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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-20981
DOCUMENT SCIENCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0485994
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6333 GREENWICH DRIVE, SAN DIEGO, CALIFORNIA 92122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 625-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 11, 1997, there were 10,730,590 shares of the Registrant's
Common Stock outstanding and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on March 11, 1997) was approximately
$14,428,643. Shares of Common Stock held by each executive officer and director
and by each entity that owns 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1996 are incorporated by reference in Part II of
this Form 10-K to the extent stated herein. Also, certain sections of the
Registrant's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on April 25, 1997 are incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
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PART I
ITEM 1. BUSINESS.
This item contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in "Certain
Additional Business Risks" below, the section of Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations
entitled "Factors Affecting Future Results" and elsewhere in this Report.
Document Sciences Corporation (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 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 500 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.
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.
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. 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.
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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
AFPDS, Adobe PostScript, HP PCLV, Xerox Escape Sequences (XES), Xerox Interpress
(DocuTech) and generic line printers. 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 were integrated into a
single Windows application, called CompuSeries II. Recently, the Company
announced it will OEM JetForm(R) Corporation's JetForm Design product as well as
the JetForm production print drivers for Metacode, DocuPrint and AFP printers,
and will integrate it with 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. They consist 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.
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. 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 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. 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. CompuView is
a Windows application for viewing CCIF files. The view of the document is
virtually identical to the printed document. CompuView may
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also be integrated with third party document retrieval systems. The Company
introduced the DVS in October 1995.
The Company is considering 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 online
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."
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 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 offers advanced and specialized customer
education in response to the unique needs of certain customers. The Company
believes that expanded Professional Services enables 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 and support organizations employed a staff of 43 as of
December 31, 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, Chicago, Cleveland, Dallas, Minneapolis, New
York City, Pittsburgh, Richmond, Raleigh, Sacramento, Orange County, CA, 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, consulting and training
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 export transactions
with Xerox affiliates were $1.3 million, $3.1 million and $2.9 million in 1994,
1995 and 1996, respectively. The sales, marketing, consulting and customer
support organization employed a staff of 79 as of December 31, 1996.
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.
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, Data Retrieval and
JetForm Corporation. These relation-
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ships provide sales leads for the Company's products and have extended the
Company's sales coverage and networking capabilities.
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 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.
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 $1.0 million in 1994, $1.7
million in 1995 and $2.3 million in 1996. These amounts do not include product
support activities. The development organization has grown from 15 people in
1994, to 22 in 1995 and 32 in 1996. The Company employs independent contractors
as needed to supplement the permanent development staff.
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 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
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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.
PATENTS AND 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 agreements.
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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 December 31, 1996 the Company had 126 employees including 79 in
sales, marketing, consulting and customer support, 32 in research and
development, and 15 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.
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition and operating results may be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
Limited Operating History. The Company was incorporated in October 1991 as
a wholly-owned subsidiary of Xerox, and Xerox currently owns approximately 63%
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
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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 1996, 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.
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 "Expansion of Sales and
Distribution Channels" below, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Control by Xerox. Xerox owns approximately 63% of the outstanding shares
of Common Stock of the Company. 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 "Reliance on Relationships with Xerox; Lack of Independent Sales
and Marketing Channels" below.
Reliance on Relationships with Xerox; Lack of Independent Sales and
Marketing Channels. 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. The Company relies on these relationships and
agreements for a significant portion of its total revenues. In 1994, 1995 and
1996, total revenues derived from relationships with Xerox and affiliates of
Xerox accounted for approximately $1.9 million, $3.9 million and $4.2 million,
representing 27%, 37% and 28% 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 $1.4 million in 1994, 1995 and 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
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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. Though the Company 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 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," and "Expansion of Sales and Distribution
Channels" below.
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. In addition, Xerox has on-going internal development activities which
could in the future lead to products that compete with the Company.
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."
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 began shipping Document Viewing Service (DVS), an optional
on-line viewer for electronic documents produced by document automation
application in October 1995. Document Library Services (DLS), an optional
document management tool, was released for general availability in September
1996. Prior to September 1996, DLS was in a limited release, with certain
configurations still in beta testing. Revenues for DVS were $1.26 million in
1996. Revenues for DLS were $1.0 million in 1996. Revenues for DVS and DLS were
insignificant in 1995.
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
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<PAGE> 10
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.
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. 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 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.
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."
Product Concentration. The Company derived 73.9% of its initial license
revenues from licenses of CompuSet and related CompuSet option products in 1996.
Initial license fees from DVS and DLS comprised 14.7% and 11.4%, respectively,
in 1996. 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."
Industry Concentration. Licenses to end users in the insurance and
commercial print services industries for 1994, 1995 and 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 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
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<PAGE> 11
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."
International Operations. Revenues from export sales, including sales
through its foreign subsidiary accounted for 26%, 42% and 34% of the Company's
total revenues in 1994, 1995 and 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 $2.9 million in 1994, 1995
and the 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 "Control by Xerox" above and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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 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."
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<PAGE> 12
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.
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 "Control
by Xerox" above.
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.
ITEM 2. PROPERTIES.
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.
The Company recently signed an amendment to the lease of facilities in San
Diego, which expands the square footage to 33,102 and extends the expiration
date to February 28, 2002, on essentially the same terms. In addition, the
Company's subsidiary in France occupies approximately 3,500
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<PAGE> 13
square feet of office space with a renewable lease expiring in February 1999.
Sales representatives and field technical support personnel operate from their
homes.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party, nor is its property subject, to any material
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1996.
Executive Officers of the Company
The executive officers of the Company and their ages, as of March 1, 1997
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ------------------------------------------------
<S> <C> <C>
Tony N. Domit...................... 59 President, Chief Executive Office and Director
Barbara E. Amantea................. 52 Vice President, Chief Financial Officer,
Treasurer and Secretary
Thomas Anthony..................... 61 Vice President, Sales
Peter L. Bradshaw.................. 41 Vice President, Development
Daniel J. Fregeau.................. 40 Vice President, Marketing
</TABLE>
Tony N. Domit, a Company founder, has served as President, Chief Executive
Officer and Director 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 that 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. Mr. Domit is a director of DataWorks Corporation.
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, 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.
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
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<PAGE> 14
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.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is incorporated by reference to the
inside back cover of the Company's 1996 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is incorporated by reference to page
1 of the Company's 1996 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information, this annual report on Form 10-K
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed herein as well as those discussed in "Certain
Additional Business Risks" on pages 7 through 12. Readers are cautioned not to
place undue reliance on these forward-looking statements, and the Company
undertakes no obligation to publicly release the results of any revision to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
Document Sciences Corporation develops, markets and supports a family of
document automation software and services used in high volume electronic
publishing applications. The Company was incorporated in Delaware in October
1991 as a wholly-owned subsidiary of Xerox Corporation ("Xerox"), and following
the Company's initial public offering of stock in September 1996, Xerox
ownership was reduced to approximately 63%.
INITIAL PUBLIC OFFERING
In September 1996, the Company completed an initial public offering ("IPO")
in which 2,645,000 shares of its Common Stock were sold, including 462,500
shares which were sold by certain selling stockholders, at $12.00 per share. The
IPO generated net proceeds to the Company of approximately $23.33 million.
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<PAGE> 15
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Revenues
Total revenues were $15.3 million, $10.5 million and $7.2 million in 1996,
1995 and 1994, respectively, representing increases of 46% from 1995 to 1996 and
47% from 1994 to 1995. The Company's revenues are divided into three categories
based upon the sources from which they are derived: 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.
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.
The growth of total revenue in each year was due primarily to increased
numbers of initial software license customers and growth in services and other
revenue, and to the expansion of the Company's sales force and product
consultants.
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. Revenues from export sales and sales through the Company's foreign
subsidiary were $5.2 million, $4.4 million and $1.9 million in 1996, 1995 and
1994, respectively, representing increases of 18% from 1995 to 1996 and 132%
from 1994 to 1995. The growth in export sales from 1994 to 1995 was due
primarily to expansion of the value added reseller channel in Europe. The growth
in export sales from 1995 to 1996 was the result of new customers licensing the
Company's products. Revenue from export sales were 34%, 42% and 26% of total
revenue for the 1996, 1995 and 1994, respectively. The increase in export sales
as a percentage of total revenue in 1995 relative to 1994 was the result of
establishing a subsidiary in Europe to focus on serving the European market. In
1996, export revenue declined as a percentage of total revenue principally
because of reduced sales in Australia and Canada.
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 $1.4 million, $752,000 and
$490,400 for 1996, 1995 and 1994, respectively. These commissions were 9% of
total revenue in 1996 and 7% of total revenue in 1995 and 1994. Failure to
continue to receive such commissions would have a material adverse effect on the
Company's business, operating results and financial condition.
The Company has entered into distributorship agreements with various Xerox
foreign affiliates to remarket the Company's products internationally. The
Company's revenues from such distributorship agreements relating to the
licensing, maintenance and support of the Company's products were $2.9 million,
$3.1 million and $1.3 million in 1996, 1995 and 1994, respectively. The decrease
in revenues from Xerox foreign affiliates in 1996 relative to 1995 was the
result of reduced sales by affiliates in Australia and Canada. Revenues from
affiliates in Europe increased 3% from 1996 to 1995.
Initial license fees. Initial license fee revenues were $8.6 million, $6.3
million and $4.4 million in 1996, 1995 and 1994, respectively, representing
increases of 36% from 1995 to 1996 and 42% from 1994 to 1995. Initial license
revenues as a percentage of total revenue were 56%, 60% and 62%, in 1996, 1995
and 1994, respectively. The growth in initial license revenues in each period
was attributable to increases in both the size
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<PAGE> 16
of licensing transactions and the number of new customers. To a lesser extent,
growth in 1996 was the result of introduction of the Company's new products,
Document Viewing Services and Document Library Services.
Annual renewal license and support fees. Revenues from annual renewal
licenses were $2.4 million, $1.9 million and $1.5 million for 1996, 1995 and
1994, respectively, representing increases of 25% from 1995 to 1996 and 28% from
1994 to 1995. The increase in both periods was principally due to the increase
in the installed base of users of the Company's software products. As a
percentage of total revenue, annual renewal license and support fees were 16%,
18% and 21% in 1996, 1995 and 1994, respectively. The decrease of annual renewal
license and support fees as a percentage of total revenue resulted from the
greater rate of increase in revenue derived from initial license fees and
services and other.
Services and other. Revenues from services and other were $4.3 million,
$2.3 million and $1.2 million in 1996, 1995 and 1994, respectively, representing
increases of 90% from 1995 to 1996 and 86% from 1994 to 1995. The increase in
each period was principally due to the increased number of new customer licenses
of the Company's software generating increased demand for services as well as
the increasing scope of professional services offered, and the increase in
commissions from $752,000 to $1.4 million from 1995 to 1996 and $490,400 to
$752,000 from 1994 to 1995, respectively, under the strategic marketing alliance
for the sale of Xerox printer products. Revenues from services and other were
28%, 22% and 17% of total revenues in 1996, 1995 and 1994, respectively.
Cost of Revenues
Cost of initial license fees. Cost of initial license revenues were
$696,000, $351,000 and $274,000 in 1996, 1995 and 1994, respectively,
representing 8%, 6% and 6% of initial license revenues in 1996, 1995 and 1994,
respectively. Cost of initial licenses of software includes documentation,
reproduction costs, product packaging, packaging design, product media,
employment costs for training, installation and distribution personnel, the cost
of third party software and amortization of previously capitalized software
development costs. The increase of cost of initial licenses as a percentage of
initial license revenues was primarily the result of increased payments for
third party software integrated into the Company's Document Library software
products.
Cost of annual licenses renewals. Cost of annual licenses renewals
consists principally of the employment-related costs for the Company's technical
support staff, which performs technical software support services. Cost of
annual licenses renewal revenues was $497,000, $370,000 and $267,000 in 1996,
1995 and 1994, respectively, representing 21%, 19% and 18% of annual licenses
renewal revenues. These costs increased as a result of the increases in
personnel to support the expansion of the installed base of users of the
Company's software products and the increased product offerings of the Company.
Cost of services and other. Cost of services and other revenues were $1.1
million, $424,000 and $192,000 in 1996, 1995 and 1994, respectively,
representing 25%, 19% and 16% of services and other revenue. 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. The increase in cost of services and other revenues resulted
principally from the additional staffing to perform the Company's professional
services.
Research and development. Research and development expenses were $2.3
million, $1.7 million and $1 million in 1996, 1995 and 1994, respectively,
representing increases of 34% from 1995 to 1996 and 67% from 1994 to 1995.
Research and development expenses consist primarily of the employment-related
costs of personnel associated with developing new products, enhancing existing
products, testing software products and developing product documentation. As a
percentage of total revenue, research and development expenses were 15%, 17% and
15% in 1996, 1995 and 1994 respectively. The Company anticipates that it will
continue to direct significant resources to development and enhancement of
products.
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 capitalized
costs of software production are amortized using the greater of the amount
computed using
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<PAGE> 17
the ratio of current product revenues to estimated total product revenues or the
straight-line method over the remaining estimated economic lives of the
products. The Company capitalized software development expenses of $104,000,
$291,000 and $164,000 in 1996, 1995 and 1994, respectively. The increase in
capitalized software development expenses in 1995 compared to 1994, and
subsequent reduction from 1995 compared to 1996 was the result of the Company's
development of the Document Viewing Services product during 1995.
Selling, and marketing. Selling and marketing expenses were $7.4 million,
$4.4 million and $2.8 million in 1996, 1995 and 1994, respectively, representing
increases of 67% from 1995 to 1996 and 60% from 1994 to 1995. Selling and
marketing expenses consist primarily of salaries, commissions, marketing
programs and related costs for pre- and post-sales activity. The increase for
both periods was the result of adding personnel to increase geographic coverage
of the selling organization and, to a lesser extent, the higher commissions
associated with increased revenues. The increase in 1995 compared to 1996 was
also the result of adding employees to develop and deliver the professional
services. Selling and marketing expenses were 48%, 42% and 39% of total revenues
in 1996, 1995 and 1994, respectively.
General and administrative. General and administrative expenses consist of
employment-related costs for finance, administration and human resources, and
general corporate management and services. General and administrative expenses
were $1.7 million in 1996, $1.5 million in 1995 and $1.3 million in 1994
representing 11%, 14% and 18% of total revenue in 1996, 1995 and 1994,
respectively. The increase in general and administrative expenses in absolute
dollars was the result of growth in the finance and administrative operations to
support the growth of the Company. The decrease of these expenses as a
percentage of total revenues reflects the benefits of economies of scale.
Interest income (expense), net. Interest income (expense) is primarily
composed of interest income from cash and cash equivalents and short term
investments offset by financing charges related to equipment leases and other
debt. Interest income (expense), net was $318,000, $5,000 and $(9,000) in 1996,
1995 and 1994, respectively. The increase in dollar amount is primarily due to
higher cash balances resulting from the infusion of cash from the Company's
initial public offering of common stock completed in September 1996.
Provision for income taxes. Effective tax rates were approximately 31%,
38% and 47% in 1996, 1995 and 1994, respectively. These rates differ from the
federal statutory rate primarily due to recognition of a net operating loss
carryforward from the Company's foreign subsidiary. From its inception to
September 19, 1996, the Company's taxes were included in the consolidated tax
returns of Xerox Corporation. For reporting purposes, the Company recognized
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.
FACTORS THAT MAY AFFECT FUTURE 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 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, therefore, the loss or delay of individual
orders could have a significant impact on revenues and quarterly operating
results of the Company. 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 software products generally are shipped as orders are
received. As a result, initial license revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter. The timing
17
<PAGE> 18
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
In September 1996, the Company completed its IPO and received net proceeds
of approximately $23.33 million.
At December 31, 1996, the Company had $25.6 million in cash, cash
equivalents and short-term investments. The Company has an agreement with a bank
that provides a working capital line of credit at the bank's prime rate. The
agreement, which expires in July 1997, allows maximum borrowings of the lesser
of $2.5 million or 75% of eligible accounts receivable. At December 31, 1996,
the Company had no outstanding borrowings under this agreement.
Net cash provided by operating activities was $1.7 million, $1.2 million
and $1.3 million in 1996, 1995 and 1994, respectively. Net cash used in
investing activities was $23.8 million, $589,000 and $411,000 in 1996, 1995 and
1994, respectively. In 1996, net cash used in investing activities was primarily
used for purchase of short term investments and to a lesser extent, for the
purchase of fixed assets. In 1995 and 1994, net cash used in investing
activities was primarily used for the purchase of fixed assets. Net cash
provided by financing activities in 1996 was $23.3 million, primarily from net
proceeds from the initial public offering of the Company's common stock. In 1995
net cash provided by financing activities was $27,000, primarily from issuance
of the Company's common stock pursuant to exercise of options granted under the
Employee Stock Option Plan, offset by payments of capital lease obligations. Net
cash used for financing activities in 1994 was primarily for repayment of bank
notes.
With the exception of plans to undertake capital spending to expand the
corporate facilities in the first quarter of 1997, the Company has no
significant capital spending or purchase commitments other than normal purchase
commitments and commitments under facilities and capital leases.
The Company believes that its existing cash balances and anticipated cash
flows from operations will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures at least through the next twelve
months. A portion of the Company's cash could be used to acquire or invest in
complementary businesses or products or obtain the right to use complementary
technologies. The Company is currently evaluating, in its ordinary course of
business, potential investments such as businesses, products or technologies.
The Company has no current understandings, commitments or agreements with
respect to any acquisition of other businesses, products or technologies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is in Item 14 of Part IV of this
Report and is incorporated into this item by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
18
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the section entitled
"Election of Directors -- Nominees" in the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders to be filed with the Commission within 120
days after the end of the Company's fiscal year ended December 31, 1996, except
that the information required by this item concerning the executive officers of
the Company is incorporated by reference to the information set forth in the
section entitled "Executive Officers of the Company" at the end of Part I of
this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the section entitled
"Executive Officer Compensation" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Management
and Certain Beneficial Owners" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Transactions" in the Company's Proxy Statement
for the 1997 Annual Meeting of Stockholders to be filed with the Commission
within 120 days after the end of the Company's fiscal year ended December 31,
1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following consolidated financial
statements, and related notes thereto, of the Company and the Report of
Independent Auditors are included in Part IV of this Report on the pages
indicated by the Index to Financial Statements as presented on page 22 of
this Report.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets -- December 31, 1996 and 1995
Consolidated Statements of Income -- Fiscal Years Ended December 31,
1996, 1995 and 1994
Consolidated Statements of Redeemable Preferred Stock and Stockholders'
Equity -- Three Year Period Ended December 31, 1996
Consolidated Statements of Cash Flows -- Fiscal Years Ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
19
<PAGE> 20
2. Financial Statement Schedule. The following financial statement
schedule of the Company for the fiscal years ended December 31, 1996, 1995
and 1994 is filed as part of this Form 10-K and should be read in
conjunction with the Consolidated Financial Statements, and related notes
thereto, of the Company.
Schedule II Valuation and Qualifying
Accounts---------------------------------------S-1
Schedules other than those listed above have been omitted since
they are either not required, not applicable, or the information is
otherwise included.
3. Exhibits: See Item 14(c) below.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fiscal quarter ended December 31, 1996.
(c) Exhibits. The exhibits listed on the accompanying index to exhibits
immediately following the financial statement schedules are filed as part of, or
incorporated by reference into, this Form 10-K.
(d) Financial Statement Schedules. See Item 14(a) above.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized on this 21st day of
March 1997.
DOCUMENT SCIENCES CORPORATION
By: /s/ TONY N. DOMIT
------------------------------------
TONY N. DOMIT
President and Chief Executive
Officer
Dated: March 21, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Tony N. Domit and Barbara E. Amantea and
each of them, jointly and severally, his or her attorneys-in-fact, each with
full power of substitution, for him or her in any and all capacities, to sign
any and all amendments to this Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his or her substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------- ------------------------------------- ---------------
<C> <S> <C>
/s/ TONY N. DOMIT President and Chief Executive Officer
- ----------------------------------- (principal executive officer)
Tony N. Domit March 21, 1997
/s/ BARBARA E. AMANTEA Vice President, Chief Financial
- ----------------------------------- Officer and Secretary (principal
Barbara E. Amantea financial and accounting officer) March 21, 1997
/s/ ROBERT V. ADAMS Chairman of the Board of Directors
- -----------------------------------
Robert V. Adams March 21, 1997
/s/ COLIN J. O'BRIEN Director
- -----------------------------------
Colin J. O'Brien March 21, 1997
/s/ JAMES J. COSTELLO Director
- -----------------------------------
James J. Costello March 21,1997
/s/ THOMAS L. RINGER Director
- -----------------------------------
Thomas L. Ringer March 21, 1997
Director
- -----------------------------------
Barton L. Faber
</TABLE>
21
<PAGE> 22
DOCUMENT SCIENCES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................................... F-1
Consolidated Balance Sheets.......................................................... F-2
Consolidated Statements of Income.................................................... F-3
Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity....... F-4
Consolidated Statements of Cash Flows................................................ F-5
Notes to Consolidated Financial Statements........................................... F-6
</TABLE>
22
<PAGE> 23
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, 1995 and 1996, 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, 1996. 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, 1995 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
January 22, 1997
F-1
<PAGE> 24
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $1,271,120 $ 2,465,694
Short-term investments........................................... -- 23,142,885
Accounts receivable, less allowance for doubtful accounts of
$22,957 and $227,112 in 1995 and 1996, respectively........... 2,152,732 2,257,025
Due from affiliates.............................................. 1,612,600 2,377,364
Deferred income taxes............................................ 79,200 170,700
Other current assets............................................. 164,233 232,304
---------- -----------
Total current assets............................................... 5,279,885 30,645,972
Property and equipment, net........................................ 632,225 998,203
Computer software costs, net of accumulated amortization of
$280,719 and $384,785 in 1995 and 1996, respectively............. 377,172 377,342
---------- -----------
$6,289,282 $32,021,517
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 328,609 $ 698,711
Accrued compensation............................................. 444,409 831,541
Other accrued liabilities........................................ 130,487 457,492
Deferred revenue................................................. 1,596,965 2,477,723
Current income tax payable to affiliate.......................... 1,382,100 311,000
Current portion of obligations under capital leases.............. 44,100 62,439
---------- -----------
Total current liabilities.......................................... 3,926,670 4,838,906
Obligations under capital leases................................... 98,500 115,740
Deferred income taxes.............................................. 157,000 156,500
Commitments
Series A Redeemable Preferred Stock, $.001 par value; 6,000,000
shares authorized, issued and outstanding at December 31, 1995;
2,000,000 shares authorized, no shares issued and outstanding at
December 31, 1996; liquidation preference of $2,000,000 in
1995............................................................. 1,250,750 --
Stockholders' equity
Common stock, $.001 par value;
Authorized shares -- 30,000,000
Issued and outstanding shares -- 1,311,423 in 1995 and 10,722,168
in 1996....................................................... 1,311 10,722
Deferred compensation............................................ -- (351,473)
Unrealized gain on short-term investments........................ -- 13,222
Additional paid-in capital....................................... 110,550 25,382,203
Retained earnings................................................ 744,501 1,855,697
---------- -----------
Total stockholders' equity......................................... 856,362 26,910,371
---------- -----------
$6,289,282 $32,021,517
========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 25
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Initial license fees (including $1,098,400,
$2,518,700 and $2,289,300 from affiliates in 1994,
1995 and 1996, respectively)...................... $4,425,970 $6,299,230 $8,593,220
Annual renewal license and support fees (including
$312,800, $461,500 and $476,500 from affiliates in
1994, 1995 and 1996, respectively)................ 1,521,389 1,942,353 2,420,780
Services and other (including $528,000, $934,700 and
$1,456,000 from affiliates in 1994, 1995 and 1996,
respectively)..................................... 1,223,897 2,270,460 4,305,294
---------- ---------- ----------
Total revenues......................................... 7,171,256 10,512,043 15,319,294
Cost of revenues:
Initial license fees................................. 273,667 350,860 695,750
Annual renewal license and support fees.............. 266,902 369,732 496,871
Services and other................................... 191,865 423,888 1,092,219
---------- ---------- ----------
Total cost of revenues................................. 732,434 1,144,480 2,284,840
---------- ---------- ----------
Gross profit........................................... 6,438,822 9,367,563 13,034,454
Operating expenses:
Research and development............................. 1,044,761 1,747,194 2,336,252
Selling and marketing (including $113,500, $167,200
and $180,600 to affiliates in 1994, 1995 and 1996,
respectively)..................................... 2,765,414 4,415,158 7,359,336
General and administrative........................... 1,274,847 1,519,865 1,673,928
---------- ---------- ----------
Total operating expenses............................... 5,085,022 7,682,217 11,369,516
---------- ---------- ----------
Income from operations................................. 1,353,800 1,685,346 1,664,938
Interest income (expense), net......................... (9,125) 5,079 317,508
---------- ---------- ----------
Income before provision for income taxes............... 1,344,675 1,690,425 1,982,446
Provision for income taxes............................. 632,900 638,400 621,500
---------- ---------- ----------
Net income............................................. $ 711,775 $1,052,025 $1,360,946
========== ========== ==========
Net income per share................................... $ 0.09 $ 0.13 $ 0.14
========== ========== ==========
Shares used in per share calculation................... 8,256,165 8,291,732 9,490,747
========== ========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 26
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------------------------------------
SERIES A REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- --------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------- ----------- ----------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993............ 6,000,000 $ 584,750 3,000 $ 3 $ 45,593 $ --
Accretion on Series A Redeemable
Preferred Stock..................... -- 333,000 -- -- -- --
Net income............................ -- -- -- -- -- --
---------- ----------- ---------- ------- ----------- ---------
Balance at December 31, 1994............ 6,000,000 917,750 3,000 3 45,593 --
Issuance of common stock upon exercise
of options.......................... -- -- 1,308,423 1,308 64,957 --
Accretion on Series A Redeemable
Preferred Stock..................... -- 333,000 -- -- -- --
Net income............................ -- -- -- -- -- --
---------- ----------- ---------- ------- ----------- ---------
Balance at December 31, 1995............ 6,000,000 1,250,750 1,311,423 1,311 110,550 --
Issuance of common stock upon initial
public offering..................... -- -- 2,182,500 2,183 23,331,329 --
Issuance of common stock upon exercise
of options.......................... -- -- 88,245 88 6,964 --
Accretion on Series A Redeemable
Preferred Stock..................... -- 249,750 -- -- -- --
Deferred compensation................. -- -- -- -- 440,000 (440,000)
Amortization of deferred
compensation........................ -- -- -- -- -- 88,527
Redemption of Series A Redeemable
Preferred Stock..................... (6,000,000) (1,500,500) 7,140,000 7,140 1,493,360 --
Unrealized gain on short-term
investments......................... -- -- -- -- -- --
Net income............................ -- -- -- -- -- --
---------- ----------- ---------- ------- ----------- ---------
Balance at December 31, 1996............ -- $ -- 10,722,168 $10,722 $25,382,203 $ (351,473)
========== =========== ========== ======= =========== =========
<CAPTION>
UNREALIZED
GAIN ON RETAINED
SHORT-TERM EARNINGS
INVESTMENTS (DEFICIT) TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
Balance at December 31, 1993............ $ -- $ (353,299) $ (307,703)
Accretion on Series A Redeemable
Preferred Stock..................... -- (333,000) (333,000)
Net income............................ -- 711,775 711,775
------- ---------- -----------
Balance at December 31, 1994............ -- 25,476 71,072
Issuance of common stock upon exercise
of options.......................... -- -- 66,265
Accretion on Series A Redeemable
Preferred Stock..................... -- (333,000) (333,000)
Net income............................ -- 1,052,025 1,052,025
------- ---------- -----------
Balance at December 31, 1995............ -- 744,501 856,362
Issuance of common stock upon initial
public offering..................... -- -- 23,333,512
Issuance of common stock upon exercise
of options.......................... -- -- 7,052
Accretion on Series A Redeemable
Preferred Stock..................... -- (249,750) (249,750)
Deferred compensation................. -- -- --
Amortization of deferred
compensation........................ -- -- 88,527
Redemption of Series A Redeemable
Preferred Stock..................... -- -- 1,500,500
Unrealized gain on short-term
investments......................... 13,222 -- 13,222
Net income............................ -- 1,360,946 1,360,946
------- ---------- -----------
Balance at December 31, 1996............ $13,222 $1,855,697 $26,910,371
======= ========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 27
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ---------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................... $ 711,775 $1,052,025 $ 1,360,946
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 63,102 141,685 254,373
Loss on disposal of fixed assets.................. -- -- 313
Amortization of computer software costs........... 103,483 136,068 104,066
Amortization of deferred compensation............. -- -- 88,527
Current income tax expense payable to
affiliates..................................... 653,700 591,400 (1,071,100)
Deferred income taxes............................. (20,800) 47,000 (92,000)
Provision for doubtful accounts................... 3,613 9,344 204,155
Changes in operating assets and liabilities:
Accounts receivable............................ (1,461,372) (920,885) (1,073,212)
Other current assets........................... (114,934) (23,258) (68,071)
Accounts payable............................... 82,693 209,087 370,102
Accrued liabilities............................ 892,877 (508,671) 714,137
Deferred revenue............................... 343,777 515,250 880,758
-------- -------- ----------
Net cash provided by operating activities........... 1,257,914 1,249,045 1,672,994
INVESTING ACTIVITIES
Purchases of short term investments................. -- -- (23,129,663)
Purchases of property and equipment, net............ (247,660) (297,964) (526,895)
Proceeds from disposal of assets.................... -- -- 8,000
Additions to computer software costs................ (163,629) (290,980) (104,236)
-------- -------- ----------
Net cash used for investing activities.............. (411,289) (588,944) (23,752,794)
FINANCING ACTIVITIES
Proceeds from note payable to bank.................. 100,000 -- --
Repayments of note payable to bank.................. (445,000) -- --
Principal payments under capital lease
obligations....................................... (29,379) (39,080) (66,190)
Proceeds from issuance of common stock.............. -- 66,265 23,340,564
-------- -------- ----------
Net cash provided by (used for) financing
activities........................................ (374,379) 27,185 23,274,374
-------- -------- ----------
Increase in cash and cash equivalents............... 472,246 687,286 1,194,574
Cash and cash equivalents at beginning of year...... 111,588 583,834 1,271,120
-------- -------- ----------
Cash and cash equivalents at end of year............ $ 583,834 $1,271,120 $ 2,465,694
======== ======== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid....................................... $ 15,800 $ 12,283 $ 29,430
======== ======== ==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations entered into for property
and equipment..................................... $ 55,592 $ 130,941 $ 101,769
======== ======== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 28
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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. Revenues
and expenses are translated into U.S. dollars at the average rates of exchange
during the period. Net realized translation adjustments were insignificant in
1994, 1995 and 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, 1995 and 1996.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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
F-6
<PAGE> 29
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 classifies its investments as available-for-sale in accordance
with that standard. Available-for-sale securities are carried at 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 will be 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 26%, 42%
and 34% of its total revenues from customers outside the United States for the
years ended December 31, 1994, 1995 and 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.
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. SFAS 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.
F-7
<PAGE> 30
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue in accordance with AICPA Statement of
Position on Software Revenue Recognition No. 91-1. Initial license fee 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 fee 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 fees
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.
COMPUTATION OF NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common shares and common stock equivalents outstanding. Common equivalent shares
from stock options and warrants are excluded from the computation when their
effect is antidilutive except that, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins, common shares and common equivalent
shares issued during the twelve months prior to the initial filing of the
Registration Statement with the Securities and Exchange Commission have been
included in the calculation as outstanding for all periods prior to the
Company's initial public offering (using the treasury stock method). The
calculation also gives effect to the conversion of all convertible preferred
shares (using the if-converted method), which automatically converted into
common shares upon completion of the Company's initial public offering.
STOCK OPTIONS
In 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by the Statement, the Company has elected to continue
accounting for its stock-based compensation in accordance with the provisions of
APB 25. As such, the new provisions of SFAS 123 had no impact on 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. The Company and Xerox had a Tax Sharing Agreement
that provided for the allocation between the Company and Xerox of all
responsibilities, liabilities and benefits relating to taxes paid or payable by
either the Company or Xerox for all taxable periods. Through September 19, 1996,
the Company was included in the consolidated tax returns of Xerox and the
Company's share of Xerox's consolidated income tax liability was determined on a
separate company basis computed under Internal Revenue Code guidelines. The
Company's income tax liability due to Xerox totaled $1,382,100 at December 31,
1995, which was paid in 1996, and $311,000 at September 19, 1996. Subsequent to
the Company's initial public offering on September 19, 1996, the Company was no
longer included in the consolidated tax returns of Xerox and will file separate
tax returns.
F-8
<PAGE> 31
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. FINANCIAL STATEMENT INFORMATION
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following at
December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Computer equipment.................................. $ 625,591 $ 929,241
Office furniture and fixtures....................... 171,399 236,573
Office equipment.................................... 46,367 168,432
Leasehold improvements.............................. 46,590 168,246
-------- ----------
889,947 1,502,492
Less accumulated depreciation and amortization...... (257,722) (504,289)
-------- ----------
$ 632,225 $ 998,203
======== ==========
</TABLE>
Equipment acquired under capital leases totaled $66,255, $145,112 and
$192,611 (net of accumulated amortization of $16,259, $35,085 and $75,161) at
December 31, 1994, 1995 and 1996, respectively.
INVESTMENTS
The Company has classified all of its marketable securities as
available-for-sale securities. The following table summarizes available-for-sale
securities at December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. treasury securities................... $ 3,513,585 $ -- $ 8,305 $ 3,505,280
U.S. government agency obligations......... 2,969,622 1,271 772 2,970,121
Obligations of states, territories and
political subdivisions................... 14,600,365 37,440 15,491 14,622,314
U.S. corporate securities.................. 1,544,517 311 1,232 1,543,596
U.S. corporate commercial paper............ 501,574 -- -- 501,574
----------- ------- ------- -----------
$23,129,663 $ 39,022 $ 25,800 $23,142,885
=========== ======= ======= ===========
</TABLE>
Included in cash and cash equivalents at December 31, 1995 were $398,889 in
U.S. treasury securities and $298,470 in U.S. government agency obligations. At
December 31, 1995, the difference between amortized cost and the estimated fair
value of the available-for-sale securities was not material.
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less........................................... $ 5,071,310 $ 5,068,204
Due after one year through five years............................. 18,058,353 18,074,681
----------- -----------
$23,129,663 $23,142,885
=========== ===========
</TABLE>
F-9
<PAGE> 32
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1994
Sales to unaffiliated customers........ $ 4,861,398 $ 370,658 $ -- $ 5,232,056
Sales to affiliates.................... 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)................ $ 1,736,832 $ (383,032) $ -- $ 1,353,800
=========== ========== ============ ===========
Identifiable assets.................... $ 3,475,168 $ 750,063 $ (16,666) $ 4,208,565
=========== ========== ============ ===========
</TABLE>
<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.................... 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)................ $ 1,691,074 $ (5,728) $ -- $ 1,685,346
=========== ========== ============ ===========
Identifiable assets.................... $ 4,748,787 $1,557,161 $ (16,666) $ 6,289,282
=========== ========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
UNITED
STATES FRANCE ELIMINATIONS TOTAL
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Sales to unaffiliated customers........ $10,165,741 $ 931,753 $ -- $11,097,494
Sales to affiliates.................... 3,919,970 301,830 -- 4,221,800
Transfers between geographic areas..... 254,611 999,738 (1,254,349) --
----------- ---------- ------------ -----------
Revenues............................... $14,340,322 $2,233,321 $ (1,254,349) $15,319,294
=========== ========== ============ ===========
Operating income (loss)................ $ 1,167,424 $ 497,514 $ -- $ 1,664,938
=========== ========== ============ ===========
Identifiable assets.................... $31,335,821 $ 702,362 $ (16,666) $32,021,517
=========== ========== ============ ===========
</TABLE>
The Company uses affiliated distributors to sell its products in Canada,
Australia and New Zealand (See Note 9).
4. CREDIT FACILITY
The Company has an agreement with a bank that provides a working capital
line of credit which allows maximum borrowings at the lesser of $2,500,000 or
75% of eligible accounts receivable (as defined). The agreement also provides
for letters of credit up to an aggregate of $100,000. Borrowings under the line
of credit bear interest at the bank's prime rate. The line of credit is
renewable annually at the sole discretion of the bank and expires in July 1997.
The Company had no outstanding borrowings or letters of credit as of December
31, 1995 and 1996.
F-10
<PAGE> 33
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASES
The Company leases its corporate office in San Diego, California under an
operating lease 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>
OPERATING CAPITAL
YEARS ENDING DECEMBER 31, LEASES LEASES
--------------------------------------------------------------- --------- --------
<S> <C> <C>
1997........................................................... $ 272,817 $ 80,499
1998........................................................... 238,405 75,667
1999........................................................... 5,084 41,558
2000........................................................... -- 12,346
2001........................................................... -- 1,260
-------- --------
$ 516,306 211,330
--------
Less amount representing interest......................................... (33,151)
--------
Present value of net minimum lease payments............................... 178,179
Less current portion...................................................... (62,439)
--------
Long-term portion of capital lease obligations............................ $115,740
========
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$137,160, $255,599 and $292,098, respectively.
6. SERIES A REDEEMABLE PREFERRED STOCK
Each share of Series A Redeemable Preferred Stock was converted into 1.19
shares of Common Stock upon the Company's initial public offering.
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, which received stockholder approval and became effective on September 19,
1996. 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 on September 19, 1996, the authorized capital
stock of the Company consisted 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
F-11
<PAGE> 34
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 following table summarizes stock option activity under the stock
incentive plans:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OPTION PRICE AVERAGE PRICE
OF SHARES PER SHARE PER SHARE
---------- ------------ -------------
<S> <C> <C> <C>
Balance as of December 31, 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............................................ 233,538 $.67-$15.00 $6.51
Exercised.......................................... (88,245) $.03-$ .17 $ .08
Canceled........................................... (9,750) $.17-$ 8.50 $ .50
----------
Balance at December 31, 1996......................... 497,445 $.03-$15.00 $3.13
==========
</TABLE>
As of December 31, 1996, 176,603 of the options were vested and exercisable
and 496,887 shares were available for future grant.
Through December 31, 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.
Adjusted pro forma information regarding net income is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. For options granted
in the year ended December 31, 1995 and the period ended September 19, 1996, the
fair value for options was estimated at the date of grant using the "minimum
value" method for option pricing with the following weighted-average
assumptions: risk-free interest rates of 6%; dividend yields of 0%; and a
weighted-average expected life of the option of seven years. For options granted
from September 19, 1996 to December 31, 1996, the fair value of options was
estimated at the date of grant using the "Black-Scholes" method for option
pricing with the following weighted-average assumptions: risk-free interest
rates of 6%; dividend yields of 0%; expected volatility of .7; and
weighted-average expected life of the option of seven years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The effect
of applying SFAS 123 for purposes of providing pro forma
F-12
<PAGE> 35
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosures is not likely to be representative of the effects on reported net
income for future years. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Adjusted pro forma net income....................... $1,050,566 $1,379,289
Adjusted pro forma net income per share............. $ 0.13 $ 0.15
</TABLE>
8. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................................................. $542,000 $469,700 $482,000
State.................................................... 111,700 121,700 119,300
Foreign.................................................. -- -- 112,200
-------- -------- --------
653,700 591,400 713,500
Deferred (credit):
Federal.................................................. (16,200) 39,500 (85,300)
State.................................................... (4,600) 7,500 (6,700)
Foreign.................................................. -- -- --
-------- -------- --------
(20,800) 47,000 (92,000)
-------- -------- --------
$632,900 $638,400 $621,500
======== ======== ========
</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. Significant components of
the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax liability -- computer software costs....... $ (93,500) $(157,000) $(156,500)
Deferred tax assets:
Foreign operating loss carryforwards.................. 134,060 136,065 --
Accrued vacation...................................... 55,500 75,000 100,000
Provision for doubtful accounts....................... 7,200 4,200 29,000
State taxes........................................... -- -- 41,700
--------- --------- ---------
Total deferred tax assets............................... 196,760 215,265 170,700
Valuation allowance..................................... (134,060) (136,065) --
--------- --------- ---------
Net deferred tax assets................................. 62,700 79,200 170,700
--------- --------- ---------
Net deferred tax liability.............................. $ (30,800) $ (77,800) $ 14,200
========= ========= =========
</TABLE>
In 1995 and 1994, a valuation allowance was recognized to offset deferred
tax assets attributed to foreign operating loss carryforwards. In 1996, the
Company realized the benefit of the foreign operating loss carryforwards and
reduced the valuation allowance.
F-13
<PAGE> 36
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the Company's income tax provision and the amounts
computed by applying the statutory federal income tax rate of 35% in 1994, 1995
and 1996 to income before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Provision at statutory rate....................... $470,636 $591,649 $ 693,856
Benefit for graduated rates....................... (13,447) (16,904) (19,824)
State income taxes, net of federal benefit........ 69,550 83,980 73,190
Increase (decrease) in valuation reserves......... 134,060 2,005 (136,095)
Benefit of research credits....................... (57,733) (57,547) (71,665)
Permanent differences and other................... 29,834 35,217 82,038
-------- -------- --------
Provision for income taxes........................ $632,900 $638,400 $ 621,500
======== ======== ========
</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 revenues in the accompanying statements of income are commissions earned
from Xerox totaling $490,400, $752,000 and $1,352,400 in 1994, 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, $167,200 and $180,600 in 1994, 1995 and 1996, respectively.
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 $796,600,
$1,088,200 and $818,600 in 1994, 1995 and 1996, respectively. Included in
accounts receivable are $193,500 and $385,300 from these revenues at December
31, 1995 and 1996, 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 $533,400, $1,985,600 and
$2,050,800 in 1994, 1995 and 1996, respectively. Related accounts receivable are
$482,900 and $646,500 at December 31, 1995 and 1996, respectively.
Under the terms of a separate agreement with Xerox, the Company provided
software support services for Xerox Publishing Systems' products. Included in
annual revenue license and support fees are revenues from Xerox under this
agreement of $118,800 in 1994 and $89,100 in 1995. There were no revenues under
this agreement during 1996.
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 statutory 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-14
<PAGE> 37
SCHEDULE II
DOCUMENT SCIENCES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994
Allowance for doubtful accounts
and returns.................... $ 10,000 $ 3,613 $ -- $ -- $ 13,613
Year Ended December 31, 1995
Allowance for doubtful accounts
and returns.................... 13,613 9,344 -- -- 22,957
Year Ended December 31, 1996
Allowance for doubtful accounts
and returns.................... 22,957 204,155 -- -- 227,112
</TABLE>
S-1
<PAGE> 38
DOCUMENT SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1996
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
- ------ ----------------------------------------------------------------------- -----------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company filed May 1, 1992
(which is incorporated herein by reference to Exhibit 3.1 to
Registrant's Registration Statement on Form S-1, Registration No.
333-06349 ("Registrant's 1996 S-1")).
3.2 Form of Amended and Restated Certificate of Incorporation of the
Company (which is incorporated herein by reference to Registrant's 1996
S-1).
3.3 Amended and Restated Bylaws of the Company (which is incorporated
herein by reference to Registrant's 1996 S-1).
3.4 Form of Certificate of Amendment of Certificate of Incorporation of the
Company (which is incorporated herein by reference to Registrant's 1996
S-1).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Stock Certificate (which is incorporated herein by reference
to Registrant's 1996 S-1).
*10.1 Form of Indemnity Agreement Between the Company and each of its
Officers and Directors (which is incorporated herein by reference to
Registrant's 1996 S-1).
*10.2 1993 Stock Option Plan and Form of Agreement (which is incorporated
herein by reference to Registrant's 1996 S-1).
*10.3 1995 Stock Incentive Plan and Form of Agreement, as amended (which is
incorporated herein by reference to Registrant's 1996 S-1).
*10.4 Stockholder Rights Agreement dated September 1996 Between the Company
and Xerox Corporation (which is incorporated herein by reference to
Registrant's 1996 S-1).
10.5 Tax Sharing Agreement dated August 1996 Between the Company and Xerox
Corporation (which is incorporated herein by reference to Registrant's
1996 S-1).
10.6 Transfer and License Agreement dated July 1, 1992, as amended in
September 1994, Between the Company and Xerox Corporation (which is
incorporated herein by reference to Registrant's 1996 S-1).
10.7 Strategic Marketing Alliance Agreement dated September 1, 1993, Between
the Company and Xerox Corporation (which is incorporated herein by
reference to Registrant's 1996 S-1).
10.8 Value Added Remarketer Agreement Between Xerox Canada Limited and the
Company (which is incorporated herein by reference to Registrant's 1996
S-1).
10.9 Value Added Reseller Agreement Between N.V. Rank Xerox S.A. and the
Company (which is incorporated herein by reference to Registrant's 1996
S-1).
10.10 Form of Professional Services Agreement (which is incorporated herein
by reference to Registrant's 1996 S-1).
10.11 Form of Domestic Value Added Remarketer Agreement (which is
incorporated herein by reference to Registrant's 1996 S-1).
10.12 Form of International Value Added Reseller Agreement (which is
incorporated herein by reference to Registrant's 1996 S-1).
10.13 Form of Software License and Software Support Agreement (which is
incorporated herein by reference to Registrant's 1996 S-1).
10.14 Lease for Company's Principal Facilities, as amended and Assignment of
Lease.
*10.15 Letter Agreement Between Tony Domit and the Company (which is
incorporated herein by reference to Registrant's 1996 S-1).
*10.16 Letter Agreement Between Thomas Anthony and the Company (which is
incorporated herein by reference to Registrant's 1996 S-1).
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
- ------ ----------------------------------------------------------------------- -----------
<C> <S> <C>
*10.17 Letter Agreement Between Judith A. O'Reilly and the Company (which is
incorporated herein by reference to Registrant's 1996 S-1).
*10.18 Letter Agreement Between Daniel Fregeau and the Company (which is
incorporated herein by reference to Registrant's 1996 S-1).
*10.19 Letter Agreement Between Alfred G. Altomare and the Company (which is
incorporated herein by reference to Registrant's 1996 S-1).
10.20 Value Added Reseller Agreement Between Geneva Digital Ltd. and the
Company (which is incorporated herein by reference to Registrant's 1996
S-1).
10.21 Value Added Remarketer Agreement Between Business and Business and the
Company (which is incorporated herein by reference to Registrant's 1996
S-1).
*10.22 1997 Employee Stock Purchase Plan.
11.1 Statement regarding calculation of net income (loss) per share.
13.1 Annual Report to Stockholders for the year ended December 31, 1996 (to
be deemed filed only to the extent required by the instructions to
exhibits for reports on Form 10-K).
21.1 List of Subsidiaries (which is incorporated herein by reference to
Registrant's 1996 S-1).
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See page 36).
27 Financial Data Schedule.
</TABLE>
- ---------------
* Indicates management compensatory plan, contract or arrangement.
<PAGE> 1
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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<PAGE> 3
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.
3
<PAGE> 4
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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<PAGE> 5
(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.
5
<PAGE> 6
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
6
<PAGE> 7
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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<PAGE> 9
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
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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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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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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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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)
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<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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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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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
FOURTH AMENDMENT TO OFFICE BUILDING LEASE
Fourth Amendment Dated January 30, 1997 to Office Building Lease Dated December
20, 1991 Between Governor Park Associates, a California Limited Partnership, as
Landlord and Document Sciences Corporation, Identified in the Original Lease
Document as Xerox Corporation, a New York Corporation, as Tenant and Further
Amended June 1, 1994 (First Amendment), January 3, 1995 (Second Amendment)and
July 1, 1996 (Third Amendment) for That Certain Property Commonly Known as 6333
Greenwich Drive, Suite 120, in the City of San Diego, County of San Diego, State
of California.
In the event of conflict between the terms and conditions of the Lease
Agreement, the First, Second and Third Amendments and this Fourth Amendment, the
terms and conditions of this Fourth Amendment shall control.
SECTION #1, PARAGRAPH #2, DESCRIPTION:
Section # 1, Paragraph #2 shall be amended to read in full: "The Leased Premises
for Tenant shall consist of Suite 100 consisting of approximately 14,727
rentable square feet in addition to Suite 200 also located in the 6333 Greenwich
Drive office building consisting of approximately 15,526 rentable square feet.
Additionally, this Lease shall include the Premises known as Suite 270 in the
6363 Greenwich Drive office building consisting of approximately 2,849 rentable
square feet. In total, the Leased Premises consists of approximately 33,102
rentable square feet."
SECTION #2, TERM:
The term shall be amended to read in full: "The Lease for the Premises as
outlined in Section # 1, Paragraph #2, Description, shall be modified to five
(5) years scheduled to commence on March 1, 1997 (hereinafter referred to as the
"Commencement Date") and to end on February 28, 2002 (hereinafter referred to as
the "Expiration Date"). Both dates inclusive, unless the term is extended
pursuant to Paragraph # 16 as outlined in this Fourth Amendment."
SECTION #3, RENT:
Section #3 shall be amended to read in full: "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 increase according to the following schedule:
Months 1-12 $1.069 per rentable square foot per month
Months 13-24 $1.112 per rentable square foot per month
Months 25-36 $1.156 per rentable square foot per month
Months 37-48 $1.202 per rentable square foot per month
Months 49-60 $1.251 per rentable square foot per month
"The aforementioned rental schedule includes the Tenant contracting directly
with the local gas and electric and/or utility company for their separately
metered utilities."
SECTION #5, PREPARATION OF PREMISES:
Section #5 shall be amended to read in full: "Tenant shall, at Tenant's sole
cost and expense, perform all work and furnish all materials necessary to
complete any construction related to improving the subject Premises in
accordance with preliminary plans and specifications which shall be agreed to by
Landlord and Tenant. Such plans and specifications shall be deemed to be Exhibit
"B-1 " (Preliminary Space Plan) attached hereto and made a part hereof."
"Tenant, using Tenant's architect and engineer at Tenant's sole cost and
expense, shall prepare complete and final architectural and engineering drawings
and specifications
<PAGE> 40
(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. The AE&S Drawings agreed to by Landlord and Tenant will be
the drawings provided to the general contractor for the construction of the
demised Premises. 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 and Tenant mutually agree that Tenant will contribute One Hundred
Sixty Thousand and No/100ths ($160,000.00) Dollars or Four and 83/100ths ($4.83)
Dollars per rentable square foot towards the construction of tenant improvements
within the subject Premises. In the event any portion of this One Hundred Sixty
Thousand and No/l00ths ($160,000.00) Dollars is not spent on the construction of
tenant improvements within the subject Premises, Landlord and Tenant further
agree that the rental schedule outlined in Section #3 above shall adjust. To the
extent that Tenant spends less than the full One Hundred Sixty Thousand and
No/l00ths ($160,000.00)Dollars, the rent shall be adjusted upwards. The monthly
upward adjustment will be calculated by adjusting the rent upwards by 2 for
every One and No/l00ths ($1.00) Dollar per square foot not spent. In other
words, if Tenant were to spend Three and 83/100ths
Fourth Amendment Dated January 30, 1997 to Office Building Lease Dated December
20, 1991 Between Governor Park Associates, a California Limited Partnership, as
Landlord and Document Sciences Corporation, Identified in the Original Lease
Document as Xerox Corporation, a New York Corporation, as Tenant and Further
Amended June 1, 1994 (First Amendment), January 3, 1995 (Second Amendment) and
July 1, 1996 (Third Amendment) for That Certain Property Commonly Known as 6333
Greenwich Drive, Suite 120, in the City of San Diego, County of San Diego, State
of California.
($3.83) Dollars per rentable square foot (One Hundred Twenty-Six Thousand Seven
Hundred Eighty and 66/100ths [$126,780.66] Dollars) instead of the full Four and
83/100ths ($4.83) Dollars per rentable square foot (One Hundred Sixty Thousand
and No/100ths [$160,000.00] Dollars) of additional tenant improvements, then the
One and No/100ths ($ 1.00) Dollar per rentable square foot of unspent monies
would equate to 2 cents per square foot per month that would be added to the
base monthly rent which then equals a base rent of $1.0869 per rentable square
foot per month plus utilities or Thirty-Five Thousand Nine Hundred Seventy-Eight
and 56/100ths ($35,978.56) Dollars per month."
SECTION #14, SUBORDINATION:
The attached Nondisturbance, Subordination & Attornment Agreement (Exhibit "F")
shall overrule Paragraph #14 of the original Lease.
SECTION #16, LEASE EXTENSION:
This Section shall be amended to read in full: "Provided Tenant is not in
default under the terms hereunder regarding the Premises outlined herein, then
Tenant may, at Tenant's option, extend the Lease for one (1) successive
additional term of five (5) years commencing on the expiration on the Extension
Term. Tenant shall be required to provide at least one hundred twenty (120) days
written notice prior to the expiration of the lease term. Tenant shall then
request from Landlord the "fair market rental rate" being charged in the
Building should the Tenant desire to extend the term of the Lease. In the event
Tenant rejects Landlord's definition of "Fair Market Rental Rate" and cannot
reach an acceptable agreement per the foregoing paragraphs in this Section,
then said option shall lapse. Tenant shall not be required to exercise said
option."
"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 Triangle area of the City of San Diego, taking into
consideration the location, quality and age of
<PAGE> 41
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 of the Lease."
"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."
"Any additional improvements required at the time of renewal shall be negotiated
between Landlord and Tenant."
Fourth Amendment Dated January 30, 1997 to Office Building Lease Dated December
20, 1991 Between Governor Park Associates, a California Limited Partnership, as
Landlord and Document Sciences Corporation, Identified in the Original Lease
Document as Xerox Corporation, a New York Corporation, as Tenant and Further
Amended June 1, 1994 (First Amendment), January 3, 1995 (Second Amendment) and
July 1, 1996 (Third Amendment) for That Certain Property Commonly Known as 6333
Greenwich Drive, Suite 120, in the City of San Diego, County of San Diego, State
of California.
SECTION #34, BROKERAGE:
This Section shall be amended to read in full: "Landlord and Tenant acknowledge
that Grubb & Ellis represents Document Sciences Corporation (previously the
XEROX Corporation) and Landlord is represented by CB Commercial Real Estate
Group, Inc. in this lease transaction. Landlord and Tenant agree that all
commissions are to be paid by Tenant in lieu of rent in accordance with the
attached "Assignment of Rents". Landlord hereby indemnifies 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."
SECTION #47, EXHIBITS & RIDERS:
The following Exhibits shall be amended as follows:
1. The original Exhibits "B" and "B-1 " shall be replaced by the attached
Exhibit "B-1" " Tenant's preliminary Space Plan.
2. Exhibit "C" shall be deleted.
3. Exhibit "D" shall be deleted.
4. The original Exhibit "F" shall be replaced by the attached Exhibit "F"
Subordination, Attornment & Nondisturbance Agreement.
5. Exhibit "H" shall be known as the Master Lease.
6. Exhibit "I" shall be known as the Assignment of Rents Between Landlord,
Tenant and Grubb & Ellis.
7. Exhibit "J" shall be known as the Assignments of Rents Between
Landlord, Tenant and CB Commercial Real Estate Group, Inc.
<PAGE> 42
SECTION (e) OF LEASE RIDER:
Section (e) of the Rider shall be amended to read in full: "Tenant's pro rata
share shall be 31.83%, calculated by dividing the number of rentable square feet
demised to Tenant (33,102 rentable square feet) by the number of rentable square
feet in the complex (103,977 rentable square feet)..."
ADDENDUM #1:
The attached Assignment of Rents marked Exhibit "I" and "J", respectively, are
attached hereto and made a part hereof Landlord and Tenant agree to abide by the
terms and conditions of said Assignment of Rent.
All other terms and conditions of the Lease shall remain in full force and
effect.
WITNESS WHEREOF, Landlord and Tenant have duly executed this Fourth Amendment to
Lease as of the day and year first above written.
LANDLORD TENANT
GOVERNOR PARK ASSOCIATES, DOCUMENT SCIENCES CORPORATION,
a California Limited Partnership IDENTIFIED IN THE ORIGINAL LEASE
DOCUMENT AS XEROX CORPORATION,
a New York Corporation
By: /s/ Michael J. Reidy By: /s/ Tony N. Domit
-------------------------- --------------------------
Michael J. Reidy Tony N. Domit
Title: Manager Title: CEO and President
Date: 2-25-97 Date: 2/20/97
EXHIBIT "B-1"
IMAGE NOT SHOWN
<PAGE> 43
EXHIBIT "B-1"
IMAGE NOT SHOWN
<PAGE> 44
EXHIBIT B-1
IMAGE NOT SHOWN
<PAGE> 45
EXHIBIT B-1
IMAGE NOT SHOWN
<PAGE> 46
EXHIBIT "B-2"
TENANT SPECIFICATIONS
GOVERNOR PARK PLAZA
DEMISING PARTITION (ONE HOUR SEPARATION)
8. 2 1/2", 25 gauge metal studs-24" on center.
9. 5/8" drywall one (1) layer each side of studs.
10. Height required from floor slab to underside of structure.
11. Partition taped smooth to receive two (2) coast of flat latex paint or
wall covering.
12. 2 1/2" batt insulation between studs for sound attenuation.
INTERIOR PARTITION (NON-RATED PARTITION):
1. 2 1/2", 25 gauge metal studs-24" on center.
2. 5/8" drywall one (1) layer each side of studs.
3. Height required from floor slab to ceiling grid -- 9'.
4. Partition taped smooth to receive two (2) coast of flat latex paint or
wall covering.
CORRIDOR DOOR ASSEMBLY COMMON AREAS ONLY 20 MIN. RATED ASSEMBLIES:
1. 3'0" X 8'10" X 1 3/4" solid core red oak rift cut veneer, 20 min.
labeled.
2. One (1) lockset-Falcon, lever type, mortise lock set with Finish: #26D.
3. One (1) door closer, handicap approved.
4. One (1) door stop floor mounted with Finish: #26D.
5. Frame to be one (1) hour rated with paint grade finish, Timely frame or
approved equal.
INTERIOR DOOR ASSEMBLY:
1. 3'0" X 8'10" X 1 3/4" solid core red oak rift cut veneer, 20 min.
labeled.
2. Timely frames factory hard bronze duranodic finish.
3. Two (2) pars 4" X 4" butts
4. One (1) latch set-Schlage 03, lever type, mortise latch set, Finish:
#626.
5. One (1) door stop wall mounted, Finish: #26D.
ELECTRICAL SERVICE:
1. One (1) sub-panel in each space, including a sub-feed to meter room.
2. One (1) HVAC disconnect/units.
2' X 4' FLUORESCENT LIGHT FIXTURES:
1. 2'X 4' with energy saving ballast and lamps, acrylic prismatic lens,
with hinged door, Lithonia or equal, 4 tube fixture.
2. Lamps to be included.
3. Conduit and hook-ups to existing J-box.
LIGHT SWITCH ASSEMBLY:
1. 20 amp specification grade, quiet type switches rated 110 and 208 volts
AC.
2. Furnish switches with ivory handles.
3. Where required, furnish two (2) pole, three (3) way and four (4) way
switches.
4. Plates shall be ivory, smooth plastic, specification grade, equal to
Sierra P-line.
ELECTRICAL WALL OUTLET:
1. 15 amp, two (2) pole, three (3) wire grounding type, specification
grade, rated 125 volts.
2. Conductors terminated in side screws.
3. Duplex.
4. Mounted vertically.
5. Ivory, smooth plastic, specification grade equal to Sierra P-line.
6. Outlet height at 15" AFF to bottom of rough-in box.
<PAGE> 47
TELEPHONE WALL OUTLET:
1. Use 4" minimum square box with single plaster ring and pull string.
2. 3/4" metal conduit from outlet box to terminate above ceiling.
3. Cover plate with 3/8" bush hold, ivory, smooth plastic, specification
grade equal to Sierra P-line.
4. Outlet height at 15" AFF to bottom of rough-in box.
ACOUSTICAL CEILING:
1. 2' x 2' x 5/8" revealed edge, Armstrong Cortega.
2. Chicago; white exposed ceiling grid, 800 series or equal.
3. Ceiling height to be 9'0" above concrete slab.
HEATING & AIR CONDITIONING DISTRIBUTION:
1. Furnish and install low pressure distribution duct work.
2. Furnish and install supply air registers.
3. Furnish and install return air grilles and return ducts.
4. Install thermostats on the walls.
5. Balance system in accordance with engineering plans and submit written
balance report.
6. Building "pre-zoned" in base building.
7. Allow for engineering and drawing plans.
FLOOR COVERING:
1. Carpet; Design Weaver, New Tempest or Atlas Mayfair, color to be
selected by Tenant.
2. Glue direct.
3. VCT: Armstrong Excelon
CARPET BASE:
1. 2 1/2" Burke or Ropper Rubber carpet base.
PAINTING:
1. All paint to be Frazee (colors to follow).
2. Minimum two (2) coast flat vinyl wall paint.
WINDOW TREATMENTS:
1. Vertical blinds, 3 1/2" PVC grey vanes.
<PAGE> 48
EXHIBIT H
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(herein after 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").
[INITIAL STAMP OMITTED]
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,
1995 (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:
S0.80 per rentable square foot for months 1 through 12
S1.59 per rentable square foot for months 13 through 24,
S1.65 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
<PAGE> 49
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
<PAGE> 50
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 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 Drawing
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 S3,000.00.
12. Adequate preventive measures so as to eliminate or
substantially reduce noise and/or vibration from external
sources, such as vehicular or railroad traffic.
<PAGE> 51
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 Tenants 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 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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<PAGE> 52
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 effect at the time such 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, the Landlord's consent shall be deemed given. All of
Tenant's construction to the Demised Premises shall be performed in a
good and workman like 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
finished 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 operated 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.
<PAGE> 53
Winter: 72 degrees FDB +/- 2 degrees FDB relative
humidity 25% minimum.
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<PAGE> 54
(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 ventral 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 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 while 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
<PAGE> 55
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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<PAGE> 56
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, Tenants 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
mortgage/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 kings 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
<PAGE> 57
or hereafter affect the Building 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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<PAGE> 58
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 to 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 Landlords, 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
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) year, 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 charmed 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 the 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 herein above and (c) fifteen (15) days after the fair
market rental rate has been determined arbitration. Upon the giving by
Tenant to Landlord of such written notice and the compliance by of
Landlord and Tenant with the foregoing provisions of this Paragraph 16,
the term his Lease shall by deemed to be automatically extended upon is
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 Triangle 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 dental 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
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 payments to be Building and/or the Complex.
Landlord further make al require 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 the
Lease, comprehensive general liability insurance covering the Building
and the Premises, except when caused by the sole or Tenant's failure to
perform its obligations under this Lease evidencing such insurance
shall provide that same may not be 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 summit
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 Tenants 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,
8
<PAGE> 60
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 policy 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, assignee, 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 a 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 Tenants reasonable business
judgement, to carry on its normal business operations for a period of
forty five (45) days 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 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 requited 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 clue or to become due hereunder.
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<PAGE> 61
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
any 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 by of proceeding to a
judgment of condemnation and Tenant is unable, in Tenant's reasonable
business judgement, to carry on its normal business operator. A period
of forty five (45) days or more, Tenant shall have the right to
terminate 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 a 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 and 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
<PAGE> 62
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> 63
(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. LANDLORDS 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 relettinq 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 relenting
during any month be less than one-twelfth (1/12) of the annual rent
reserved 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
<PAGE> 64
thirty (30) day period and shall thereafter diligently
prosecute such cure to completion.
11
<PAGE> 65
24. TENANT'S 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 I 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> 66
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 a
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 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> 67
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 purpose 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 indemnifies
Tenant against the claims of any 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> 68
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 Weds 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 indemnities 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 herein above
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 & 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 the under) 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 Tenants 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
Retaining 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
night 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 result of such
improvements or alterations shall be repaired by Tenant at Tenant's
expense.
15
<PAGE> 69
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 on 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 cleared 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 supersedes 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, distributes, 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
<PAGE> 70
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> 71
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 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 situate, to
appoint such arbitrator and the arbitrator appointed by said judge
shall serve in said capacity.
NOTICE: BY INITIALING 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 INITIALING IN
THE SPACE BELOW, YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY
AND APPEAL UNLESS SUCH RIGHT 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.
/s/ MR /s/ MF
---------------------------- -----------------------------
Initialed by Landlord Initial 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> 72
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the
day and year first above written.
WITNESS: GOVERNOR PARK ASSOCIATES
a California Limited Partnership
By: /s/ Michael J. Reidy
----------------------------
Michael J. Reidy
Its: Managing Partner
(Landlord)
WITNESS: XEROX CORPORATION
- -----------------------------------
By:/s/ Mark A. Flaim
-----------------------------------
Mark A. Flaim
Manager, Real Estate Operations
Western United States
(Tenant)
18
<PAGE> 1
EXHIBIT 10.22
DOCUMENT SCIENCES CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1997 Employee Stock
Purchase Plan of Document Sciences Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the common stock of the Company.
(d) "Company" shall mean Document Sciences Corporation, a
Delaware corporation, and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings and sales commissions, overtime pay and cash bonuses.
(f) "Designated Subsidiaries" shall mean the Subsidiaries
which have been designated by the Board from time to time in its sole discretion
as eligible to participate in the Plan.
(g) "Employee" shall mean any Employee of the Company for tax
purposes whose customary employment with the Company is at least twenty (20)
hours per week and more than five (5) months in any calendar year. For purposes
of the Plan, the employment relationship shall be treated as continuing intact
while the individual is on sick leave or other leave of absence approved by the
Company. Where the period of leave exceeds 90 days and the individual's right to
reemployment is not guaranteed either by statute or by contract, the employment
relationship will be deemed to have terminated on the 91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each
Offering Period.
(i) "Exercise Date" shall mean the last day of each Offering
Period.
(j) "Fair Market Value" shall mean, as of any date, the value
of Common Stock determined as follows:
<PAGE> 2
(1) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation The
Nasdaq National Market or the Nasdaq Small Cap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for such stock
(or the closing bid, if no sales were reported) as quoted on such exchange or
system for the last market trading day prior to the time of determination, as
reported in The Wall Street Journal or such other source as the Board deems
reliable, or;
(2) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(k) "Offering Period" shall mean a period of approximately six
(6) months, commencing on an Enrollment Date and terminating on an Exercise
Date. The first Offering Period shall commence on the first Trading Day
following June 1, 1997 and shall terminate on the last Trading Day of the sixth
month following the commencement of the Offering Period. Thereafter, Offering
Periods shall commence on the first Trading Day following termination of the
prior Offering Period and shall terminate on the last Trading Day of the sixth
month following commencement of such Offering Period.
(l) "Parent" shall mean any corporation, domestic or foreign,
in an unbroken chain of corporations ending with the Company if each corporation
in the chain (other than the Company) owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in the chain.
(m) "Plan" shall mean this 1997 Employee Stock Purchase Plan.
(n) "Purchase Price" shall mean an amount equal to not less
than 85% of the Fair Market Value of a share of Common Stock on the Enrollment
Date or on the Exercise Date, whichever is lower. If the Enrollment Date shall
fall on a Saturday, Sunday, or other legal holiday, the Fair Market Value shall
be determined as of the trading day immediately preceding the Enrollment Date.
(o) "Reserves" shall mean the number of Treasury Shares
covered by each option under the Plan which have not yet been exercised and the
number of Treasury Shares which have been authorized for issuance under the Plan
but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
2
<PAGE> 3
(q) "Trading Day" shall mean a day on which national stock
exchanges and The Nasdaq Stock Market are open for trading.
(r) "Treasury Shares" shall mean shares of Common Stock that
have been previously issued to stockholders and reacquired by the Company.
3. Eligibility.
(a) Any Employee (as defined in Section 2(g)), who shall be
employed by the Company on a given Enrollment Date shall be eligible to
participate in the Plan.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i)to the
extent, immediately after the grant, such Employee (or any other person whose
stock would be attributed to such Employee pursuant to Section 424(d) of the
Code) would own capital stock and/or hold outstanding options to purchase such
stock possessing five percent (5%) or more of the total combined voting power or
value of all classes of the capital stock of the Company or of any Parent,
Subsidiary, or (ii) to the extent his or her rights to purchase stock under all
employee stock purchase plans (as defined in Section 423(b) of the Code) of the
Company and any Parent or its subsidiaries will not accrue at a rate which
exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the
fair market value of the shares at the time such option is granted) for each
calendar year in which such option is outstanding at any time. The accrual of
rights to purchase stock shall be determined in accordance with Section
423(b)(8) of the Code.
4. Offering Periods. The Plan shall be implemented by consecutive
Offering Periods. The first Offering Period shall commence on the first Trading
Day following June 1, 1997 and shall terminate on the last Trading Day of the
sixth month following the commencement of the Offering Period. Thereafter,
Offering Periods shall commence on the first Trading Day following Exercise Date
of the prior Offering Period and shall terminate on the last Trading Day of the
sixth month following commencement of such Offering Period. The Board shall have
the power to change the duration of Offering Periods (including the commencement
dates thereof) with respect to future offerings without shareholder approval if
such change is announced at least fifteen (15) days prior to the scheduled
beginning of the first Offering Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan
by completing a enrollment agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's Human Resources
office not later than one day prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
3
<PAGE> 4
6. Payroll Deductions.
(a) At the time a participant files his or her enrollment
agreement, he or she shall elect to have payroll deductions made on each pay day
during an Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and will be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in
the Plan as provided in Section 10 hereof, but may not otherwise increase or
decrease the rate of his or her payroll deductions during the Offering Period. A
participant's enrollment agreement shall remain in effect for successive
Offering Periods unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to 0% at such time during any
Offering Period which is scheduled to end during the current calendar year (the
"Current Offering Period") that the aggregate of all payroll deductions which
were previously used to purchase stock under the Plan in a prior Offering Period
which ended during that calendar year plus all payroll deductions accumulated
with respect to the Current Offering Period equal $21,250. Payroll deductions
shall recommence at the rate provided in such participant's enrollment agreement
at the beginning of the first Offering Period which is scheduled to end in the
following calendar year, unless terminated by the participant as provided in
Section 10 hereof.
(e) At the time the option is exercised, in whole or in part,
or at the time some or all of the Company's Common Stock issued under the Plan
is disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but will not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering
Period, each eligible Employee participating in such Offering Period shall be
granted an option to purchase on the Exercise Date of such Offering Period (at
the applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the participant's account as of the
Exercise Date by the applicable Purchase Price. During a six month Offering
Period no Employee shall be permitted to purchase, more than 2,000 shares (or
such lesser number determined by the Administrator); provided, however, that
such limit shall be adjusted proportionately in the event of an Offering Period
longer than six months. All such purchases shall also be subject to the
limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option
shall occur as provided
4
<PAGE> 5
in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10
hereof, and shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the
Plan as provided in Section 10 hereof, his or her option for the purchase of
shares shall be exercised automatically on the Exercise Date, and the maximum
number of full shares subject to option shall be purchased for such participant
at the applicable Purchase Price with the accumulated payroll deductions in his
or her account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be carried over in the participant's account into the next
Offering Period. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date
on which a purchase of shares occurs, the shares shall be credited to an account
in the participant's name with a brokerage firm selected by the Plan Committee
to hold the shares in it's street name.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time up to two weeks prior to any
Exercise Date by giving written notice to the Company in the form of Exhibit B
to this Plan. All of the participant's payroll deductions credited to his or her
account will be paid to such participant promptly after receipt of notice of
withdrawal, such participant's option for the Offering Period will be
automatically terminated, and no further payroll deductions for the purchase of
shares will be made during the Offering Period. If a participant withdraws from
an Offering Period, payroll deductions will not resume at the beginning of the
succeeding Offering Period unless the participant delivers to the Company a new
enrollment agreement.
(b) Upon a participant's ceasing to be an Employee (as defined
in Section 2(g) hereof) for any reason, he or she will be deemed to have elected
to withdraw from the Plan and the payroll deductions credited to such
participant's account during the Offering Period but not yet used to exercise
the option will be returned to such participant or, in the case of his or her
death, to the person or persons entitled thereto under Section 14 hereof, and
such participant's option will be automatically terminated. The preceding
sentence notwithstanding, a participant who receives payment in lieu of notice
of termination of employment shall be treated as continuing to be an Employee
for the participant's customary number of hours per week of employment during
the period in which the participant is subject to such payment in lieu of
notice.
(c) A participant's withdrawal from an Offering Period will
not have any effect upon his or her eligibility to participate in any similar
plan which may hereafter be adopted by the Company or in succeeding Offering
Periods which commence after the termination of the Offering Period from which
the participant withdraws.
11. Interest. No interest shall accrue on the payroll deductions
of a participant in the Plan.
5
<PAGE> 6
12. Stock.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be three hundred
fifty thousand (350,000) shares, subject to adjustment upon changes in
capitalization of the Company as provided in Section 18 hereof. Shares issuable
under the Plan shall be Treasury Shares. If on a given Exercise Date the number
of shares with respect to which options are to be exercised exceeds the number
of shares then available under the Plan, the Company shall make a pro rata
allocation of the shares remaining available for purchase in as uniform a manner
as shall be practicable and as it shall determine to be equitable.
(b) The participant will have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
will be registered in the name of the participant or in the name of the
participant and his or her spouse.
13. Administration.
(a) Administrative Body. The Plan shall be administered by the
Board or a committee of members of the Board appointed by the Board. The Board
or its committee shall have full and exclusive discretionary authority to
construe, interpret and apply the terms of the Plan, to determine eligibility
and to adjudicate all disputed claims filed under the Plan. Every finding,
decision and determination made by the Board or its committee shall, to the full
extent permitted by law, be final and binding upon all parties.
(b) Rule 16b-3 Limitations. Notwithstanding the provisions of
Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor provision ("Rule 16b-3") provides specific requirements for the
administrators of plans of this type, the Plan shall be administered only by
such a body and in such a manner as shall comply with the applicable
requirements of Rule 16b-3.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to an Exercise Date on which the option is exercised but prior to
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
6
<PAGE> 7
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
15. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof. Shares of
Common Stock acquired through exercise of options granted pursuant to this Plan
may not be sold or otherwise transferred until at least twelve months after the
Exercise Date. The Company shall have the right to place a legend on all stock
certificates delivered pursuant to this Plan setting forth the restriction on
transferability of such shares.
16. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to participating
Employees at least annually, which statements will set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
18. Adjustments Upon Changes in Capitalization; Dissolution;
Liquidation; Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the stockholders of the Company, the Reserves as well as the price per share
of Common Stock covered by each option under the Plan which has not yet been
exercised, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration". Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of
7
<PAGE> 8
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) Merger or Asset Sale. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"). The
New Exercise Date shall be before the date of the Company's proposed sale or
merger. The Board shall notify each participant in writing, at least ten (10)
business days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date, unless prior to
such date the participant has withdrawn from the Offering Period as provided in
Section 10 hereof.
19. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and
for any reason amend or terminate the Plan. Except as provided in Section 18
hereof, no such termination can affect options previously granted. Except as
provided in Section 18 hereof, no amendment may make any change in any option
theretofore granted which adversely affects the rights of any participant. To
the extent necessary to comply with Rule 16b-3 or under Section 423 of the Code
(or any successor rule or provision or any other applicable law or regulation),
the Company shall obtain shareholder approval in such a manner and to such a
degree as required.
(b) Without shareholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods
(provided no Offering Period may be more than seven months), limit the frequency
and/or number of changes in the amount withheld during an Offering Period,
establish the exchange ratio applicable to amounts withheld in a currency other
than U.S. dollars, permit payroll withholding in excess of the amount designated
by a participant in order to adjust for delays or mistakes in the Company's
processing of properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for each
participant properly correspond with amounts withheld from the participant's
Compensation, and establish such other limitations or procedures as the Board
(or its committee) determines in its sole discretion advisable which are
consistent with the Plan.
20. Notices. All notices or other communications by a participant
to the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be
issued with respect to an option unless the exercise of such option and the
issuance and delivery of such shares pursuant
8
<PAGE> 9
thereto shall comply with all applicable provisions of law, domestic or foreign,
including, without limitation, the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
22. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 19 hereof.
9
<PAGE> 10
EXHIBIT A
DOCUMENT SCIENCES CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
ENROLLMENT AGREEMENT
_____ Original Application Enrollment Date: __________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________ hereby elects to participate in
the Document Sciences Corporation 1997 Employee Stock Purchase Plan
(the "Employee Stock Purchase Plan") and subscribes to purchase shares
of the Company' s Common Stock in accordance with this Enrollment
Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Gross Compensation (not to exceed 10%) beginning on the
first payday after the Grant Date and on each payday thereafter until
the Exercise Date, as determined by the Board, in accordance with the
Employee Stock Purchase Plan. (Please note that no fractional
percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Company's Common Stock at the applicable Purchase
Price determined in accordance with the Section 9.3 of the Employee
Stock Purchase Plan. I understand that, prior to the Exercise Date, I
shall be permitted only once to (a) withdraw accumulated payroll
deductions, (b) discontinue payroll deductions, or (c) decrease, but
not increase, the percentage of Gross Compensation withheld. I further
understand that I may withdraw all but not less than all the payroll
deductions credited to my account and not yet used to exercise my
option under the Plan at any time up to two weeks prior to the Exercise
Date by giving written notice to the Company.
4. I have received a copy of the complete "Employee Stock Purchase Plan."
I understand that my participation in the Employee Stock Purchase Plan
is in all respects subject to the terms of the Plan. I understand that
the grant of the option by the Company under this Enrollment Agreement
is subject to obtaining shareholder approval of the Employee Stock
Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and Spouse Only):
1
<PAGE> 11
6. I understand that I may not sell or otherwise transfer shares of Common
Stock purchased pursuant to this Plan until at least twelve months
after the Exercise Date and that the Company shall have the right to
place a legend on all stock certificates representing Option Shares
setting forth the restriction on transferability of such shares.
7. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be
treated for federal income tax purposes as having received ordinary
income at the time of such disposition in an amount equal to the excess
of the fair market value of the shares at the time such shares were
purchased by me over the price which I paid for the shares. I hereby
agree to notify the Company in writing within 30 days after the date of
any disposition of shares and I will make adequate provision for
Federal, state or other tax withholding obligations, if any, which
arise upon the disposition of the Common Stock. The Company may, but
will not be obligated to, withhold from my compensation the amount
necessary to meet any applicable withholding obligation including any
withholding necessary to make available to the Company any tax
deductions or benefits attributable to sale or early disposition of
Common Stock by me. If I dispose of such shares at any time after the
expiration of the 2-year holding period, I understand that I will be
treated for federal income tax purposes as having received income only
at the time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser of
(1) the excess of the fair market value of the shares at the time of
such disposition over the purchase price which I paid for the shares,
or (2) 15% of the fair market value of the shares on the first day of
the Offering Period. The remainder of the gain, if any, recognized on
such disposition will be taxed as capital gain.
8. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Enrollment Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
9. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)
-------------------------------------------------
(First) (Middle) (Last)
Relationship
-------------------------------------------------
-------------------------------------------------
(Address)
2
<PAGE> 12
NAME: (Please print)
-------------------------------------------------
(First) (Middle) (Last)
Relationship
-------------------------------------------------
-------------------------------------------------
(Address)
Employee's Social
Security Number:
-------------------------------------------------
Employee's Address:
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
I UNDERSTAND THAT THIS ENROLLMENT AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
----------------------------------
Signature of Employee
----------------------------------
Spouse's Signature
(If beneficiary other than spouse)
3
<PAGE> 1
EXHIBIT 11.1
DOCUMENT SCIENCES CORPORATION AND SUBSIDIARIES
COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE (1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Pro forma net income (loss)......................................... $ 1,361 $ 1,052
Weighted average number of common shares outstanding................ 9,115,533 119,210
Weighted average number of preferred shares outstanding on an as if
converted basis................................................... -- 7,140,000
Number of common stock equivalents as a result of stock options
outstanding using the treasury stock method....................... 230,110 885,357
Number of common shares issued and stock options granted in
accordance with Staff Accounting Bulletin No. 83 (2).............. 145,104 147,165
Shares used in per share computation................................ 9,490,747 8,291,732
Pro forma net income (loss) per share............................... $ 0.14 $ 0.13
</TABLE>
- ---------------
(1) This exhibit presents the primary and fully diluted computations of pro
forma income and loss per share. There is no material difference in the per
share amounts when applying either method.
(2) Common shares issued by the Company during the twelve months immediately
preceding the initial public offering date plus the number of common
equivalent shares which were issued during the same period pursuant to the
grant of stock options (using the treasury stock method and offering price)
have been included in the calculation of common equivalent shares pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83.
<PAGE> 1
Exhibit 13.1
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1992 1993 1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME
====================================================================================
<S> <C> <C> <C> <C> <C>
NET REVENUES $1,567 $3,491 $7,171 $10,512 $15,319
- ------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (268) 720 1,354 1,685 1,665
- ------------------------------------------------------------------------------------
NET INCOME (LOSS) (174) 413 712 1,052 1,361
- ------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE (.02) .06 .09 .13 .14
- ------------------------------------------------------------------------------------
SHARES USED IN PER SHARE CALCULATIONS $7,290 7,290 8,256 8,292 9,491
====================================================================================
BALANCE SHEET
====================================================================================
WORKING CAPITAL (DEFICIT) $ (319) $ 84 $ 537 $ 1,353 $25,807
- ------------------------------------------------------------------------------------
TOTAL ASSETS 744 1,805 4,209 6,289 32,322
- ------------------------------------------------------------------------------------
LONG TERM LIABILITIES 10 18 20 99 116
- ------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT) (388) (308) 71 856 26,910
====================================================================================
</TABLE>
STOCKHOLDER INFORMATION
STOCK LISTING
The Company's common stock is quoted on the Nasdaq National Market System,
symbol: DOCX.
The following table sets forth, for the periods indicated, the range of high
and low sales prices since the Company completed its initial public offering on
September 20, 1996:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
September 20, 1996 through $14.50 $12.00
September 30, 1996
Fourth quarter ended $16.38 $ 9.50
December 31, 1996
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Document Sciences Corporation of our report dated January 22, 1997,
included in the 1996 Annual Report to Stockholders of Document Sciences
Corporation.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8) of our report dated January 22, 1997, with respect to the
consolidated financial statements of Document Sciences Corporation incorporated
by reference in the Annual Report (Form 10-K) for the year ended December 31,
1996.
/s/ ERNST & YOUNG LLP
San Diego, California
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,465,694
<SECURITIES> 23,142,885
<RECEIVABLES> 4,861,501
<ALLOWANCES> (227,112)
<INVENTORY> 0
<CURRENT-ASSETS> 30,645,972
<PP&E> 1,502,492
<DEPRECIATION> 504,289
<TOTAL-ASSETS> 32,021,517
<CURRENT-LIABILITIES> 4,838,906
<BONDS> 0
0
0
<COMMON> 10,722
<OTHER-SE> 26,899,649
<TOTAL-LIABILITY-AND-EQUITY> 32,021,517
<SALES> 11,014,000
<TOTAL-REVENUES> 15,319,294
<CGS> 1,192,621
<TOTAL-COSTS> 2,284,840
<OTHER-EXPENSES> 11,127,976
<LOSS-PROVISION> 241,540
<INTEREST-EXPENSE> 29,430
<INCOME-PRETAX> 1,982,446
<INCOME-TAX> (621,500)
<INCOME-CONTINUING> 1,360,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,360,946
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
