown on
Exhibit A attached hereto and made a part hereof (hereinafter referred
to as the "Complex"), which contains parking areas, common areas and
one or more buildings and/or future building sites, including Building
1 containing 61,808 rentable square feet, known as Governor Park Plaza
and located at 6333 Greenwich Drive in the City of San Diego, State of
California, 92122 (hereinafter referred to as the "Building").
Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the following space in the Building, the space consisting of
7,042 rentable square feet (6,350 usable square feet) on the first
floor of Building 1 and known as Suite 120, as shown on Exhibit B
attached hereto and made a part hereof (hereinafter referred to as the
"Demised Premises"), together with the use in common with other
tenants of the Building of the hallways, corridors, lobby, lavatories,
elevators, stairways and other common areas and facilities of the
Building appurtenant thereto, and together with the sidewalks,
driveways and parking facilities provided for in Paragraph 10(h)
hereof (all together hereinafter referred to as the "Premises").
2. TERM
The term of this Lease is three (3) years, to scheduled to commence on
the first day of February, 1992 (hereinafter referred to as the
"Commencement Date"), and to end on the thirty first day of January,
1993 (hereinafter referred to as the "Expiration Date"), both dates
inclusive, unless the term be extended pursuant to Paragraph 16 or
Exhibit C hereof, or earlier terminated as provided herein.
3. RENT
The base monthly rental shall be fully serviced and shall be at the
rate of:
$0.80 per rentable square foot for months 1 through 12,
$1.59 per rentable square foot for months 13 through 24,
$1.65 per rentable square foot for months 25 through 36,
to be paid in advance on or before the first day of each month during
the term hereof; provided however, that if the term of this Lease
should commence on the date other than the first day of the month, the
first and last month's rent shall be prorated.
4. USE
The Demised Premises may be used and occupied for general office
purposes, including by way of specification (but without limiting the
generality of the foregoing), offices, research and development,
training, customer service demonstration areas and computer areas.
Landlord covenants, warrants and represents that there are no zoning
ordinances or other prohibitions restricting or limiting the use of
the Demised Premises for the purposes herein specified. Should any
law, regulation or other governmental order restrict or limit Tenant's
use of the Demised Premises, then Tenant
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may cancel this Lease upon written notice to Landlord within ninety
(90) days following that date upon which Tenant shall have become
aware of such law, regulation or order and thereupon Tenant shall have
no further obligation to Landlord either hereunder or otherwise. In
addition, Tenant may use all or any part of the Demised Premises for
any lawful purpose then permitted by the zoning ordinances and the
certificate of occupancy.
Tenant may, if Tenant so elects, and for Tenant's sole use, install
and operate within the Demised Premises microwave ovens and install
and operate within the Demised Premises vending machines to dispense
hot and cold beverages, ice cream, candy, food and cigarettes;
such machines shall be maintained in a neat and sanitary condition and
shall comply with all applicable laws and ordinances.
5. PREPARATION OF PREMISES
Landlord shall, at Landlord's sole cost and expense perform all work
and furnish all materials necessary to complete the Demised Premises
in accordance with Preliminary Plans and Specifications which shall be
agreed to by Tenant and Landlord. Such plans and specifications shall
be deemed to be Exhibit B-1, attached hereto and made a part hereof.
Landlord, using Landlord's Architect and Engineer, at Landlord's sole
cost and expense, shall prepare complete final Architectural and
Engineering drawings and Specifications (hereinafter referred to as
"AE&S Drawings") in accordance with those Preliminary Plans and
Specifications submitted by Tenant and approved, or deemed approved,
by Landlord. Landlord agrees to make revisions to the AE&S Drawings
as required by Tenant, at no additional cost to Tenant. The AE&S
Drawings agreed to by Tenant and Landlord on or before DECEMBER
26, 1991 will be the drawings provided to Landlord's General Contractor
for the construction of the Demised Premises and such drawings shall
be deemed to be Exhibit C, attached hereto and made a part hereof.
Such final AE&S drawings shall be stamped, as may be necessary, by a
licensed Engineer so that Building Permits and/or other required
Permits may be obtained.
Landlord shall provide in the Demised Premises, in addition to the
Tenant Improvements herein described as Exhibit C, the following, all
in good condition and proper working order:
1. Ceiling grid: material and installation.
2. Ceiling tile: material only.
3. Building standard mini blinds: material and installation, on
all exterior and atrium windows.
4. Main HVAC System to include on the floor main supply and
return ductwork: Branch ducts and diffusers to the space are
not included in the shell.
5. Lighting installed in accordance with the building standard
plan.
6. Dry wall, tape and bed the interior of all exterior walls,
cores, demising walls, and all columns.
7. Provide electrical service to, and a distribution panel in,
the Demised Premises.
9. Landlord shall provide an allowance towards the purchase and
installation of a telephone communication system to include
telephone sets, telecommunication wiring and labor to install
to be specified by Tenant as detailed in Exhibit B-1, and such
allowance shall not exceed $12,000.00.
10. Landlord shall provide an allowance towards the purchase and
installation of computer network cabling and such allowance
shall not exceed $3,000.00.
12. Adequate preventive measures so as to eliminate or
substantially reduce noise and/or vibration from external
sources, such as vehicular or railroad traffic.
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13. Complete final architectural and engineering drawings and
specifications, stamped as may be necessary by a licensed
engineer and/or architect so that building and/or other
required permits may be obtained.
Landlord and Tenant acknowledge that Landlord may be performing work
in the Building simultaneously with Tenant's work, and Landlord and
Tenant agree to cooperate with each other in the conduct of their
work, recognizing the amount of space each party will be working on,
in terms of fairly allocating access to the freight elevator, truck
loading dock and like facilities.
If the Premises and Demised Premises are not so completed on or before
the Scheduled Commencement Date as hereinbefore set forth, then the
term of this Lease and the obligation of Tenant to pay rent shall not
commence until the Premises are completed pursuant to the foregoing
paragraph, and Landlord shall have given Tenant at least fifteen (15)
days written notice prior to the date the Premises are so completed.
In the event Landlord fails to so complete the Building and the
Premises for causes beyond Landlord's control, such as strikes,
governmental restrictions, and acts of God, then the Commencement Date
shall be postponed for the period of such delay, provided however,
that if the Landlord fails to so complete the Premises (for a cause
either within or beyond Landlord's control) on or before February 1,
1992, then Tenant, at Tenant's reasonable discretion, may cancel this
Lease by giving written notice to Landlord and thereupon Tenant shall
have no further obligation to Landlord either hereunder or otherwise.
In the event the Demised Premises are not completed on or before the
Commencement Date for the reasons set forth in the preceding paragraph
permitting postponement of the Commencement Date, then Landlord and
Tenant promptly shall execute a document in the form attached hereto
as Exhibit D and made a part hereof, to establish the Commencement
Date. In the event the delay in the Commencement Date was caused by
Tenant, then the Expiration date shall be extended for a like period
so as to provide for the full term as set forth in Paragraph 2 hereof,
but in the event the delay in the Commencement Date was caused by
force majeure or by delay by the Landlord, then Tenant shall have the
option (a) to extend the Expiration Date by a like period so as to
provide for the full term as set forth in Paragraph 2 hereof, or (b)
not to extend the Expiration Date.
Tenant hereby designates JUDY O' REILLY as its representative with
authority to approve changes in design or construction, and to inspect
and approve workmanship and material. In all cases, his/her signature
shall be final and binding upon Tenant with respect to the authority
herein granted to him/her. All alternates either of additions or
deletions, agreed to between Landlord and Tenant must be in writing
and must be agreed to by Tenant's representative to be binding.
Tenant reserves the right to designate an alternate representative by
notice to Landlord.
Landlord hereby guarantees that the work shall be free from defects
for a period of one (1) year from the completion date. Landlord shall
at Landlord's sole cost and expense, promptly correct any portion of
the work found to be defective during the one (1) year period, and any
other portion of the work damaged or destroyed in the course of such
correction.
Upon completion and acceptance of the Demised Premises, Landlord shall
if requested by Tenant at no expense to Tenant furnish Tenant with a
complete set of "As-Built" drawings setting forth all improvements to
the Demised Premises.
6. TELEPHONE EQUIPMENT
Landlord shall provide suitable non-exclusive space for installation
of Tenant's telephone relay cabinets, power panels and electric
panels. Such space will be in addition to the Demised Premises and
shall be provided at no additional cost to Tenant.
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7. MAINTENANCE AND REPAIRS
Landlord shall, at Landlord's sole expense, maintain and repair the
Premises and the Building in a first-class condition, with all systems
properly functioning. Upon notification by Tenant, Landlord shall
promptly repair any damage to or defect in the Premises and the
Building; provided however, that if such damage is occasioned by fault
or neglect of the Tenant (except as provided in Paragraph 18 hereof)
and there shall not be in effect at the time such damage occurred a
policy or policies of insurance insuring Landlord against any loss
resulting from such damage, then Tenant shall reimburse Landlord for
the cost of repairs, or if the proceeds of such insurance are
insufficient to cover the cost of such repairs, then Tenant shall
reimburse Landlord the difference between such cost and the proceeds
which Landlord received.
8. ALTERATIONS
Tenant shall have the right to make such alterations and modifications
to the Demised Premises as Tenant may deem desirable provided such
non-structural alterations and modifications do not exceed $5,000.00
per occurrence. Should Tenant desire to make any alterations or
modifications which exceed $5,000.00 per occurrence or any structural
alterations or modifications, then Tenant agrees to first obtain
Landlord's consent, which consent shall not be unreasonably withheld or
delayed. Should Landlord fail to respond to Tenant's request within
five (5) days, then Landlord's consent shall be deemd given. All of
Tenant's construction to the Demised Premises shall be performed in a
good and workmanlike manner in accordance with applicable building
codes, regulations and all other legal requirements. Any damage to
the Building resulting from such alterations or modifications shall be
repaired at Tenant's expense.
9. SIGNS AND BUILDING NAME
Tenant at Landlord's expense shall have the right to be listed on the
Building lobby directory, if any, and to have identification signs
outside of the Demised Premises, within the Building in conformance
with Landlord's approved signage plan for the Complex. Tenant at
Tenant's expense shall have the right to require to be installed
and/or removed in conformance with Landlord's approved signage plan
for the Complex, at Tenant's option, an illuminated or nonilluminated
sign on an exterior wall of the Building, and/or a monument sign,
provided such sign does not violate any governmental law, ordinance or
regulation.
10. SERVICES
Landlord shall furnish the following installations and/or services to
Tenant at Landlord's cost and expense, all of which shall be adequate
for the intended use of the Premises and in conformity with that
furnished in local first-class buildings of similar nature. These
services shall be provided between the hours of 7 a.m. to 6 p.m. on
normal business days, and 9 a.m. to 1 p.m.. on Saturdays, except, all
equipment necessary to operate heating, ventilating and air
conditioning systems shall be operate sufficiently in advance and
during these hours so as to provide such services and all cleaning
services shall be provided before or after such hours.
(a) Elevator service, with a minimum of one elevator subject to
call at all times.
(b) Year round air conditioning system capable of producing and
maintaining the following conditions throughout the Demised
Premises, regardless of outside temperature.
(i) Temperature and Humidity - inside temperature to be
maintained at:
Summer: 74 degrees FDB +/- 2 degrees FDB relative
humidity 50% maximum.
Winter: 72 degrees FDB +/- 2 degrees FDB relative
humidity 25% minimum.
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(ii) Temperature Control - areas having excessive heat
gain or heat loss or are affected by solar-radiation
at different times of the day shall be independently
zoned and controlled so that the interior temperature
condition stipulated above can be maintained.
(iii) Air Movement - in conference rooms and toilet areas,
a mechanical ventilation system shall be furnished to
provide for the exhausting of stale air and smoke as
well as providing a comfortable circulation of air.
(iv) Drafts, Noise and Vibration - the heating, air
conditioning and ventilating From systems shall be
free from objectionable drafts, noise and vibration.
(v) Filtration - all air conditioned supply air shall be
adequately filtered so as to maintain a clean, dust
free, non-toxic and odorless environment.
(vi) Ventilation - the air conditioning system shall
supply not less than 25% of fresh air wile in
operation. In toilets exhaust air quantities of at
least 50 cu. ft./minute for each water closet or
urinal or 2 cu. ft. per square foot of floor area,
whichever is greater, is to be provided.
(vii) Service and maintain an existing stand alone air
conditioner in the Demised Premises commonly known as
a CONTEMPO unit.
(c) All utility services. In addition, Landlord shall furnish, at
its sole cost and expense, all necessary utilities including
electricity, to the exterior common areas, including the
walkways, driveways and parking area.
(d) Adequate insect and vermin control.
(e) Adequate security services for the Premises and the Building
including fire and burglar alarm devices.
(f) Initial or first installation of lamps and/or bulbs as well as
future replacement, as required, of lamps and/or bulbs,
ballasts and starters to maintain a light level of 75 foot
candles at desk level.
(g) Landlord acknowledges that the availability of sufficient
parking is a material inducement to the entering into of this
Lease by Tenant. Landlord represents that it has sufficient
parking available to provide at no cost to Tenant and for
Tenant's exclusive use at least 3.9 paved parking spaces for
every 1,000 rentable square feet in the Demised Premises of
which 2 spaces shall be in the open parking area and shall be
marked exclusive to Tenant, all of which shall be no more than
100 feet from any public entrance to the Building. There
shall be a minimum of 350 square feet allocated for each
parking space including aisle and turnaround space.
(i) Landlord shall provide, at no expense to Tenant, cleaning
service, trash removal, and window washing for the Demised
Premises and the Premises in accordance with the Cleaning
Schedule marked Exhibit E and attached hereto and made a part
hereof.
Tenant acknowledges that any one or more of the services provided for
in Paragraph 10 hereof may be interrupted or suspended by reason of
accident, repair, alterations or improvements necessary to be made,
strikes, lockout, and except as hereinafter provided, Landlord shall
not be liable to Tenant therefore, provided however, that (a) Landlord
shall use its best efforts to restore such services as soon as
reasonably possible, (b) in the event such services is not restored
within ten (10) business days, whether or not through the fault of
Landlord, to the extent that Tenant cannot reasonably use all or any
part of the Premises, rent and other charges shall abate as to such
part effective on the eleventh (11) business day and continue abated
until such service is restored, and (c) in the event such interruption
continues for thirty (30) calendar days, whether or not through the
fault of Landlord, then Tenant shall have the right and option to
cancel and terminate this Lease, on ten (10) days written notice to
Landlord, and thereafter shall be relieved of all further liability
under this Lease.
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11. REDECORATING
DELETED IN ITS ENTIRETY
12. COMPLIANCE WITH LAW
Landlord covenants that the Demised Premises, the Premises and the
Building, and the fixtures and appurtenances thereto (except those
installed by Tenant) do conform or that Landlord will promptly cause
them to conform to every applicable requirement of law or duly
constituted authority or the requirements of the carriers of all
insurance on or relating to the Demised Premises, the Premises or the
Building whether such insurance be furnished by Landlord or Tenant and
that Landlord will, at its sole risk and expense, at all times during
the term hereof promptly comply with all such requirements. The
Tenant shall comply with all applicable statutes, ordinances, rules
and regulations of federal, state and municipal governments and all
applicable rules and regulations of the Board of Fire Underwriters as
such statutes, ordinances, rules and regulations pertain to Tenant's
use of the Demised Premises.
Landlord shall also comply with all applicable city, county, state and
federal ordinances in effect from time to time with respect to
facilities for the handicapped in the Demised Premises, the Premises
and the Building.
13. LANDLORD'S TITLE, AUTHORITY AND QUIET ENJOYMENT
Landlord covenants and represents that it has good and marketable
title to the Building and the Complex, free and clear of all ground
leases, liens and mortgages or deeds of trust affecting Tenant's
possession of the Demised Premises, Tenant's use of the Premises, or
the rights granted to Tenant hereunder, except: a mortgage/deed of
trust dated Nov. 2, 1987 from Landlord, as mortgagor, and NEW ENGLAND
MUTUAL LIFE INSURANCE COMPANY, a MASSACHUSETTS CORPORATION, as
mortgagee/beneficiary of deed of trust.
In the event this Lease or the leasehold estate created hereunder is
subject to the prior rights of any mortgagee/beneficiary of deed of
trust or ground lessor, then Landlord shall secure from such
mortgagee/beneficiary of deed of trust or ground lessor a written
agreement in recordable form, in the form of Exhibit "F",
Non-Disturbance and Attornment Agreement (executed and acknowledged by
and on behalf of such mortgagee/beneficiary of deed of trust, or
ground lessor), which provides, among other things that Tenant, so
long as Tenant is not in default hereunder, may remain in possession
of the Demised Premises pursuant to the terms hereof and without
diminution of Tenant's rights should Landlord become in default with
respect to such mortgage or ground lease or should the Premises become
the subject of any action to foreclose any mortgage or to dispossess
Landlord. Such agreement shall be secured and furnished to Tenant at
the same time this executed Lease is delivered to Tenant.
Landlord covenants and represents that it has full and complete
authority to enter into this Lease under all of the terms, conditions
and provisions set forth herein, and so long as Tenant keeps and
substantially performs each and every term, provision and condition
herein contained on the part of Tenant to be kept and performed,
Tenant shall peacefully and quietly enjoy the Premises without
hindrance or molestation by Landlord or by any other person claiming
by, through or under Landlord.
14. SUBORDINATION
The priority of this Lease and the leasehold estate of Tenant created
hereunder are and shall be subject and subordinate to the lien of any
mortgage or ground lease, whether such mortgage is placed against the
fee or leasehold estate, which may now or hereafter affect the
Building and to all renewals, modifications, consolidations,
replacements and extensions thereof, and advances thereunder,
effective upon the date the mortgagee or ground lessor, as the case
may be, shall deliver to Tenant a written agreement in the form of
Exhibit "F", Non-Disturbance and Attornment
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Agreement (executed and acknowledged by and on behalf of the
mortgagee/beneficiary of deed of trust, or ground lessor) in
recordable form which provides, among other things that Tenant, so
long as Tenant is not in default hereunder, may remain in possession
of the Demised Premises pursuant to the terms hereof and without any
diminution of the Tenant's rights should Landlord become in default
with respect to such mortgage or ground lease or should the Premises
become the subject of any action to foreclose any mortgage or to
dispossess Landlord. Any fee which Landlord's lender or ground lessor
may charge for such agreement shall be paid by Landlord.
15. ASSIGNMENT AND SUBLETTING
Tenant shall have the right to assign this Lease or to sublease all or
any portion of the Demised Premises, with Landlord's consent which
consent shall not be unreasonably withheld or delayed. Should
Landlord fail to respond to Tenant's request within five (5) days
Landlord's consent shall be deemed given. Any such assignment or
subletting shall not relieve Tenant of its obligations hereunder.
In the event Tenant sells the operating unit which occupies the
Demised Premises to another company, then anything to the contrary in
this paragraph notwithstanding, Tenant shall have the right to assign
this Lease to such other company, but Tenant shall not thereby be
released of liability under this Lease.
16. LEASE EXTENSION
If this Lease shall not have been terminated pursuant to any
provisions hereof and Tenant is not in default under the terms
hereunder, then Tenant may, at Tenant's option, extend the term of
this Lease for one (1) successive additional term of three (3) years,
commencing on the expiration of the original term, or the immediately
preceding additional term as the case may be, and in the event Tenant
has elected to exercise its option to lease additional space pursuant
to Paragraph 25 the option provided for herein shall include such
additional space. At least nine (9) months prior to the expiration of
the initial term or any extended term, as the case may be, Tenant
shall request from Landlord the fair market rental rate being charged
in the Building, should Tenant desire to extend the term of this
Lease. At least eight (8) months prior to the expiration of the
initial or any extended term Landlord shall notify Tenant, in writing,
the applicable rental rate for the next succeeding option period.
Tenant may exercise such option by giving Landlord written notice by a
date which is the later to occur of (a) six (6) months prior to the
expiration of the original term or the additional term, as the case
may be, and (b) sixty (60) days after receipt by Tenant of Landlord's
notice of the applicable rental rate, as hereinabove provided, and (c)
fifteen (15) days after the fair market rental rate has been
determined by arbitration. Upon the giving by Tenant to Landlord of
such written notice and the compliance by Landlord and Tenant with the
foregoing provisions of this Paragraph 16, the term of this Lease
shall by deemed to be automatically extended upon all the covenants,
agreements, terms, provisions and conditions, set forth in this Lease,
except rental which:
(a) During the first renewal term shall be limited to a maximum of
90% of the then fair market rental rate,
(b) Or if Tenant elects, the rental rate schedule shall be as
follows:
$1.65 per rentable square foot for months 36 through 48,
$1.70 per rentable square foot for months 49 through 60,
$1.75 per rentable square foot for months 61 through 72,
(c) Upon execution of this extension option, Landlord shall repaint
the Demised Premises with two (2) coats of prime quality paint;
repainting shall be performed in a workmanlike manner with a
minimum of interference with Tenant's normal business
operations and replace all carpeting, with a quality comparable
to the initial installation, in the Demised Premises and in any
adjoining lobby/reception area, and except for such terms and
conditions as shall be inapplicable during any additional term
or in connection with this Paragraph 16.
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The term "month" as used in this paragraph shall mean (a) if the
Expiration Date is the last day of a calendar month, a calendar month,
or (b) if the Expiration Date is not the last day of a calendar month,
the period between the Expiration Date and the date in the preceding
month which is one (1) day after the date in the month of the
Expiration Date, e.g., if the Expiration Date falls on May 19, one (1)
"month" prior thereto would be April 20 and two (2) "months" prior
thereto would be March 20.
With respect to the lease extensions, the applicable "fair market
rental rate" shall be that rate charged for space of comparable size
and condition in comparable buildings, including the Building, located
in the geography commonly known as the Golden Train area of the City
of San Diego, taking into consideration the location, quality and age
of the building, floor level, extent of leasehold improvements
(existing or to be provided) including the amount spent by Tenant for
leasehold improvements over building standard in the Demised Premises,
rental abatements, lease takeover/assumptions, moving expenses and
other concessions, term of lease, extent of services to be provided,
distinction between "gross" and "net" lease, a base year or amount for
escalation purposes "both operating costs and ad valorem/real estate
taxes" and the time the particular rental rate under consideration
becomes or is to become effective, or any other relevant term or
condition, including any allowances for leasehold improvements, thus,
the "fair market value" rental rate may be a rental rate with or
without an allowance and/or with or without various other concessions
as set forth hereinabove.
In the event Tenant disagrees with Landlord's determination of the
fair market rental rate, Tenant shall promptly so notify Landlord and
Landlord and Tenant shall thereupon negotiate in good faith to attempt
to agree upon a mutually acceptable fair market rental rate, but in
the event agreement has not been reached within thirty (30) days after
Tenant's receipt of Landlord's Notice, then Tenant shall have the
option to demand arbitration as provided in Paragraph 46 hereof.
If Tenant fails or omits to so give to Landlord the first written
notice referred to above, it shall be deemed, without further notice
and without further agreement between the parties hereto, that Tenant
elected not to exercise the options granted Tenant pursuant to this
Paragraph 16 to extend the term of this Lease for additional periods.
17. TAXES, ETC.
Landlord shall pay all real estate taxes, assessments, water and sewer
rates and charges, and any other charges which may be levied, assessed
or charged against the Building and/or the Complex. Landlord shall
further make all payments required to be made under the terms of any
mortgage or deed of trust or ground lease which is now or hereafter a
lien on the building or the Complex which is superior to this Lease
and all payments required to be made under any ground lease. Landlord
shall have a reasonable time to cure a default under the terms of the
mortgage or deed of trust, before constituting an event of default by
Landlord as hereinafter described in Paragraph 23 of this Lease.
18. INSURANCE AND WAIVER OF LIABILITY
Landlord shall provide, at its expense, throughout the term of this
Lease, comprehensive general liability insurance covering the Building
and the Premises, except when caused by the sole negligence of Tenant
or Tenant's failure to perform its obligations under this Lease. The
policy or policies evidencing such insurance shall provide that same
may not be cancelled or amended without fifteen (15) days prior
written notice to Tenant, and shall provide for a combined coverage of
bodily injury and property damage in an amount not less than Five
Million Dollars ($5,000,000). Such policy or policies shall be issued
by an insurance company licensed to do business in the state in which
the Building is situate. Upon Tenant's request, Landlord shall submit
to Tenant suitable evidence that the foregoing policy or policies are
in effect.
Tenant shall provide, at its expense, throughout the term of this
Lease, comprehensive general liability insurance covering the Building
and the Premises when caused by the sole negligence of Tenant or
Tenant's failure to perform its obligations under this Lease. The
policy or policies evidencing such insurance shall provide that same
may not be cancelled or amended without fifteen (15) days prior
written notice to Landlord,
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and shall provide for a combined coverage of bodily injury and
property damage in an amount not less than Five Million Dollars
($5,000,000). Such policy or policies shall be issued by an
insurance company licensed to do business in the state in which the
Building is situate. Upon Landlord's request, Tenant shall submit to
Landlord suitable evidence that the foregoing policy or policies are
in effect. Notwithstanding the foregoing, Tenant may insure the
foregoing risks under its blanket policy, or elect to self-insure such
risks.
Landlord, for itself and its insurers, hereby releases Tenant with
respect to any liability (including that deriving from the fault or
neglect of Tenant, assignees, subtenants, its agents, employees or
other persons under its or their direction or control) which Tenant
might otherwise have for any damage to the Building or the Demised
Premises by fire, other casualty or cause which Landlord could have
covered by a standard fire insurance policy with extended coverage
endorsement. The term "Tenant" as used in this paragraph shall
include any subsidiary of Tenant and any assignee or subtenant of
Tenant.
Landlord shall insure the Building against fire or other casualty with
extended coverage endorsement with an insurance company selected by
Landlord and Landlord shall cause the policy evidencing such insurance
to include provision permitting such release of liability if such a
provision is obtainable from such insurer at no additional expense to
Landlord. If such insurer will not include such a provision in such
policy, or if the inclusion of such provision in such policy would
involve an additional expense for Landlord, Landlord shall so notify
Tenant within a reasonable time. Where such a provision is obtainable
from such insurer and Tenant notifies Landlord in writing within a
reasonable time thereafter that Tenant desires Landlord to cause such
a provision to be included in such policy at the expense of Tenant,
Landlord shall cause such a provision to be included, and Tenant
agrees to pay promptly all expenses incurred by Landlord as a result
of such inclusion.
19. DAMAGE
In the event that the Building or Premises are damaged for any reason
whatsoever and Tenant is unable, in Tenant's reasonable business
judgement, to carry on its normal business operations for a period of
forty five (45) days or more, Tenant's shall have the right to
terminate this Lease by giving written notice of such termination to
the Landlord no later than thirty (30) days after the occurrence of
such damage. Upon such termination, Tenant's obligations hereunder
and each of them, including the obligation to pay rent, shall cease
and determine as of the day the Premises were so damaged. If in
Tenant's reasonable business judgement, it is unable to carry on its
normal business operations for a period of less than forty five (45)
days because of such damage, rent shall abate (or any free rent period
provided for in Paragraph 3 hereof shall be extended) for the period
the Premises are untenantable.
In the event the Premises are partially damaged by fire or other
casualty and Tenant shall determine that it is able to carry on its
normal business operations, Tenant shall pay rent for only such
portion of the Premises which Tenant in its determination may
reasonably occupy during the time required to make repairs. All
repairs necessary to restore the Premises to its original condition
shall be:
(a) commenced within thirty (30) days after the occurrence of such
damage;
(b) performed in a diligent and workmanlike manner with material
of at least the same quality utilized originally in the
construction of the Premises;
(c) completed by Landlord at Landlord's sole expense with a
minimum of interference with Tenant's normal business
operations.
If in Tenant's determination Landlord shall not have performed any of
the above obligations in strict compliance therewith, then Tenant may,
but shall not be required to, undertake such obligations, and all
costs and expenses incurred by Tenant as a result thereof may be
deducted from any rent or other payment due or to become due
hereunder.
9
<PAGE> 10
20. CONDEMNATION
In the event the Building or the Complex shall be condemned for public
use or voluntarily transferred to a public or quasi-public body in
lieu of proceeding to a judgment of condemnation, this Lease shall
terminate and rent shall be adjusted to the date of termination. In
the event a portion of the Building or the Complex shall be condemned
for public use or voluntarily transferred to a quasi-public body in
lieu of proceeding to a judgment of condemnation and Tenant is unable,
in Tenant's reasonable business judgement, to carry on its normal
business operations for a period of forty five (45) day's or more,
Tenant-shall have the right to terminate this Lease by giving written
notice of such termination to the Landlord no later than thirty (30)
days after the occurrence of such condemnation or transferal. Upon
such termination, Tenant's obligations hereunder and each of them,
including the obligation to pay rent, shall cease and determine as of
the date of termination. If in Tenant's determination, it is unable
to carry on its normal business operations for a period of less than
forty five (45) days because of such partial condemnation, rent shall
abate for the period the Premises are untenantable.
In the event a portion of the Building or Complex shall be condemned
for public use or voluntarily transferred to a public or quasi-public
body in lieu of proceeding to a judgment of condemnation, and Tenant
shall determine that it is able to carry on its normal business
operations, Tenant shall pay rent for only such portion which Tenant
in its determination may reasonably occupy after such partial
condemnation or transfer. All repairs necessary to restore the
Demised Premises, Premises, Building or the Complex as nearly as
possible to its original condition shall be:
(a) commenced within thirty (30) days after the taking or
transfer;
(b) performed in a diligent and workmanlike manner with material
of at least the same quality utilized originally in the
construction of the Building or Complex.
(c) completed by Landlord at Landlord's sole expense with a
minimum of interference with Tenant's normal business
operations.
If in Tenant's determination Landlord shall not have performed any of
the above obligations in strict compliance therewith, then Tenant may,
but shall not be required to, undertake such obligations, and all
costs and expenses incurred by Tenant as a result thereof may be
deducted from any rent or other payment due or to become due
hereunder. Tenant is hereby granted a lien upon any award or
settlement resulting from the condemnation to the extent that Tenant
has not been reimbursed for any cost or expense which Tenant may have
incurred hereunder.
Except as provided in the paragraph immediately preceding, Tenant
shall not be entitled to any award or settlement resulting from the
condemnation, provided that nothing contained herein shall be
construed to in any way restrict or limit Tenant from asserting a
claim for any damages resulting from the taking of any leasehold
improvements paid for by Tenant or moving expenses incurred as a
result of such condemnation.
21. DEFAULT BY TENANT
The occurrence of any one or more of the following events shall
constitute an event of default by Tenant:
(a) the failure by Tenant to make any payment of rent or any
other payment required to be made by Tenant hereunder, as and
when due, where such failure shall continue for a period of ten
(10) days after receipt of written notice thereof by Tenant
from Landlord;
(b) the failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease where such
failure shall continue for a period of thirty (30) days after
receipt of written notice thereof by Tenant from Landlord,
provided, however, that if the nature of Tenant's default is
such that it cannot be cured solely by payment of money and
that more than thirty (30) days may be reasonably required for
such cure, then Tenant shall not be deemed to be in default if
Tenant shall commence such cure within such thirty (30) day
period and shall thereafter diligently prosecute such cure to
completion;
10
<PAGE> 11
(c) (i) the making of any general arrangement or any
assignment by Tenant for the benefit of creditors;
(ii) the filing by or against Tenant of a petition to have
Tenant adjudged a bankrupt or a petition of
reorganization or arrangement under any law relating
to bankruptcy (unless, in the case of a petition
filed against Tenant, when such petition is dismissed
within ninety (90) days);
(iii) the appointment of a trustee or receiver to take
possession of substantially all of Tenant's assets;
(iv) the attachment, execution or other judicial seizure
of substantially all of Tenant's assets.
22. LANDLORD'S REMEDIES
Upon the occurrence of an event of default under this Lease by Tenant,
then Landlord in addition to other rights or remedies it may have,
shall have the right to terminate this Lease upon fifteen (15) days
written notice to Tenant, and also the right, with or without
termination of this Lease, of reentry upon and taking possession of
the Demised Premises and Landlord may remove all persons and property
from the Demised Premises; such property may be removed and stored in
any other place in the Building or in any other reasonably secure
place for the account of and at the expense and risk of Tenant.
Tenant hereby waives all claims for damages which may be caused by the
reentry of Landlord and taking possession of the Demised Premises or
removing or storing the furniture and property as herein provided and
shall save Landlord harmless from any costs or damages occasioned
Landlord thereby, and no such reentry shall be considered or be
construed to be a forcible entry. Should Landlord elect to reenter,
as herein provided, or should it take possession pursuant to legal
proceedings or pursuant to any notice provided for by law, Landlord
may either terminate this Lease or, Landlord may from time to time,
without terminating this Lease, relet the Demised Premises or any part
thereof for such term or terms and at such rental or rentals and upon
such other terms and conditions as may be reasonable, with the right
to make minor alterations and repairs to the Demised Premises. Rental
received by Landlord from such reletting shall be applied first, to
the payment of any costs of such reletting including reasonable
brokerage and attorney's fee; and the residue, if any, shall be held
by Landlord and applied in payment of future rent as the same may
become due and payable hereunder. Should such rentals received from
such reletting in any during month be less than one-twelfth (1/12) of
the annual rent reserve hereunder, then Tenant shall pay such
deficiency to Landlord. Such deficiency shall be calculated and paid
monthly. No such reentry or taking possession of the Demised Premises
by Landlord shall be construed as an election on its part to terminate
this Lease, unless written notice of such intention be given to
Tenant, in which event Tenant's obligations to Landlord shall
forthwith cease, or unless the termination thereof be decreed by a
court of competent jurisdiction.
23. DEFAULT BY LANDLORD
The occurrence of any one or more of the following events shall
constitute an event of default by Landlord:
(a) The failure by Landlord to make any payment required to be
made by Landlord hereunder, as and when due, where such
failure shall continue for a period of ten (10) days after
receipt of written notice thereof from Tenant to Landlord;
(b) The failure by Landlord to observe or perform any of the
covenants, conditions or provisions of this Lease where such
failure shall continue for a period of thirty (30) days after
receipt of written notice thereof from Tenant to Landlord;
provided however, that if the nature of Landlord's default is
such that it cannot be cured solely by payment of money and
that more than thirty (30) days may be reasonably required for
such cure, then Landlord shall not be deemed to be in default
if Landlord shall commence such cure within such thirty (30)
day period and shall thereafter diligently prosecute such cure
to completion.
11
<PAGE> 12
24. TENANTS REMEDIES
Upon the occurrence of an event of default under this Lease by
Landlord, then Tenant in addition to other rights or remedies it may
have, at Tenant's sole option, may set off any amount owed to Tenant
by Landlord against any rent or other payment due or to become due
hereunder or perform any obligations of Landlord (which Landlord has
failed to perform) in which event Tenant shall have the right to set
off any expense incurred thereby against any rent or other payment due
or to become due hereunder.
25. ADDITIONAL SPACE
Landlord hereby grants to Tenant the right to lease additional space
contiguous to the Demised Premises and any other location in Building
1 upon the following terms and conditions:
(a) No later than four (4) months prior to the time additional
space in Building 1 by Tenant, Tenant shall notify Landlord in
writing that Tenant elects to exercise this right.
(b) Within fifteen (15) days after Landlord receives such notice,
Landlord shall inform Tenant in writing the exact date
additional space shall be available for preparation by Tenant.
Provided that Tenant exercises this right Between months 1 and
12 inclusive of this original Term Landlord agrees to
contribute toward the preparation of additional space the same
sum of dollars per rentable square foot as was required
buildout Tenant's original improvements multiplied by the
number of additional rentable square feet. If however, Tenant
exercises this right between months 13 and 36 inclusive of
this original Term, Landlord agrees to only perform touch-up
painting and carpet cleaning for any additional rentable
square feet to be leased. All improvements required to be
made hereunder shall be of the same and/or similar quality
required to be furnished with respect to the completion of the
Demised Premises.
(c) The rent for any additional space shall be computed at the
same annual rate per square foot as the rent for the space
described in Paragraph 1 hereof and shall commence on the date
the additional space has been completed in accordance with (b)
above as the case may be.
(h) The term of the Lease for such additional space shall be the
balance of the term of this Lease and any additional term
thereof.
(i) Landlord shall provide Tenant with additional parking spaces
in the event Tenant elects to lease additional space in the
same ratio set forth in Paragraph 10 (h).
(j) All of the terms and conditions of this Lease not inconsistent
with this Paragraph 25 shall govern the leasing of any
additional space.
(k) Any space added to the Demised Premises pursuant to this
Paragraph 25 shall thereafter be deemed to be a part of and
included in the Demised Premises.
26. DOWNSIZE AND RETURN OF SPACE
DELETED IN ITS ENTIRETY
27. RIGHT OF FIRST REFUSAL TO PURCHASE
DELETED IN ITS ENTIRETY
12
<PAGE> 13
28. FIRST RIGHT TO LEASE
If, during the original or any additional term hereof, Landlord elects
to lease any space in Building 2 of Governor Park Plaza, 6363
Greenwich Drive, then Landlord shall first offer such space in writing
to Tenant on terms and conditions no less favorable than those offered
to third parties. If within twelve (12) days after receipt of such
offer, Tenant does not notify Landlord that Tenant elects to lease
such space, then Landlord shall be relieved of any obligations to
Tenant with regard to any such offering; provided, however, that a
failure by Tenant to lease any specific space when so offered by
Landlord shall not relieve Landlord of its obligation to first offer
Tenant any other space in Building 2 if, as and when Landlord elects
to offer such other space to third parties.
29. RENT ABATEMENT
Should Tenant or those holding by, through or under Tenant not occupy
all or any portion of the Demised Premises for any period during the
term hereof or any additional term for any reason whatsoever, then
anything herein to the contrary notwithstanding, Landlord and Tenant
shall mutually agree to the percentage of the monthly rent for which
Tenant is or might be obligated to pay based on the previous 6 month
Operating Expense history for the Complex, and which the parties agree
constitutes the cost of providing the services set forth in Paragraph
10 shall abate for as long as that portion of the Demised Premises are
not so occupied.
30. DELIVERY OF EXECUTED LEASE AND RELATED DOCUMENTS
Within fifteen (15) days after Tenant delivers to Landlord four (4)
duplicate originals of this Lease duly executed by Tenant, Landlord
shall deliver to Tenant two (2) fully executed originals of this Lease
accompanied by agreements in the Form of Exhibit "F" (Non-Disturbance
and Attornment Agreement) duly executed and acknowledged by and on
behalf of each mortgagee/beneficiary of deed of trust referred to in
Paragraph 13 hereof, and if requested by Tenant, a Memorandum of Lease
in the form of Exhibit "G" duly executed and acknowledged by and on
behalf of Landlord (said executed Lease, Non-Disturbance Agreement(s)
and Memorandum of Lease are together referred to herein as the Lease
and Related Documents"). In the event Landlord shall fail to deliver
the fully executed Lease and Related Documents as herein required,
Tenant may, if Tenant so elects, withdraw its execution and delivery
of this Lease by giving Landlord written notice of such withdrawal.
Upon such withdrawal neither party shall have any rights against the
other either hereunder or otherwise except that Landlord shall
forthwith return to Tenant any sums which Tenant shall have paid to
Landlord prior to such withdrawal.
31. TERMINATION
Landlord hereby grants to Tenant the right to terminate this Lease at
any time during the initial term upon one hundred and eighty (180)
days prior written notice to Landlord. In the event Tenant elects to
terminate the Lease as herein provided, Tenant shall pay to Landlord
an amount equal to thirty-five percent (35%) of the annual rental set
forth in Paragraph 3 hereof (as it may have been amended by Paragraphs
16, 25 and 26 hereof) from the date of termination through the balance
of the unexpired term of the Lease. Such payment shall be made on or
before the date such termination becomes effective.
32. COMPETITORS OF TENANT
DELETED IN ITS ENTIRETY
13
<PAGE> 14
33. NOTICES
All notices shall be sent U. S. Registered Mail, Return Receipt
Requested to the following addresses:
TO LANDLORD: TO TENANT:
Governor Park Associates Xerox Corporation
c/o Nexus Development Corp. Attention: RE/GSD Lease Administration
6333 Greenwich Dr., Ste. 110 800 Long Ridge Road
San Diego, CA 92122 P.O. Box 1600
Stamford, Connecticut 06904
WITH A COPY TO:
Xerox Corporation
Attention: Manager,
Real Estate Operations
Western United States
1851 E. 1st St., Ste. 460
Santa Ana, CA 92705
Any notice shall be deemed to have been given on the date set forth on
the Registry Receipt given to the sender at the time of mailing, except
that for purposes of Paragraphs 21 and 23 hereof, such notice shall be
deemed to have been received on the earlier of (a) the date set forth on
the Return Receipt, (b) the date of delivery as shown on the Post Office
records, or (c) the date delivery was refused as shown on the Post
Office records.
Except as otherwise provided in this Lease, all correspondence to Tenant
with respect to this Lease or any of the provisions hereof shall be sent
to the addresses of Tenant set forth above, and any and all
correspondence sent to Tenant at the Demised Premises or any location
other than as stated herein, and any documents signed by Tenant at the
Demised Premises as a result thereof shall be null and void and of no
force and effect. Either party, by notice to the other, shall have the
right to change the address(es) for notice(s) to be sent to such party,
and to add or substitute entities to which a copy of any notice shall be
sent by the other party.
34. BROKERAGE
Landlord and Tenant acknowledge that MR. J. WRIGHT, OF ILIFF-THORN AND
COMPANY, is the real estate broker which brought about this lease
transaction, and Landlord shall pay the brokerage commission to such
broker pursuant to separate agreement. Landlord hereby indemnities
Tenant against the claims of any other broker arising from Landlord's
acts, and Tenant hereby indemnifies Landlord against the claims of any
other broker arising from Tenant's acts.
35. ESTOPPEL CERTIFICATE
Landlord and Tenant shall, at any time upon not less than twenty (20)
days prior written notice, execute and deliver to a prospective new
landlord, lender, or assignee or subtenant of Tenant, as the case may
be, a statement in writing (i) certifying that this Lease is unmodified
and in full force and effect (or if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full
force and effect), (ii) the date to which the rent and other charges are
paid in advance, if any, and (iii) acknowledging that there are not, to
the party's knowledge, any uncured defaults or unfulfilled obligations
on the part of the other party hereunder, or specifying such defaults or
unfulfilled obligations if any are claimed.
14
<PAGE> 15
36. INDUSTRIAL DEVELOPMENT BONDS
Landlord covenants, warrants and represents that tax exempt Industrial
Development Bonds, sometimes referred to as Industrial Revenue Bonds
("I.R.B.s") were not used in financing the Complex or the Building. If it is
subsequently determined that tax exempt I.R.B.s were used in such financing,
Tenant shall have the right and option to terminate this Lease and thereafter
be relieved of all further liability hereunder.
In the event Landlord elects to finance the Complex or Building with tax
exempt I.R.B.s during the term (or any additional term) of this Lease and
Tenant occupies ten percent (10%) or more of the Building or Complex, then
Landlord shall promptly so notify Tenant and Landlord hereby indemnifies and
holds Tenant harmless from any loss by or claim against Tenant as a result of
such tax exempt I.R.B. financing, and Landlord hereby releases Tenant from
any liability to Landlord as a result of such tax exempt I.R.B. financing.
In addition, Tenant shall have the right and option to terminate this Lease,
as hereinabove provided.
37. ASBESTOS AND CONTAMINATION
Landlord covenants, warrants and represents that the Premises and the
Building are free of any friable asbestos containing materials and that any
non-friable asbestos containing materials in the Premises or the Building are
identified in Exhibit attached hereto.
-----
Landlord covenants, warrants and represents that to the best of its
knowledge, after thorough investigation, the Premises and the Building
(including the land thereunder) do not contain any environmental contaminants
("toxic contamination") of any kind (including PCBs, except for PCBs that are
totally contained within light fixtures and exterior transformers). At any
time during the term of this Lease, Tenant shall have the right and option,
at Tenant's expense, to investigate the Building for the presence of asbestos
and PCBs and to investigate the land for the presence of toxic contamination.
Landlord agrees to indemnify and hold Tenant harmless from any claims or
actions related to or arising out of any subsequent discovery of friable
asbestos or toxic contamination at the Premises or the Building (including
the land thereunder). In the event of such a finding, or in the event of any
breach of a covenant, warranty or representation by Landlord under this
paragraph, Tenant shall have the option of terminating this Lease without
penalty of any kind and be released from any liability under the Lease after
the date of such termination.
38. HOLDOVER
If Tenant shall remain in possession of the Demised Premises after expiration
of the original or any additional term hereof, Tenant's occupancy shall be a
month-to-month tenancy at 1.25 times the rental rate applicable to the last
month of the unexpired term and under all of the other terms, conditions and
provisions hereof except those pertaining to the term of the Lease. Landlord
hereby grants to Tenant the right to holdover for up to three (3) months.
39. SURRENDER
Upon any termination or expiration of this Lease, Tenant shall surrender the
Demised Premises in the same condition as existed at the commencement of the
term, except for normal wear and tear and damage caused by the elements,
casualty, or any other cause for which Tenant might not be liable, provided,
however, that Tenant shall have the option, but not the obligation, to remove
any or all of the improvements and alterations made to the Demised Premises by
Tenant or at Tenant's expense. Any damage to the Demised Premises resulting
from the removal of such improvements or alterations shall be repaired by
Tenant at Tenant's expense.
15
<PAGE> 16
40. ROOF-TOP ANTENNA
DELETED IN ITS ENTIRETY
41. MODIFICATION OF LEASE
The terms, covenants and conditions of this Lease may not be changed
orally but only by an instrument in writing signed by the party against
whom enforcement of the change is sought. The failure of either party
hereto to insist in any one or more cases upon the strict performance of
any term, covenant or condition of this Lease to be performed or
observed by the other party hereto shall not constitute a waiver or
relinquishment for the future of any such term, covenant or condition.
42. MEMORANDUM OF LEASE
Neither party shall record this Lease or any of the exhibits and/or
riders attached hereto, (except that Tenant may record the executed
Non-Disturbance and Attornment Agreement) but at the request of either
party, Landlord and Tenant shall enter into a "short form" or Memorandum
of Lease in recordable form, attached hereto as Exhibit "G" and made a
part hereof, which may be recorded and which shall set forth the
parties, the legal description of the land underlying the Building or
Complex, a description of the Demised Premises, the Commencement Date
and Expiration Date of the term of the Lease, and any options and/or
restrictions in this Lease desired to be included by either party.
43. PARAGRAPH CAPTIONS
Paragraph captions herein are for Landlord's and Tenant's convenience
only, and neither limit nor amplify the provisions of this Lease.
44. ENTIRE AGREEMENT
This Lease represents the entire agreement between Landlord and Tenant
and supercedes all prior agreements both written and oral. The terms,
covenants and conditions of this Lease shall be binding upon and shall
inure to the benefit of Landlord and Tenant and their respective
executors, administrators, heirs, distributees, legal representatives,
successors and assigns. The term "Tenant" as used in this Lease shall
include Xerox Corporation and any subsidiary (or any subsidiary of any
subsidiary) of Xerox Corporation.
45. CHOICE OF LAW AND INTERPRETATION
This Lease shall be governed by the law of the State in which the
Complex is situate. Should any provisions of this Lease require
judicial interpretation, it is agreed that the court interpreting or
construing the same shall not apply a presumption that the terms of any
such provision shall be more strictly construed against one party or the
other by reason of the rule of construction that a document is to be
construed most strictly against the party who itself or through its
agent prepared the same, it being agreed that the agents of all parties
hereto have participated in the preparation of this Lease.
46. ARBITRATION OF DISPUTES
All disputes between Landlord and Tenant with respect to Paragraph 16 of
this Lease, with respect to the determination of fair market value
rental rates, shall be decided by arbitration. Tenant shall have the
right, by giving written notice to Landlord, setting forth in detail the
nature of the dispute, to request arbitration. The dispute shall be
submitted to arbitration as follows:
Within fifteen (15) business days after delivery of the above notice,
each party (Landlord and Tenant) shall appoint a person to act as an
arbitrator in its behalf.
16
<PAGE> 17
Within five (5) business days thereafter, the two appointed arbitrators
shall jointly appoint a third arbitrator. The dispute shall be
arbitrated by said three arbitrators. A majority decision of the three
arbitrators shall control. All of the arbitrators shall be persons
having at least ten (10) years experience in dealing with the commercial
leases in office buildings within the City of San Diego, State of
California, and none shall have any interest in the Building or the
Complex or be or have been associated or affiliated with either Landlord
or Tenant.
In the event Landlord and Tenant, or the two arbitrators fail or refuse
to appoint an arbitrator within the time set forth herein, then either
party shall have the right to petition the senior judge (in terms of
years of service), of the United States District Court of the applicable
Federal District in which the Building is situated to appoint such
arbitrator and the arbitrator appointed by said judge shall serve in
said capacity.
NOTICE: BY INITIALLING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY
DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF
DISPUTES' PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY
CALIFORNIA LAW, AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO
HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALLING IN
THE SPACE BELOW, YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND
APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE 'ARBITRATION
OF DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER
AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO
THIS ARBITRATION PROVISION IS VOLUNTARY. WE HAVE READ AND UNDERSTAND
THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS
INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO NEUTRAL
ARBITRATION.
[SIG] [SIG]
---------------------- --------------------
INITIALLED BY LANDLORD INITIALLED BY TENANT
47. EXHIBITS AND RIDERS
Attached hereto and made a part hereof are the following:
EXHIBIT A: COMPLEX
EXHIBIT B: DEMISED PREMISES
EXHIBIT B-1: PRELIMINARY SPACE PLAN
EXHIBIT C: PLANS AND SPECIFICATIONS
EXHIBIT D: LEASE TERM AGREEMENT
EXHIBIT E: CLEANING SCHEDULE
EXHIBIT F: NON-DISTURBANCE AND ATTORNMENT AGREEMENT
EXHIBIT G: MEMORANDUM OF LEASE
17
<PAGE> 18
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the
day and year first above written.
<TABLE>
<S> <C>
WITNESS: GOVERNOR PARK ASSOCIATES
a California Limited Partnership
By: /s/ MICHAEL J. REIDY
- ------------------------------- ---------------------------------
Michael J. Reidy
Its: Managing Partner
(Landlord)
WITNESS: XEROX CORPORATION
[SIG] By: /s/ MARK A. FLAIM
- ------------------------------- --------------------------------
Mark A. Flaim
Manager, Real Estate Operations
Western United States
(Tenant)
</TABLE>
18
<PAGE> 19
EXHIBIT A
"COMPLEX"
[GRAPHIC]
<PAGE> 20
EXHIBIT B
"DEMISED PREMISES"
Building I
6333 Greenwich Drive
San Diego, CA 92122
Suite 120
1st floor
[GRAPHIC]
<PAGE> 21
EXHIBIT Bl
PRELIMINARY SPACE PLANS
23
<PAGE> 22
EXHIBIT D
LEASE TERM AGREEMENT
AGREEMENT made and entered into the _________ day of ____________________ 19__,
by and between ______________________________, a corporation/partnership,
having its principal office at
__________________________________________________ (hereinafter referred to as
"Landlord"), and XEROX CORPORATION, a New York corporation, having its principal
office at 800 Long Ridge Road, Stanford, Connecticut 06904 (hereinafter referred
to as "Tenant"),
W I T N E S S E T H:
WHEREAS, by Lease (hereinafter called the "Lease") made the __________ day of
____________________, 19__, Landlord demised and leased unto Tenant
certain Demised Premises in a Building known as and/or located at
________________________________________ for a term of __________ (__________)
years commencing on __________ _____, 19__, and ending on __________ _____,
19__ unless sooner terminated or extended as provided therein, and
WHEREAS, the Tenant did not enter into occupancy of the Demised Premises until
__________ _____, 19__ and
WHEREAS, pursuant to Exhibit C of the Lease, Landlord and Tenant now desire to
set forth the correct Commencement Date of the term and to adjust the
Expiration Date of the term to provide for a full term of the Lease of
____________________ (__________) years,
NOW, THEREFORE, Landlord and Tenant do hereby agree as follows:
1. The term of the Lease commenced on ____________________, 19__
and shall continue until ______, 19__ unless sooner terminated or
extended as provided therein.
2. Except as hereby amended, the Lease shall continue in full force and
effect.
3. This agreement shall be binding on the parties hereto, their heirs,
executors, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly
executed as of the day and year first above written.
Witness:
____________________ By:____________________
(Landlord)
Witness: XEROX CORPORATION
____________________ By:____________________
(Tenant)
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<PAGE> 23
EXHIBIT E
CLEANING SCHEDULE
NIGHTLY
(between the hours of 6:00 p.m. and 6:00 a.m., Monday through Friday, Legal
Holidays excepted).
1. Clean lavatories as follows:
(a) Sweep and wash floors, using an odorless disinfectant in wash
water.
(b) Wash and polish all mirrors, powder shelves, bright work, and
enamel surfaces.
(c) Thoroughly scour, wash and disinfect all basins, bowls, and
urinals.
(d) Wash and disinfect all toilet seats, both sides.
(e) Wash all partitions, tile walls, towel, paper, and sanitary
napkin dispensers, and receptacles, as required.
(f) Empty and clean paper towel and sanitary disposal receptacles.
(g) Fill toilet tissue holders, soap dispensers and towel
dispensers, materials to be furnished by Landlord janitorial
service.
2. Empty and clean all waste receptacles, ashtrays and sand urns.
Utilize plastic bag liners in all waste receptacles.
3. Wash, clean and disinfect all water fountains and water coolers.
4. Hand dust all office furniture and fixtures, shelves, sills and other
dust collecting surfaces.
5. Remove all rubbish and trash from premises.
6. Vacuum all rugs and carpeting and remove any spots or stains.
7. Dust mop all uncarpeted areas, using treated mops and damp mop, as
necessary to remove any stains or spills.
8. Damp mop floors in entrance foyers, elevator lobbies, and
public corridors, if applicable.
9. Wet sponge wipe table tops in employee lounge, including cleaning
of any spills, if applicable.
10. During nightly tour, close all windows and blinds, extinguish lights,
lock doors and report any malfunctions.
11. Keep locker, storage and slop sink rooms in a clean and orderly
manner.
12. Keep sidewalks and parking areas clean and rubbish free.
WEEKLY
1. Damp mop and buff polish all uncarpeted areas.
2. Keep lawn and landscaping properly maintained, if applicable.
3. Wash all directory board, display, entry door, and side light glass, as
necessary.
4. Remove all finger marks and smudges from doors, partitions, woodwork,
window ledges and window mullions.
MONTHLY
1. All uncarpeted floor areas to be washed, waxed and machine polished.
2. Clean air conditioning grilles and filters as required.
3. High dusting:
(a) Dust in place all pictures, frames, charts, graphs and similar
wall hangings.
(b) Dust clean all vertical surfaces, such as walls, partitions,
doors, books and other surfaces not reached in nightly
cleaning.
(c) Dust clean all exposed pipes, air conditioning louvers, ducts
and other areas not reached in nightly cleaning.
(d) Dust clean all lighting fixtures.
(e) Vacuum all mini blinds.
4. Wash all windows inside and out as needed but in no event less than 2
times per year.
5. Wash, clean, and disinfect all lavatory vinyl.
ANNUALLY
1. Damp wipe all light fixtures, including lenses and fluorescent tubes.
2. Shampoo all rugs and carpeting.
If the above requirements are not properly complied with and the Demised
Premises and/or the Premises are not maintained in a satisfactory manner, the
Tenant may on 21 days notice to Landlord provide its own cleaning service and
deduct the cost thereof from the rental due Landlord.
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<PAGE> 24
EXHIBIT F
NON-DISTURBANCE
AND
ATTORNMENT AGREEMENT
This AGREEMENT dated as of the __________ day of ____________________ 19
__________, by and between the ______________________________, having a mailing
address at ______________________________ (hereinafter referred to as
"Mortgagee") and XEROX CORPORATION, a New York Corporation, having a mailing
address at Post Office Box 1600, Stamford, Connecticut 06904 (hereinafter
referred to as "Tenant").
W I T N E S S E T H:
WHEREAS, Mortgagee is the holder of a first mortgage or deed of trust dated as
of the ____________________ and recorded on __________ in _______ __ County, in
an Official Record Book, __________ Page __________ on a certain building
located at ________________________________________; and
WHEREAS, Tenant entered into a Lease dated as of the __________ day of
____________________ 19 __________, with ________________________ (hereinafter
referred to as "Landlord") for ____________________ square feet in that certain
building described in the Lease (hereinafter referred to as "Building" and
Mortgagee and Tenant desire to confirm their understanding with respect to the
Lease and the rights of Tenant thereunder.
NOW THEREFORE, in consideration of One Dollar ($1.00) and other good and
valuable consideration each in hand paid to the other, the receipt and
sufficiency whereof is hereby acknowledged, Mortgagee and Tenant hereby
covenant and agree as follows:
1. Mortgagee agrees unless Tenant shall then be in default under the Lease
and the time to cure such default shall have expired that:
(a) When Tenant or any person claiming through or under Tenant is deemed
a necessary party by the court, such party may be so named or joined,
but such naming or joinder shall not otherwise be in derogation of
the rights of Tenant set forth in this Agreement; and
(b) Neither Tenant nor any person claiming through or under Tenant shall
be evicted from the Building, nor shall the leasehold estate or
possession of Tenant or any person claiming through or under Tenant
be terminated or disturbed, nor (except to the extent provided in
Paragraph 2 of this Agreement) shall any of the rights of Tenant
or any person claiming through or under Tenant, be affected in any
way by reason of any default or event of default under the Mortgage;
and in no case (except as provided in Paragraph 2 hereof) shall the
rights of Tenant under the Lease be diminished, reduced or adversely
affected in any way whatsoever by reason of any default or event of
default under, or foreclosure of, the Mortgage.
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<PAGE> 25
EXHIBIT F
2. If, at any time Mortgagee (or any person, or such person's successors or
assigns, who acquired the interest of the Landlord under the Lease
through foreclosure action of the Mortgage or otherwise) shall succeed
to the rights of the Landlord under the Lease as a result of a default
or event of default under the Mortgage, and if the Tenant is not then in
default under the lease beyond the time permitted therein to cure such
default, the (i) Lease shall not terminate, (ii) Upon receipt by Tenant
of written notice of such succession of interest, Tenant shall attorn to
and recognize such person so succeeding to the rights of the Landlord
under the Lease (herein sometimes called "Successor Landlord") as
Tenant's Landlord under the Lease, upon the then executory terms and
conditions of the Lease and as hereinafter provided in this Paragraph 2,
and (iii) Successor Landlord shall accept such Attornment and recognize
Tenant as the Successor Landlord's Tenant under the Lease. Upon such
attornment and recognition, the Lease shall continue in full force and
effect as, or as if it were, a direct lease between the Successor
Landlord and Tenant upon all of the then executory terms, conditions and
covenants(including any right under the lease on the part of Tenant to
extend the term of the lease) as are set forth in the Lease and which
shall be applicable after such attornment and recognition.
3. Tenant confirms that the lien or priority of the Lease shall at all
times continue to be subject and subordinate to (a) the lien, security
title and security interests of the Mortgage and (b) any additional
financing of the Building or portions thereof provided by Mortgagee and
the liens, security titles and security interests of the documents
evidencing and securing such additional financing, and to any increases
therein or supplements thereto, it being understood that such
subrogation shall not derogate any of Tenant's rights, or Landlord's
obligations, under said Lease.
4. Tenant certifies that there are no defaults on the part of the Landlord
under the Lease known to Tenant, that the Lease is a complete statement
of the agreement of the parties thereto with respect to the letting of
the Building, that the Lease is in full force and effect and that all
conditions to the effectiveness or continuing effectiveness thereof
required to be satisfied at the date hereof have been satisfied.
5. Tenant will notify Mortgagee of any default of the Landlord under the
Lease which would entitle Tenant to cancel the Lease or abate the rent
or additional rent payable thereunder, and agrees that notwithstanding
any provisions of the Lease, no notice of cancellation thereof shall be
effective unless Mortgagee has received the notice aforesaid and has
failed within thirty (30) days of the date thereof to cure the default,
or if the default cannot be cured within thirty (30) days, has failed to
commence and to diligently prosecute the curing of the default which
gave rise to such right of cancellation or abatement. All such notices
shall be in writing and shall be deemed to have been given when
deposited in the United States mail, registered, postage prepaid,
addressed as follows:
______________________________
______________________________
______________________________
______________________________
6. The provisions of this Agreement shall be self-operative and no further
instrument shall be necessary to effect the aforementioned attornment,
recognition and subordination. Nevertheless, in confirmation thereof,
Tenant shall execute and deliver an appropriate certificate to confirm
such attornment, recognition and subordination upon the request of
Mortgagee or any other party to whom Tenant herein agrees to attorn.
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<PAGE> 26
EXHIBIT F
7. This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
WITNESS:
____________________ BY:____________________
(TITLE)
(MORTGAGEE)
WITNESS: XEROX CORPORATION
____________________ BY:____________________
(TITLE)
(TENANT)
3
<PAGE> 27
EXHIBIT - G
MEMORANDUM OF LEASE
THIS MEMORANDUM OF LEASE dated, for reference purposes, the __________ day of
____________________, 19 __________, between _____________________ a ________
corporation/partnership, having its principal office at______________,
__________________________, __________________, hereinafter referred to as
"Landlord"), and Xerox Corporation, a New York corporation, having its principal
office at 800 Long Ridge Road, Stamford, Connecticut 06904 (hereinafter referred
to as "Tenant").
W I T N E S S E T H:
Landlord, in consideration of the rents, terms, agreements and conditions
contained in that certain lease between Landlord and Tenant dated the
__________ day of ____________________ 19 __________, leased to Tenant and
Tenant leased from landlord, the premises known as __________ and located in a
building (the "Building') located at _____________,__________ as more
particularly described in Exhibit A, attached hereto and made a part hereof,
under the following terms and conditions:
1. The term of the lease is for____________ years, commencing __________
_____, 19 _____ and ending on __________ _____, 19_____
2. Tenant has a right to extend the term of the lease for __________
(_____) successive additional terms of __________ (_____) years each.
3. Tenant has the option to expand the size of the premises leased from
Landlord by_________________ square feet.
4. Tenant has the option to downsize and return to Landlord,
approximately __________ square feet of space.
5. Tenant has the right of first refusal to purchase the building from
Landlord.
6. Tenant has the first right to lease additional space in the building.
7. Tenant has the right to terminate the lease on ___________________
(________) days prior written notice to Landlord.
8. Tenant has the right and option to participate in the net income of
the building in the net proceeds of refinancing, and in the net
proceeds of sale of the building.
This Memorandum of Lease is not a complete summary of the lease. Provisions in
this Memorandum shall not be used in interpreting the provisions of the lease.
In the event of conflict between this Memorandum and the lease, the lease shall
control.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Memorandum of
Lease as of the day and year first above written.
BY:_________________________
(Title)
(Landlord)
XEROX CORPORATION
BY:_________________________
(Title)
(Tenant)
<PAGE> 28
EXHIBIT - G
STATE OF____________________
COUNTY OF___________________ SS:
On this ___________ day of ______________, 19__, before me personally
appeared, ______________________________, to me personally known, who, being by
me duly sworn did say that he is the___________________________________
of______________________________ and that the foregoing instrument was signed
in behalf of said corporation by authority of its board of directors and said
____________________ acknowledged said instrument to be the free act and deed
of said corporation.
______________________________
NOTARY PUBLIC
MY COMMISSION EXPIRES:__________
STATE OF____________________
SS:
COUNTY OF___________________
On this___________ day of________________, 19__, before me personally
appeared,______________________________, to me personally known, who, being by
me duly sworn did say that he is the ____________________ of Xerox Corporation
and that the foregoing instrument was signed in behalf of said corporation by
authority of its board of directors and said ________________ acknowledged said
instrument to be the free act and deed of said corporation.
______________________________
NOTARY PUBLIC
MY COMMISSION EXPIRES:__________
<PAGE> 29
EXHIBIT - G
EXHIBIT A
LEGAL DESCRIPTION
<PAGE> 30
This Rider is made a part of Lease dated December 20, 1991 for space at 6333
Greenwich Dr., Ste. 120, San Diego, California and in the event of conflict
between this Rider and the printed portion of said Lease, this Rider shall
prevail.
OPERATING EXPENSES, REAL ESTATE TAXES AND UTILITY COSTS ESCALATION RIDER
Landlord and Tenant each acknowledge that the rent specified in Paragraph 3
does not provide for changes in Operating Expenses, Real Estate Taxes, and
Utility Costs which may hereafter pertain to the Demised Premises or the
Building. Therefore, in addition to the rent (but not as additional rent)
Tenant shall pay Landlord its pro rata share of reasonable and customary
Operating Expenses, Real Estate Taxes and Utility Costs as hereinafter
provided:
(a) The term "OPERATING EXPENSES" shall include the following annual
expenses of Landlord for the operation and maintenance of the Complex
of which the Demised Premises are a part:
o janitorial expenses;
o premiums for fire and casualty insurance required to be carried by
Landlord pursuant to this Lease;
o cost of all maintenance and service agreements;
o cost of supplies and materials used in the operation and
maintenance of the Complex;
o employees directly and exclusively involved in the operation
and maintenance of the Building and the Complex;
o all costs and expenses (other than those of a capital nature) of
maintaining and repairing, paving and restriping, curbs,
walkways, landscaping and the common areas of the Building,
except in the event that during the last two (2) years of the
term or extended term, as the case may be, Landlord elects to
perform a single maintenance and repair project which causes
Operating Expenses to be increased during such year by more than
five percent (5%) over the previous years Operating Expenses,
then in such event Tenant's obligation to reimburse Landlord for
Operating Expenses during the year in which Landlord performed
such single maintenance and repair project shall be limited to a
maximum of five percent (5%) over the previous years costs for
Operating Expenses.
o normal maintenance of mechanical and electrical equipment,
including heating, ventilating, and air conditioning equipment
but excluding capital expenditures;
All expenses to be taken into account pursuant to this paragraph shall
be "net" only, and for such purpose shall be deemed reduced by the
amount of reimbursement, recoupment, payment, discount or allowance
received or receivable by Landlord in connection with such expenses.
The term "OPERATING EXPENSES" shall exclude the following annual expenses of
Landlord:
o the cost of any work or service performed or rendered exclusively
for any tenant, including Tenant, and the cost of making any
installation or alteration to the Building and Complex which under
generally accepted accounting principles are properly classified
as capital expenditures;
o premiums for public liability insurance;
o brokerage commissions or other fees and other costs incurred in
procuring tenants;
o management fees and administrative wages and salaries, including
executives and officers of Landlord;
o depreciation, franchise or income taxes imposed on Landlord;
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<PAGE> 31
o advertising expenses;
o the cost of painting, repainting, decorating and redecorating for
any tenant, including Tenant, of the Building and the Complex;
o maintenance and repair of capital items not a part of the Building;
o the cost of installing, operating and maintaining any specialty
services, such as an observatory, broadcasting and/or
telecommunication facility, data processing facility, luncheon
club, retail store, sundries shop, newsstand, concession, athletic
or recreational club;
o the cost of correcting defects in the construction of the Premises,
Building and the Complex;
o the cost of any work or service performed for any tenant of the
Building and Complex (other than Tenant) to a greater extent
or in a materially more favorable manner than that furnished
generally to the tenants and other occupants;
o the cost of any items for which Landlord is reimbursed by
insurance, condemnation, refund, rebate or otherwise;
o the cost of any addition or additions to the Building or the
Complex after the Commencement Date of this Lease;
o the cost of any repairs made by Landlord pursuant to the Damage or
Condemnation paragraphs in the Lease;
o interest and amortization on any mortgage or deed of trust and any
rent paid on any ground or underlying lease;
o any costs representing an amount paid to an entity related to
Landlord which is in excess of the amount which would have
been paid in the absence of such relationship;
o payments for rented equipment, the cost of which equipment would
constitute a capital expenditure if the equipment were purchased;
o any expenses for repairs or maintenance which are covered by
warranties, guarantees and service contracts (excluding any
mandatory deductible);
o legal expenses arising out of the construction, operation, use,
occupation or maintenance of the Building or Land or the
enforcement of the provisions of any agreements affecting the Land
or Building, including without limitation this Lease;
o increases in premiums for insurance required to be carried by
Landlord pursuant to this Lease when such increase is
caused by use of the Building by Landlord or any other tenant of
Landlord which is hazardous on account of fire or otherwise, or
premiums for any insurance carried by Landlord which is not
required to be carried pursuant to this Lease.
o new items of maintenance or services for all tenants of the
Building not included in the Operating Expense Base Year Statement,
unless the Operating Expense Base Year Statement is revised to
include such new items of maintenance or services.
(b) The term "REAL ESTATE TAXES" shall mean the annual ad valorem taxes
levied against the Building and Complex of which the Demised Premises
are a part, by any authority having the direct power so to tax,
including any city, county, state, or federal government, or any school,
agricultural, transportation or environmental control agency, lighting,
drainage or other improvement district thereof. All expenses to be
taken into account pursuant to this paragraph shall be "net' only, and
for such purpose shall be deemed reduced by the amount of reimbursement,
recoupment, payment, discount or allowance received or receivable by
Landlord in connection with such expenses. The term "Real Estate Taxes"
shall not include any assessment for local improvements, license fee,
penalty, inheritance or estate tax, any tax on Landlord's right to rent
or other income from the Complex or on
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<PAGE> 32
Landlord's business of leasing the Building, any penalty for delinquent
payment of taxes, increases in taxes arising from additions or
improvements to the Building or Complex (including leasehold improvements
made by or for other tenants made subsequent to the Building having been
assessed as a fully completed building), and increases in taxes due to a
reassessment of the Building and/or Complex due to Landlord's sale
thereof. In the event the Building and/or land or Complex is reassessed
(which term includes the current assessment being increased without
reassessment) and such reassessment is greater than the prior assessment,
then Landlord shall (a) promptly notify Tenant thereof, and (b) if in
Tenant's reasonable determination such reassessment is excessive and
Tenant so notifies Landlord, Landlord shall diligently protest such
reassessment. In the event Landlord fails so to notify Tenant, or to
contest the reassessment (as the case may be), then Tenant's obligation
to pay its share of Real Estate Taxes shall be computed by multiplying
the prior assessment by the then current tax rate.
(c) The term "UTILITY COSTS" shall include the following annual expenses of
Landlord for the operation and maintenance of the Building and the
Complex. Utility charges for water, electricity, sewerage, and gas, all
accrued and based on a calendar year operation. All expenses to be taken
into account pursuant to this paragraph shall be "net" only, and for such
purpose shall be deemed reduced by the amount of reimbursement,
recoupment, payment, discount or allowance received or receivable by
Landlord in connection with such expenses, whether from utilities or any
tenant in the Building.
(d) (1) The Base Year for Operating Expenses and Utility Costs shall
be the calendar year 1992. In the event the Building was not
one hundred percent (100%) occupied at the commencement of the
Base Year, then for purposes of establishing the Base Year
costs, the actual Operating Expenses and Utility Costs shall
be adjusted upward as if the Building were one hundred percent
(100%) occupied.
(2) The Base Year for "Real Estate Taxes" shall be the later of
(a) the annual tax levy year next following that in which the
Commencement Date occurs, and (b) the annual tax levy year
next following the date on which the Building was fully
assessed as a fully completed building (including all tenant
leasehold improvements).
(3) Upon the request of either Landlord or Tenant, Landlord and
Tenant agree to convert the Base Year and each succeeding
twelve (12) month period to a calendar year basis, the
computation in making such a conversion to be acceptable to
both Landlord and Tenant.
(e) Initially, Tenant's pro rata share shall be 6.77% calculated by
dividing the number of rentable square feet demised to Tenant (7,042
rentable square feet) by the number of rentable square feet in the
Building (103,977 rentable square feet). Tenant's pro rata share
shall be adjusted during the term of said Lease and any renewals
thereof by any increases or decreases in the square feet demised to
Tenant and by any increases in the square feet in the Building.
(f) Within ninety (90) days after the end of the Base Year and each
anniversary thereof, the Landlord shall deliver to Tenant in Stamford,
Connecticut (Attention: RE/GSD Lease Administration), a statement
setting forth the amounts of Operating Expenses, Real Estate Taxes,
and Utility Costs for the Base Year, and the amounts relative to the
then current year, together with an invoice showing the amounts of
increase or decrease for reimbursement. Copies of the accounting
statements used in the calculations and copies of receipted real
estate tax bills, shall be furnished with the statements and invoice
for reimbursement, and upon request by Tenant, Landlord shall submit
additional back-up data (including copies of receipted bills) to
permit Tenant to review such statement. Tenant or any authorized
agent of Tenant shall have the right, upon prior written notice, to
audit Landlord's books at any time with respect to the Base Year or
any subsequent year. Upon request by Tenant, Landlord shall submit a
statement signed by an officer (or partner, as the case may be) of
Landlord, setting forth the percentage of occupancy of the Building at
the Commencement of the Base Year.
(g) In the event the Complex contains buildings in addition to the
Building or land in excess of that required to support the Building,
parking and common areas for the Building, and Landlord is unable to
obtain a separate tax assessment of the Building, parking and common
areas, the Landlord shall make a reasonable allocation for the
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<PAGE> 33
the entire Complex. Landlord shall also make such a reasonable
allocation of any Operating Expenses and Utilities Costs attributable to
the entire Complex. In both cases, Landlord shall submit to Tenant
sufficient back-up data as to the basis for such allocation to permit
Tenant to determine the reasonableness of the allocation. In the event
that Tenant disputes the reasonableness of either such allocation,
Landlord and Tenant agree to submit the determination of such allocation
to arbitration in accordance with the rules of the American Arbitration
Association.
(h) Tenant shall pay such reimbursement due, if any, within thirty (30) days
from receiving the remove statement, the required documentation and the
requested documentation. If Tenant shall dispute, in good faith, any
reimbursement item or other sum (other than Rent) claimed by Landlord
hereunder and Tenant shall give Landlord written notice specifying in
reasonable detail the basis for its dispute, Tenant may withhold payment
of the particular amount in dispute and shall not be deemed to be in
default hereunder by reason of withholding such amount unless and until
such dispute is determined adversely to Tenant and Tenant shall fail to
pay the withheld amount, or the portion thereof as shall be determined to
be payable to Landlord, within fifteen (15) days of the resolution of
such dispute. Tenant and Landlord shall proceed diligently to resolve
any such dispute by agreement or arbitration in accordance with the rules
of the American Arbitration Association.
(i) Tenant shall have the right but not the obligation to pay any
reimbursement due Landlord, as determined above, in twelve (12) equal
monthly payments at the same time and in the same manner as rent.
(j) If the first or final billing period during the term or any additional
term of this Lease for which reimbursement may be due, shall contain less
than twelve (12) months, the reimbursement under this Rider shall be
prorated.
(k) Landlord and Tenant stipulate and agree that of the rent set forth in
Paragraph 3 hereof, $0.55 per rentable square foot per month has been
allocated to the estimated cost of Operating Expenses, Real Estate Taxes
and Utility Costs. In the event the actual Operating Expenses, Real
Estate Taxes and Utility Costs per square foot for the Building or
Complex, as the case may be, for the Base Year or any subsequent year are
less than $0.55 per rentable square foot per month, then the Landlord
shall pay Tenant the difference multiplied by the number of square feet
then leased to Tenant. Landlord shall pay such amount to Tenant within
thirty (30) days from sending the above statement, the required
documentation and the requested documentation.
(1) Tenant's obligation to reimburse Landlord for monies, under this Rider,
shall be limited to a maximum of $0.66 per rentable square foot per month
of space under Lease to Tenant during any one year.
(m) Notwithstanding the foregoing provisions of this Rider, it is understood
and agreed that in the event Landlord fails to bill Tenant for any
amounts which may be due hereunder within four (4) months after the Base
Year or any anniversary thereof, then Tenant shall have no liability or
obligation to make such payment.
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<PAGE> 34
AMENDMENT TO LEASE
This Amendment To Lease ("Amendment") is made and entered into this first day
of June, 1994 by and among Governor Park Associates, a California limited
partnership ("Landlord"), and XEROX Corporation, New York Corporation,
("Tenant"), with regard to that certain lease dated December 20, 1991
("Lease"), and the Rider to the Lease also dated December 20, 1991 for the
premises known as suite 120 of 6333 Greenwich Drive San Diego California.
Landlord and Tenant mutually agree to amend the Lease and Rider as follows:
SECTION 1, PARAGRAPH 2 shall be amended to read:....... "consisting of 7,042
rentable square feet (6,350 usable square feet) on the first floor and 4,152
rentable square feet (3,695 usable square feet) on the-second floor of building
1 and known as suite 120 and suite 250 respectively.
SECTION 2 shall be amended to read: .... ("Commencement Date"), and to end on
the 31st day of January, 2000.
SECTION 3 shall be amended to read: The initial monthly base rent for the
extended term shall be fully serviced and shall be in the amount of $13,096.68
during the first year of the extended lease term. The rent shall be paid in
advance on or before the first day of each month during the term hereof;
provided however, that if the term of this lease should commence on the date
other than the first day of the month, the first and last month's rent shall be
prorated. Beginning February 1, 1997 and annually thereafter, the rent shall
be increased by 4%, effective the first day of February.
SECTION 5 shall be amended to read: Landlord's Contractor shall construct
Tenant's interior improvements in accordance with plans and specifications
approved by the Tenant.
SECTION 10 (c) "SERVICES" shall be amended to read "All utility services. In
addition, Landlord shall furnish, at its sole cost and expense, all necessary
utilities including electricity to the common areas of the premises, including
the walkways, driveways and parking areas. Tenant shall pay costs of
separately metered electricity consumed within its suite.
SECTION 16 "LEASE EXTENSION" shall be deleted and amended to read:
LEASE EXTENSION
If this Lease shall not have been terminated pursuant to any provisions hereof,
then Tenant may, at Tenant's option, extend the term of this Lease for one (1)
successive additional term of
<PAGE> 35
XEROX
Amendment to Lease
June 1, 1994
page two
three (3) years, commencing on the expiration of the original term, or the
immediately preceding additional term as the case may be. Tenant may exercise
such option by giving Landlord written notice at least six (6) months prior to
the expiration of the original term, as the case may be and in the event Tenant
has elected to exercise its option to lease additional space pursuant to
Paragraph 25, the option provided for herein shall include such additional
space. Upon the giving by Tenant to Landlord of such written notice the
compliance by Tenant with the foregoing provisions of this Paragraph 16, this
Lease shall be deemed to be automatically extended upon all the covenants,
agreements, terms provisions and conditions, set forth in this Lease, except
rental which:
(a) During the extension option shall be limited to the base rent then in
effect in the last year of the initial extended Lease term, and
(b) Upon execution of this extension option, Landlord shall repaint the
Demised premises with two (2) coats of prime quality paint; repainting shall be
performed in a workmanlike manner with a minimum of interference with Tenant's
normal business operations and replace all carpeting, with quality comparable
to the initial installation, in the Demised premises and in any adjoining
lobby/reception area, and
except for such terms and conditions as shall be applicable during any
additional term in connection with this Paragraph 16. If Tenant fails or omits
to so give to Landlord the first written notice referred to above, it shall be
deemed, without further notice and without further agreement between the
parties hereto, that Tenant elected not to exercise the options granted Tenant
pursuant to this Paragraph 16, to extend the term of this lease for additional
periods.
The term "month" as used in this paragraph shall mean (a) if the Expiration
Date is the last day of a calendar month, a calendar month, or (b) if the
Expiration Date is not the last day of a calendar month, the period between the
Expiration Date and the date in the preceding month which is one (1) day after
the date in the month of the Expiration Date, e.g., if the Expiration Date
falls on May 19, one (1) "month" prior thereto would be April 20 and two (2)
"months" prior thereto would be March 20.
<PAGE> 36
XEROX
Amendment to Lease
June 1, 1994
page three
In the event this Lease is extended pursuant to the terms of this Paragraph 16,
then the BASE YEAR OR EXPENSE STOP that shall be used during any such extended
term shall be the amount of Operating Expenses, Real Estate Taxes and Utility
Costs required to be paid by Tenant pursuant to the terms of the Rider for the
twelve (12) month period immediately preceding the beginning of such extended
term (or the immediately preceding calendar year of the operating expense
payment period has been converted to a calendar year).
SECTION 31 "TERMINATION" shall be amended to read "Landlord hereby grants to
Tenant the right to terminate this lease at any time after January 31, 1998
upon one hundred and eighty (180) days prior written notice to Landlord. In
the event Tenant elects to terminate the lease as herein provided, Tenant
shall pay to Landlord an amount equal to thirty-five percent (35%) of the
annual rental set forth in paragraph 3 hereof (as it may have been amended by
Paragraphs 16, 25 and 26 hereof) from the date of termination through the
balance of the unexpired term of the lease. Such payment shall be made on or
before the date such termination becomes effective.
SECTION 34 is amended to read "Landlord and Tenant acknowledge that Terrence
McGrath of COMCORE-Colliers International represents the Tenant in this lease
transaction and Landlord shall pay the brokerage commission pursuant to a
separate agreement. Landlord hereby indemnifies Tenant against claims of any
Broker arising from this lease transaction.
THE RIDER TO THE LEASE DATED DECEMBER 20, 1991 AND MADE A PART THEREOF SHALL
HEREBY BE AMENDED AS FOLLOWS:
The term "Utility Costs" as utilized throughout this Rider is mutually
understood to mean common area utility costs as distinguished from separately
metered utilities within the Tenant's suite.
SECTION (d) (1) OF THE RIDER shall be amended to read "The Base Year for
Operating Expenses and Utility Costs shall be the Calendar year 1994." ......
<PAGE> 37
XEROX
Amendment to Lease
June 1, 1994
page four
SECTION (e) OF THE RIDER shall be amended to read "Initially, Tenant's pro rata
share shall be 10.72% calculated by dividing the number of rentable square feet
demised to Tenant (11,194 rentable square feet) by the number of rentable
square feet in the complex (103,977 rentable square feet)" ....
SECTION (k) OF THE RIDER SHALL BE DELETED AND AMENDED TO READ, "Landlord and
Tenant stipulate and agree that of the rent set forth in Paragraph 3 hereof,
$0.325 per rentable square foot per month has been allocated to the estimated
cost of Operating Expenses, Real Estate Taxes and Common Area Utility Costs.
In the event the actual Operating Expenses, Real Estate Taxes, and Common Area
Utility Costs per Square foot for the Building or Complex, as the case may be,
for the Base Year or any subsequent year are less than $0.325 per rentable
square foot per month, then the Landlord shall pay Tenant the difference
multiplied by the number of square feet then leased to Tenant. Landlord shall
pay such amount to Tenant within thirty (30) days from sending the above
statement, the required documentation and the requested documentation.
SECTION (1) OF THE RIDER SHALL BE DELETED AND AMENDED TO READ, "Tenant's
obligation to reimburse Landlord for monies, under this Rider, shall be limited
to a maximum of $0.50 per rentable square foot per month of space under Lease
to Tenant during any one year.
ALL OTHER TERMS AND CONDITIONS OF THE LEASE SHALL REMAIN IN FULL FORCE AND
EFFECT.
WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment To Lease
as of the day and year first above written.
GOVERNOR PARK ASSOCIATES XEROX CORPORATION
/s/ MICHAEL J. REIDY /s/ MARK A. FLAIM
- ------------------------ ----------------------
BY: MICHAEL J. REIDY BY: MARK A. FLAIM
ITS: MANAGING PARTNER MANAGER, REAL ESTATE
(LANDLORD) OPERATIONS WESTERN
UNITED STATES (TENANT)
<PAGE> 38
SECOND AMENDMENT TO OFFICE BUILDING LEASE
This Second Amendment dated January 31, 1995 will modify the office
building lease between Governor Park Plaza Associates, a California limited
partnership, as Landlord, and XEROX Corporation, a New York Corporation, as
Tenant, dated December 20, 1991, and amended June 1, 1994. In the event of
conflict between the terms and conditions of the Lease Agreement and this
Second Amendment, the terms and conditions of this Second Amendment shall
control.
SECTION 1, PARAGRAPH 2 shall be amended to read:..... "consisting of 14,727
rentable square feet (13,106 usable square feet) on the first floor of building
1 and known as suite 100 and 120."
SECTION 3 shall be amended to read: "The initial monthly base rent for the
extended term shall be fully serviced (except as provided in the Amendment to
Lease, Section 10) and shall be in the amount of $17,230.59 during the first
year of the extended lease term. The rent shall be paid in advance on or
before the first day of each month during the term hereof; provided however,
that if the term of this lease should commence on the date other than the first
day of the month, the first and last month's rent shall be prorated. Beginning
February 1, 1997 and annually thereafter, the rent shall be increased by 4%,
effective the first day of February."
The terms of this Second Amendment will become effective on March 1, 1995,
which is Tenant's estimated occupancy date of suite 100. On that same date, per
the terms of this Second Amendment as stated in Section 1 above, Tenant's lease
of the 4,152 square feet known as suite 240 will become void.
Landlord agrees to build-out suite 100 to mutually agreeable specifications.
Tenant agrees to pay for $3,169.50 of the costs to reconfigure suite 100.
ALL OTHER TERMS AND CONDITIONS OF THE LEASE SHALL REMAIN IN FULL FORCE AND
EFFECT.
WITNESS WHEREOF, Landlord and Tenant have duly executed this Second Amendment
to Lease as of the day and year first above written.
DOCUMENT SCIENCES CORPORATION,
GOVERNOR PARK ASSOCIATES A XEROX COMPANY
/s/ MICHAEL J. REIDY /s/ TONY N. DOMIT
- -------------------------- ------------------------------
BY: MICHAEL J. REIDY BY: TONY N. DOMIT
ITS: MANAGING PARTNER ITS: CEO AND PRESIDENT
(LANDLORD)
<PAGE> 39
ASSIGNMENT OF LEASE
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Xerox Corporation, a New
York corporation having its office at 800 Long Ridge Road, Stamford,
Connecticut 06904 (hereinafter referred to as "Assignor"), for good and
valuable consideration, the receipt of which is hereby acknowledged, hereby
assigns, transfers and sets over unto Document Sciences Corporation, a
Delaware corporation having an office at Governor Park Plaza, Suite 120, 6333
Greenwich Drive, San Diego California 92122 (hereinafter referred to as
"Assignee"), all right, title and interest of the Assignor in and to a certain
Lease by and between Governor Park Plaza Associates, as Landlord, and Assignor,
as Tenant, dated December 20, 1991, and amended by an Amendment to Lease dated
June 4, 1994 and a Second Amendment to Office Building Lease dated January 31,
1995 (hereinafter referred to as "Lease"), covering a portion of certain
premises commonly known as Governor Park Plaza located at 6333 Greenwich Drive
in the City of San Diego, State of California 92122.
To have and to hold unto Assignee, its successors and assigns forever, for the
balance of the term mentioned in said Lease, subject only to the provisions
contained in said Lease.
And Assignee hereby assumes the performance of all of the terms, covenants, and
conditions of said Lease as and when the same shall be or become due and
payable, and will perform all of the terms, covenants and conditions of said
Lease, in all respects and with the same effect as though Assignee had executed
said Lease as the tenant originally named therein.
And Assignor shall not be relieved of liability under said Lease, except that
Assignor shall not have any liability to the extent it is due to, arises under
or in connection with or relates to any subsequent extensions, amendments or
modifications of said Lease, including but not limited to any such extension,
amendment or modification contemplated by Paragraphs 16, 25 and 28 of said
Lease.
And Assignee shall indemnify, defend, protect and hold Assignor harmless from
any and all claims, losses, costs, expenses (including reasonable attorney's
fees and costs) or liabilities arising as a consequence of Assignee's breach of
the obligations assumed by Assignee with respect to the Lease. The provisions
of this paragraph shall survive the expiration or termination of the Lease and
the mutual execution and delivery of this Assignment.
Assignor and Assignee represent and warrant to the other that the transaction
contemplated herein was not submitted by Assignor or Assignee to, or to
Assignor or Assignee by, any real estate broker or finder and each party agrees
to indemnify and save, defend and hold harmless the other party from claims of
<PAGE> 40
brokers or finders for commissions or other compensation in connection with
this transaction resulting from a breach of such representation and warranty.
The effective date of this Assignment shall be the 11th day of
September, 1996.
IN WITNESS WHEREOF, the Assignor and the Assignee have executed this instrument
as of this 11th day of September, 1996.
ASSIGNOR: ASSIGNEE:
XEROX CORPORATION DOCUMENT SCIENCES CORPORATION
By: /s/ Colin J. O'Brien By: /s/ Tony N. Domit
-------------------------------- ----------------------------------
Title: Vice President Title: President and Chief
Executive Officer
Witness/Attest: Witness/Attest:
/s/ Roy Larson /s/ Barbara E. Amantea
- ----------------------------------- -------------------------------------
CONSENT OF ASSIGNMENT
Governor Plaza Park Associates, as Landlord, and Xerox Corporation, as Tenant,
entered into a certain Lease agreement dated December 20, 1991, and amended by
an Amendment to Lease dated June 4, 1994 and a Second Amendment to Office
Building Lease dated January 31, 1995 (hereinafter referred to as "Lease"),
covering a portion of certain premises commonly known as Governor Park Plaza
located at 6333 Greenwich Drive in the City of San Diego, State of California
92122. Pursuant to paragraph 15 of said Lease, Xerox Corporation has the right
to assign said Lease with Landlord's consent which consent shall not be
unreasonably withheld or delayed. Governor Plaza Park Associates hereby
consents to the assignment of said Lease (the "Assignment") by Xerox
Corporation to Document Sciences Corporation, a Delaware corporation
("Assignee"); provided, nevertheless, that nothing herein shall as between
Landlord under said Lease and Xerox Corporation, as Assignor, be deemed to
release Assignor, of and from any obligations under said Lease heretofore or
concurrently herewith assumed by Assignee, except that Assignor shall not have
any liability to the extent it is due to, arises under or in connection with or
relates to any subsequent extensions, amendments or modifications of said
Lease, including but not limited to any such extension, amendment or
modification contemplated by Paragraphs 16, 25, and 28 of said Lease.
GOVERNOR PLAZA PARK ASSOCIATES
By: /s/ Michael J. Reidy
----------------------------------
Title: Managing Partner
Witness/Attest:
/s/ Brandon Crocker
---------------------------------------
<PAGE> 41
Dated this 11th day of September, 1996.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated July
12, 1996, in Amendment No. 4 to the Registration Statement (Form S-1) and the
related Prospectus of Document Sciences Corporation for the registration of
2,645,000 shares of its common stock.
ERNST & YOUNG LLP
San Diego, California
September 13, 1996
