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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, 1998
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)
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DELAWARE 33-0485994
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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6333 GREENWICH DRIVE, SUITE 200, SAN DIEGO, 92122
CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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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 25, 1999, there were 10,890,681 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 25, 1999) was approximately
$5,675,793. 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 definitive Proxy Statement for the
1999 Annual Meeting of Stockholders to be held on May 24, 1999 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
"Business -- Risk Factors" 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 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. Our document
automation software, the Document Sciences Autograph family of products, enables
personalized and customized publishing solutions for many industries including
insurance, managed healthcare, financial services, telecommunications,
manufacturing/distribution, government and commercial print services. Our
products facilitate 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, our core technology is being applied to provide electronic
document automation solutions for the Internet by leveraging the capabilities of
Adobe's widespread PDF technology. Document Sciences Autograph is licensed to
more than 670 customers worldwide who are collectively producing an estimated
one billion customized pages per month. The highly portable Document Sciences
Autograph software 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. Our products are used in a
wide array of computing environments from client/server to large computer
systems.
PRODUCTS
The Document Sciences Autograph family of products currently addresses
three major functional areas: Document Composition and Assembly, Content
Management, and Document Viewing, as described below. All of our software
products can be complemented by our professional services organization.
Historically, we have licensed our products for one year, after which an
annual renewal fee, usually 15% of the initial license fee, is required for
continued use. We are transitioning to a new sales model where we will offer
perpetual licenses for our products, as well as three-year subscription license
terms, after which the license may be renewed for additional three-year terms,
or converted for perpetual use. We will also provide three-year maintenance
agreements that are usually in an amount equal to 15%, per year, of the
subscription license fee. The list price for a subscription license fee for
CompuSet, our core product, is currently $90,000 for a mainframe installation
and ranges down to $45,000 for a PC NT server installation. Options currently
range from $3,000 to $50,000. A typical new sale is currently about $100,000 for
software licenses and approximately $75,000 for professional services.
Document Composition and Assembly
Composition and Assembly. CompuSet automates document composition and
assembly using data and information in corporate databases. CompuSet software
consists of a rule-based language and a composition engine that provides
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
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driven graphics generation and full color. CompuSet operates on a range of
computers and operating systems including mainframes, Unix platforms and PC NT
servers.
Data Capture and Setup. Data capture and setup products include the newly
introduced Data Preparation Tool, or DPT, and a number of Importers. These
prepare data and content for subsequent composition and assembly by CompuSet.
DPT 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 provides an easy-to-use Graphical User
Interface, or GUI, that describes the data environment, related data processing
and the tagging instructions for CompuSet. It then automatically generates a
data preparation program in COBOL that is compatible with mainframe COBOL
compilers, and Acucorp's AcuCobol runtime products. Importers accept externally
generated document objects, including text, static graphics and scanned images,
and convert them into formats compatible with CompuSet. The Importers currently
support Xerox Metacode, Adobe PostScript and the TIFF standard for scanned
images. Additional Importer extensions for supporting additional IBM AFPDS
format types are planned for introduction during 1999.
Document Output and Merge. Emitters transform CompuSet's output into a
number of popular Page Description Languages, or PDLs, for printing and viewing.
The PDLs provide instructions for rendering text, forms, bitmaps, and graphics
into documents. The Emitters also condition the PDLs for transport over a
variety of high-speed printing interfaces. The PDL formats currently supported
are Xerox Metacode, IBM AFPDS, HP PCL, Adobe PostScript, and Adobe Portable
Document Format, or PDF. This part of the architecture is extensible and new
Emitters can be developed as required.
Application Development Tools. Visual CompuSet application development
tools run on Microsoft Windows(R) and simplify document design and application
prototyping. Visual CompuSet incorporates support for JetForm(R) Corporation's
JetForm Design tool, the optional DPT and for the CompuSeries II design
environment. CompuSeries II consists of several integrated modules including 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. Visual CompuSet uses a PC version of
CompuSet, combined with an editor to manipulate the tagged document data. Visual
CompuSet supports all of the dynamic functions and features of the CompuSet
production engine. Additional extensions to Visual CompuSet are planned for
introduction during 1999.
Content Management
Content Management tools provide client/server solutions for the creation,
revision and management of document components used in our document automation
solutions. They consist of the Document Library Service, or DLS, and Desktop
Document Manager, or 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. DDM is the client
component of DLS and manages text objects created with Microsoft Word(R). 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 Document
Viewing Service, or 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 platforms, and PC NT servers. The electronic document
files are generated in a
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format called composite container format, or CCF, which is optimized for fast,
memory-efficient viewing, transport and storage. CCF files can then be viewed by
CompuView. CCF files consist of three major components: a PDL rendition of the
pages for WYSIWYG viewing, various indices for locating documents and reusable
document elements. CCF files can also be distributed, archived or printed
through document distribution and archiving systems offered by third party
software developers that integrate CompuView. The view of the document is
virtually identical to the printed document. CompuView may also be integrated
with third party document archival and retrieval systems that support the CCF
format.
We are considering possible future Internet extensions, some of which are
not currently under active development. We believe that our core technology can
be extended to the Internet and intranets and we are continuing development
activities 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 our software products, we provide a comprehensive suite of
professional services which can assist customers in the implementation of
mission-critical document automation applications. Professional services include
on-site software installation, customer training programs, telephone support
programs and consulting services. Consulting services is currently focused on
assisting in the sale of high margin initial software licenses by providing
project management, requirements analysis, application design and application
development services. In addition to consulting services, we currently provide
introductory-level customer education with CompuSet, DLS and DPT initial
licenses. Additional and advanced classes are available for additional fees at
our headquarters in San Diego and at customer sites. We believe that the use of
our professional services enables customers to deploy our document automation
products more rapidly and effectively. The professional services and support
organizations employed a staff of 54 as of December 31, 1998.
SALES AND MARKETING
Our sales and marketing organization targets vertical industry markets that
require document automation and high volume document personalization and
customization. We currently license our products using a combination of direct
sales and alternate channels. In the United States, we market our products
through a direct sales force. Sales representatives are provided with pre-sales
technical support by solution analysts. Sales representatives and solution
analysts are located throughout the United States. We distribute our products
through value added resellers, or VARs, such as Xerox Canada, Ltd. in Canada,
Fuji Xerox Co., Ltd. in Australia, and Xerox Brazil, Ltd. in Brazil. Our
subsidiary, Document Sciences Europe, markets and supports our products in
Europe, Africa and the Middle East by providing channel management, technical
support, consulting and training services, and by defining European market and
product requirements. We license our products in Europe through VARs and, to a
lesser extent, direct sales. The VARs are principally Xerox Europe affiliates
who remarket our products. Our revenues from export transactions with Xerox
affiliates were $2.9 million, $2.9 million and $4.1 million in 1996, 1997 and
1998, respectively. The sales and marketing organization employed a staff of 50
as of December 31, 1998.
We intend to expand our 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 we are able to
increase our market presence, we may then augment our alternate channels with a
direct sales capability.
In addition, we intend to increase both our 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, New Dimension Software, RSD, JetForm
Corporation, Systemware and Anacomp. These relationships provide sales leads for
our products and have extended our sales coverage and networking capabilities.
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RESEARCH AND DEVELOPMENT
In general, our strategy is to augment and extend the document composition
and assembly capabilities of our core products. Initially, product development
investments are primarily focused on completing the Document Sciences Autograph
family of products, which include delivering products for document viewing as
well as adding support for additional print environments. Subsequently, there is
a substantial investment in product maintenance, software integration, testing
and documentation. We supplement these 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 Document Sciences Autograph family of products has been
applied mainly to document automation applications producing paper-based
documents. We believe that our core technology can be extended to the Internet,
intranets and commercial on-line services, and we have recently begun initial
development activity in this area. The short-term strategy is to engage this
emerging opportunity with two complementary initiatives. We intend to work
closely with existing customers to define product requirements, many of whom
have expressed interest in using the Internet in their document automation
solutions. Additionally, we intend to develop incremental extensions to the
Document Sciences Autograph family of products which can be incorporated by
current customers into our existing document automation products. There can be
no assurance that we 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 jointly 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. We
have a formal release planning process for annual maintenance releases, and we
deliver interim versions as needed to support our customers. The development
organization maintains a database of all customer and internal requests which
forms the basis for release planning.
We expect to continue to enhance our existing products and to develop new
products, particularly as they relate to electronic publishing applications.
Research and development expenditures have grown substantially since our
inception. Such expenditures, not including amounts capitalized, were $2.3
million, $3.3 million and $4.3 million in 1996, 1997 and 1998. The development
organization employed a staff of 42 as of December 31, 1998. We employ
independent contractors as needed to supplement the permanent development staff.
COMPETITION
The market for our document automation products is intensely competitive,
subject to rapid change, and significantly affected by new product introductions
and other market activities of industry participants. Our 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. We face direct and indirect competition from a broad range of competitors
who offer a variety of products and solutions to our current and potential
customers. Our principal competition currently comes from systems developed
in-house by the internal MIS departments of large organizations where there is a
reluctance to commit the time and effort necessary to convert their document
automation processes to our document automation software. We also face
competition from Docucorp, which is partially owned by Xerox, in the insurance
industry, M&I Data Services, Inc. in banking and financial services, Group 1
Software, Inc. in commercial direct mailing and other direct general purpose
competitors such as IBM's Direct Composition Facility. Several of our
competitors have longer operating histories, significantly greater financial,
technical and marketing resources, greater name recognition and a larger
installed base of customers.
It is also possible that we 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 be
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a large competitor. Moreover, as the market for document automation software
develops, a number of these or other companies with significantly greater
resources than Document Sciences could attempt to enter or increase their
presence in the document automation market by either acquiring or forming
strategic alliances with our competitors or by increasing 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 our current and
prospective customers. 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 our business,
operating results and financial condition. There can be no assurance that we
will be able to compete successfully against current or future competitors or
that competitive pressures faced by us will not materially adversely affect our
business, operating results and financial condition.
We believe that the principal competitive factors affecting our market
include product performance and functionality, ease of use, scalability,
operating across multiple computer and operating system platforms, product and
company reputation, client service and support and price. Although we believe we
currently compete favorably with respect to such factors, there can be no
assurance that we will be able to maintain our competitive position against
current and future competitors, especially those with greater financial,
technical and marketing resources than us, or that we will be successful in the
face of increasing competition from new products, new solutions introduced by
existing competitors or by new companies entering the market.
PATENTS AND PROPRIETARY RIGHTS
Our success is dependent, in part, on the ability to protect our
proprietary technology. We rely primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary rights. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. We presently have no patents or patent
applications pending. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult, and while we are
unable to determine the extent to which piracy of our software products exists,
software piracy can be expected to be a persistent problem. In addition, the
laws of some foreign countries do not protect our proprietary rights to as great
an extent as do the laws of the United States. There can be no assurance that
our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology. We are not aware
that any of our products infringes upon the proprietary rights of third parties.
There can be no assurance, however, that third parties will not claim
infringement by us with respect to current or future products. We expect that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in our 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 us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could have a material
adverse effect upon our business, operating results and financial condition.
In addition, we also rely on certain software that we license from third
parties, including software that is integrated with internally developed
software and used in our 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 us 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 our business, operating
results and financial condition.
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EMPLOYEES
As of December 31, 1998, we had 163 employees including 54 in professional
services, 50 in sales and marketing, 42 in research and development and 17 in
finance and administration. None of our employees are represented by a labor
union. We have experienced no work stoppages and believe our relationship with
our employees is good. Competition for qualified personnel in the industry in
which we compete is intense. We believe that our future success will depend in
part on our continued ability to attract, hire and retain qualified personnel.
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RISK FACTORS
The following is a discussion of certain factors which currently impact or
may impact our business, operating results and/or financial condition. Anyone
making an investment decision with respect to our common stock or other
securities is cautioned to carefully consider these factors.
If any of the following risks actually occur, our business, results of
future operations or financial condition could be materially adversely affected.
In such case, the trading price of our common stock could decline, and you may
lose all or part of your investment.
WE HAVE A LIMITED OPERATING HISTORY.
We were incorporated in October 1991 as a wholly owned subsidiary of Xerox,
and Xerox currently owns approximately 62% of our outstanding shares of common
stock. Our limited operating history means that predicting future operating
results is difficult, and our operating history during prior periods cannot
necessarily be regarded as indicative of our prospects as an independent
company. Accordingly, although we have experienced revenue growth in recent
years, we cannot assure you that we will sustain such growth in revenues or that
we will become profitable on a quarterly or annual basis.
OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY, AND WE MAY NOT BE ABLE TO
MAINTAIN OUR EXISTING GROWTH RATES.
Our total revenues and operating results can vary, sometimes substantially,
from quarter to quarter and we expect them to vary significantly in the future.
Our revenues and operating results are difficult to forecast; and our future
results will depend upon many factors, including the following:
- the demand for our products;
- the level of product competition and price competition that we face;
- the length of our sales cycle;
- the size and timing of individual license transactions;
- the delay or deferral of customer implementations;
- the budget cycles of our customers;
- the level of commissions that we receive from the sale of Xerox printers
under the strategic marketing alliance that we have with Xerox;
- our success in expanding our direct sales force and indirect distribution
channels;
- the timing of our new product introductions and product enhancements, as
well as those of our competitors;
- our mix of products and services;
- our level of international sales;
- the activities of and acquisitions by our competitors;
- our timing of new hires;
- changes in foreign currency exchange rates;
- our ability to develop and market new products and to control costs; and
- general domestic and international economic conditions.
Our initial license fee revenue mainly depends on when orders are received
and shipped. However, because of our sales model, our customers' implementation
schedule and the complexity of the implementation process, revenue from some
software shipments may not be recognized in the same quarter as the
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shipment occurs. Our operating expenses are primarily based on anticipated
revenue levels. Since a high percentage of those expenses are relatively fixed,
a delay in the recognition of revenue from license transactions could cause
significant variations in operating results from quarter to quarter and we may
sustain losses as a result. If such expenses precede increased revenues, our
operating results would be materially adversely affected.
As a result of these factors, results from operations for any quarter are
subject to significant variation, and we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and you
should not rely upon them as an indication of our future performance.
Furthermore, our operating results in some future quarter may fall below the
expectations of public market analysts and investors. If this occurs, the price
of our common stock would likely be materially adversely affected.
WE ARE SUBSTANTIALLY CONTROLLED BY XEROX.
Xerox owns approximately 62% of the outstanding shares of our common stock.
Consequently, Xerox controls Document Sciences, is able to elect our entire
board of directors and could have significant input into our operations. In
addition, Xerox is 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 our assets. Xerox's
voting power could delay or prevent a change in control of Document Sciences and
may prevent or discourage tender offers for our common stock at a premium price
by another person or entity. Xerox affiliates currently hold three of the six
seats on our board of directors.
OUR BUSINESS IS DEPENDENT ON MAINTAINING OUR RELATIONSHIPS WITH XEROX.
We currently have a variety of contractual and informal relationships with
Xerox and affiliates of Xerox, including a Cooperative Marketing Agreement, a
Transfer and License Agreement and various distribution agreements. We rely on
these relationships and agreements for a significant portion of our total
revenues.
- In 1998, revenues derived from relationships with Xerox and affiliates of
Xerox accounted for approximately $5.4 million, representing 27% of our
total revenues;
- In 1997, revenues derived from relationships with Xerox and affiliates of
Xerox accounted for approximately $3.8 million, representing 19% of our
total revenues; and
- In 1996, revenues derived from relationships with Xerox and affiliates of
Xerox accounted for approximately $4.2 million, representing 28% of our
total revenues.
Included above were commissions that we received from sales of Xerox
printers under our strategic marketing alliance with Xerox. These commissions
were:
- 1998: $344,000;
- 1997: $859,000; and
- 1996: $1.4 million.
These commissions have little or no associated costs and have contributed a
substantial portion of our income from operations for certain prior operating
periods. In addition, these commissions have been inconsistent from quarter to
quarter and are difficult to estimate. Although neither Xerox nor its affiliated
entities have expressed any intention to terminate their agreements with us,
these agreements generally may be terminated on no more than 90 days notice.
Accordingly, there can be no assurance that Xerox or its affiliates will
continue these relationships or, if they do, that they will be on terms
favorable to us.
Furthermore, there can be no assurance that existing and potential
customers will continue to do business with us because of these relationships or
our historical ties with Xerox and its affiliates. Though we intend to continue
our existing relationships with Xerox, our strategy is to lessen our dependence
on Xerox. However, there can be no assurance that we will be able to do so and,
because of our current level of dependence on Xerox, there can be no assurance
that our move to become more independent will not adversely affect our business,
results of operations or financial condition. Our failure to maintain these
relationships, particularly
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with Xerox and its affiliates, or to establish new relationships in the future,
could have a material adverse effect on our business, operating results and
financial condition.
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 our competitors.
There can be no assurance that Xerox or one of its affiliated companies will not
engage in business that directly competes with us. In addition, Xerox has
ongoing internal development activities that could in the future lead to
products that compete with us. Xerox could in the future expand these
relationships or enter into additional ones, and as a result our business could
be materially adversely affected.
OUR GROWTH IS DEPENDENT UPON SUCCESSFULLY FOCUSING OUR DISTRIBUTION CHANNELS.
We intend to streamline our worldwide sales and distribution channels by
focusing on key target industry market segments where our current and planned
products enjoy a significant competitive advantage and a current, high market
demand. We also plan on leveraging our existing relationships with Xerox
Corporation, IBM Corporation and their channels and affiliates by launching
targeted joint marketing and value added reseller programs and by introducing
new product offerings that are optimized for selected target markets and
marketing channels. In addition, we intend to form additional partnerships with
system integrators and consultants in order to broaden our capacity to deliver
complete document automation solutions that incorporate significant services
content, while also maintaining our core domain expertise. We cannot assure you
that we will be able to successfully streamline and focus our worldwide
channels, leverage our existing relationships or form new alliances. If we fail
to do so, it will have a material adverse effect on our business, operating
results and financial condition.
CONTINUED EXPANSION OF OUR PROFESSIONAL SERVICES IS NECESSARY FOR OUR FUTURE
GROWTH.
We are increasing our focus on the consulting services component of our
professional services to assist customers in the planning and implementation of
enterprise-wide, mission-critical document automation applications. Our
increased focus is dependent on retaining and hiring professionals to perform
these consulting services. Should we be unable to maintain the necessary
services workforce, our business and financial condition could be materially
adversely affected.
OUR GROWTH DEPENDS ON OUR INTRODUCTION OF NEW PRODUCTS AND ENHANCEMENTS TO
EXISTING PRODUCTS.
Our future business, operating results and financial condition will depend
upon our ability to develop new products that address the future needs of our
target markets and to respond to emerging industry standards and practices. Our
Document Sciences Autograph family of products has been applied mainly to
document automation applications producing paper-based documents. We believe
that our core technology can be extended to the Internet, intranets and
commercial on-line services, and we have begun initial development activity in
this area. We cannot assure you that we 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. In
addition, we cannot assure you that our new products and product enhancements
will adequately meet the requirements of the marketplace or achieve market
acceptance. Delays in our commercial shipments of new products or enhancements
may result in client dissatisfaction and a delay or loss of product revenues.
If we are 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, then our
business, operating results and financial condition will be materially adversely
affected. In addition, we cannot assure you that our new products or new
versions of our existing products will achieve market acceptance. In order to
provide our customers with integrated product solutions, our future success will
also depend in part upon our ability to maintain and enhance relationships with
our technology partners, such as JetForm Corporation and New Dimension Software.
9
<PAGE> 11
A LONGER THAN EXPECTED SALES CYCLE MAY AFFECT OUR REVENUES AND OPERATING
RESULTS.
The licensing of our software products is often an enterprise-wide decision
by prospective customers and generally involves a sales cycle of three to twelve
months in order to educate our prospective customers regarding the use and
benefits of our products. In addition, the implementation of our products by
customers involves a significant commitment of their resources over an extended
period of time, and is commonly associated with substantial customer business
process reengineering efforts. For these and other reasons, our sales and
customer implementation cycles are subject to a number of significant delays
over which we have little or no control. Any delay in the sale or customer
implementation of a limited number of license transactions could have a material
adverse effect on our business and results of operations and cause our operating
results to vary significantly from quarter to quarter.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON SALES OF A SMALL NUMBER OF
PRODUCTS IN HIGHLY CONCENTRATED INDUSTRIES.
We derived 69% of our initial license revenues from licenses of CompuSet
and related CompuSet option products in 1998. Our initial license fees from DVS
and DLS comprised 13% and 18%, respectively, in 1998. As a result, factors that
may adversely impact the pricing of or demand for CompuSet and related products,
such as competition from other products, negative publicity or obsolescence of
the hardware or software environments in which our products run, could have a
material adverse effect on our business, operating results and financial
condition. Our financial performance will continue to depend significantly on
the successful development, introduction and customer acceptance of new and
enhanced versions of our CompuSet software and related products. Our revenues
have been derived from sales to a small number of industries as follows:
- Licenses to end users in the insurance and commercial print services
industries for 1998 accounted for 44% of initial license revenues;
- Licenses to end users in these industries for 1997 accounted for 61% of
initial license revenues; and
- Licenses to end users in these industries for 1996 accounted for 55% of
initial license revenues.
Our future success will depend on our ability to continue to successfully
market our products in these and other industries. We cannot assure you that we
will continue to be successful in developing and marketing CompuSet products and
related services. Our failure to do so would have a material adverse effect on
our business, results of operations and financial condition.
WE MAY BE EXPOSED TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Our revenues from export sales, including sales through our foreign
subsidiary, accounted for the following:
- 31% of our total revenues in 1998;
- 28% of our total revenues in 1997; and
- 34% of our total revenues in 1996.
Our wholly owned subsidiary, Document Sciences Europe, markets and supports
our products in Europe. We license our products in Europe through value added
resellers and to a lesser extent, direct sales. Our value added resellers are
principally Xerox affiliates who re-market our products. Revenues generated by
this subsidiary were $4.3 million, $4.4 million and $4.5 million in 1996, 1997
and 1998, respectively. In Australia, Canada and Brazil we distribute our
products through Fuji Xerox Co., Ltd., Xerox Canada, Ltd. and Xerox Brazil,
Ltd., respectively. Revenues generated by these Xerox affiliates were $819,000,
$1.0 million and $1.7 million in 1996, 1997 and 1998, respectively. In order to
successfully expand export sales, we must establish additional foreign
operations, hire additional personnel and develop relationships with additional
international resellers. If we are unable to do so in a timely manner, our
growth in international export sales could be limited, and our business,
operating results and financial condition could be materially adversely
10
<PAGE> 12
affected. In addition, we cannot assure you that we will be able to maintain or
increase international market demand for our products.
Additional risks inherent in our international business activities include:
- currency fluctuations;
- unexpected changes in regulatory requirements;
- tariffs and other trade barriers;
- our limited experience in localizing products for foreign countries;
- lack of acceptance of our localized products in foreign countries;
- longer accounts receivable payment cycles;
- difficulties in managing our 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 our business is conducted in currencies other than the U.S.
dollar, primarily the French franc. Although exchange rate fluctuations have not
had a significant impact on us, fluctuations in the value of the currencies in
which we conduct our business relative to the U.S. dollar could cause currency
transaction gains and losses in future periods. We do not currently engage in
currency hedging transactions, and we cannot assure you that fluctuations in
currency exchange rates in the future will not have a material adverse impact on
our international revenues and our business, operating results or financial
condition.
OUR BUSINESS IS DEPENDENT ON THE EMERGING MARKET 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. We cannot assure
you that the market for document automation software will develop or that, if it
does develop, organizations will adopt our products. We have spent, and intend
to continue to spend, significant resources educating potential customers about
the benefits of our products. However, we cannot assure you that such
expenditures will enable our products to achieve further market acceptance, and
if the document automation software market fails to develop or develops more
slowly than we currently anticipate, our business, operating results and
financial condition would be materially adversely affected.
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 our products
designed for this market will depend in part on their compatibility with such
services. It is difficult to predict whether the Internet, intranets and
commercial on-line services will 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 our products and services as well as the
introduction of new products and services, we cannot assure you that we will be
able to effectively or successfully compete in this emerging market.
OUR ABILITY TO MANAGE OUR GROWTH WILL AFFECT OUR BUSINESS.
We have recently experienced a period of growth in total revenues. Our
ability to compete effectively and to manage future change will require us to
continue to improve our financial and management controls, reporting systems and
procedures on a timely basis and to expand, train and manage our work force. We
cannot assure you that we will be able to do so successfully. Our failure to do
so could have a material adverse effect on our business, operating results and
financial condition.
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<PAGE> 13
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS,
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of
whom had signed employment agreements with us as of December 31, 1998. The loss
of the services of one or more of our executive officers could have a material
adverse effect on our business, operating results and financial condition. Our
future success also depends on our continuing ability to attract and retain
highly qualified product development, sales and management personnel.
Competition for such personnel is intense, and there can be no assurance that we
will be able to retain our key employees or that we will be able to attract,
assimilate or retain other highly qualified product development, sales and
managerial personnel in the future.
OUR FAILURE TO ADEQUATELY LIMIT OUR EXPOSURE TO PRODUCT LIABILITY CLAIMS MAY
ADVERSELY AFFECT US.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. However,
it is possible that the limitation of liability provisions contained in our
license agreements may not be effective under the laws of certain jurisdictions.
Although we have not experienced any product liability claims to date, sale and
support of our products may entail the risk of such claims in the future. A
successful product liability claim brought against us or a claim arising as a
result of our professional services could have a material adverse effect upon
our business, operating results and financial condition.
OUR PRODUCTS MAY SUFFER FROM DEFECTS OR ERRORS.
Software products as complex as those we offer, particularly our new Visual
CompuSet and Data Prep Tool products, may contain undetected defects or errors
when first introduced or as new versions are released. As a result, we could in
the future lose or delay recognition of revenues as a result of software errors
or defects. In addition, our products are typically intended for use in
applications that may be critical to a customer's business. As a result, we
expect that our customers and potential customers have a greater sensitivity to
product defects than the market for software products generally. Although our
business has not been adversely affected by any such errors to date, we cannot
assure you that, despite our testing and testing by current and potential
customers, errors will not be found in our new products or releases. If these
errors are discovered after the commencement of commercial shipments, it could
result in any of the following:
- loss of revenue or delay in market acceptance;
- diversion of our development resources;
- damage to our reputation; or
- increased service and warranty costs.
If any of these factors occur, it would have a material adverse effect upon
our business, operating results and financial condition.
WE MAY FACE RISKS OF YEAR 2000 NONCOMPLIANCE.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar activities.
Based on recent assessments, we have determined that our information
technology, or IT, and non-IT systems, software, hardware and equipment, are
currently purported by the software and hardware vendors to be able to utilize
dates beyond December 31, 1999. However, if such testing disconfirms readiness,
the Year 2000 Issue could have a material impact on our operations.
12
<PAGE> 14
We have queried our significant suppliers and subcontractors that do not
share information systems with us. To date, we are not aware of any external
agent with a Year 2000 issue that would materially impact our results of
operations, liquidity or capital resources. However, we have no means of
ensuring that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely fashion could
materially impact us. The effect of non-compliance by external agents is not
determinable.
We have not yet completed the final phase of the Year 2000 program. In the
event that we do not complete the testing phase to confirm readiness and the
systems believed to be ready are not, we might be unable to sell merchandise and
might be unable to use our financial systems to operate the finance and
accounting functions. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially adversely affect us. We
could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business records. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
WE MAY FACE RISKS FROM THE EURO
Beginning in January 1999, a new currency called the "euro" is scheduled to
be introduced in certain Economic and Monetary Union, or EMU, countries. During
2002, all EMU countries are expected to be operating with the euro as their
single currency. Uncertainty exists as to the effects the euro currency will
have on the marketplace. Additionally, all of the final rules and regulations
have not yet been defined and finalized by the European Commission with regard
to the euro currency. We are still assessing the impact the EMU formation will
have on our internal systems and the sale of our products. We expect to take
appropriate actions based on the results of such assessment. We have not yet
determined any potential costs.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, training, and research and
development facilities occupy approximately 34,500 square feet in San Diego,
California, pursuant to a lease expiring on February 28, 2002. Our subsidiary in
France occupies approximately 3,500 square feet of office space with a renewable
lease expiring in February 2001. In addition, our regional office in Milwaukee,
Wisconsin occupies approximately 7,500 square feet of office space pursuant to a
lease expiring on March 31, 2003. In February 1999, we entered into a lease
agreement for approximately 21,300 square feet of office space in Carlsbad,
California pursuant to a lease expiring on February 28, 2005. This space will
replace our current offices in San Diego as our headquarters. The San Diego
lease allows us to sublet those facilities. We are currently in the process of
pursuing sublet options. Additionally, we plan to move our European office to
Paris by June 30, 1999 and vacate our present facilities in accordance with the
applicable lease provisions. Sales representatives and field technical support
personnel operate from their homes.
ITEM 3. LEGAL PROCEEDINGS
We are not a party, nor is our property subject, to any material pending
legal proceedings.
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<PAGE> 15
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 1998.
Executive Officers of Document Sciences
The executive officers of Document Sciences and their ages, as of March 31,
1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles R. Harris 49 President and Chief Executive Officer
John H. Wilson 54 Interim Chief Financial Officer
Peter L. Bradshaw 43 Vice President, Development
Daniel J. Fregeau 42 Vice President, Worldwide Sales and
Business Development
</TABLE>
Charles R. Harris has served as President and Chief Executive Officer and
as a Director of the Company since August 1998. Prior to joining Document
Sciences, Mr. Harris was President and Chief Executive Officer and a Director of
Simulation Sciences Inc. from July 1995 to July 1998. From September 1994 to
June 1995, Mr. Harris was an independent consultant. From April 1993 to August
1994, Mr. Harris was employed by Computervision Corp., a computer modeling
equipment provider ("Computervision"), as Vice President of the Industry
Business Group and a Member of the Management Committee. From 1980 to 1993, Mr.
Harris was employed by Hewlett-Packard Company, a computer and instrument
manufacturer ("Hewlett-Packard"), as Global Account Manager for General
Motors/Electronic Data Systems. Mr. Harris holds a B.A degree and an M.S. degree
from Emory University in Georgia.
John H. Wilson has served as Interim Chief Financial Officer since May
1998. Between 1988 and 1998, Mr. Wilson served as an interim senior financial
officer for several software and electronic industry companies in San Diego,
California. Mr. Wilson's previous experience includes senior financial and
general management positions in the retail and healthcare industries and service
with Price Waterhouse Coopers, LLP in Los Angeles, California. Mr. Wilson is a
Certified Public Accountant in California and holds a Master's Degree in
Business from Woodbury University in Los Angeles.
Peter L. Bradshaw has served as Vice President of Development since March
1994. Prior to joining Document Sciences, 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.
Daniel J. Fregeau has served as Vice President, Worldwide Sales and
Business Development since 1998. From 1997 to 1998, Mr. Fregeau served as Vice
President, Business Development, from 1994 to 1997, he served as Vice President,
Marketing and from 1992 to 1994, he served as Vice President, Sales. Prior to
joining Document Sciences, 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.
Executive officers 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 Document Sciences.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"DOCX". The following table sets forth the range of high and low closing prices
on the National Market of the common stock for the periods indicated, as
reported by Nasdaq. Such quotations represent inter-dealer prices without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1996
September 20, 1996 through September 30, 1996.............. $14.50 $12.00
Forth quarter ended December 31, 1996...................... $16.38 $ 9.50
FISCAL 1997
First quarter ended March 31, 1997......................... $10.13 $ 3.88
Second quarter ended June 30, 1997......................... $ 5.50 $ 3.00
Third quarter ended September 30, 1997..................... $ 4.75 $ 3.63
Fourth quarter ended December 31, 1997..................... $ 3.82 $ 2.50
FISCAL 1998
First quarter ended March 31, 1998......................... $ 4.88 $ 2.94
Second quarter ended June 30, 1998......................... $ 4.25 $ 2.69
Third quarter ended September 30, 1998..................... $ 3.00 $ 1.69
Fourth quarter ended December 31, 1998..................... $ 2.50 $ 1.38
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of Document Sciences
Corporation. This historical data should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto in Item 8 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
Net revenues..................................... $7,171 $10,512 $15,319 $19,740 $ 20,107
Income (loss) from operations.................... 1,354 1,685 1,665 (58) (10,361)
Net income (loss)................................ 712 1,052 1,361 838 (9,154)
Net income (loss) per share...................... .09 .12 .14 .08 (.86)
Shares used in per share calculations............ 8,256 8,563 9,615 11,013 10,690
BALANCE SHEET
Working capital.................................. $ 537 $ 1,353 $25,807 $23,896 $ 14,883
Total assets..................................... 4,209 6,289 32,022 34,229 30,989
Capital lease obligations, less current
portion........................................ 20 99 116 52 13
Stockholders' equity............................. 71 856 26,910 27,691 18,410
</TABLE>
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this Form 10-K contains
forward-looking statements that involve risks and uncertainties. Our 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 "Business -- Risk Factors" on
pages 7 through 13. Readers are cautioned not to place undue reliance on these
forward-looking statements, and we undertake 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. We were incorporated in Delaware in October 1991 as a
wholly owned subsidiary of Xerox Corporation, and following our initial public
offering of stock in September 1996, Xerox ownership was reduced to
approximately 62%.
On May 9, 1997, we purchased substantially all of the assets of Data
Retrieval Corporation of America from the West Group. Included in the purchase
were exclusive ownership of the TextBook, TextComply, TextDBMS, TextGen and
TextMigrate software products and their installed base of commercial accounts.
We subsequently developed DLS and DDM from the technology purchased from Data
Retrieval. We have retained employees responsible for the development, product
support and customer service of the Data Retrieval software products. In
addition, we will continue to provide training and customer support for existing
and future customers for all supported products. We have initiated an end of
life strategy for the products which were replaced by DLS and DDM.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Revenues
Total revenues were $15.3 million, $19.7 million and $20.1 million in 1996,
1997 and 1998, respectively, representing increases of 29% from 1996 to 1997 and
2% from 1997 to 1998. Our 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 our
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 us as well as fees received from Xerox in
connection with the sale of certain Xerox printer products. We recognize revenue
in accordance with AICPA Statement of Position (SOP) 97-2, Software Revenue
Recognition. Initial license revenue is recognized when a contract exists, the
fee is fixed or determinable, software delivery has occurred and collection of
the receivable is deemed probable. The portion of the initial license revenue
which represents the software support for the first year is deferred and
recognized ratably over the contract period. Annual renewal license and support
fees are 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 services are recognized as the related services are performed.
However, when such consulting services are deemed to be essential to the
functionality of the delivered software product, revenue from the entire
arrangement is recognized in accordance with SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts, and
Accounting Research Bulletin (ARB) No. 45, Long-Term Construction-Type
Contracts.
We sell our products principally through our direct sales force
domestically, and internationally principally through distributors and value
added resellers (VARs) and, to a lesser extent, through our direct sales force.
Revenues from export sales and sales through our foreign subsidiary were $5.2
million, $5.5 million and $6.2 million in 1996, 1997 and 1998, respectively,
representing increases of 6% from 1996 to 1997 and 13% from 1997 to 1998.
Revenue from export sales were 34%, 28% and 31% of total revenues in 1996, 1997
and
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<PAGE> 18
1998, respectively. The increase in total export revenue is due primarily to our
increased presence in foreign markets.
We maintain a strategic marketing alliance with Xerox under which both
parties agree to pay each other fees on referrals that lead to the successful
sale or licensing of each other's products. Our revenues from this strategic
marketing alliance were $1.4 million, $859,000 and $344,000 in 1996, 1997 and
1998, respectively. These commissions were 9%, 4% and 2% of total revenues in
1996, 1997 and 1998, respectively. Commissions paid relating to referrals from
Xerox were $181,000, $121,000 and $0 in 1996, 1997 and 1998, respectively.
We have entered into distributorship agreements with various Xerox foreign
affiliates to remarket our products internationally. Our revenues from such
distributorship agreements relating to the licensing, maintenance and support of
our products were $2.9 million in 1996 and 1997 and $4.1 million in 1998.
Initial license fees. Initial license fee revenues were $8.6 million, $8.8
million and $7.2 million in 1996, 1997 and 1998, respectively, representing an
increase of 2% from 1996 to 1997 and a decrease of 18% from 1997 to 1998. The
decrease from 1997 to 1998 reflects the greater dependence on solution sales and
the adoption of SOP 97-2, Software Revenue Recognition, which was effective for
transactions entered into in fiscal years beginning after December 14, 1997.
This SOP requires deferring recognition of some revenues, depending on the
nature and complexity of certain transactions. The application of SOP 97-2
contributed $1.9 million to the increase in deferred revenue in 1998. Initial
license revenues as a percentage of total revenues were 56%, 44% and 36% in
1996, 1997 and 1998, respectively.
Annual renewal license and support fees. Revenues from annual renewal
licenses were $2.4 million, $4.6 million and $5.9 million in 1996, 1997 and
1998, respectively, representing increases of 91% from 1996 to 1997 and 28% from
1997 to 1998. The increase in both periods was principally due to an increase in
the installed base of users of our software products, including the increase in
our installed base of customers resulting from the Data Retrieval purchase. As a
percentage of total revenues, annual renewal license and support fees were 16%,
23% and 29% in 1996, 1997 and 1998, respectively.
Services and other. Revenues from services and other were $4.3 million,
$6.4 million and $7.0 million in 1996, 1997 and 1998, respectively, representing
increases of 48% from 1996 to 1997 and 9% from 1997 to 1998. The increase in
each period was principally due to the increased number of new customer licenses
of our software generating increased demand for services as well as the
increasing scope of professional services offered. Revenues from services and
other were 28%, 32% and 35% of total revenues in 1996, 1997 and 1998,
respectively.
Cost of Revenues and Operating Expenses
Cost of initial license fees. Cost of initial license revenues were
$696,000, $677,000 and $1.4 million in 1996, 1997 and 1998, respectively,
representing 8%, 8% and 19% of initial license revenues in 1996, 1997 and 1998,
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 in the cost of initial licenses was primarily
the result of increased payments for third party software integrated into our
Visual CompuSet products and an increase in the amount of capitalized software
resulting from the 3rd quarter release of Visual CompuSet and DPT.
Cost of annual renewal licenses. Cost of annual renewal licenses consists
principally of the employment-related costs for our technical support staff,
which performs technical software support services. Cost of annual licenses
renewals revenues was $497,000, $750,000 and $862,000 in 1996, 1997 and 1998,
respectively, representing 21%, 16% and 15% of annual renewal license revenues.
While the relative cost of servicing the customer base is decreasing, the
increase in absolute dollars is attributable to additional technical support
personnel necessary to support the customer base acquired from Data Retrieval
and an increase in the installed base of users of our software products.
Cost of services and other. Cost of services and other revenues were $1.1
million, $3.1 million and $4.3 million in 1996, 1997 and 1998, respectively,
representing 25%, 48% and 62% of services and other
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<PAGE> 19
revenue. Cost of services and other consists principally of the
employment-related costs of our consulting and training staff. The increase in
cost of services and other revenues in absolute dollars as well as a percentage
of revenue resulted principally from the addition of new staff to perform our
professional services. As the new professional services staff becomes more
experienced in our products and solutions, the cost of services and other
revenues as a percentage of revenues is expected to decrease. There are little
or no costs related to commissions from the sale of Xerox printers under the
strategic marketing alliance.
Research and development. Research and development expenses were $2.3
million, $3.3 million and $4.3 million in 1996, 1997 and 1998, respectively,
representing increases of 42% from 1996 to 1997 and 30% from 1997 to 1998.
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
22% in 1996, 1997 and 1998, respectively. We anticipate that we will continue to
direct significant resources to development and enhancement of products.
We expense all costs for research and development of new products until
technological feasibility has been assured. Thereafter, costs of software
development are capitalized until general release of the product. The
capitalized costs of software development are amortized using the greater of the
amount computed using the ratio of current product revenues to estimated total
product revenues or the straight-line method over the remaining estimated
economic lives of the products. We capitalized software development costs of
$104,000, $831,000 and $644,000 in 1996, 1997 and 1998, respectively. We expect
that capitalization of software development costs will decrease in the future if
the time between the establishment of technological feasibility of a product and
its general release decreases as expected.
Selling and marketing. Selling and marketing expenses were $7.4 million,
$9.1 million and $11.4 million in 1996, 1997 and 1998, respectively,
representing increases of 23% from 1996 to 1997 and 25% from 1997 to 1998.
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 the related costs and
commissions associated with revenues. Selling and marketing expenses were 48%,
46% and 56% of total revenues in 1996, 1997 and 1998, respectively.
General and administrative. General and administrative expenses consist of
employment-related costs for finance, administration and human resources and
general corporate management expenses. General and administrative expenses were
$1.7 million, $2.9 million and $6.2 million in 1996, 1997 and 1998,
respectively, representing 11%, 15% and 31% of total revenues in 1996, 1997 and
1998, respectively. The increase in general and administrative expenses in 1998
was the result of increased provisions for bad debts, a one-time charge for
severance and recruiting costs, increased costs of outside consultants and
professional fees as well as planned growth in the finance and administrative
operations.
Restructuring charges. In connection with a restructuring plan adopted in
the fourth quarter of fiscal 1998, we recorded a $2.0 million restructuring
charge associated with our actions to reduce our overall cost structure to
reflect a staff size that had become inconsistent with our revenue base. This
charge included the termination of 46 employees, the write off of impaired
assets and a reduction in our leased facilities.
Interest, net. Interest, net is composed of interest income from cash and
cash equivalents and short-term investments offset by finance charges related to
equipment leases. Interest, net was $318,000, $1.1 million and $901,000 in 1996,
1997 and 1998, respectively. The decrease in 1998 is primarily due to declining
cash balances as a result of operational losses in 1998.
Provision for income taxes. Effective tax rates were approximately 31%, 22%
and 3% in 1996, 1997 and 1998, respectively. The 1998 rate differs from the
federal statutory rate primarily due a valuation allowance offsetting deferred
tax assets. From our inception to September 19, 1996, our operating results were
included in the consolidated tax returns of Xerox Corporation. Subsequent to our
initial public offering on September 19, 1996, we were no longer included in the
consolidated tax returns of Xerox Corporation.
18
<PAGE> 20
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Our total revenues and operating results can vary, sometimes substantially,
from quarter to quarter and are expected to vary significantly in the future.
Our revenues and operating results are difficult to forecast. Future results
will depend upon many factors, including the demand for our products, the level
of product and price competition, the length of our sales cycle, the size and
timing of individual license transactions, the delay or deferral of customer
implementations, the budget cycles of our customers, our success in expanding
our direct sales force and indirect distribution channels, the timing of new
product introductions and product enhancements by us and our 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, our ability to develop and market new products,
controlling costs and general domestic and international economic conditions. In
addition, our sales generally reflect a relatively high amount of revenue per
order, and, therefore, the loss or delay of individual orders could have a
significant impact on our revenues and quarterly operating results. In addition,
a significant amount of our revenues occur predominantly in the third month of
each fiscal quarter and tend to be concentrated in the latter half of that third
month.
Our 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 of receipt of initial
license revenue is difficult to predict because of the length of our sales
cycle, typically three to twelve months from the initial contact. Because our
operating expenses are based on anticipated revenue trends and because a high
percentage of our 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, our operating results could be materially
adversely affected.
Due to the foregoing factors, revenues and operating results for any
quarter are subject to significant variation, and we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had $19.9 million in cash, cash equivalents and
short-term investments. Net cash provided by operating activities was $1.7
million in 1996. Net cash used in operating activities was $637,000 and $31,000
in 1997 and 1998, respectively. Net cash used in investing activities was $23.8
million in 1996, primarily for the purchase of short-term investments and to a
lesser extent, for the purchase of fixed assets. Net cash provided by investing
activities was $2.0 million and $3.6 million in 1997 and 1998, respectively, due
primarily to net short-term investment sales and maturities partially offset by
purchases of property and equipment and additions to computer software costs.
Net cash provided by financing activities in 1996 was $23.3 million, primarily
from net proceeds from the initial public offering of our common stock. Net cash
used in financing activities was $285,000 and $499,000 in 1997 and 1998,
respectively, primarily from the purchase of treasury stock.
We believe that our existing cash balances and anticipated cash flows from
operations will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures at least through the next twelve months. A
portion of our cash could be used to acquire or invest in complementary
businesses or products or obtain the right to use complementary technologies. We
are currently evaluating, in our ordinary course of business, potential
investments such as businesses, products or technologies. We have no current
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies.
RECENTLY ENACTED ACCOUNTING STANDARDS
In 1998, we adopted Statement of Financial Accounting Standards (SFAS) No.
130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS 130 requires that all
components of comprehensive income, including net income, be reported in the
financial statements in the period they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner
19
<PAGE> 21
sources. Net income and other comprehensive income, including foreign currency
translation adjustments, and unrealized gains and losses on investments, shall
be reported, net of their related tax effect, to arrive at comprehensive income.
We have disclosed comprehensive income in our financial statements accordingly.
SFAS No. 131 amends the requirements for public enterprises to report financial
and descriptive information about their reportable operating segments. Operating
segments, as defined in SFAS No. 131, are components of an enterprise for which
separate financial information is available and is evaluated regularly by a
company in deciding how to allocate resources and in assessing performance. The
financial information is required to be reported on the basis that is used
internally for evaluating the segment performance. We believe we operate in two
segments, which have been identified by management as United States and France
operations.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar activities.
Based on recent assessments, we have determined that our information
technology, or IT, and non-IT systems, software, hardware and equipment, are
currently purported by the software and hardware vendors to be able to utilize
dates beyond December 31, 1999. However, if such testing disconfirms readiness,
the Year 2000 Issue could have a material impact on our operations.
Our plan to resolve the Year 2000 Issue involves the following three
phases: assessment, remediation and testing. To date, we have fully completed
our assessment of all systems that could be significantly affected by the Year
2000. The completed assessment indicated that most of our significant IT and
non-IT systems are ready for the Year 2000. The few components of our end-user
computing infrastructure that remain to be upgraded will be addressed during the
second quarter 1999. Accordingly, we do not believe that the Year 2000 presents
a material exposure as it relates to our operations. In addition, we have
gathered information about the Year 2000 compliance status of our significant
suppliers and subcontractors and we continue to monitor their compliance.
For our information technology exposures, we are 85% complete on the
remediation phase and expect to complete software reprogramming and replacement
no later than June 1, 1999. Once our software is upgraded or replaced, we will
begin testing to confirm Year 2000 readiness. To date, we have completed 85% of
our testing and readiness confirmation. Completion of the testing phase for all
significant systems is expected by September 1, 1999, with 100% readiness at
that time.
We do not have any significant electronic transactions with suppliers or
customers. Our electronic transactions with financial institutions have been
assessed and have been confirmed ready through testing.
We have queried our significant suppliers and subcontractors that do not
share information systems with us. To date, we are not aware of any external
agent with a Year 2000 issue that would materially impact our results of
operations, liquidity or capital resources. However, we have no means of
ensuring that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely fashion could
materially impact us. The effect of non-compliance by external agents is not
determinable.
We will utilize both internal and external resources to reprogram, or
replace, test and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $10,000,
of which $3,000 has been incurred and we expect to incur $7,000 in 1999, and is
being funded through operating cash flows.
We believe we have an effective program in place to test and confirm Year
2000 readiness in a timely manner. As noted above, we have not yet completed the
final phase of the Year 2000 program. In the event that we do not complete the
testing phase to confirm readiness and the systems believed to be ready are not,
we might be unable to sell merchandise and might be unable to use our financial
systems to operate the
20
<PAGE> 22
finance and accounting functions. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely affect
us. We could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business records. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
We have developed contingency plans to address failure of remediation
activities as applied to internal, IT and non-IT, systems and external agents.
We have identified specific contingency plan options related to our supply chain
management process. In assessing our critical suppliers, management has
prioritized these business relationships and is developing plans to provide for
the continuance of product availability through accelerated purchasing should
adequate assurance regarding a specific entity's ability to become ready for the
Year 2000 not be obtained.
EURO CONVERSION
Beginning in January 1999, a new currency called the "euro" is scheduled to
be introduced in certain Economic and Monetary Union, or EMU, countries. During
2002, all EMU countries are expected to be operating with the euro as their
single currency. Uncertainty exists as to the effects the euro currency will
have on the marketplace. Additionally, all of the final rules and regulations
have not yet been defined and finalized by the European Commission with regard
to the euro currency. We are still assessing the impact the EMU formation will
have on our internal systems and the sale of our products. We expect to take
appropriate actions based on the results of such assessment. We have not yet
determined any potential cost.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RISK
Our earnings and cash flow are subject to fluctuations due to changes in
foreign currency exchange rates. To a certain extent, foreign currency exchange
rate movements also affect our competitive position, as exchange rate changes
may affect business practices and/or pricing strategies on non-U.S. based
competitors. The primary foreign currency risk exposure is related to U.S.
Dollar to French Franc and U.S. Dollar to euro conversions. Considering both the
anticipated cash flows from firm sales commitments and anticipated sales for the
next quarter and the foreign currency derivative instruments in place at year
end, a hypothetical 10% weakening of the U.S. Dollar relative to all other
currencies would not materially adversely affect expected first quarter 1999
earnings or cash flows. This analysis is dependent on actual export sales during
the next quarter occurring within 90% of budgeted forecasts. The effect of the
hypothetical change in exchange rates ignores the affect this movement may have
on other variables including competitive risk. If it were possible to quantify
this competitive impact, the results could well be different than the
sensitivity effects described above. In addition, it is unlikely that all
currencies would uniformly strengthen or weaken relative to the U.S. Dollar. In
reality, some currencies may weaken while others may strengthen. Each month we
review our position for expected currency exchange rate movements.
INTEREST RATE RISK
We are exposed to changes in interest rates primarily from our short-term
available for sale investments and, secondly, from our capital lease
arrangements. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. A hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield
curve would adversely affect the net fair value of the investment portfolio by
approximately $340,000 as of December 31, 1998.
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.
21
<PAGE> 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item concerning our directors is
incorporated by reference to the information set forth in the section entitled
"Election of Directors -- Nominees" in our Proxy Statement for the 1999 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of our fiscal year ended December 31, 1998, except that the information
required by this item concerning our executive officers 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 our Proxy Statement for the 1999 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of our fiscal year ended December 31, 1998.
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 our Proxy Statement for the 1999 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of our fiscal year ended December 31, 1998.
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 our Proxy Statement for the
1999 Annual Meeting of Stockholders to be filed with the Commission within 120
days after the end of our fiscal year ended December 31, 1998.
22
<PAGE> 24
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. Our following consolidated financial statements,
and related notes thereto, 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 25 of this Report.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets -- December 31, 1997 and 1998
Consolidated Statements of Operations -- Fiscal Years Ended December
31, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity -- Fiscal Years Ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows -- Fiscal Years Ended December
31, 1996, 1997 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedule. Our following financial statement schedule
for the fiscal years ended December 31, 1996, 1997 and 1998 is filed as part of
this Form 10-K and should be read in conjunction with our Consolidated Financial
Statements, and related notes thereto.
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 us during the
fiscal quarter ended December 31, 1998.
(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.
23
<PAGE> 25
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 24th day of
March 1999.
DOCUMENT SCIENCES CORPORATION
By: /s/ CHARLES R. HARRIS
------------------------------------
Charles R. Harris
President and Chief Executive
Officer
Dated: March 24, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles R. Harris his 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 March 24, 1999 in the capacities
indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
/s/ CHARLES R. HARRIS President and Chief Executive Officer
- ----------------------------------------------------- (principal executive officer)
Charles R. Harris
/s/ JOHN H. WILSON Interim Chief Financial Officer
- ----------------------------------------------------- (principal financial and accounting officer)
John H. Wilson
/s/ THOMAS L. RINGER Chairman of the Board of
- ----------------------------------------------------- Directors
Thomas L. Ringer
/s/ BARTON L. FABER Director
- -----------------------------------------------------
Barton L. Faber
/s/ CHARLES P. HOLT Director
- -----------------------------------------------------
Charles P. Holt
/s/ COLIN J. O'BRIEN Director
- -----------------------------------------------------
Colin J. O'Brien
/s/ BRIAN E. STERN Director
- -----------------------------------------------------
Brian E. Stern
</TABLE>
24
<PAGE> 26
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 Operations....................... F-3
Consolidated Statements of Stockholders' Equity............. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
25
<PAGE> 27
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, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
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, 1997 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
January 25, 1999
F-1
<PAGE> 28
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,526,301 $ 6,694,420
Short-term investments.................................... 18,228,527 13,220,581
Accounts receivable, less allowance for doubtful accounts
of $218,278 and $725,561 in 1997 and 1998,
respectively........................................... 5,602,062 4,721,466
Due from affiliates....................................... 1,718,406 1,122,343
Unbilled revenue.......................................... 288,932 391,601
Income tax receivable..................................... -- 331,337
Deferred income taxes..................................... 326,500 --
Other current assets...................................... 279,888 519,479
----------- -----------
Total current assets.............................. 29,970,616 27,001,227
Property and equipment, net................................. 2,135,930 1,668,855
Computer software costs, net of accumulated amortization of
$476,125 and $853,509 in 1997 and 1998, respectively...... 1,117,319 1,383,590
Goodwill, net of accumulated amortization of $46,749 and
$116,874 in 1997 and 1998, respectively................... 1,005,111 934,987
----------- -----------
$34,228,976 $30,988,659
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 673,657 $ 1,065,986
Accrued compensation...................................... 787,511 1,874,044
Other accrued liabilities................................. 348,559 1,773,716
Deferred revenue.......................................... 3,812,365 7,362,838
Current income tax payable to affiliate................... 387,443 --
Current portion of obligations under capital leases....... 65,108 41,568
----------- -----------
Total current liabilities......................... 6,074,643 12,118,152
Obligations under capital leases............................ 52,236 12,618
Deferred revenue............................................ -- 448,099
Deferred income taxes....................................... 411,500 --
Commitments
Stockholders' equity:
Common stock, $.001 par value;
Authorized shares -- 30,000,000.
Issued and outstanding shares -- 10,803,369 in 1997 and
10,857,958 in 1998.................................... 10,803 10,858
Deferred compensation..................................... (241,469) (67,326)
Treasury stock............................................ (240,515) (686,989)
Additional paid-in capital................................ 25,398,897 25,409,399
Accumulated comprehensive income.......................... 69,506 204,071
Retained earnings (deficit)............................... 2,693,375 (6,460,223)
----------- -----------
Total stockholders' equity........................ 27,690,597 18,409,790
----------- -----------
$34,228,976 $30,988,659
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 29
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Initial license fees (including $2,289,300,
$1,765,000 and $2,987,600 from affiliates in
1996, 1997 and 1998, respectively)............ $ 8,593,220 $ 8,758,364 $ 7,186,247
Annual renewal license and support fees
(including $476,500, $888,700 and $1,234,300
from affiliates in 1996, 1997 and 1998,
respectively)................................. 2,420,780 4,622,810 5,889,410
Services and other (including $1,456,000,
$1,117,300 and $1,184,800 from affiliates in
1996, 1997 and 1998, respectively)............ 4,305,294 6,359,135 7,031,693
----------- ----------- ------------
Total revenues........................... 15,319,294 19,740,309 20,107,350
Cost of revenues:
Initial license fees............................. 695,750 677,324 1,367,939
Annual renewal license and support fees.......... 496,871 750,069 862,058
Services and other............................... 1,092,219 3,096,362 4,344,896
----------- ----------- ------------
Total cost of revenues................... 2,284,840 4,523,755 6,574,893
----------- ----------- ------------
Gross profit....................................... 13,034,454 15,216,554 13,532,457
Operating expenses:
Research and development......................... 2,336,252 3,321,397 4,336,116
Selling and marketing (including $180,600,
$121,000 and $0 to affiliates in 1996, 1997
and 1998, respectively)....................... 7,359,336 9,088,486 11,353,604
General and administrative....................... 1,673,928 2,864,868 6,214,275
Restructuring charges............................ -- -- 1,988,983
----------- ----------- ------------
Total operating expenses................. 11,369,516 15,274,751 23,892,978
----------- ----------- ------------
Income (loss) from operations...................... 1,664,938 (58,197) (10,360,521)
Interest, net...................................... 317,508 1,127,075 900,755
----------- ----------- ------------
Income (loss) before provision for income taxes.... 1,982,446 1,068,878 (9,459,766)
Provision for income taxes......................... 621,500 231,200 (306,168)
----------- ----------- ------------
Net income (loss).................................. $ 1,360,946 $ 837,678 $ (9,153,598)
=========== =========== ============
Net income (loss) per share -- basic............... $ 0.16 $ 0.08 $ (.86)
=========== =========== ============
Weighted average shares used in basic
calculation...................................... 8,525,172 10,743,352 10,690,340
=========== =========== ============
Net income (loss) per share -- diluted............. $ 0.14 $ 0.08 $ (.86)
=========== =========== ============
Weighted average shares used in diluted
calculation...................................... 9,614,682 11,012,635 10,690,340
=========== =========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 30
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK TREASURY STOCK ADDITIONAL COMPREHENSIVE
-------------------- ------------------- PAID-IN DEFERRED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (LOSS)
---------- ------- ------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... 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.................. -- -- -- -- -- -- --
Deferred compensation.............. -- -- -- -- 440,000 (440,000) --
Amortization of deferred
compensation..................... -- -- -- -- -- 88,527 --
Conversion of Series A Redeemable
Preferred Stock.................. 7,140,000 7,140 -- -- 1,493,360 -- --
Comprehensive income (loss):
Unrealized gain on short-term
investments.................... -- -- -- -- -- -- 13,222
Net income....................... -- -- -- -- -- -- --
Comprehensive income.............
---------- ------- ------- --------- ----------- --------- --------
Balance at December 31, 1996....... 10,722,168 10,722 -- -- 25,382,203 (351,473) 13,222
Issuance of common stock upon
exercise of options.............. 81,201 81 -- -- 16,694 -- --
Purchase of treasury stock......... -- -- 75,000 (285,000) -- -- --
Sale of treasury stock............. -- -- (14,928) 44,485 -- -- --
Amortization of deferred
compensation..................... -- -- -- -- -- 110,004 --
Comprehensive income (loss):
Unrealized gain on short-term
investments.................... -- -- -- -- -- -- 56,284
Net income....................... -- -- -- -- -- -- --
Comprehensive income.............
---------- ------- ------- --------- ----------- --------- --------
Balance at December 31, 1997....... 10,803,369 10,803 60,072 (240,515) 25,398,897 (241,469) 69,506
Issuance of common stock upon
exercise of options.............. 54,589 55 -- -- 10,502 -- --
Purchase of treasury stock......... -- -- 212,800 (543,618) -- -- --
Sale of treasury stock............. -- -- (49,714) 97,144 -- -- --
Amortization of deferred
compensation..................... -- -- -- -- -- 174,143 --
Comprehensive income (loss):
Unrealized loss on short-term
investments.................... -- -- -- -- -- -- (22,337)
Foreign currency translation
adjustment..................... -- -- -- -- -- -- 156,902
Net loss......................... -- -- -- -- -- -- --
Comprehensive loss...............
---------- ------- ------- --------- ----------- --------- --------
Balance at December 31, 1998....... 10,857,958 $10,858 223,158 $(686,989) $25,409,399 $ (67,326) $204,071
========== ======= ======= ========= =========== ========= ========
<CAPTION>
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(DEFICIT) EQUITY
----------- -------------
<S> <C> <C>
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
Conversion of Series A Redeemable
Preferred Stock.................. -- 1,500,500
Comprehensive income (loss):
Unrealized gain on short-term
investments.................... -- 13,222
Net income....................... 1,360,946 1,360,946
-----------
Comprehensive income............. 1,374,168
----------- -----------
Balance at December 31, 1996....... 1,855,697 26,910,371
Issuance of common stock upon
exercise of options.............. -- 16,775
Purchase of treasury stock......... -- (285,000)
Sale of treasury stock............. -- 44,485
Amortization of deferred
compensation..................... -- 110,004
Comprehensive income (loss):
Unrealized gain on short-term
investments.................... -- 56,284
Net income....................... 837,678 837,678
-----------
Comprehensive income............. 893,962
----------- -----------
Balance at December 31, 1997....... 2,693,375 27,690,597
Issuance of common stock upon
exercise of options.............. -- 10,557
Purchase of treasury stock......... -- (543,618)
Sale of treasury stock............. -- 97,144
Amortization of deferred
compensation..................... -- 174,143
Comprehensive income (loss):
Unrealized loss on short-term
investments.................... -- (22,337)
Foreign currency translation
adjustment..................... -- 156,902
Net loss......................... (9,153,598) (9,153,598)
Comprehensive loss............... (8,996,696)
----------- -----------
Balance at December 31, 1998....... $(6,460,223) $18,409,790
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 31
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ 1,360,946 $ 837,678 $ (9,153,598)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 254,373 455,663 614,099
Amortization of goodwill....................... -- 46,749 70,125
Loss on disposal of fixed assets............... 313 -- 610,159
Amortization of computer software costs........ 104,066 91,340 377,384
Amortization of deferred compensation.......... 88,527 110,004 174,143
Current income tax expense payable to
affiliates.................................. (1,071,100) 76,443 (387,443)
Deferred income taxes.......................... (92,000) 99,200 (85,000)
Provision for doubtful accounts................ 204,155 432,451 507,283
Changes in operating assets and liabilities,
net of effects of acquired business:
Accounts receivable......................... (308,448) (3,336,203) 398,369
Due from affiliates......................... (764,764) 658,958 679,251
Unbilled revenue............................ -- (288,932) (102,669)
Income tax receivable....................... -- -- (331,337)
Other current assets........................ (68,071) (47,584) (239,162)
Accounts payable............................ 370,102 (25,054) 391,675
Accrued compensation........................ 387,132 (44,030) 1,080,978
Accrued liabilities......................... 327,005 (108,933) 1,374,169
Deferred revenue............................ 880,758 404,780 3,990,648
------------ ------------ ------------
Net cash provided by (used in) operating
activities..................................... 1,672,994 (637,470) (30,926)
INVESTING ACTIVITIES
Purchases of short-term investments.............. (23,129,663) (16,905,885) (16,196,630)
Sales of short-term investments.................. -- 19,220,812 18,194,575
Maturities of short-term investments............. -- 2,599,431 3,010,000
Purchases of property and equipment, net......... (526,895) (1,593,389) (752,194)
Unrealized losses on securities.................. -- -- (22,337)
Cash paid for acquired business.................. -- (507,000) --
Proceeds from disposal of assets................. 8,000 -- --
Additions to computer software costs............. (104,236) (831,317) (643,655)
------------ ------------ ------------
Net cash provided by (used in) investing
activities..................................... (23,752,794) 1,982,652 3,589,759
FINANCING ACTIVITIES
Principal payments under capital lease
obligations.................................... (66,190) (60,835) (63,158)
Purchase of treasury stock....................... -- (285,000) (543,618)
Sale of treasury stock........................... -- 44,485 97,144
Proceeds from issuance of common stock........... 23,340,564 16,775 10,557
------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... 23,274,374 (284,575) (499,075)
------------ ------------ ------------
Increase in cash and cash equivalents............ 1,194,574 1,060,607 3,059,758
Foreign currency translation adjustment.......... -- -- 108,361
Cash and cash equivalents at beginning of year... 1,271,120 2,465,694 3,526,301
------------ ------------ ------------
Cash and cash equivalents at end of year......... $ 2,465,694 $ 3,526,301 $ 6,694,420
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................... $ 29,430 $ 17,777 $ 11,135
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations entered into for
property and equipment......................... $ 101,769 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 32
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Document Sciences Corporation was incorporated on October 18, 1991 in
Delaware as a subsidiary of Xerox Corporation. We develop, market and support a
family of document automation software products and services used in high volume
electronic publishing applications. Autograph, our 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.
We currently derive substantially all of our license revenues from licenses
of CompuSet, Autograph's flagship product, and related products and from fees
for services related to the CompuSet software. Our 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 we will
continue to be successful in developing and marketing CompuSet products and
related services.
We currently have a variety of contractual and informal relationships with
Xerox and affiliates of Xerox, including a cooperative 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. Our failure to maintain these relationships with Xerox and its
affiliates could have a material adverse effect on our financial statements.
Basis of Presentation
In 1994, we established a wholly owned subsidiary, Document Sciences
Europe, in Sophia Antipolis, France, in order to market and support our products
to the European community. The accompanying consolidated financial statements
include the accounts of all our operations. 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 our French 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. For the year ended December 31, 1998, foreign currency
translation gains are recorded in stockholders' equity. Foreign currency
translation gains and losses were not material in 1996 and 1997. Foreign
currency transaction gains and losses are included in general and administrative
expenses in the consolidated statements of operations and were not material
during the years ended December 31, 1996, 1997 and 1998.
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. We evaluate the
F-6
<PAGE> 33
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financial strength of institutions at which significant investments are made and
believe the related credit risk is limited to an acceptable level.
We have adopted Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and classify
our 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
We sell our products primarily to large, multinational customers in the
United States, Europe, Canada and Australia. We derived 34%, 28% and 31% of our
total revenues from customers outside the United States for the years ended
December 31, 1996, 1997 and 1998, respectively. A significant concentration of
our customers are in the insurance and commercial print service industries. No
customer has accounted for 10% or more of our 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. We estimate our
potential losses on trade receivables on an ongoing basis and provide for
anticipated losses in the period in which the revenues are recognized.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, we record
impairment losses 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 No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. To date, no such impairments have been identified.
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 costs of software to be sold, licensed or otherwise marketed
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. Amortization of goodwill is provided
over an estimated life of 15 years.
F-7
<PAGE> 34
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
We recognize revenue in accordance with AICPA Statement of Position (SOP)
97-2, Software Revenue Recognition. Initial license revenue is recognized when a
contract exists, the fee is fixed or determinable, software delivery has
occurred and collection of the receivable is deemed probable. The portion of the
initial license revenue representing software support for the first year is
deferred and recognized ratably over the contract period. Annual renewal license
and support fees are 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 services are recognized as the related services are performed.
However, when such consulting services are deemed to be essential to the
functionality of the delivered software product, revenue from the entire
arrangement is recognized either on a percentage of completion or completed
contract basis in accordance with SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, and Accounting Research
Bulletin (ARB) No. 45, Long-Term Construction-Type Contracts.
Computation of Net Income Per Share
In accordance with SFAS No. 128, Earnings per Share, "Basic EPS" includes
no dilution and is based on weighted-average common shares outstanding for the
period. SFAS No. 128 also requires companies with complex capital structures to
present "Diluted EPS" that reflects the potential dilution of securities such as
employee stock options.
In 1996 and 1997, the difference between weighted-average shares used in
determining Basic EPS versus Diluted EPS related to dilutive common stock
options totaled 108,015 and 269,288 shares, respectively. Common stock options
to purchase 389,430 and 248,182 shares were excluded from the calculation of
weighted-average shares used in determining Diluted EPS for 1996 and 1997,
respectively, as their effect would have been antidilutive. In 1998, 867,234
common stock options were excluded from the calculation of weighted-average
shares used in determining Basic and Diluted EPS as their effect would have been
antidilutive.
Stock Options
As permitted by SFAS No. 123, Accounting for Stock-based Compensation, we
have elected to follow Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock options. Under APB Opinion No. 25, when the
exercise price of our employee stock options is not less than the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Income Taxes
We follow the liability method of accounting for income taxes, as set forth
in SFAS No. 109, Accounting for Income Taxes. Through September 19, 1996, we
were included in the consolidated tax returns of Xerox, and our share of Xerox
consolidated income tax liability was determined on a separate company basis
computed under Internal Revenue Code guidelines. Subsequent to our initial
public offering on September 19, 1996, we have filed separate federal and state
tax returns and are only included in certain consolidated state tax returns with
Xerox.
New Accounting Pronouncements
In 1998, we adopted SFAS No. 130, Reporting Comprehensive Income, and SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
SFAS 130 requires that all components of comprehensive income, including net
income, be reported in the financial statements in the period they are
F-8
<PAGE> 35
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recognized. Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including foreign currency
translation adjustments, and unrealized gains and losses on investments, shall
be reported, net of their related tax effect, to arrive at comprehensive income.
We have disclosed comprehensive income in our financial statements accordingly.
SFAS No. 131 amends the requirements for public enterprises to report financial
and descriptive information about their reportable operating segments. Operating
segments, as defined in SFAS No. 131, are components of an enterprise for which
separate financial information is available and is evaluated regularly by a
company in deciding how to allocate resources and in assessing performance. The
financial information is required to be reported on the basis that is used
internally for evaluating the segment performance. We believe we operate in two
segments, which have been identified by management as United States and France
operations.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This standard requires companies to capitalize
qualifying computer software costs, which are incurred during the application
development stage and amortize them over the software's estimated useful life.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. We are
currently evaluating the impact of SOP 98-1 on our financial statements and
related disclosures.
RECLASSIFICATIONS
Certain reclassifications, none of which affect net income (loss), have
been made to prior year's amounts in order to conform to the current year's
presentation.
2. ACQUISITION
In 1997, we acquired certain assets and liabilities of Data Retrieval
Corporation of America (Data Retrieval) for cash consideration of $507,000. The
acquisition has been accounted for as a purchase, and accordingly, the total
purchase price has been allocated to the assets acquired and liabilities assumed
at their estimated fair values in accordance with the provisions of APB Opinion
No. 16, Business Combinations. The estimated excess of the purchase price over
the net assets acquired totaled $1,052,000. This is being carried as goodwill in
intangible assets, and is being amortized over an estimated life of 15 years.
Our consolidated financial statements included the results of Data Retrieval
from the purchase date of May 7, 1997.
3. FINANCIAL STATEMENT INFORMATION
Property and Equipment
Property and equipment are stated at cost and consist of the following at
December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Computer equipment.................................. $1,632,403 $1,763,942
Office furniture and fixtures....................... 741,618 243,857
Office equipment.................................... 223,984 449,444
Leasehold improvements.............................. 497,877 242,155
---------- ----------
3,095,882 2,699,398
Less accumulated depreciation and amortization...... (959,952) (1,030,543)
---------- ----------
$2,135,930 $1,668,855
========== ==========
</TABLE>
The cost of equipment acquired under capital leases totaled $192,611,
$140,519 and $85,113 (net of accumulated depreciation of $75,161, $141,866 and
$131,958) at December 31, 1996, 1997 and 1998, respectively.
F-9
<PAGE> 36
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENTS
We have classified all of our investment securities as available-for-sale.
The following table summarizes available-for-sale securities at December 31,
1997 and 1998:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. treasury securities........... $ 1,515,289 $ 1,750 $ -- $ 1,517,039
U.S. government agency
obligations...................... 2,526,628 1,943 -- 2,528,571
Obligations of states, territories
and political subdivisions....... 10,339,124 64,932 -- 10,404,056
U.S. corporate securities.......... 2,299,540 881 -- 2,300,421
U.S. corporate commercial paper.... 1,478,440 -- -- 1,478,440
----------- ------- ------- -----------
$18,159,021 $69,506 $ -- $18,228,527
=========== ======= ======= ===========
DECEMBER 31, 1998
U.S. treasury securities........... $ 5,048,469 $ 5,723 $ 7,081 $ 5,047,111
U.S. government agency
obligations...................... 3,046,330 25,018 -- 3,071,348
Obligations of states, territories
and political subdivisions....... 1,353,893 -- -- 1,353,893
U.S. corporate securities.......... 3,724,720 23,509 -- 3,748,229
----------- ------- ------- -----------
$13,173,412 $54,250 $ 7,081 $13,220,581
=========== ======= ======= ===========
</TABLE>
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 1998, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less........................... $ 3,798,041 $ 3,809,051
Due after one year through five years............. 9,375,371 9,411,530
----------- -----------
$13,173,412 $13,220,581
=========== ===========
</TABLE>
F-10
<PAGE> 37
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION
The table below summarizes our domestic operations and those of our
subsidiary, Document Sciences Europe:
<TABLE>
<CAPTION>
UNITED STATES FRANCE ELIMINATIONS TOTAL
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Sales to unaffiliated customers....... $ 8,839,055 $2,258,433 $ -- $ 11,097,488
Sales to affiliates................... 2,170,967 2,050,839 -- 4,221,806
------------ ---------- -------- ------------
Revenues.............................. $ 11,010,022 $4,309,272 $ -- $ 15,319,294
============ ========== ======== ============
Operating income...................... $ 1,167,424 $ 497,514 $ -- $ 1,664,938
============ ========== ======== ============
Identifiable assets................... $ 31,335,821 $ 702,362 $(16,666) $ 32,021,517
============ ========== ======== ============
YEAR ENDED DECEMBER 31, 1997
Sales to unaffiliated customers....... $ 13,423,889 $2,545,303 $ -- $ 15,969,192
Sales to affiliates................... 1,871,136 1,899,981 -- 3,771,117
------------ ---------- -------- ------------
Revenues.............................. $ 15,295,025 $4,445,284 $ -- $ 19,740,309
============ ========== ======== ============
Operating income (loss)............... $ (267,503) $ 209,306 $ -- $ (58,197)
============ ========== ======== ============
Identifiable assets................... $ 32,185,873 $2,059,769 $(16,666) $ 34,228,976
============ ========== ======== ============
YEAR ENDED DECEMBER 31, 1998
Sales to unaffiliated customers....... $ 13,581,446 $2,081,749 $ -- $ 15,663,195
Sales to affiliates................... 2,019,548 2,424,607 -- 4,444,155
------------ ---------- -------- ------------
Revenues.............................. $ 15,600,994 $4,506,356 $ -- $ 20,107,350
============ ========== ======== ============
Operating income (loss)............... $(10,404,611) $ 44,090 $ -- $(10,360,521)
============ ========== ======== ============
Identifiable assets................... $ 29,811,491 $1,193,834 $(16,666) $ 30,988,659
============ ========== ======== ============
</TABLE>
In 1998, we adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. Sales attributable to the United States were
made to customers located in North America, South America and Australia. Sales
attributable to France are based on those sales generated by our French
subsidiary. These sales were made to customers located in Europe, the Middle
East and Africa.
5. LEASES
We lease our corporate office in San Diego, California under an operating
lease expiring on February 28, 2002. Under the terms of the lease, effective
February 1, 1997, monthly rental payments will be increased annually by 4%. The
lease provides us 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. Our offices in France and Milwaukee, Wisconsin are under an operating
leases expiring in February 2001 and March 2003, respectively. We also
F-11
<PAGE> 38
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
lease certain equipment under capital leases. Annual future minimum lease
payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEARS ENDING DECEMBER 31, LEASES LEASES
------------------------- ---------- --------
<S> <C> <C>
1999................................................. $ 497,280 $ 45,366
2000................................................. 532,096 12,346
2001................................................. 568,463 2,058
2002................................................. 157,797 --
2003................................................. 61,508 --
---------- --------
$1,817,144 59,770
----------
Less amount representing interest.................... (5,584)
--------
Present value of net minimum lease payments.......... 54,186
Less current portion................................. (41,568)
--------
Long-term portion of capital lease obligations....... $ 12,618
========
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
$292,098, $522,694 and $576,417, respectively. Our new headquarters in Carlsbad,
California will be leased through February 28, 2005 with annual future minimum
lease payments of $222,372.
6. STOCKHOLDERS' EQUITY
Stock
As of December 31, 1998, authorized capital stock consisted of 30,000,000
shares of common stock and 2,000,000 shares of preferred stock.
STOCK INCENTIVE PLANS
Our Stock Incentive Plans provide for the issuance of incentive and
nonstatutory options to purchase Common Shares to eligible employees, officers,
directors of, and consultants to Document Sciences. Our 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 included 29,250 shares previously reserved for issuance under the 1993
Plan. In 1998, this plan was amended to provide for the issuance of an
additional 750,000 shares. The 1995 Plan replaced the 1993 Plan. All outstanding
options under the 1993 Plan remain exercisable in accordance with their original
terms. Terms of the stock purchase or stock option agreements, including vesting
requirements, are determined by the Board of Directors, subject to the
provisions of the 1995 Plan. The maximum term of options granted under the 1995
Plan is ten years. The exercise price of incentive stock options must equal at
least the fair market value on the date of grant. The exercise price of
nonstatutory stock options and stock issued under purchase rights must equal at
least 85% of the fair market value on the date of grant or time of issuance.
F-12
<PAGE> 39
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 at December 31, 1996......... 497,445 $.03 - $15.00 $3.13
Granted............................ 158,850 $3.19 - $ 5.44 $3.94
Exercised.......................... (81,201) $.03 - $ .67 $ .24
Canceled........................... (57,624) $.03 - $15.00 $4.18
--------
Balance at December 31, 1997......... 517,470 $.03 - $15.00 $3.57
Granted............................ 567,038 $1.75 - $ 3.38 $2.47
Exercised.......................... (54,589) $.17 - $ .67 $ .19
Canceled........................... (162,685) $.17 - $15.00 $4.13
--------
Balance at December 31, 1998......... 867,234 $.03 - $10.00 $2.64
========
</TABLE>
As of December 31, 1998, 263,991 of the options were vested and exercisable
and 632,994 were available for future grant. Following is a breakdown of the
options outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
WEIGHTED AVERAGE EXERCISE PRICE EXERCISE PRICE
RANGE OF OPTIONS REMAINING OF OPTIONS OPTIONS OF OPTIONS
EXERCISE PRICES OUTSTANDING LIFE IN YEARS OUTSTANDING EXERCISABLE EXERCISABLE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .03 - $ .67 176,721 5.48 $0.28 159,650 $0.24
$1.70 - $ 4.75 649,399 9.21 $2.77 76,684 $4.25
$5.44 - $10.00 41,114 7.56 $9.73 27,657 $9.81
------- -------
867,234 8.37 $2.53 263,991 $2.41
======= =======
</TABLE>
In 1996, we recorded $440,000 of deferred compensation for options granted
to employees prior to our initial public offering, which closed September 19,
1996. The amount recorded represents the difference between the option grant
price and the deemed fair market value of the related shares. We are amortizing
such amount ratably over the vesting period of the options, generally 48 months.
On March 17, 1998, 68,403 options with exercise prices between $5.00 and
$15.00 per share were repriced to $4.75 per share, the fair market value of the
stock at such date.
Adjusted pro forma information regarding net income (loss) is required by
SFAS No. 123, and has been determined as if we had accounted for our employee
stock options under the fair value method of that Statement. For options granted
in the period prior to 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 5.5% - 6%; dividend yields of 0%; and a weighted-average expected life
of the option of four to seven years. For options granted from September 19,
1996 to December 31, 1998, 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 5.5% - 6%; dividend
yields of 0%; expected volatility of .69 to 1.43; and a 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 option's vesting period. The effect
of applying SFAS No. 123 for purposes of providing pro forma disclosures is not
likely to be representative of the effects on reported net income (loss) for
future years
F-13
<PAGE> 40
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
because changes in the subjective input assumptions can materially affect future
value estimates. Our pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
---------- -------- -----------
<S> <C> <C> <C>
Adjusted pro forma basic net income (loss)..... $1,379,289 $592,538 $(9,704,706)
Adjusted pro forma basic net income (loss) per
share........................................ $ .15 $ .05 $ (.91)
Adjusted pro forma diluted net income (loss)
per share.................................... $ .14 $ .05 $ (.91)
</TABLE>
Our 1997 Employee Stock Purchase Plan provides for the issuance of shares
of our common stock, up to a total of 350,000 shares, to eligible employees. The
price of the common shares purchased under the Plan is equal to 85% of the fair
market value of the common shares on the first or last day of the offering
period, whichever is lower.
7. INCOME TAXES
For financial reporting purposes, income (loss) before income taxes
includes the following components:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
United States......................... $1,484,932 $ 778,573 $(9,660,080)
Foreign............................... 497,514 290,305 200,314
---------- ---------- -----------
$1,982,446 $1,068,878 $(9,459,766)
========== ========== ===========
</TABLE>
The provision for income taxes (benefit) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Current:
Federal................................. $482,000 $ 3,500 $(331,337)
State................................... 119,300 19,900 --
Foreign................................. 112,200 108,600 110,169
-------- -------- ---------
713,500 132,000 (221,168)
Deferred (credit):
Federal................................. (85,300) 122,100 (104,000)
State................................... (6,700) (22,900) 19,000
Foreign................................. -- -- --
-------- -------- ---------
(92,000) 99,200 (85,000)
-------- -------- ---------
$621,500 $231,200 $(306,168)
======== ======== =========
</TABLE>
F-14
<PAGE> 41
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
-----------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax liabilities:
Computer software costs............... $(156,500) $(411,500) $(509,100)
Fixed assets.......................... -- -- (127,900)
--------- --------- ---------
Total deferred tax liabilities.......... (156,500) (411,500) (637,000)
--------- --------- ---------
Deferred tax assets:
Operating loss carryforwards.......... -- -- 2,496,000
Accrued vacation...................... 100,000 125,100 132,000
Provision for doubtful accounts....... 29,000 76,600 262,400
Research and development credits...... -- 118,000 205,900
Restructuring charges................. -- -- 728,800
State taxes........................... 41,700 6,800 --
--------- --------- ---------
Total deferred tax assets............... 170,700 326,500 3,825,100
Valuation allowance..................... -- -- 3,188,100
--------- --------- ---------
Net deferred tax assets................. 170,700 326,500 637,000
--------- --------- ---------
Net deferred tax asset (liability)...... $ 14,200 $ (85,000) $ 0
========= ========= =========
</TABLE>
A valuation allowance has been recognized to offset deferred tax assets as
of December 31, 1998 as realization of such assets is uncertain.
As of December 31, 1998, we have Federal and California research and
development tax credit carryforwards of approximately $146,500 and $90,000,
respectively, which will begin to expire in 2012 unless previously utilized.
The differences between our income tax provision and the amounts computed
by applying the statutory Federal income tax rate of 35% in 1996, 1997 and 1998
to income before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Provision at statutory rate............ $ 693,856 $ 374,107 $(3,310,918)
Benefit for graduated rates............ (19,824) (10,689) 94,596
State income taxes, net of Federal
benefit.............................. 73,190 (1,950) --
Increase (decrease) in valuation
allowance............................ (136,095) -- 3,188,100
Benefit of research credits............ (71,665) (118,004) --
Permanent differences and other........ 82,038 (12,264) (277,946)
--------- --------- -----------
Provision for income taxes............. $ 621,500 $ 231,200 $ (306,168)
========= ========= ===========
</TABLE>
8. TRANSACTIONS WITH AFFILIATES
We maintain a strategic marketing alliance with Xerox under which both
parties agree 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 operations are commissions earned
from Xerox totaling $1.4 million, $859,000 and $344,000 in 1996, 1997 and 1998,
respectively. These commissions were 9%, 4%
F-15
<PAGE> 42
DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and 2% of total revenues in 1996, 1997 and 1998, respectively. Commissions paid
relating to referrals from Xerox, included in selling and marketing expense in
the accompanying statements of operations, were $181,000, $121,000 and $0 in
1996, 1997 and 1998, respectively.
We have distribution agreements with affiliates providing the non-exclusive
right to sub-license our software in Australia, New Zealand, Canada and Brazil.
The terms of the distributor agreements provide that the affiliates receive a
discount from the list price of our licensed products and annual license fees.
Revenues from the affiliates under these agreements, net of discounts, were
$819,000, $1.0 million and $1.7 million in 1996, 1997 and 1998, respectively.
Included in accounts receivable are $385,300, $333,900 and $473,800 from these
revenues at December 31, 1996, 1997 and 1998, respectively.
We have distribution agreements with affiliates providing the non-exclusive
right to sub-license our software in Europe. Revenues under these agreements
totaled $2.1 million, $1.9 million and $2.4 million in 1996, 1997 and 1998,
respectively. Related accounts receivable are $646,500, $414,500 and $181,600 at
December 31, 1996, 1997 and 1998, respectively.
9. EMPLOYEE RETIREMENT PLAN
401(k) Plan
Document Sciences has an employee savings and retirement plan (the "401(k)
Plan") that is intended to be tax-qualified covering substantially all
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. We may, in our discretion, match
employee contributions, at such rate as we determine, up to a maximum of $3,000
or 10% of the employee's compensation. The 401(k) Plan has a profit sharing
element whereby we 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.
10. RESTRUCTURING CHARGES
In December 1998, our board of directors approved a plan of restructuring
and we recorded a charge of approximately $2.0 million. The restructuring
included the shutdown of certain facilities and the termination of 46 employees
involved in development, sales, marketing, professional services and
administrative activities. The charge consisted primarily of $1.2 million in
termination benefits, a $470,000 write off of impaired assets and $333,000 in
facilities shutdown and other costs. At December 31, 1998, our restructuring
reserve totaled $1.5 million and consisted of $1.2 million in termination
benefits and $333,000 in facilities shutdown costs, none of which has been paid
at December 31, 1998.
F-16
<PAGE> 43
DOCUMENT SCIENCES CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Allowance for doubtful accounts and
returns.................................. $ 22,957 $ 204,155 $ -- $227,112
Year Ended December 31, 1997
Allowance for doubtful accounts and
returns.................................. 227,112 432,451 441,285 218,278
Year Ended December 31, 1998
Allowance for doubtful accounts and
returns.................................. 218,278 1,199,425 692,142 725,561
</TABLE>
F-17
<PAGE> 44
DOCUMENT SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
------- ------------------- -----------
<C> <S> <C>
3.1(1) Restated Certificate of Incorporation of the Registrant
filed May 1, 1992...........................................
3.2(1) Form of Amended and Restated Certificate of Incorporation of
the Registrant..............................................
3.3(1) Amended and Restated Bylaws of the Registrant...............
3.4(1) Form of Certificate of Amendment of Certificate of
Incorporation of the Registrant.............................
4.1(1) Specimen Stock Certificate..................................
10.1(1, 3) Form of Indemnity Agreement Between the Registrant and each
of its Officers and Directors...............................
10.2(1, 3) 1993 Stock Option Plan and Form of Agreement................
10.3(5) 1995 Stock Incentive Plan and Form of Agreement, as amended
and restated................................................
10.4(1, 3) Stockholder Rights Agreement Dated September 1996 Between
the Registrant and Xerox Corporation........................
10.5(1) Tax Sharing Agreement Dated August 1996 Between the
Registrant and Xerox Corporation............................
10.6(1) Transfer and License Agreement Dated July 1, 1992, as
Amended in September 1994, Between the Registrant and Xerox
Corporation.................................................
10.7(1) Strategic Marketing Alliance Agreement Dated September 1,
1993, Between the Registrant and Xerox Corporation..........
10.8(1) Value Added Remarketer Agreement Between Xerox Canada
Limited and the Registrant..................................
10.9(1) Value Added Reseller Agreement Between N.V. Rank Xerox S.A.
and the Registrant..........................................
10.10(1) Form of Professional Services Agreement.....................
10.11(1) Form of Domestic Value Added Remarketer Agreement...........
10.12(1) Form of International Value Added Reseller Agreement........
10.13(1) Form of Software License and Software Support Agreement.....
10.14(2) Lease for Registrant's Principal Facilities, as Amended and
Assignment of Lease.........................................
10.15(1, 3) Letter Agreement Between Tony Domit and the Registrant......
10.16(1, 3) Letter Agreement Between Thomas Anthony and the
Registrant..................................................
10.17(1, 3) Letter Agreement Between Judith A. O'Reilly and the
Registrant..................................................
10.18(1, 3) Letter Agreement Between Daniel Fregeau and the
Registrant..................................................
10.19(1, 3) Letter Agreement Between Alfred G. Altomare and the
Registrant..................................................
10.20(1) Value Added Reseller Agreement Between Geneva Digital Ltd.
and the Registrant..........................................
10.21(1) Value Added Remarketer Agreement Between Business and
Business and the Registrant.................................
10.22(5) 1997 Employee Stock Purchase Plan, as amended and
restated....................................................
10.23(4) Tony N. Domit Agreement.....................................
10.24(4) Xerox Cooperative Marketing Agreement.......................
10.25(4) Xerox Canada Cooperative Marketing and Customer Support
Agreement...................................................
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
------- ------------------- -----------
<C> <S> <C>
10.26(5) International Business Machines Marketing Agreement.........
10.27(5) Lease for Company's new Principal Facilities, as Amended,
and Assignment of Lease.....................................
10.28(5) Thomas J. Anthony Agreement.................................
10.29(5) Robert J. Pryor Agreement...................................
10.30(5) John H. Wilson Consulting Agreement.........................
21.1(1) List of Subsidiaries........................................
23.1 Consent of Ernst & Young LLP, Independent Auditors..........
24.1 Power of Attorney (See page 24).............................
27 Financial Data Schedule.....................................
</TABLE>
- ---------------
(1) Previously filed as exhibits to Registration Statement on Form S-1
Registration Number 333-06344.
(2) Previously filed as exhibits to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
(3) Indicates management compensatory plan, contract or arrangement.
(4) Previously filed as exhibits to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
(5) Filed herewith.
<PAGE> 1
EXHIBIT 10.3
DOCUMENT SCIENCES CORPORATION
1995 STOCK INCENTIVE PLAN
(as amended and restated on March 26, 1999)
1. Purposes of the Plan. The name of this plan is the Document Sciences
Corporation 1995 Stock Incentive Plan (the "Plan"). The purpose of the Plan is
to enable Document Sciences Corporation, a Delaware corporation (the "Company"),
and any Parent or any Subsidiary to obtain and retain the services of the types
of employees, consultants, officers and Directors who will contribute to the
Company's long range success and to provide incentives which are linked directly
to increases in share value which will inure to the benefit of all shareholders
of the Company.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below:
"Administrator" shall have the meaning as set forth in Article 3.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor thereto.
"Committee" means a committee of the Board designated by the Board to
administer the Plan and composed of not less than the minimum number of persons
from time to time required both by Rule 16b-3 and Section 162(m) of the Code,
each of whom is a Disinterested Person and an Outside Director.
"Company" means Document Sciences Corporation, a corporation organized
under the laws of the State of Delaware (or any successor corporation).
"Date of Grant" means the date on which the Administrator adopts a
resolution expressly granting a Right to a Participant, or if a different date
is set forth in such resolution as the Date of Grant, then such date as is set
forth in such resolution.
"Director" means a member of the Board.
"Disability" means permanent and total disability as defined by the
Administrator.
"Disinterested Person" shall have the meaning set forth in Rule
16b-3(c)(2)(i) under the Exchange Act, or any successor definition adopted by
the SEC.
"Election" shall have the meaning set forth in Section 10.3(d) of the
Plan.
"Eligible Person" means an employee, officer, consultant or Director of
the Company, any Parent or any Subsidiary.
<PAGE> 2
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" per share at any date shall mean (i) if the Stock
is listed on an exchange or exchanges, or admitted for trading in a market
system which provides last sale data under Rule 11Aa3-1 of the General Rules and
Regulations of the Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended (a "Market System"), the last reported sales
price per share on the last business day prior to such date on the principal
exchange on which it is traded, or in such a Market System, as applicable, the
last reported sales price per share on the most recent day prior to such date on
which a sale was reported on such exchange or such Market System, as applicable;
or (ii) if the Common Stock is not then traded on an exchange or in such a
Market System, the average of the closing bid and asked prices per share for the
Common Stock in the over-the-counter market as quoted on Nasdaq on the day prior
to such date; or (iii) if the Common Stock is not listed on an exchange or
quoted on Nasdaq, an amount determined in good faith by the Administrator,
taking into account the price at which securities of reasonably comparable
corporations are being traded, adjusted for any dissimilarities, and the
earnings history, book value and prospects of the Company in light of then
existing general market conditions.
"Incentive Stock Option" means a Stock Option intended to qualify as an
"incentive stock option" as that term is defined in Section 422 of the Code.
"Non-Statutory Option" means a Stock Option intended to not qualify as
an Incentive Stock Option.
"Offeree" means a Participant who is granted a Purchase Right pursuant
to the Plan.
"Optionee" means a Participant who is granted a Stock Option pursuant
to the Plan.
"Outside Director" means a Director who is not (a) a current employee
of the Company (or any related entity), (b) a former employee of the Company (or
any related entity) who is receiving compensation for prior services (other than
benefits under a tax-qualified retirement plan), (c) a former officer of the
Company (or any related entity), or (d) a consultant or person otherwise
receiving compensation or other remuneration, either directly or indirectly, in
any capacity other than as a Director.
"Parent" means any present or future corporation which would be a
"parent corporation" as that term is defined in Section 424 of the Code.
"Participant" means any Eligible Person selected by the Administrator,
pursuant to the Administrator's authority in Article 3, to receive grants of
Rights.
"Plan" means this Document Sciences Corporation 1995 Stock Incentive
Plan, as the same may be amended or supplemented from time to time.
"Purchase Price" shall have the meaning set forth in Section 7.2(b) of
the Plan.
-2-
<PAGE> 3
"Purchase Right" means the right to purchase Stock granted pursuant to
Article 7.
"Rights" means Stock Options and Purchase Rights.
"Retirement" means retirement from active employment with the Company
or any Parent or Subsidiary as defined by the Administrator.
"SEC" means the Securities and Exchange Commission.
"Section 16(b) Person" shall mean a person subject to Section 16(b) of
the Exchange Act.
"Special Terminating Event" with respect to a Participant shall mean
the death, Disability or Retirement of that Participant.
"Stock" means the Common Stock, par value $0.001 per share, of the
Company.
"Stock Option" means an option to purchase shares of Stock granted
pursuant to Article 6.
"Stock Option Agreement" shall have the meaning set forth in Section
6.2 of the Plan.
"Stock Purchase Agreement" shall have the meaning set forth in Section
7.2 of the Plan.
"Subsidiary" means any present or future corporation which would be a
"subsidiary corporation" as that term is defined in Section 424 of the Code.
"Tax Date" shall have the meaning set forth in Section 10.3(d) of the
Plan.
"Ten Percent Shareholder" means a person who on the Date of Grant owns,
either directly or indirectly or through attribution as provided in Section
424(d) of the Code, Stock possessing more than 10% of the total combined voting
power of all classes of stock of his or her employer corporation or of any
Parent or Subsidiary.
"Withholding Right" shall have the meaning set forth in Section 10.3(c)
of the Plan.
3. Administration.
3.1 Administrator. The Plan shall be administered by either (i) the
Board, or (ii) the Committee (the group that administers the Plan is referred to
as the "Administrator").
3.2 Powers in General. The Administrator shall have the power and
authority to grant to Eligible Persons, pursuant to the terms of the Plan: (i)
Stock Options; (ii) Purchase Rights; or (iii) any combination of the foregoing.
-3-
<PAGE> 4
3.3 Specific Powers. In particular, the Administrator shall have the
authority: (i) to construe and interpret the Plan and apply its provisions; (ii)
to promulgate, amend and rescind rules and regulations relating to the
administration of the Plan; (iii) to authorize any person to execute, on behalf
of the Company, any instrument required to carry out the purposes of the Plan;
(iv) to determine when Rights are to be granted under the Plan; (v) from time to
time to select, subject to the limitations set forth in this Plan, those
Eligible Persons to whom Rights shall be granted; (vi) to determine the number
of shares of Stock to be made subject to each Right; (vii) to prescribe the
terms and conditions of each Stock Option, including, without limitation, the
exercise price, medium of payment, right of first refusal and repurchase
provisions and to determine whether the Stock Option is to be an Incentive Stock
Option or a Non-Statutory Option and to specify the provisions of the Stock
Option agreement relating to such Stock Option; (viii) to prescribe the terms
and conditions of each Stock Option and Purchase Right, including, without
limitation, the purchase price and medium of payment, vesting provisions and
repurchase provisions, and to specify the provisions of the Stock Option
Agreement or Stock Purchase Agreement relating to such sale; (ix) to amend any
outstanding Rights for the purpose of modifying the time or manner of vesting,
the purchase price or exercise price, as the case may be, thereunder or
otherwise, subject to applicable legal restrictions and to the consent of the
other party to such agreement; (x) to determine when a consultant's relationship
with the Company is sufficient to constitute the equivalent of employment with
the Company for purposes of the Plan; (xi) to determine the duration and purpose
of leaves of absences which may be granted to a Participant without constituting
termination of their employment for purposes of the Plan; and (xii) to make any
and all other determinations which it determines to be necessary or advisable
for administration of the Plan.
3.4 Decisions Final. All decision made by the Administrator pursuant
to the provisions of the Plan shall be final and binding on the Company and the
Participants.
3.5 The Committee. The Board may, in its sole and absolute discretion,
from time to time delegate any or all of its duties and authority with respect
to the Plan to the Committee whose members are to be appointed by and to serve
at the pleasure of the Board. Once appointed, the Committee shall continue to
serve until otherwise directed by the Board. From time to time, the Board may
increase or decrease (to not less than the minimum number of persons from time
to time required by both Rule 16b-3 and Section 162(m) of the Code) the size of
the Committee, add additional members to, remove members (with or without cause)
from, appoint new members in substitution therefor, and fill vacancies, however
caused, in the Committee. The Committee shall act pursuant to a vote of the
majority of its members or, in the case of a committee comprised of only two
members, the unanimous consent of its members, whether present or not, or by the
written consent of the majority of its members or, in the case of a committee
comprised of only two members, the unanimous written consent of its members, and
minutes shall be kept of all its meetings and copies thereof shall be provided
to the Board. Subject to the limitations prescribed by the Plan and the Board,
the Committee may establish and follow such rules and regulations for the
conduct of its business as it may determine to be advisable.
-4-
<PAGE> 5
4. Stock Subject to Plan.
4.1 Stock Subject to Plan. Subject to an adjustment as provided in
Article 8, the total number of shares of Stock reserved and available for
issuance under the Plan shall be 1,879,250 shares. Shares reserved hereunder may
consist, in whole or in part, of authorized and unissued shares or treasury
shares.
4.2 Unexercised Rights; Reacquired Shares. To the extent that any
Rights expire or are otherwise terminated without being exercised, the shares
underlying such Rights (and shares related thereto) shall again be available for
issuance in connection with future Rights under the Plan. Shares acquired by the
Company upon exercise of Rights pursuant to Section 6.2(e) or Section 7.2(c) or
Section 10.3 shall not increase the shares available for issuance under the
Plan.
5. Eligibility. Directors, officers, employees and consultants of the
Company, any Parent or any Subsidiary, who are responsible for or contribute to
the management, growth or profitability of the Company, any Parent or
Subsidiary, shall be eligible to be granted Rights hereunder subject to
limitations set forth in this Plan; provided, however, that only officers and
employees shall be eligible to be granted Incentive Stock Options hereunder.
6. Stock Options.
6.1 General. Stock Options may be granted alone or in addition to
other Rights granted under the Plan. Each Stock Option granted under the Plan
shall be in such form and under such terms and conditions as the Administrator
may from time to time approve: provided, that such terms and conditions are not
inconsistent with the Plan. The provisions of Stock Option Agreements entered
into under the Plan need not be identical. Stock Options granted under the Plan
may be either Incentive Stock Options or Non-Statutory Options.
6.2 Terms and Conditions of Stock Options. Each Stock Option granted
pursuant to the Plan shall be evidenced by a written option agreement between
the Company and the Optionee (the "Stock Option Agreement"), which shall comply
with and be subject to the following terms and conditions:
a) Number of Shares. Each Stock Option Agreement shall state the
number of shares of Stock to which the Stock Option relates.
b) Type of Option. Each Stock Option Agreement shall identify the
portion (if any) of the Stock Option which constitutes an Incentive Stock
Option.
c) Exercise Price. Each Stock Option Agreement shall state the
price at which shares subject to the Stock Option may be purchased (the
"Exercise Price"), which shall with respect to Incentive Stock Options be not
less than 100% of the Fair Value of the shares of Stock on the Date of Grant. In
the case of Non-Statutory Options, the Exercise Price shall be determined in the
sole discretion of the Administrator. In the case of either an Incentive Stock
Option or a Non-
-5-
<PAGE> 6
Statutory Option granted to a Ten Percent Shareholder, the Exercise Price shall
not be less than 110% of such Fair Market Value.
d) Value of Shares. The Fair Market Value of the shares of Stock
(determined as of the Date of Grant) with respect to which Incentive Stock
Options are first exercisable by an Optionee under this Plan and all other
incentive option plans of the Company and any Parent or Subsidiary in any
calendar year shall not, for such year, in the aggregate, exceed $100,000; but
this Section 6.2(d) shall not affect the right of the Administrator to
accelerate or otherwise alter the time of vesting of any Options granted as
Incentive Stock Options, even, if as a result thereof, some of such Options
cease being Incentive Stock Options.
e) Medium and Time of Payment. The Exercise Price shall be paid in
full, at the time of exercise, in cash or cash equivalents or, with the approval
of the Administrator, in shares of Stock which have been held by the Optionee
for a period of at least six calendar months preceding the date of surrender and
which have a Fair Market Value equal to the Exercise Price, or in a combination
of cash and such shares, and may be effected in whole or in part (i) with monies
received from the Company at the time of exercise as a compensatory cash
payment; or (ii) to the extent that the Exercise Price exceeds the par value of
the shares so purchased, with monies borrowed from the Company in accordance
with Section 10.5.
f) Term and Exercise of Stock Options. Stock Options shall be
exercisable over the exercise period at the times the Administrator may
determine, as reflected in the related Stock Option Agreements. The Stock Option
Agreements shall provide that Option Holders shall have the right to exercise
the Stock Options at the rate of at least 20% per year over 5 years from the
Date of Grant of such Stock Options. The exercise period of any Stock Option
shall be determined by the Administrator, but shall not exceed ten years from
the Date of Grant of the Stock Option. In the case of an Incentive Stock Option
granted to a Ten Percent Shareholder, the exercise period shall be determined by
the Administrator, but shall not exceed five years from the Date of Grant of the
Stock Option. The exercise period shall be subject to earlier termination upon
the occurrence of either a Special Terminating Event, as provided in Section
10.6, or the Termination of Employment, as provided in Section 10.7. A Stock
Option may be exercised, as to any or all full shares of Stock as to which the
Stock Option has become exercisable, by giving written notice of such exercise
to the Company.
7. Purchase Rights.
7.1 General. Purchase Rights may be granted alone or in addition to
other Rights under the Plan. Each sale of Stock under this Article 7 shall be in
such form and under such terms and conditions as the Administrator shall from
time to time approve; provided, that such terms and conditions are not
inconsistent with the Plan. The provisions of Stock Purchase Agreements entered
into under the Plan need not be identical.
7.2 Terms and Conditions of Purchase Rights. Each Purchase Right
granted pursuant to the Plan shall be evidenced by a written stock purchase
agreement between the Company and the
-6-
<PAGE> 7
Offeree (the "Stock Purchase Agreement"), which shall comply with and be subject
to the following terms and conditions.
a) Number of Shares. Each Stock Purchase Agreement shall state the
number of shares of Stock which may be purchased pursuant to such agreement.
b) Purchase Price. Each Stock Purchase Agreement shall state the
price at which the Stock subject to such Stock Purchase Agreement may be
purchased (the "Purchase Price"), which, with respect to Stock Purchase Rights,
shall be determined in the sole discretion of the Administrator.
c) Medium and Time of Payment. The Purchase Price shall be paid in
full at the time of exercise, in cash or cash equivalent or, with the approval
of the Administrator, in shares of Stock which have been held by the Offeree for
a period of at least six calendar months preceding the date of surrender and
which have a Fair Market Value equal to the Purchase Price or in a combination
of cash or cash equivalent and such shares, and may be effected in whole or in
part (i) with monies received from the Company at the time of exercise as a
compensatory cash payment; or (ii) to the extent the purchase price exceeds the
par value of the shares so purchased, with monies borrowed from the Company in
accordance with Section 10.5 of the Plan.
8. Adjustments.
8.1 Effect of Certain Changes.
a) Stock Dividends, Splits, Etc. If there is any change in the
number of outstanding shares of Stock through the declaration of Stock dividends
or through a recapitalization resulting in Stock splits, or combinations or
exchanges of the outstanding shares, (i) the number of shares of Stock available
for Rights, (ii) the number of shares covered by outstanding Rights and (iii)
the Exercise Price or Purchase Price of any Stock Option or Purchase Right, in
effect prior to such change, shall be proportionately adjusted by the
Administrator to reflect any increase or decrease in the number of issued shares
of Stock; provided, however, that any fractional shares resulting from the
adjustment shall be eliminated.
b) Liquidating Event. In the event of the proposed dissolution or
liquidation of the Company, or in the event of any corporate separation or
division, including, but not limited to, a split-up, split-off or spin-off
(each, a "Liquidating Event"), the Administrator may provide that the holder of
any Right then exercisable shall have the right to exercise such Right (at the
price provided in the Rights) subsequent to the Liquidating Event, and for the
balance of its term, solely for the kind and amount of shares of Stock and other
securities, property, cash or any combination thereof receivable upon such
Liquidating Event by a holder of the number of shares of Stock for or with
respect to which such Right might have been exercised immediately prior to such
Liquidating Event; or the Administrator may provide, in the alternative, that
each Right granted under the Plan shall terminate as of a date to be fixed by
the Board; provided, however, that not less than 30 days written notice of the
date so fixed shall be given to each Rights holder and if such notice is given,
each Rights
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<PAGE> 8
holder shall have the right, during the period of 30 days preceding such
termination, to exercise the Right as to all or any part of the shares of Stock
covered thereby, to the extent that such Right is then exercisable, on the
condition, however, that the Liquidating Event actually occurs; and if the
Liquidating Event actually occurs, such exercise shall be deemed effective (and,
if applicable, the Rights holder shall be deemed a shareholder with respect to
the Rights exercised) immediately preceding the occurrence of the Liquidating
Event, or the date of record for shareholders entitled to share in such
Liquidating Event, if a record date is set.
c) Merger or Consolidation. In the case of any capital
reorganization, any reclassification of the Common Stock (other than a change in
par value or recapitalization described in Section 8.1(a) of the Plan), or the
consolidation of the Company with, or a sale of substantially all of the assets
of the Company to (which sale is followed by a liquidation or dissolution of the
Company), or merger of the Company with another person (a "Reorganization
Event"), the Administrator shall be obligated to determine whether the
Reorganization Event shall constitute a "Liquidity Event," and to deliver to
Rights holders at least 15 days prior to such Reorganization Event (or at least
15 days prior to the date of record for shareholders entitled to share in the
securities or property distributed in the Reorganization Event, if a record date
is set) a notice which shall (i) indicate whether the Reorganization Event is a
Liquidity Event, and (ii) advise the Rights holder of his or her rights pursuant
to the Agreement applicable to such Rights. If the Reorganization Event is
determined to be a Liquidity Event, in its sole and absolute discretion, the
surviving corporation may, but shall not be obligated to, (i) tender stock
options to the Rights holder with respect to the surviving corporation which
shall contain terms and provisions that substantially preserve the rights and
benefits of the applicable Right, and (ii) in the event that no stock options
have been tendered by the surviving corporation pursuant to the terms of item
(i) immediately above, the Rights holder shall have the right exercisable during
a ten-day period ending on the fifth day prior to the Reorganization Event (or
ending on the fifth day prior to the date of record for shareholders entitled to
share in the securities or property distributed in the Reorganization Event, if
a record date is set) to exercise his or her Rights, to the extent that such
Rights are then exercisable, in whole or in part, on the condition, however,
that the Reorganization Event is actually effected; and if the Reorganization
Event is actually effected, such exercise shall be deemed effective (and, if
applicable, the Rights holder shall be deemed a shareholder with respect to the
Rights exercised) immediately preceding the effective time of the Reorganization
Event (or on the date of record for shareholders entitled to share in the
securities or property distributed in the Reorganization Event, if a record date
is set). If the Reorganization Event is not determined to be a Liquidity Event,
the Rights holder shall thereafter be entitled upon exercise of the Right to
purchase the kind and number of shares of stock or other securities property of
the surviving corporation receivable upon such event by a holder of the number
of shares of the common Stock which the Right entitles the Rights holder to
purchase from the Company immediately prior to such event, and in any such case,
appropriate adjustment shall be made in the application of the provisions set
forth in this Plan with respect to the Rights holders' rights and interests
thereafter, to the end that the provisions set forth in the agreement applicable
to such Rights (including the specified changes and other adjustments to the
Exercise Price) shall thereafter be applicable in relation to any shares or
other property thereafter purchasable upon exercise of the Right.
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<PAGE> 9
d) Where Company Survives. Section 8. 1 (c) shall not apply to a
merger or consolidation in which the Company is the surviving corporation,
unless shares of Stock are converted into or exchanged for securities other than
publicly-traded common stock, cash (excluding cash in payment for actual shares)
or any other thing of value. Notwithstanding the preceding sentence, in case of
any consolidation or merger of another corporation into the company in which the
Company is the surviving corporation and in which there is a reclassification or
change (including a change to the right to receive an amount of money payable by
cash or cash equivalent or other property) of the shares of Stock (other than a
change in par value, or from par value to no par value, or as a result of a
subdivision or combination, but including any change in such shares into two or
more classes or series of shares), the Administrator may provide that the holder
of each Right then exercisable shall have the right to exercise such Right
solely for the kind and amount of shares of Stock and other securities
(including those of any new direct or indirect parent of the Company), property,
cash or any combination thereof receivable upon such reclassification change,
consolidation or merger by the holder of the number of shares of Stock for which
such Right might have been exercised.
e) Surviving Corporation Defined. The determination as to which
party to a merger or consolidation is the "surviving corporation" shall be made
on the basis of the relative equity interests of the shareholders in the
corporation existing after the merger or consolidation, as follows: if
immediately following any merger or consolidation the holders of outstanding
voting securities of the Company immediately prior to the merger or
consolidation own equity securities possessing more than 50% of the voting power
of the corporation existing following the merger or consolidation, then for
purposes of this Plan, the Company shall be the surviving corporation. In all
other cases, the Company shall not be the surviving corporation. In making the
determination of ownership by the shareholders of a corporation immediately
after the merger or consolidation, of equity securities pursuant to this Section
8.1(e), equity securities which the shareholders owned immediately before the
merger or consolidation as shareholders of another party to the transaction
shall be disregarded. Further, for purposes of this Section 8.1(e) only,
outstanding voting securities of a corporation shall be calculated by assuming
the conversion of all equity securities convertible (immediately or at some
future time) into shares entitled to vote.
f) Par Value Changes. In the event of a change in the Stock of the
Company as presently constituted which is to a change of all of its authorized
shares with par value, into the same number of shares without par value, or a
change in the par value, the shares resulting from any such change shall be
"Stock" within the meaning of the Plan.
8.2 Decision of Administrator Final. To the extent that the foregoing
adjustments relate to stock or securities of the Company, such adjustments shall
be made by the Administrator, whose determination in respect shall be final,
binding and conclusive; provided, however, that each Incentive Stock Option
granted pursuant to the Plan shall not be adjusted without the prior consent of
the Holder thereof in a manner that causes such Stock Option to fail to continue
to qualify as an Incentive Stock Option.
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<PAGE> 10
8.3 No Other Rights. Except as herein before expressly provided in
this Article 8, no Rights holder shall have any rights by reason of any
subdivision or consolidation of shares of Stock or the payment of any dividend
or any other increase or decrease in the number of shares of Stock of any class
or by reason of any Liquidating Event, merger, or consolidation of assets or
stock of another corporation, or any other issue by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class;
and except as provided in this Article 8, none of the foregoing events shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Stock subject to Rights. The grant of a Right
pursuant to the Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, Exercise Price) shall thereafter
be applicable in relation to any shares or other property thereafter purchasable
upon exercise of the Right.
8.4 No Rights as Shareholder. Except as specifically provided in this
Article 8, a Rights holder or a transferee of a Right shall have no rights as a
shareholder with respect to any shares covered by the Rights until the date of
the issuance of a Stock certificate to him or her for such shares, and no
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions of other rights for which
the record date is prior to the date such Stock certificate is issued, except as
provided in Section 8.1(b) or 8.1(c).
9. Amendment and Termination. The Board may amend, alter or discontinue
the Plan, but no amendment, alteration or discontinuation shall be made which
would impair the rights of a Participant under any Right theretofore granted
without such Participant's consent. The Board shall obtain shareholder approval
of an Plan amendment to the extent necessary and desirable to comply with Rule
16b-3, Section 422 of the Code (or any successor rule or statute) or other
applicable law, rule or regulation, including the requirements of any Market
System on which the Stock is listed or quoted. The Administrator may amend the
terms of any award theretofore granted, prospectively or retroactively, but,
subject to Article 3, no such amendment shall impair the rights of any holder
without his or her consent.
10. General Restrictions.
10.1
a) Limitation on Granting of Rights. Subject to adjustment as
provided in Article 8, no Participant shall be granted Rights with respect to
more than 100,000 shares of Stock during any one-year period.
b) No View to Distribute. The Administrator may require each
person acquiring shares of Stock pursuant to the Plan to represent to and agree
with the Company in writing that such person is acquiring the shares without a
view towards distribution thereof. The certificates for such shares may include
any legend which the Administrator deems appropriate to reflect any restrictions
on transfer.
c) Legends. All certificates for shares of Stock delivered under
the Plan shall be subject to such stop transfer orders and other restrictions as
the Administrator may deem advisable
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<PAGE> 11
under the rules, regulations and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Stock is then listed and
any applicable federal or state securities laws.
d) Market Stand-Off. All Stock Option Agreements and Stock
Purchase Agreements shall provide that in connection with any underwritten
public offering by the Company of its equity securities pursuant to an effective
registration statement filed under the 1933 Act, including the Company's initial
public offering, the Participant agrees (the "Hold-Back Agreement") not to sell,
make any short sale of, loan, hypothecate, pledge, grant any option for the
purchase of, or otherwise dispose or transfer or otherwise agree to engage in
any of the foregoing transactions with respect to any shares purchased by the
Optionee upon exercise of his or her Option ("Purchased Shares") without the
prior written consent of the Company or its underwriters, for such period of
time from and after the effective date of such registration statement as may be
requested by the Company or such underwriters; provided, however, that in no
event shall such period exceed one hundred-eighty (180) days. Stock Option
Agreements and Stock Purchase Agreements may provide that the Hold-Back
Agreement shall terminate following expiration of the two-year period
immediately following the effective date of the Company's initial public
offering.
10.2 Other Compensation Arrangements. Nothing contained in this Plan
shall prevent the Board from adopting other or additional compensation
arrangements, subject to shareholder approval if such approval is required; and
such arrangements may be either generally applicable or applicable only in
specific cases.
10.3
a) Disqualifying Disposition. If an Optionee makes a "disposition"
(as defined in the Code) of all or any of the Purchased Shares within two years
from the date of Grant of the Incentive Stock Option covering such shares or
within one year after the issuance of such Purchased Shares, he or she shall
immediately advise the Company in writing as to the occurrence of the sale and
the price upon the sale of such Shares. The Optionee agrees that he or she shall
maintain all Purchased Shares in his or her name so long as he or she maintains
beneficial ownership of such Purchased Shares.
b) Withholding Required. Each Participant shall, no later than the
date as of which the value derived from a Right first becomes includable in the
gross income of the Participant for income tax purposes, pay to the Company, or
make arrangements satisfactory to the Administrator regarding payment of, any
federal, state or local taxes of any kind required by law to be withheld with
respect to the Right or its exercise. The obligations of the Company under the
Plan shall be conditioned upon such payment or arrangements and the Participant
shall, to the extent permitted by law, have the right to request that the
Company deduct any such taxes from any payment of any kind otherwise due to the
Participant.
c) Withholding Right. The Administrator may, in its discretion,
grant a Rights holder the right (a "Withholding Right") to elect to make such
payment by irrevocably requiring the Company to withhold from shares issuable
upon exercise of the Right that number of full shares of Common Stock having a
Fair Market Value on the Tax Date (as defined below) equal to the amount
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<PAGE> 12
(or portion of the amount) required to be withheld. The Withholding Right may be
granted with respect to all or any portion of the Right.
d) Exercise of Withholding Right. To exercise a Withholding Right,
the Rights holder must follow the election procedures set forth below, together
with such additional procedures and conditions as may be set forth in the
related Rights agreement or otherwise adopted by the Administrator.
i) The Rights holder must deliver to the Company his or her
written notice of election (the "Election") to have the Withholding Right apply
to all (or a designated portion) of his or her Right.
ii) Unless disapproved by the Administrator as provided in
Subsection (iii) below, the Election once made will be irrevocable.
iii) No election is valid unless the Administrator consents to
the Election; the Administrator has the right and power, in its sole discretion,
with or without cause or reason therefor, to consent to the Election, to refuse
to consent to the Election, or to disapprove the Election; and if the
Administrator has not consented to the Election on or prior to the date that the
amount of tax to be withheld is, under applicable federal income tax laws, fixed
and determined by the Company (the "Tax Date"), the Election will be deemed
approved.
e) Effect. If the Administrator consents to an Election of a
Withholding Right:
i) Upon the exercise of the Right (or any portion thereof) to
which the Withholding Right relates, the Company shall withhold from the shares
otherwise issuable that number of full shares of Stock having an actual Fair
Market Value equal to the amount (or portion of the amount, as applicable)
required to be withheld under applicable federal and/or state income tax laws as
a result of the exercise; and
ii) If the Rights holder is then a Section 16(b) Person who has
made an Election, the related Right may not be exercised, nor may any shares of
Stock issued pursuant thereto be sold, exchanged or otherwise transferred,
unless such exercise, or such transaction, complies with an exemption from
Section 16(b) provided under Rule 16b-3.
10.4 Indemnification. In addition to such other rights of
indemnification as they may have as Directors or members of the Committee, and
to the extent allowed by applicable law, the Administrators shall be indemnified
by the Company against the reasonable expenses, including attorney's fees,
actually incurred in connection with any action, suit or proceeding or in
connection with any appeal therein, to which they or any one of them may be
party by reason of any action taken or failure to act under or in connection
with the Plan or any option granted under the Plan, and against all amounts paid
by them in settlement thereof (provided that the settlement has been approved by
the Company, which approval shall not be unreasonably withheld) or paid by them
in satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to
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<PAGE> 13
which it shall be adjudged in such action, suit or proceeding that such
Administrator did not act in good faith and in a manner in which such person
reasonably believed to be in the best interests of the Company, and in the case
of a criminal proceeding, had no reason to believe that the conduct complained
of was unlawful; provided, however, that within 60 days after institution of any
such action, suit or proceeding, such Administrator shall, in writing, offer the
Company the opportunity at its own expense to handle and defend such action,
suit or proceeding.
10.5 Loans. The Company may make loans to Optionees and Offerees as
the Administrator, in its discretion, may determine in connection with the
exercise of outstanding Stock Options and Purchase Rights granted under the
Plan. Such loans shall (i) be evidenced by promissory notes entered into by the
holders in favor of the Company; (ii) be subject to the terms and conditions set
forth in this Section 10.5 and such other terms and conditions, not inconsistent
with the Plan, as the Administrator shall determine; and (iii) bear interest, if
any, at such rate as the Administrator shall determine. In no event may the
principal amount of any such loan exceed the Exercise Price or the Purchase
Price less the par value of the shares of Stock covered by the Stock Option or
Purchase Right, or portion thereof, exercised by the Optionee or Offeree. The
initial term of the loan, the schedule of payments of principal and interest
under the loan, the extent to which the loan is to be with or without recourse
against the holder with respect to principal and applicable interest and the
conditions upon which the loan will become payable in the event of the holder's
termination of employment shall be determined by the Administrator; provided,
however, that the term of the loan, including extensions, shall not exceed 10
years. Unless the Administrator deems otherwise, when a loan shall have been
made, shares of Stock having a Fair Market Value at least equal to the principal
amount of the loan shall be pledged by the holder to the Company as security for
payment of the unpaid balance of the loan and such pledge shall be evidenced by
a pledge agreement, the terms of which shall be determined by the Administrator,
in its discretion; provided, however, that each loan shall comply with all
applicable laws, regulations and rules of the Board of Governors of the Federal
Reserve System and any other governmental agency having jurisdiction.
10.6 Special Terminating Events. If a Special Terminating Event
occurs, all Rights theretofore granted to such Rights holder may, unless earlier
terminated in accordance with their terms, be exercised by the Rights holder or
by his or her estate or by a person who acquired the right to exercise such
Right by bequest or by reason of the death or Disability of the Rights holder,
at any time within one year after the date of the Special Terminating Event.
Notwithstanding the foregoing, an Incentive Stock Option shall be exercisable at
any time within three months after the date of Retirement or termination of
employment of an Optionee.
10.7 Termination of Employment. Except as provided in this Section
10.7, no Right may be exercised unless the Right holder is then a Director of
the Company, or in the employ of the Company or any Parent or Subsidiary, or
rendering services as a consultant to the Company or any Parent or Subsidiary,
and unless he or she has remained continuously so employed or engaged since the
Date of Grant. If the employment or services of a Right holder shall terminate
(other than by reason of a Special Terminating Event), all Rights previously
granted to the Right holder which are exercisable at the time of such
termination may be exercised for the period ending 90 days after
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<PAGE> 14
such termination, provided, however, that if the employment or services of a
Rights holder is terminated "for cause," such Rights may be exercised for the
period ending 30 days after such termination; provided, further, that no Right
may be exercised following the date of its expiration. Nothing in the Plan or in
any Right granted pursuant to the Plan shall confer upon an employee any right
to continue in the employ of the Company or any Parent or Subsidiary or
interfere in any way with the right of the Company or any Parent or Subsidiary
to terminate such employment at any time.
10.8 Non-Transferability of Rights. Each Stock Option Agreement and
Stock Purchase Agreement shall provide that the Rights granted under the Plan
shall not be transferable otherwise than by will or by the laws of descent and
distribution, and the Rights may be exercised, during the lifetime of the Rights
holder, only by the Rights holder or by his or her guardian or legal
representative.
10.9 Regulatory Matters. Each Stock Option Agreement and Stock
Purchase Agreement shall provide that no shares shall be purchased or sold
thereunder unless and until (i) any then applicable requirements of state or
federal laws and regulatory agencies shall have been fully complied with to the
satisfaction of the Company and its counsel; and (ii) if required to do so by
the Company, the Optionee or Offeree shall have executed and delivered to the
Company a letter of investment intent in such form and containing such
provisions as the Board or Committee may require.
10.10 Recapitalizations. Each Stock Option Agreement and Stock Purchase
Agreement shall contain provisions to reflect the provisions of Article 8.
10.11 Delivery. Upon exercise of a Right granted under this Plan, the
Company shall issue Stock or pay any amounts due within a reasonable period of
time thereafter. Subject to any statutory obligations the Company may have, for
purposes of this Plan, thirty days shall be considered a reasonable period of
time.
10.12 Rule 16b-3. With respect to persons subject to Section 16 of the
Securities Exchange Act of 1934 (the "Exchange Act"), transactions under this
plan are intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the Exchange Act. To the extent any provisions of the plan or
action by the Administrator fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Administrator.
10.13 Other Provisions. The Stock Option Agreements and Stock Purchase
Agreements authorized under the Plan may contain such other provisions not
inconsistent with this Plan, including, without limitation, restrictions upon
the exercise of the Rights, as the Administrator may deem advisable.
11. Effective Date of Plan. The Plan shall become effective on the date on
which the Plan is adopted by the Board, subject to the approval by the Company's
shareholders, which approval must be obtained within one year from the date the
Plan is adopted by the Board.
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<PAGE> 15
12. Term of Plan. No Right shall be granted pursuant to the Plan on or
after June 30, 2005, but Rights theretofore granted may extend beyond that date.
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<PAGE> 16
STOCK OPTION AGREEMENT
(NON-STATUTORY STOCK OPTION)
This STOCK OPTION AGREEMENT (this "Option Agreement") is made and
entered into on the execution date of the Option Certificate to which it is
attached (the "Certificate"), by and between Document Sciences Corporation, a
Delaware corporation (the "Company"), and the Director, consultant or employee
named in the Certificate ("Optionee").
Pursuant to the Document Sciences Corporation 1995 Stock Incentive Plan
(the "Plan"), the Board of Directors of the Company (the "Board") has authorized
the grant to Optionee of a non-statutory stock option to purchase shares of the
Company's Common Stock, par value $0.001 per share (the "Common Stock"), upon
the terms and subject to the conditions set forth in this Option Agreement and
in the Plan.
The Company and Optionee agree as follows:
1. GRANT OF OPTION.
The Company hereby grants to Optionee the right and option
(the "Option"), upon the terms and subject to the conditions set forth in this
Option Agreement, to purchase all or any portion of that number of shares of the
Common Stock (the "Shares") set forth in the Certificate (the "Exercise Price").
2. TERM OF OPTION.
The Option shall terminate and expire on the Option Expiration Date set
forth in the Certificate, unless sooner terminated as provided herein.
3. EXERCISE PERIOD.
(a) Subject to the provisions of Paragraphs 3(b), 5, 7(c) and
7(d) of this Option Agreement, the Option shall become exercisable (in whole or
in part) upon and after the dates set forth under the caption "Exercise
Schedule" in the Certificate. The installments shall be cumulative; i.e., the
Option may be exercised, as to any or all Shares covered by an installment, at
any time or times after the installment first becomes exercisable and until
expiration or termination of the Option.
(b) Notwithstanding anything to the contrary contained in this
Option Agreement, the Option may not be exercised, in whole or in part, unless
and until any then-applicable requirements of all federal, state and local laws
and regulatory agencies shall have been fully complied with to the satisfaction
of the Company and its counsel.
4. EXERCISE OF OPTION.
There is no obligation to exercise the Option, in whole or in
part. The Option may be exercised, in whole or in part, only by delivery to the
Company of:
(a) written notice of exercise in form and substance identical
to Exhibit "A" attached to this Option Agreement stating the number of shares of
Common Stock then being purchased (the "Purchased Shares"); and
<PAGE> 17
(b) payment of the Exercise Price of the Purchased Shares,
either in cash, by check, by cancellation of any indebtedness of the Company to
Optionee for accrued and unpaid salary or, with the consent of the Administrator
of the Plan, by transfer to the Company of issued and outstanding shares of
Common Stock, or by any combination of the above methods of payment. If payment
is made, in whole or in part, by transfer to the Company of issued and
outstanding shares of Common Stock, the value (the "Fair Market Value") of such
shares shall be determined as follows: (i) if the Stock is listed on an exchange
or exchanges, or admitted for trading in a market system which provides last
sale data under Rule 11Aa3-1 of the General Rules and Regulations of the
Securities and Exchange Commission under the Securities and Exchange Act of
1934, as amended (a "Market System"), the last reported sales price per share on
the last business day prior to such date on the principal exchange on which it
is traded, or in such a Market System, as applicable; or if no sale was made on
such day on such principal exchange or in such a Market System, as applicable,
the last reported sales price per share on the most recent day prior to such
date on which a sale was reported on such exchange or such Market System, as
applicable; or (ii) if the Common Stock is not then traded on an exchange or in
such a Market System, the average of the closing bid and asked prices per share
for the Common Stock in the over-the-counter market as quoted on Nasdaq on the
day prior to such date; or (iii) if the Common Stock is not listed on an
exchange or quoted on Nasdaq, an amount determined in good faith by the
Administrator.
Following receipt of the notice and payment referred to above, the
Company shall issue and deliver to Optionee a stock certificate or stock
certificates evidencing the Purchased Shares; provided, however, that the
Company shall not be obligated to issue a fraction or fractions of a share of
its Common Stock, and may pay to Optionee, in cash or by check, the Fair Market
Value of any fraction or fractions of a share exercised by Optionee, which Fair
Market Value shall be determined as set forth in the preceding paragraph.
5. TERMINATION OF EMPLOYMENT.
(a) If Optionee shall cease to be a Director of the Company,
or to be in the employ of, or a consultant to the Company, any Subsidiary or any
Parent for any reason other than Optionee's death, permanent disability, or
retirement (a "Special Terminating Event"), Optionee shall have the right to
exercise the Option at any time within 90 days after the date Optionee ceased to
be a Director of the Company, or to be employed by, or to be a consultant to the
Company, and prior to the date of termination of the Option under Paragraph 2 of
this Option Agreement with respect to all shares with respect to which the
Option was exercisable at the date Optionee's employment terminated as to which
the Option had not previously been exercised; and to the extent unexercised at
the end of this period, the Option shall terminate. The Administrator, in its
sole and absolute discretion, shall determine whether or not authorized leaves
of absence shall constitute termination of employment for purposes of this
Option Agreement.
(b) If Optionee shall be terminated "for cause" by the
Company, any Subsidiary or any Parent, Optionee shall have the right to exercise
the Option at any time within 30 days after such termination of employment and
prior to the date of termination of the Option under Paragraph 2 of this Option
Agreement with respect to all Shares with respect to which the Option was
exercisable on the date his employment terminated as to which the Option had not
previously been exercised.
(c) If a Special Terminating Event occurs while Optionee is in
the employ of the Company, any Subsidiary or any Parent, then Optionee,
Optionee's executors or administrators or any person or persons acquiring the
Option directly from Optionee by bequest or inheritance, shall have the right to
exercise the entire Option at any time within one year after such death or
permanent disability, but not later than the Option Expiration Date; to the
extent the Option is unexercised at the end of that period, the Option will
terminated.
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<PAGE> 18
(d) For purposes of this Option Agreement, "cause" shall mean:
(i) with respect to Optionees of the Company:
(1) the failure or refusal by Optionee to perform his
duties to the Company; or
(2) Optionee's willful disobedience of any orders or
directives of the Board or any officers thereof acting under the authority
thereof or Optionee's deliberate interference with the compliance by other
employees of the Company with any such orders or directives; or
(3) the failure or refusal of Optionee to abide by or
comply with the written policies, standard procedures or regulations of the
Company; or
(4) any willful or continued act or course of conduct
by Optionee which the Board in good faith determines might reasonably be
expected to have a material detrimental effect on the Company or the business,
operations, affairs or financial position thereof; or
(5) the committing by the Optionee of any fraud,
theft, embezzlement or other dishonest act against the Company; or
(6) the determination by the Board of Directors of the
Company, in good faith and in the exercise of reasonable discretion, that
Optionee is not competent to perform his duties of employment; and
(ii) with respect to consultants, any material breach of
their consulting agreement with the Company.
(e) For purposes of this Option Agreement, "permanent
disability" shall mean permanent and total disability as defined by the
Administrator. Optionee shall not be considered permanently disabled unless he
furnishes proof of such disability in such form and manner, and at such times,
as the Administrator of the Plan may from time to time require.
6. RESTRICTIONS ON PURCHASED SHARES.
(a) Market Stand-Off.
(i) In connection with any underwritten public offering by
the Company of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Company's initial public
offering, Optionee shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with
respect to any Purchased Shares without the prior written consent of the Company
or its underwriters, for such period of time from and after the effective date
of such registration statement as may be requested by the Company or such
underwriters; provided, however, that in no event shall such period exceed one
hundred-eighty (180) days. This Section 6(a)(i) shall only remain in effect for
the two-year period immediately following the effective date of the Company's
initial public offering and shall thereafter terminate and cease to be in force
or effect. Optionee agrees to execute and deliver to the Company such further
documents or instruments as the Company reasonably determines to be necessary or
appropriate to effect the provisions of this Section 6(a).
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<PAGE> 19
(ii) In the event of any stock dividend, stock split,
recapitalization, or other change affecting the Company's outstanding Common
Stock effected without receipt of consideration, then any new, substituted, or
additional securities distributed with respect to the Purchased Shares shall be
immediately subject to the provisions of this Section 6(a), to the same extent
the Purchased Shares are at such time covered by such provisions.
(iii) In order to enforce the provisions of Section 6(a),
the corporation may impose stop-transfer instructions with respect to the
Purchased Shares until the end of the applicable stand-off period.
(b) Noncomplying Transfers Invalid.
(i) Any attempted Transfer which is not in full compliance
with this Paragraph (6) shall be null and void ab initio, and of no force or
effect.
7. ADJUSTMENTS UPON RECAPITALIZATION.
Subject to any required action by the shareholders of the
Company:
(a) If the outstanding shares of the Common Stock shall be
subdivided into a greater number of shares of the Common Stock, or a dividend in
shares of Common Stock or other securities of the Company convertible into or
exchangeable for shares of the Common Stock (in which latter event the number of
shares of Common Stock issuable upon the conversion or exchange of such
securities shall be deemed to have been distributed) shall be paid in respect of
the shares of Common Stock, the Exercise Price in effect immediately prior to
such subdivision or at the record date of such dividend shall, simultaneously
with the effectiveness of such subdivision or immediately after the record date
of such dividend, be proportionately reduced, and conversely, if the outstanding
shares of Common Stock shall be combined into a smaller number of shares of
Common Stock, the Exercise Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased.
(b) When any adjustment is required to be made in the Exercise
Price, the number of Shares purchasable upon the exercise of the Option shall be
adjusted to that number of Shares determined by (i) multiplying an amount equal
to the number of Shares purchasable on the exercise of the Option immediately
prior to such adjustment by the Exercise Price in effect immediately prior to
such adjustment, and then (ii) dividing that product by the Exercise Price in
effect immediately after such adjustment.
(c) In case of any capital reorganization, any
reclassification of the Common Stock (other than a change in par value or
recapitalization described in Paragraph 7(a) of this Option Agreement, or the
consolidation of the Company with, or sale of substantially all of the assets of
the Company to (which sale is followed by a liquidation or dissolution of the
Company), or merger of the Company with another person (a "Reorganization
Event"), the Administrator shall be obligated to determine whether the
Reorganization Event shall constitute a "Liquidity Event," and to deliver to
Optionee at least 15 days prior to such Reorganization Event a notice which
shall (i) indicate whether the Reorganization Event is a Liquidity Event and
(ii) advise Optionee of his or her rights pursuant to this Option Agreement. If
the Reorganization Event is determined to be a Liquidity Event, in its sole and
absolute discretion, the surviving corporation may, but shall not be obligated
to, (i) tender to Optionee Stock Options with respect to the surviving
corporation which shall contain terms and provisions that substantially preserve
the rights and benefits of this Option, and (ii) in the event that no Stock
Options have been tendered by the surviving corporation pursuant to the terms of
item (i) immediately above, Optionee shall have the right exercisable during a
ten-day period ending on the fifth day prior to the Reorganization Event to
exercise his or her Stock Options, to the
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<PAGE> 20
extent that such Stock Options are then exercisable, in whole or in part, on the
condition, however, that the Reorganization Event is actually effected; and if
the Reorganization Event is actually effected, such exercise shall be deemed
effective (and, if applicable, the Optionee shall be deemed a shareholder with
respect to the Stock Options exercised) immediately preceding the effective time
of the Reorganization Event (or on the date of record for shareholders entitled
to share in the securities or property distributed in the Reorganization Event,
if a record date is set). If the Reorganization Event is not determined to be a
Liquidity Event, Optionee shall thereafter be entitled upon exercise of the
Option to purchase the kind and number of shares of stock or other securities or
property of the surviving corporation receivable upon such event by a holder of
the number of shares of the Common Stock which the Option entitles Optionee to
purchase from the Company immediately prior to such event, and in any such case,
appropriate adjustment shall be made in the application of the provisions set
forth in this Option Agreement with respect to Optionee's rights and interests
thereafter, to the end that the provisions set forth in this Option Agreement
(including the specified changes and other adjustments to the Exercise Price)
shall thereafter be applicable in relation to any shares or other property
thereafter purchasable upon exercise of the Option.
(d) In the event of the proposed dissolution or liquidation of
the Company, or in the event of any corporate separation or division, including,
but not limited to, a split-up, split-off or spin-off (each, a "Liquidating
Event"), the holder of any Stock Option then exercisable shall have the right to
exercise such Stock Option (at the price provided in the Stock Option Agreement)
subsequent to the Liquidating Event, and for the balance of its term, solely for
the kind and amount of shares of Stock and other securities, property, cash or
any combination thereof receivable upon such Liquidating Event by a holder of
the number of shares of Stock for or with respect to which such Stock Option
might have been exercised immediately prior to such Liquidating Event; or, in
the alternative, that each Stock Option granted under the Plan shall terminate
as of a date to be fixed by the Board; provided, however, that not less than 30
days written notice of the date so fixed shall be given to each Option Holder
and if such notice is given, each Option Holder shall have the right, during the
period of 30 days preceding such termination, to exercise the Stock Option as to
all or any part of the shares of Stock covered thereby, to the extent that such
Stock Option is then exercisable, on the condition, however, that the
Liquidating Event actually occurs; and if the Liquidating Event actually occurs,
such exercise shall be deemed effective (and, if applicable, the Option Holder
shall be deemed a shareholder with respect to the Stock Options exercised)
immediately preceding the occurrence of the Liquidating Event, or the date of
record for shareholders entitled to share in such Liquidating Event, if a record
date is set.
(e) To the extent that the foregoing adjustments related to
stock or securities of the Company, such adjustments shall be made by the
Administrator of the Plan, and its determination shall be final, binding and
conclusive.
(f) The provisions of this Paragraph 7 are intended to be
exclusive, and Optionee shall have no other rights upon the occurrence of any of
the events described in this Paragraph 7.
(g) The grant of the Option shall not affect in any way the
right or power of the Company to make adjustments, reclassifications,
reorganizations or changes in its capital or business structure, or to merge,
consolidate, dissolve or liquidate, or to sell or transfer all or any part of
its business or assets.
8. WAIVER OF RIGHTS TO PURCHASE STOCK.
By signing this Option Agreement, Optionee acknowledges and
agrees that neither the Company nor any other person or entity is under any
obligation to sell or transfer to Optionee any option or equity security of the
Company, other than the shares of Common Stock subject to the Option and any
other right or option to purchase Common Stock which was previously granted to
Optionee by the Board (or a committee thereof). By signing this
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<PAGE> 21
Option Agreement, Optionee specifically waives all rights which he or she may
have had prior to the date of this Option Agreement to receive any option or
equity security of the Company.
9. INVESTMENT INTENT.
Optionee represents and agrees that if he or she exercises the
Option in whole or in part and if at the time of such exercise the Plan and /or
the Purchased Shares have not been registered under the Act, he or she will
acquire the Shares upon such exercise for the purpose of investment and not with
a view to the distribution of such Shares, and that upon each exercise of the
Option he or she will furnish to the Company a written statement to such effect.
10. LEGEND ON STOCK CERTIFICATES.
Optionee agrees that all certificates representing the
Purchased Shares will be subject to such stock transfer orders and other
restrictions (if any) as the Company may deem advisable under the rules,
regulations and other requirements of the Securities and Exchange Commission,
any stock exchange upon which the Common Stock is then listed and any applicable
federal or state securities laws, and the Company may cause a legend or legends
to be put on such certificates to make appropriate reference to such
restrictions.
11. NO RIGHTS AS SHAREHOLDER.
Except as provided in Section 8.1 of the Plan, Optionee shall
have no rights as a shareholder with respect to the Shares until the date of the
issuance to Optionee of a stock certificate or stock certificates evidencing
such Shares. Except as may be provided in Paragraph 7 of this Option Agreement,
no adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued.
12. MODIFICATION.
Subject to the terms and conditions and within the limitations
of the Plan, the Board (or a committee thereof) may modify, extend or renew the
Option or accept the surrender of, and authorize the grant of a new option in
substitution for, the Option (to the extent not previously exercised). No
modification of the Option shall be made which, without the consent of Optionee,
would cause the Option to fail to continue to qualify as an "incentive stock
option" within Section 422 of the Code or would alter or impair any rights of
the Optionee under the Option.
13. WITHHOLDING.
(a) The Company shall be entitled to require as a condition of
delivery of any Purchased Shares upon exercise of any Option that the Optionee
agree to remit, at the time of such delivery or later date as the Company may
determine, an amount sufficient to satisfy all federal, state and local
withholding tax requirements relating thereto, and Optionee agrees to take such
other action required by the Company to satisfy such withholding requirements.
(b) With the consent of the Administrator, and in accordance
with any rules and procedures from time to time adopted by the Administrator,
Optionee may elect to satisfy his or her obligations under Paragraph 13(a) above
by (i) directing the Company to withhold a portion of the Shares otherwise
deliverable (or to tender back to the Company a portion of the Shares issued
where the Optionee (a "Section 16(b) Recipient") is required to report the
ownership of the Shares pursuant to Section 16(a) of the Securities Exchange Act
of 1934, as amended, and has
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<PAGE> 22
not made an election under Section 83(b) of the Code (a "Withholding Right"));
or (ii) tendering other shares of the Common Stock of the Company which are
already owned by Optionee which in all cases have a Fair Market Value (as
determined in accordance with the provisions of Paragraph 4(b) hereof) on the
date as of which the amount of tax to be withheld is determined (the "Tax Date")
equal to the amount of taxes to be paid by such method.
(c) To exercise a Withholding Right, the Optionee must follow
the election procedures set forth below, together with such additional
procedures and conditions set forth in this Option Agreement or otherwise
adopted by the Administrator.
(i) the Optionee must deliver to the Company his or her
written notice of election (the "Election") and specify whether all or a stated
percentage of the applicable taxes will be paid in accordance with Paragraph
13(b) above and whether the amount so paid shall be made in accordance with the
"flat" withholding rates for supplemental wages or as determined in accordance
with Optionee's form W-4 (or comparable state or local form);
(ii) unless disapproved by the Administrator as provided
in Subsection (iii) below, the Election once made will be irrevocable; and
(iii) no Election is valid unless the Administrator has
the right and power, in its sole discretion, with or without cause or reason
therefor, to consent to the Election, to refuse to consent to the Election, or
to disapprove the Election; and if the Administrator has not consented to the
Election on or prior to the Tax Date, the Election will be deemed approved.
14. CHARACTER OF OPTION.
The Option is not intended to qualify as an "incentive stock
option" as that term is defined in Section 422 of the Code.
15. GENERAL PROVISIONS.
(a) FURTHER ASSURANCES. Optionee shall promptly take all
actions and execute all documents requested by the Company which the Company
deems to be reasonably necessary to effectuate the terms and intent of this
Option Agreement.
(b) NOTICES. All notices, requests, demands and other
communications under this Option Agreement shall be in writing and shall be
given to the parties hereto as follows:
(i) If the Company, to:
Document Sciences Corporation
6333 Greenwich Drive, Suite 120
San Diego, CA 92112
(ii) If to Optionee, to the address set forth in the
records of the Company,
or at such other address or addresses as may have been furnished by such either
party in writing to the other party hereto. Any such notice, request, demand or
other communication shall be effective (i) if given by mail, 72 hours after such
communication is deposited in the mail by first-class certified mail, return
receipt requested, postage prepaid,
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<PAGE> 23
addressed as aforesaid, or (ii) if given by any other means, when delivered at
the address specified in this subparagraph (b).
(c) TRANSFER OF RIGHTS UNDER THE OPTION AGREEMENT. The Company
may at any time transfer and assign its rights and delegate its obligations
under this Option Agreement to any other person, corporation, firm or entity,
including its officers, directors and stockholders, with or without
consideration.
(d) OPTION NON-TRANSFERABLE. Optionee may not sell, transfer,
assign or otherwise dispose of the Option except by will or the laws of descent
and distribution, and Stock Options may be exercised during the lifetime of the
Option Holder only by the Option Holder or by his or her guardian or legal
representative.
(e) SUCCESSORS AND ASSIGNS. Except to the extent specifically
limited by the terms and provisions of this Option Agreement, this Option
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors, assigns, heirs and personal representatives.
(f) GOVERNING LAW. THIS OPTION AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE
TO CONTRACTS MADE IN , AND TO BE PERFORMED WITHIN, THE STATE.
(g) THE PLAN. This Option Agreement is made pursuant to the
Plan, and it is intended, and shall be interpreted in a manner, to comply
therewith. Any provision of this Option Agreement inconsistent with the Plan
shall be superseded and governed by the Plan.
(h) MISCELLANEOUS. Titles and captions contained in this Option
Agreement are inserted for convenience of reference only and do not constitute a
part of this Option Agreement for any other purpose. Except as specifically
provided herein, neither this Option Agreement nor any right pursuant hereto or
interest herein shall be assignable by any of the parties hereto without the
prior written consent of the other party hereto.
The Signature Page to this Option Agreement consists of the last page
of the Certificate.
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<PAGE> 24
Exhibit "A"
NOTICE OF EXERCISE
(To be signed only upon exercise of the Option)
TO: Document Sciences Corporation
The undersigned, the holder of the enclosed Stock Option Agreement
(NonStatutory Stock Option), hereby irrevocably elects to exercise the purchase
rights represented by the Option and to purchase thereunder _______________*
shares of Common Stock of Document Sciences Corporation (the "Company"), and
herewith encloses payment of $_____________ and/or _________ shares of the
Company's Common Stock in full payment of the purchase price of such shares
being purchased.
Dated:____________________________
------------------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Option)
------------------------------------------
(Please print name)
------------------------------------------
(Address)
* Insert here the number of shares called for on the face of the Option
(or, in the case of a partial exercise, the number of shares being exercised),
in either case without making any adjustment for additional Common Stock of the
Company, other securities or property which, pursuant to the provisions of the
Option, may be deliverable upon exercise.
<PAGE> 25
OPTION CERTIFICATE
(NON-STATUTORY STOCK OPTION)
THIS IS TO CERTIFY that Document Sciences Corporation, a Delaware
corporation (the "Company"), has granted to the person named below a
non-statutory stock option (the "Option") to purchase shares of the Company's
Common Stock, par value $0.001 per share, under its Stock Incentive Plan, as
follows:
Name of Optionee: "Optionee"
Address of Optionee: "Address1"
"Address2"
"Address3"
Number of Shares: "Shares"
Option Exercise Price: $"Price"
Date of Grant: "GrantDate"
Option Expiration Date: "ExpirationDate"
EXERCISE SCHEDULE: The Option shall become exercisable as follows:
25% on "VestDate", and 2.0833% of the total shares each month
thereafter.
SUMMARY OF OTHER TERMS: This option is defined in the Stock Option
Agreement (NonStatutory Stock Option) (the "Option Agreement") which is attached
to this Option Certificate (this "Certificate") as Annex I. This Certificate
summarizes certain of the provisions of the Option Agreement for your
information, but is not complete. Your rights are governed by the Option
Agreement, not by this summary. The Company strongly suggests that you carefully
review the full Option Agreement prior to signing this Certificate or exercising
the Option.
Among the terms of the Option Agreement are the following:
EMPLOYMENT: The Option Agreement does not obligate the Company to
retain you for any period of time. Unless otherwise agreed in writing, the
Company reserves the right to terminate any employee at any time, with or
without cause.
TERMINATION OF EMPLOYMENT: While the Option terminates on the Option
Expiration Date, it will terminate earlier if you cease to be employed by the
Company (or to hold office if you are a director). If your employment ends "for
cause," the Option terminates 30 days after the date of termination of
employment, and is exercisable during such 30 day period as to the portion of
the Option which had vested prior to the date of termination of employment. If
your employment ends due to death, disability or retirement, the Option
terminates one year after the date of death, disability or retirement, and is
exercisable in full during such one year period. In all other cases, the Option
terminates 90 days after the date of termination of employment, and is
exercisable during such 90 day period as to the portion of the Option which had
vested prior to the date of termination of employment. See Section 5 of the
Option Agreement.
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<PAGE> 26
TRANSFER: The Option is personal to you, and cannot be sold,
transferred, assigned or otherwise disposed of to any other person, except on
your death. See Section 15(d) of the Option Agreement.
EXERCISE: You can exercise the Option (once it is exercisable), in
whole or in part, by delivering to the Company a Notice of Exercise identical to
Exhibit "A" attached to the Option Agreement, accompanied by payment of the
Option Exercise Price, set forth above, for the Shares to be purchased. The
Company will then issue a certificate to you for the Shares you have purchased.
You are under no obligation to exercise the Option. See Section 4 of the Option
Agreement.
MARKET STAND-OFF: The Option provides that in connection with any
underwritten public offering by the Company, you may not sell or transfer any of
your Shares without the prior written consent of the Company or its underwriters
for a period of up to 180 days after the effective date of the offering. See
Section 6 of the Option Agreement.
ANTI-DILUTION PROVISIONS: The Option contains provisions which adjust
your Option to reflect stock splits, stock dividends, mergers and other major
corporate reorganizations which would change the nature of the Shares underlying
your Option. See Section 7 of the Option Agreement.
WAIVER: By signing this Certificate, you will be agreeing to all of the
terms of the Option Agreement, including those not summarized in this
Certificate. You will waive your rights to any other options or stock which may
have heretofore been promised to you. See Section 8 of the Option Agreement.
WITHHOLDING: The Company may require you to make any arrangements
necessary to insure the proper withholding of any amount of tax, if any,
required to be withheld by the Company as a result of the exercise of the
Option. See Section 13 of the Option Agreement.
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<PAGE> 27
AGREEMENT
Document Sciences Corporation, a Delaware corporation (the "Company"),
and the above-named person ("Optionee") each hereby agrees to be bound by all of
the terms and conditions of the Stock Option Agreement (Non-Statutory Stock
Option) which is attached hereto as Annex I and incorporated herein by this
reference as if set forth in full in this document.
------------------------------------------
Certificate Date
DOCUMENT SCIENCES CORPORATION
By: Tony N. Domit
Its: President and CEO
OPTIONEE
------------------------------------------
Signature
------------------------------------------
(Please print your name exactly as you wish
it to appear on any stock certificates issued
to you upon exercise of the Option.)
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<PAGE> 1
EXHIBIT 10.22
DOCUMENT SCIENCES CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
(as amended and restated on March 26, 1999)
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 5,000 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
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<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. 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):
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<PAGE> 11
6. 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.
7. 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.
8. 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 10.26
IBM SOFTWARE VENDOR MARKETING PROGRAMS
- --------------------------------------------------------------------------------
Software Vendor Marketing Programs Agreement
SOFTWARE VENDOR MARKETING PROGRAMS AGREEMENT
Agreement Number: SVMP-CA-639
Date of Agreement: March 17, 1998
This is an Agreement between IBM Corporation ("IBM") and You:
Your Name and Address:
Document Sciences, Corp.
Business Development
Suite 200
6333 Greenwich Drive
San Diego, CA 92122-5921
You and IBM hereby agree as follows:
1.0 PURPOSE
This Agreement sets forth the terms and conditions under which IBM, for a fee,
will assist You in the marketing of Your Product(s).
2.0 DEFINITIONS
When used in this Agreement, the capitalized terms listed below will have the
following meanings:
2.1 FEDERAL PROSPECT means a Prospect that is a) an agency or other unit of the
Federal government, b) that You know or should know is a prospective federal
prime or subcontractor, or c) a Prospect which You otherwise know or have reason
to believe will acquire Product(s) for use in connection with a federal
acquisition or project.
2.2 HARMFUL CODE means any computer CODE or programming instructions that are
constructed with the ability to damage, interfere with or otherwise adversely
affect computer programs, data files or hardware without the consent or intent
of the computer user. This definition includes, but is not limited to,
self-replicating and self-propagating programming instructions commonly called
"viruses" and "worms."
2.3 MARKETING ACTIVITIES means: the activities undertaken by the Marketing
Force in marketing the Product(s) to Prospects where at a minimum the Marketing
Force:
2.3.1 establishes contact with the Prospect;
2.3.2 provides information regarding the Product(s) to the Prospect; and
2.3.3 maintains contact with the Prospect throughout the sales cycle.
2.4 Marketing Force means:
2.4.1 IBM; and
2.4.2 any IBM Business Partners and IBM Subsidiaries that IBM utilizes in
marketing the Product(s).
2.5 MARKETING PACKAGE means materials provided by You to the Marketing Force.
The Marketing Package shall include the following:
2.5.1 Software Vendor Marketing Programs Notice means an IBM supplied
description of IBM's responsibilities to Prospects with respect to the
Product(s).
2.5.2 Marketing Materials means Product brochures, technical specification
sheets, demonstration presentations, Product descriptions utilized in electronic
online services, and other marketing sales literature provided by You to IBM, or
prepared by IBM and approved by You, for use by IBM in marketing Your Products
to Prospects. IBM's use of the marketing materials and demonstration materials
may include transmission of them on electronic, online services.
2.5.3 Order Form means an IBM supplied form on which orders for the
Product(s) are recorded by the Marketing Force. It is used in internal IBM
processes which may include sending it to You as part of the order confirmation
process.
2.5.4 Price Schedule means a written statement supplied by You of Your
retail prices for the Product(s), including discounts offered, if any.
2.5.5 User Agreement means the agreement supplied and used by You to sell,
lease and/or license the Product(s) to Prospects.
2.6 PRODUCT(S) means Your software and documentation and any related materials,
that are listed and described in the Attachment A "Product(s) List."
2.7 PROSPECT means a potential or actual customer of the Product(s) that is
subject to Marketing Activities.
3.0 APPOINTMENT
Subject to the terms and conditions hereof, You hereby designate and appoint the
Marketing Force as a nonexclusive representative for the marketing of the
Product(s) in the United States and Puerto Rico.
<PAGE> 2
IBM SOFTWARE VENDOR MARKETING PROGRAMS
- --------------------------------------------------------------------------------
Software Vendor Marketing Programs Agreement
4.0 YOUR RESPONSIBILITIES
4.1 PRICING Notwithstanding anything contained herein, You shall retain full
and absolute freedom and flexibility in pricing Your Product(s), and in
establishing the terms and conditions under which they may be offered to
Prospects.
4.2 MARKETING PACKAGE
4.2.1 You shall provide to IBM a copy of the items in the Marketing Package
provided by You prior to sending the initial Marketing Package to the Marketing
Force. You shall give IBM forty-five (45) days prior written notice should You
elect to change any materials supplied by You in the Marketing Package and shall
provide IBM with a complete copy of the revised Marketing Package at least
thirty days prior to the effective date of the changes. IBM shall have the right
to review all changes to the Marketing Package and to request reasonable
modifications.
4.2.2 You shall at all times during the term of this Agreement ensure that
the Marketing Package completely and accurately represents the Product(s) and
shall provide reasonable quantities of the most current Marketing Package to the
Marketing Force upon request.
4.3 MARKETING SUPPORT You shall cooperate with the Marketing Force in the
marketing of the Product(s). Such cooperation shall include the reasonable
provision of technical support services and training to the Marketing Force
(including, but not limited to, telephone support), and reasonable participation
and assistance with the Marketing Force in sales calls to Prospects, trade shows
and conferences. In addition, You shall, in a manner reasonably consistent with
industry practice, promote the Product(s) through national and local
advertising.
4.4 PROSPECT QUALIFICATION You shall promptly review the qualifications of each
Prospect that has signed an User Agreement. If You determine that You are
unwilling to accept an User Agreement, You shall so notify IBM in writing prior
to notifying the Prospect. Your notice to IBM shall identify the reason for such
rejection.
4.5 PRODUCT(S) In order to ensure that the Product(s) marketed by the Marketing
Forces under this Agreement are the most current release or version offered by
You to Your customers, You shall make available for marketing by the Marketing
Force under this Agreement all maintenance modifications, engineering changes,
upgrades, enhancements, or new versions (including any future adaptations of the
Product(s) to current or future IBM operating systems, systems, and platforms)
of the Product(s) that You offer to Your customers.
4.6 YOUR MISCELLANEOUS RESPONSIBILITIES
4.6.1 You shall perform all of Your obligations under accepted User
Agreements.
4.6.2 You shall ship or deliver the Product(s) no later than the requested
shipment date contained in the order confirmation notice, as described in
Section 4.9 of this Agreement, or within 7 days of receipt said notice, unless a
different date is specified on an User Agreement. If such shipment date is not
reasonably possible, You shall promptly notify the Prospect and IBM of Your
projected shipment date and shall ship, deliver or provide the Product(s) at the
earliest possible date.
4.6.3 You shall invoice and use reasonable efforts to collect all amounts
payable under each User Agreement accepted by You.
4.6.4 You shall pay to IBM the compensation set forth in Section 6.0,
"PAYMENT," and shall provide IBM with documentation and maintain records as
provided therein.
4.6.5 You shall timely notify IBM when a Prospect's signature on an User
Agreement is independently obtained by You and payment is due IBM under Section
6.0, "PAYMENT."
4.6.6 Throughout the term of this Agreement, You shall amend in writing the
information provided to IBM on the business and product overview forms (provided
to You by IBM and incorporated herein by reference) to ensure that such
information remains accurate and complete.
4.6.7 You shall 1) promptly disclose to all Federal Prospects the existence
of this Agreement, including the existence of the contingent fee payment
arrangement in effect with IBM that would apply to the Federal Prospect's
acquisition of the Product(s), 2) promptly, completely, and accurately execute
any certifications, representations, and disclosure documents that may be
required by any Federal Prospect to comply with federal regulations requiring
certification and disclosure of contingent fee arrangements applicable to the
acquisition of the Product(s).
4.6.8 In order for IBM to market Your Product(s) via an online service, You
must presently have or must obtain a userid (at Your expense). IBM may direct
inquires regarding Your Product(s) specifications, pricing, User Agreement terms
and conditions and other such inquires to You. You will respond to such inquires
from Prospects with best efforts within two (2) business days of receipt.
4.6.9 You will approve in a timely manner all Marketing Materials and
demonstration materials provided by IBM for IBM's use in marketing Your Products
to Prospects. You shall provide written approval to IBM for all information
included in such Marketing Materials, including but not limited to, content,
descriptions, pricing, technical information and usage of trademarks, trade
names and copyrighted materials.
-2-
<PAGE> 3
IBM SOFTWARE VENDOR MARKETING PROGRAMS
- --------------------------------------------------------------------------------
Software Vendor Marketing Programs Agreement
4.7 DEMONSTRATION LICENSE You hereby grant IBM a worldwide, royalty-free,
non-exclusive license to use, execute, perform, display, copy and distribute in
tangible or electronic form all, or any portion of the Product(s) and any
copyrighted material, including but not limited to graphics, pictures, drawings,
screen layouts, text, icons, and any other related items owned by You for use by
IBM in marketing Your Product(s) to Prospects and to authorize others to do any
of the foregoing. Upon request by IBM, You shall deliver to IBM one complete
copy of the Product(s) within 15 days of said request.
4.8 PROSPECT REGISTRATION The Marketing Force may provide You with Prospect
registration(s) identifying, at a minimum, the Prospect's name and location. You
shall, upon receipt of the registration, promptly review and reply to IBM in ten
(10) business days or less from date of receipt whether You will accept or
reject Prospect. If You accept the Prospect registration, You will send to the
initiator of the registration a completed Marketing Package. If You reject said
Prospect registration, You will provide in writing to IBM the reason(s) for
rejection.
4.9 ORDER CONFIRMATION IBM may provide You with order confirmation notices
identifying Product(s) licensed by Prospects. You shall confirm in writing
within ten (10) working days from date of receipt, the Product(s) licensed by a
Prospect, the dollar value of the related User Agreement(s) and the estimated
date You will pay to IBM the associated fees as described in Section 6.1 of this
Agreement.
5.0 IBM'S RESPONSIBILITIES
5.1 MARKETING SUPPORT ACTIVITIES IBM will, at its sole cost, undertake the
following market support activities for the Product(s):
5.1.1 provide to You the IBM Business Partner Program emblem as described in
Section 11.3 "Advertising and Trademark Usage" of this Agreement; and
5.1.2 issue an announcement letter to its Marketing Force and customers that
describes the Product(s), to include pricing, and announces that the Marketing
Force may solicit and obtain orders for the Product(s) on Your behalf. This
announcement letter may also be posted on the Internet; and
5.1.3 make available to You a registration process whereby You may accept or
reject a Prospect; and
5.1.4 include Your Product(s) (identified as Software Vendor Marketing
Programs offerings) in IBM National Solution Center database.
5.2 IBM may solicit and obtain orders from Prospects on the Order Form, obtain
the Prospect's signature on an User Agreement, and forward or facilitate the
forwarding of the same to You.
5.3 IBM may participate in joint sales calls with You.
5.4 IBM will, in its Marketing Activities, rely on the information supplied by
You and contained in the Marketing Package, training, and instruction received
from You, and information otherwise provided by You regarding the Product(s).
5.5 IBM may, in a manner and amount that it deems appropriate, compensate the
Marketing Force based upon fees received by IBM from You under this Agreement.
5.6 Notwithstanding anything contained herein, IBM shall have full freedom and
flexibility in its marketing effort for the Product(s), including whether to
market or discontinue marketing. IBM makes no guarantee or commitment that the
Product(s) will be marketed nor does IBM guarantee the financial or other
success of any marketing effort engaged in.
6.0 PAYMENT
6.1 FEE In consideration for the Marketing Activities (as defined in Section
2.3) and Market Support Activities (as described in Section 5.1), You shall owe
IBM a fee equal to the applicable percentage (as listed in the Attachment A -
"Product(s) List") of the total revenue received by You for Product(s) under:
6.1.1 User Agreements with Prospects obtained as a result of Marketing
Activities with or without an order confirmation notice as described in Section
4.9 and/or with or without a Prospect registration as described in Section 4.8
of this Agreement; and
6.1.2 User Agreements with Prospects rejected by You under Section 4.4,
"Prospect Qualification," provided You subsequently accept an User Agreement(s)
for the Product(s) from such Prospects during the term of this Agreement and for
six (6) months after IBM's withdrawal of the Products from marketing by the
Marketing Force unless the reason for the rejection was that You were engaged in
marketing activities with the Prospects prior to the Marketing Force's
engagement with the Prospects; and
6.1.3 Additional User Agreements for Product(s) issued to Prospects by You
during the term of this Agreement and six (6) months after IBM's withdrawal of
the Products from marketing by the Marketing Forces which are a direct or
follow-on result of Marketing Activities; and
6.1.4 User Agreements with Prospects obtained as a result of Marketing
Activities initiated before the IBM's withdrawal of the Product(s) from
marketing by the Marketing Force and three (3) months following said withdrawal.
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IBM SOFTWARE VENDOR MARKETING PROGRAMS
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Software Vendor Marketing Programs Agreement
6.2 PAYMENT OBLIGATION Your payment to IBM shall accrue when the Prospect's fee
for the Product(s) becomes payable to You.
6.3 REMITTANCE Payment shall be made to IBM within thirty (30) days after the
conclusion of each calendar month for the amounts received by You in such
calendar month. Payment shall be accompanied by an activity report summarizing
the basis for the payment to IBM. For months in which no payment is due IBM, You
will send an activity report so stating.
6.3.1 For Products, the report should include the names of each of the
Prospects, the identification, quantity, and unit price of each Product(s), the
order confirmation control number, the IBM feature and/or program number, the
total due You from Prospect, the total payments received from Prospect, total
due IBM, total fees paid to IBM to date under each User Agreement and the amount
of fee to IBM included in this payment.
6.3.2 Rejection or Refund In addition, in the event, a Prospect cancels
prior to making payment to You, or You grant a refund to a Prospect, the
activity report shall contain detailed information identifying the reasons for
and amounts of any resulting adjustment in payment due IBM.
6.4 AUDIT You shall maintain records in accordance with generally accepted
methods of accounting of all transactions which are the subject of this
Agreement for three years from the date revenue from the Product(s) accrues to
You. If IBM deems it necessary, IBM (or an accounting organization retained by
IBM) shall have access to such records, upon reasonable notice, for the purposes
of audit during normal business hours, for so long as such records are required
to be maintained.
6.5 FEE DISPUTE In the event IBM determines that additional payment is due, IBM
will issue an invoice for such additional amount with supporting documentation.
Except for disputed fees, You agree to pay such invoice within 30 days of
receipt. In the event a dispute arises over fees due to IBM, IBM and You agree
to work in good faith toward a mutually agreeable resolution of the dispute.
7.0 WARRANTY
You represent and warrant, as a present and ongoing affirmation of the facts,
that:
7.1 You have all intellectual property rights to the Product(s) that are
necessary to perform Your obligations under this Agreement and all agreements
entered into with Prospect(s); and
7.2 The Product(s) and all related materials (including Marketing Materials and
demonstration materials) do not infringe any intellectual property right
(including but not limited to patents, copyrights, trademarks and trade secrets)
of any third party; and
7.3 The Product(s) substantially conform to the statements and representations
made by You in the Marketing Package or otherwise provided by You to Prospects
and the Marketing Force; and
7.4 Your performance of Your obligations hereunder do not conflict with any
agreement between You, the Prospects or any third party; and
7.5 You, in entering into this Agreement, have not relied on any promises,
inducements, or representations by IBM except those expressly stated in this
Agreement; and
7.6 The Product(s) comply with all applicable governmental regulations, rules
and guidelines.
7.7 The Product(s) and all related materials do not contain any Harmful CODE.
7.8 The Products, when used in accordance with their associated documentation,
are capable of correctly processing, providing and/or receiving date data within
and between the twentieth and twenty-first centuries, provided that all products
(for example, hardware, software and firmware) used with the Products properly
exchange accurate date data with the Products.
8.0 INDEMNIFICATION
8.1 You hereby agree to defend, indemnify, and hold harmless IBM against any
and all claims, losses, and expenses, including reasonable attorney fees and
other costs of litigation, based on or arising out of any claim related to Your
Product(s) including but not limited to claims that:
8.1.1 the Product(s) infringe any third party's intellectual property
rights;
8.1.2 You negligently performed, or failed to perform, Your obligations
under an User Agreement or this Agreement;
8.1.3 You breached Your representations or warranties under any agreement
with Prospects or this Agreement.
8.2 The foregoing indemnities are conditioned on the following:
8.2.1 prompt written notice to You of the claim or proceeding subject to
indemnification; and
8.2.2 cooperation by IBM at Your expense in the defense and settlement of
any such claim; and
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IBM SOFTWARE VENDOR MARKETING PROGRAMS
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Software Vendor Marketing Programs Agreement
8.2.3 IBM's obtaining Your prior consent to settlement, resolution, or any
cost of litigation of any such claim, which consent shall not unreasonably be
withheld.
8.3 IBM hereby agrees to defend, indemnify, and hold harmless You against any
and all claims, losses, and expenses, including reasonable attorney fees and
other costs of litigation, to the extent that such claims, losses, and expenses
arise out of the intentional misrepresentation of the Product(s) by IBM;
provided, however, that any such misrepresentation is not caused by Your acts or
omissions.
8.3.1 The foregoing indemnities are conditioned on the following:
8.3.1.1 Prompt written notice to IBM of any claims or proceedings subject to
indemnity: and
8.3.1.2 cooperation by You in the defense and settlement of such claim at the
expense of IBM: and
8.3.1.3 prior written approval by IBM of any settlement, which approval shall
not be unreasonably withheld.
9.0 TERM AND TERMINATION
9.1 This Agreement shall be effective for a period of two years and shall be
automatically renewed on a yearly basis thereafter unless terminated under this
Section.
9.2 Either party may elect to terminate this Agreement with or without cause by
written notification to the other party. Termination will be effective ninety
(90) days after such notice.
9.3 In the event of any termination or expiration of this Agreement in whole or
in part:
9.3.1 the provisions of Sections 2.0, "DEFINITIONS," 7.0, "WARRANTY," 8.0,
"INDEMNIFICATION," 10.0, "INFORMATION," and 11.0, "GENERAL" shall survive and
continue until they expire in accordance with their terms; and
9.3.2 any obligation under Section 6.0, "PAYMENT" shall survive and continue
until satisfied.
10.0 INFORMATION
10.1 Unless otherwise agreed to in writing by the authorized representative of
both parties, neither party shall provide the other party with information that
is confidential to itself or any third party. Accordingly, in the absence of
such a writing, no obligation of confidentiality of any kind is assumed by, or
shall be implied against, either party by virtue of its discussions and/or
correspondence with the other party or with respect to any information received
(in whatever form and whenever received) from the other party under this
Agreement or in activities related hereto notwithstanding any legend or
statement to the contrary. Any exchange of confidential information will be
covered under a separate agreement.
10.2 Notwithstanding the foregoing, You agree to use the methods and procedures
You use to protect Your own information that You do not wish to disclose, to
avoid disclosure of the provisions of the terms and conditions of this Agreement
and its amendments. You may not disclose the terms and conditions of this
Agreement and its amendments to any third party without the prior written
consent of IBM. Such consent shall not be unreasonably withheld. You may refer
to this Agreement solely by stating IBM has been granted the right to market and
take orders for the Product(s).
11.0 GENERAL
11.1 FREEDOM OF ACTION Nothing in this Agreement shall be construed as
prohibiting or restricting either party from independently developing,
acquiring, and marketing products, services, and other materials which are
competitive in any form with the Product(s) or products created or marketed by
each other.
11.2 EXPENSES Each party shall bear its own expenses.
11.3 ADVERTISING AND TRADEMARK USAGE
11.3.1 IBM hereby grants You the use of the IBM Business Partner Program
emblem ("Emblem") in Your advertising and promotional materials in the United
States and Puerto Rico for the Product(s) ("Advertising Materials"). You shall
not use the Emblem prior to IBM's initial announcement of the availability of
the Product(s) to the Marketing Force. Any use must comply with the instructions
set forth in guidelines issued by IBM from time to time entitled "IBM Business
Partner Program Emblem Usage Guidelines" ("Guidelines").
A copy of the Guidelines shall be provided to You and is incorporated herein by
reference. You may not use the IBM logotype other than as part of the Emblem.
Except for Your press releases and as otherwise specified in the Guidelines, You
do not need to provide to IBM for IBM's prior review and approval Your
Advertising Materials incorporating trademarks or trade names of IBM or that
which refers to You as a participant in the IBM Software Vendor Marketing
Program if such use complies with the Guidelines. You must provide to IBM for
IBM's prior review and approval Your press releases if such release makes any
reference to the IBM Software Vendor Marketing Program. You shall make no
reference to IBM, IBM equipment and IBM products that may be misleading. You
agree to change at Your expense, any Advertising Materials which IBM, in its
sole judgment, determines to be inaccurate, objectionable, misleading, or a
misuse of IBM trademarks or trade names. You, on written
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IBM SOFTWARE VENDOR MARKETING PROGRAMS
- --------------------------------------------------------------------------------
Software Vendor Marketing Programs Agreement
demand by IBM, shall immediately cease the use of any materials that IBM deems
to be in violation of this Section.
11.3.2 The authorization granted in this Section 11.3, "Advertising and
Trademark Usage" on page 5 shall terminate immediately upon the termination or
expiration of this Agreement. IBM reserves the right to modify or revoke the
authorization granted to You hereunder effective upon thirty (30) days written
notice. Revocation shall be effective immediately upon written notice in the
event of any violation by You of the Guidelines or breach of this Agreement.
Upon revocation of the rights granted in this Section 11.3, "Advertising and
Trademark Usage" on page 5, or upon termination or expiration of this Agreement,
You shall cease using the Emblem, and shall destroy any and all Advertising
Materials.
11.3.3 Except as expressly provided herein, this Agreement grants You no
right to use IBM's trademarks or trade names in connection with any product,
promotion, or publication without the prior written consent of IBM.
11.3.4 You hereby authorize IBM to use Your trademarks, trade names and
copyrighted materials for the Product(s) solely in performing Marketing
Activities.
11.4 ASSIGNMENT AND DELEGATION You shall not sell, transfer, assign, or
subcontract any right or obligation hereunder without the prior written consent
of IBM. Any act in derogation of the foregoing shall be null and void. In no
event may You use the services of an IBM dealer or an IBM remarketer for the
performance of any obligation hereunder.
11.5 LIMITATIONS Except for claims arising under the Sections entitled
"WARRANTY" and "INDEMNIFICATION", neither party shall be entitled to indirect,
incidental or consequential damages. IBM will be responsible only for the amount
of any actual direct damage arising from IBM's negligence or breach of this
Agreement, including fundamental breach, tort, or misrepresentation, up to the
greater of $25,000 or the fees paid to IBM regarding the Prospect.
11.6 NATURE OF THE RELATIONSHIP IBM is acting under this Agreement solely as
Your marketing representative. Nothing herein shall be deemed to create any
other relationship, including that of partnership. Neither You nor any employee
of Yours shall be considered an employee or agent of IBM for any purpose.
11.7 NOTICE Any notice required or permitted under this Agreement shall be sent
to:
In the case of IBM:
IBM Corporation
Vendor Marketing Programs
Department BAV (WG09A)
3200 Windy Hill Road
Atlanta, GA 30339
In the case of You:
Document Sciences, Corp.
Business Development
Suite 200
6333 Greenwich Drive
San Diego, CA 92122-5921
11.8 PAYMENT
11.8.1 Any payment to IBM under this Agreement shall be sent to:
IBM Corporation
Vendor Marketing Programs Control Desk
Department BAV (WG09A)
3200 Windy Hill Road
Atlanta, GA 30339
11.9 GOVERNING LAW The validity, construction, and performance of this Agreement
will be governed by the substantive law of the State of New York.
11.10 AMENDMENTS IN WRITING No amendment, modification or waiver of any
provision of this Agreement shall be effective unless it is set forth in a
writing which refers to the provisions so affected and is executed by an
authorized representative of both parties. No failure or delay by IBM in
exercising any right, power or remedy will operate as a waiver of any such
right, power, or remedy.
11.11 ENTIRE AGREEMENT The provisions of this Agreement constitute the
entire agreement between the parties and supersede all prior agreements, oral or
written, relating to the subject matter of this Agreement. Any payments due IBM
under this Agreement shall be separate from, and in addition to, any due IBM
under any other agreement between the parties.
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IBM SOFTWARE VENDOR MARKETING PROGRAMS
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Software Vendor Marketing Programs Agreement
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective Authorized Representatives.
<TABLE>
<S> <C>
International Business Machines Corporation Document Sciences Corp. -
Business Development
By: /s/ J.W. Mason By: /s/ Daniel J. Fregeau
----------------------------------- ----------------------------------
J.W. Mason Daniel J. Fregeau
----------------------------------- ----------------------------------
Print Name Print Name
GM, Solution Developer Marketing Vice President, Business Development
----------------------------------- ----------------------------------
Title Title
May 11, 1998 April 9, 1998
----------------------------------- ----------------------------------
Date Date
</TABLE>
-7-
<PAGE> 8
IBM SOFTWARE VENDOR MARKETING PROGRAMS
- --------------------------------------------------------------------------------
Software Vendor Marketing Programs Agreement
ATTACHMENT A - PRODUCT(S) LIST
List in the table below or attach separately in table form the Products and
applicable percentage due IBM. A more detailed description of the Product(s) may
follow below the table or attached separately.
1.0 PRODUCTS AND APPLICABLE PERCENTAGE:
<TABLE>
<CAPTION>
PRODUCT(S) PERCENTAGE
- ---------------------------------------- ------------------------------------------------
<S> <C>
Autograph Family of Products (excluding 15% Fee - LEAD GENERATION AND MARKETING
maintenance and support) ASSISTANCE: IBM provides the lead and marketing
assistance to Document Sciences who is
responsible for marketing, order fulfillment,
invoicing, installation, training,
implementation, ongoing support, etc.
</TABLE>
-1-
<PAGE> 1
EXHIBIT 10.27
Richard Ellis CB Commercial Real Estate Group
Brokerage and Management
Licensed Real Estate Broker
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
SECTION 1.01 DATE OF LEASE: January 27, 1999.
SECTION 1.02 LANDLORD (INCLUDE LEGAL ENTITY): Westcap Properties, Inc.
(A California Corporation). Address of Landlord: 9191 Towne Centre Drive, Suite
310, San Diego, CA 92122.
SECTION 1.03 TENANT (INCLUDE LEGAL ENTITY): DOCUMENT SCIENCES
CORPORATION (a Delaware Corporation). Address of Tenant: 6333 Greenwich Drive,
Suite 200, San Diego, CA 92122-5921
SECTION 1.04 PROPERTY: (INCLUDE STREET ADDRESS, APPROXIMATE SQUARE
FOOTAGE AND DESCRIPTION): 6339 Paseo Del Lago, Carlsbad, CA (containing
approximately 21,300 rentable square feet).
SECTION 1.05 LEASE TERM: six(6) years zero (0) months beginning on March
1, 1999, and ending on February 28, 2005.
SECTION 1.06 PERMITTED USES: (See Article Five) Office and Production of
Software Products.
SECTION 1.07 TENANT'S GUARANTOR: (If none, so state) None.
SECTION 1.08 BROKERS: (See Article Fourteen) (If none, so state).
Landlord's Broker: Lannie Allee - CB Richard Ellis, Inc.
Tenant's Broker: Larry Strickland - Lee & Associates
SECTION 1.09 COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) $As per written agreement dated February 16, 1998.
SECTION 1.10 INITIAL SECURITY DEPOSIT: (See Section 3.03) $Eighteen
Thousand Five Hundred Thirty-One and no/100 ($18,531.00) Dollars.
SECTION 1.11 VEHICLE PARKING SPACES ALLOCATED TO TENANT: All parking
existing now on subject property (Approximately 80 spaces.)
SECTION 1.12 RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) BASE RENT: Eighteen Thousand Five Hundred Thirty-One &
no/100 Dollars ($18,531.00) per month, for the first twelve (12) months, as
provided in Section 3.01, and shall be increased on the first day of the 13th,
25th, 37th, 49th & 61st month(s) after the Commencement Date, either (i) as
provided in Section 3.02, or (ii) See Addendum. (If (ii) is completed, then (i)
and Section 3.02 are inapplicable.)
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See
Section 4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See
Section 4.04); (iv) Impounds for Insurance Premiums and Property Taxes (See
Section 4.07); (v) Maintenance Repairs and Alterations* (See Article Six). *
including common area maintenance.
<PAGE> 2
SECTION 1.13 LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See
Section 9.05) Fifty percent (50%) of the Profit (the "Landlord's Share").
SECTION 1.14 RIDERS: The following Riders are attached to and made a
part of this Lease: (If none, so state): _________________
(1) Addendum
(2) Option to Extend
(3) Disclosures and Acknowledgement
ARTICLE TWO: LEASE TERM
SECTION 2.01 LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
SECTION 2.02 DELAY IN COMMENCEMENT. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on the
Commencement Date. Landlord's non-delivery of the Property to Tenant on that
date shall not affect this Lease or the obligations of Tenant under this Lease
except that the Commencement Date shall be delayed until Landlord delivers
possession of the Property to Tenant and the Lease Term shall be extended for a
period equal to the delay in delivery of possession of the Property to Tenant,
plus the number of days necessary to end the Lease Term on the last day of a
month. If Landlord does not deliver possession of the Property to Tenant within
sixty (60) days after the Commencement Date, Tenant may elect to cancel this
Lease by giving written notice to Landlord within ten (10) days after the sixty
(60)-day period ends. If Tenant gives such notice, the Lease shall be cancelled
and neither Landlord nor Tenant shall have any further obligations to the other.
If Tenant does not give such notice, Tenant's right to cancel the Lease shall
expire and the Lease Term shall commence upon the delivery of possession of the
Property to Tenant. If delivery of possession of the Property to Tenant is
delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to
this Lease setting forth the actual Commencement Date and expiration date of the
Lease. Failure to execute such amendment shall not affect the actual
Commencement Date and expiration date of the Lease.
SECTION 2.03 EARLY OCCUPANCY. If Tenant occupies the Property prior to
the Commencement Date, Tenant's occupancy of the Property shall be subject to
all of the provisions of this Lease. Early occupancy of the Property shall not
advance the expiration date of this Lease. Tenant shall pay Base Rent and all
other charges specified in this Lease for the early occupancy period.
SECTION 2.04 HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all damages which Landlord incurs from
Tenant's delay in vacating the Property. If Tenant does not vacate the Property
upon the expiration or earlier termination of the Lease and Landlord thereafter
accepts rent from Tenant, Tenant's occupancy of the Property shall be a
"month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent then in effect shall be
increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
SECTION 3.01 TIME AND MANNER OF PAYMENT. Upon execution of this Lease.
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at a such other place as
Landlord may designate in writing.
Section 3.02 Section deleted.
SECTION 3.03 SECURITY DEPOSIT; INCREASES.
2
<PAGE> 3
(a) Upon the execution of this Lease, Tenant shall deposit with
Landlord a cash Security Deposit in the amount set forth in Section 1.10 above.
Landlord may apply all or part of the Security Deposit to any unpaid rent or
other charges due from Tenant or to cure any other defaults of Tenant. If
Landlord uses any part of the Security Deposit, Tenant shall restore the
Security Deposit to its full amount within ten (10) days after Landlord's
written request. Tenant's failure to do so shall be a material default under
this Lease. No interest shall be paid on the Security Deposit. Landlord shall
not be required to keep the Security Deposit separate from its other accounts
and no trust relationship is created with respect to the Security Deposit.
(b) Each Time the Base Rent is increased, Tenant shall deposit
additional funds with Landlord sufficient to increase the Security Deposit to an
amount which bears the same relationship to the adjusted Base Rent as the
initial Security Deposit bore to the initial Base Rent.
SECTION 3.04 TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease Article Seven Damage or Destruction), Article Eight (Condemnation) or any
other termination not resulting from Tenant's default, and after Tenant has
vacated the Property in the manner required by this Lease, Landlord shall refund
or credit to Tenant (or Tenant's successor) the unused portion of the Security
Deposit, any advance rent or other advance payments made by Tenant to Landlord,
and any amounts paid for real property taxes and other reserves which apply to
any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
SECTION 4.01 ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
SECTION 4.02 PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Tenant shall pay all real property
taxes on the Property (including any fees, taxes or assessments against, or as a
result of, any tenant improvements installed on the Property by or for the
benefit of Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and
Section 4.07 below, such payment shall be made at least ten (10) days prior to
the delinquency date of the taxes. Prior to such ten (10) day period, Tenant
shall furnish Landlord with satisfactory evidence that the real property taxes
have been paid. Landlord shall reimburse Tenant for any real property taxes paid
by Tenant covering any period of time prior to or after the Lease Term. If
Tenant fails to pay the real property taxes when due, Landlord may pay the taxes
and Tenant shall reimburse Landlord for the amount of such tax payment as
Additional Rent.
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax"
means: (i) any fee, license fee, license tax, business license fee, commercial
rental tax, levy, charge, assessment, penalty or tax imposed by any taxing
authority against the Property; (ii) any tax on the Landlord's right to receive,
or the receipt of, rent or income from the Property or against Landlord's
business of leasing the Property; (iii) any tax or charge for fire protection,
streets, sidewalks, road maintenance, refuse or other services provided to the
Property by any governmental agency; (iv) any tax imposed upon this transaction
or based upon a re-assessment of the Property due to a change of ownership, as
defined by applicable law, or other transfer of all or part of Landlord's
interest in the Property; and (v) any charge or fee replacing any tax previously
included within the definition of real property tax. "Real property tax" does
not, however, include Landlord's federal or state income, franchise, inheritance
or estate taxes.
(c) JOINT ASSESSMENT. If the Property is not separately
assessed, Landlord shall reasonably determine Tenant's share of the real
property tax payable by Tenant under Paragraph 4.02(a) from the assessor's
worksheets or other reasonably available information. Tenant shall pay such
share to Landlord within fifteen (15) days after receipt of Landlord's written
statement.
(d) PERSONAL PROPERTY TAXES.
3
<PAGE> 4
(i)Tenant shall pay all taxes charged against trade
fixtures, furnishings, equipment or any other personal property belonging to
Tenant. Tenant shall try to have personal property taxed separately from the
Property.
(ii) If any of Tenant's personal property is taxed with
the Property, Tenant shall pay Landlord the taxes for the personal property
within fifteen (15) days after Tenant receives a written statement from Landlord
for such personal property taxes.
(e) TENANT'S RIGHT TO CONTEST TAXES. Tenant may attempt to have
the assessed valuation of the Property reduced or may initiate proceedings to
contest the real property taxes. If required by law, Landlord shall join in the
proceedings brought by Tenant. However, Tenant shall pay all costs of the
proceedings, including any costs or fees incurred by Landlord. Upon the final
determination of any proceeding or contest, Tenant shall immediately pay the
real property taxes due, together with all costs, charges, interest and
penalties incidental to the proceedings. If Tenant does not pay the real
property taxes when due and contests such taxes, Tenant shall not be in default
under this Lease for nonpayment of such taxes if Tenant deposits funds with
Landlord or opens an interest-bearing account reasonably acceptable to Landlord
in the joint names of Landlord and Tenant. The amount of such deposit shall be
sufficient to pay the real property taxes plus a reasonable estimate of the
interest, costs, charges and penalties which may accrue if Tenant's action is
unsuccessful, less any applicable tax impounds previously paid by Tenant to
Landlord. The deposit shall be applied to the real property taxes due, as
determined at such proceedings. The real property taxes shall be paid under
protest from such deposit if such payment under protest is necessary to prevent
the Property from being sold under a "tax sale" or similar enforcement
proceeding.
SECTION 4.03 UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other property, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such share to Landlord within fifteen (15) days after receipt of Landlord's
written statement.
SECTION 4.04 INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall
maintain a policy of commercial general liability insurance (sometimes known as
broad form comprehensive general liability insurance) insuring Tenant against
liability for bodily injury, property damage (including loss of use of property)
and personal injury arising out of the operation, use or occupancy of the
Property. Tenant shall name Landlord as an additional insured under such policy.
The initial amount of such insurance shall be One Million Dollars ($1,000,000)
per occurrence and shall be subject to periodic increase based upon inflation,
increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii)
contain cross-liability endorsements; and (iii) insure Landlord against Tenant's
performance under Section 5.05, if the matters giving rise to the indemnity
under Section 5.05 result from the negligence of Tenant. The amount and coverage
of such insurance shall not limit Tenant's liability nor relieve Tenant of any
other obligation under this Lease. Landlord may also obtain comprehensive public
liability insurance in an amount and with coverage determined by Landlord
insuring Landlord against liability arising out of ownership, operation, use or
occupancy of the Property. The policy obtained by Landlord shall not be
contributory and shall not provide primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to the
Property in the full amount of its replacement value. Such policy shall contain
an Inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance. Landlord shall not obtain
insurance for Tenant's fixtures or equipment or building improvements installed
by Tenant on the Property. During the Lease Term, Landlord shall also maintain a
rental income insurance policy, with loss payable to Landlord, in an amount
equal to one year's Base Rent, plus estimated real property taxes and insurance
premiums. Tenant shall be liable for the payment of any deductible amount under
Landlord's or
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Tenant's insurance policies maintained pursuant to this Section 4.04, in an
amount not to exceed Ten Thousand Dollars ($10,000.00). Tenant shall not do or
permit anything to be done which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS. Subject to Section 4.07, Tenant shall
pay all premiums for the insurance policies described in Paragraphs 4.04(a) and
(b) (whether obtained by Landlord or Tenant) within fifteen (15) days after
Tenant's receipt of a copy of the premium statement or other evidence of the
amount due, except Landlord shall pay all premiums for non-primary comprehensive
public liability insurance which Landlord elects to obtain as provided in
Paragraph 4.04(a). If insurance policies maintained by Landlord cover
improvements on real property other than the Property, Landlord shall deliver to
Tenant a statement of the premium applicable to the Property showing in
reasonable detail how Tenant's share of the premium was computed. If the Lease
Term expires before the expiration of an insurance policy maintained by
Landlord, Tenant shall be liable for Tenant's prorated share of the insurance
premiums. Before the Commencement Date, Tenant shall deliver to Landlord a copy
of any policy of insurance which Tenant is required to maintain under this
Section 4.04. At least thirty (30) days prior to the expiration of any such
policy, Tenant shall deliver to Landlord a renewal of such policy. As an
alternative to providing a policy of insurance, Tenant shall have the right to
provide Landlord a certificate of insurance, executed by an authorized officer
of the insurance company, showing that the insurance which Tenant is required to
maintain under this Section 4.04 is in full force and effect and containing such
other information which Landlord reasonably requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain
under this Lease shall include a provision which requires the insurance carrier
to give Landlord not less than thirty (30) day's written notice prior to any
cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate
or renewal to Landlord required under this Lease within the prescribed time
period or if any such policy is cancelled or modified during the Lease Term
without Landlord's consent, Landlord may obtain such insurance, in which case
Tenant shall reimburse Landlord for the cost of such insurance within fifteen
(15) days after receipt of a statement that indicates the cost of such
insurance.
(iii) Tenant shall maintain all insurance required under
this Lease with companies holding a "General Policy Rating" or A-12 or better,
as set forth in the most current issue of "Best Key Rating Guide". Landlord and
Tenant acknowledge the insurance markets are rapidly changing and that insurance
in the form and amounts described in this Section 4.04 may not be available in
the future. Tenant acknowledges that the insurance described in this Section
4.04 is for the primary benefit of Landlord. If at any time during the Least
Term, Tenant is unable to maintain the insurance required under the Lease,
Tenant shall nevertheless maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for Tenant's type of business,
as that coverage may change from time to time. Landlord makes no representation
as to the adequacy of such insurance to protect Landlord's or Tenant's
interests. Therefore, Tenant shall obtain any such additional property or
liability insurance which Tenant deems necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance
policies maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents or
representatives of the other, for loss of or damage to its property or the
property of others under its control, if such loss or damage is covered by any
insurance policy in force (whether or not described in this Lease) at the time
of such loss or damage. Upon obtaining the required policies of insurance,
Landlord and Tenant shall give notice to the insurance carriers of this mutual
waiver of subrogation.
SECTION 4.05 LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
ten percent (10%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonably estimate of the costs Landlord will incur by
reason of such late payment.
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SECTION 4.06 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of ten
percent (10%) per annum from due date of such amount. However, interest shall
not be payable on late charges to be paid by Tenant under this Lease. The
payment of interest on such amounts shall not excuse or cure any default by
Tenant under this Lease. If the interest rate specified in this Lease is higher
than the rate permitted by law, the interest rate is hereby decreased to the
maximum legal interest rate permitted by law.
SECTION 4.07 IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If
requested by any ground lessor or lender to whom Landlord has granted a security
interest in the Property, or if Tenant is more than ten (10) days late in the
payment of rent more than once in any consecutive twelve (12)-month period,
Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real
property taxes and insurance premiums payable by Tenant under this Lease,
together with each payment of Base Rent. Landlord shall hold such payments in a
non-interest bearing impound account. If unknown, Landlord shall reasonably
estimate the amount of real property taxes and insurance premiums when due.
Tenant shall pay any deficiency of funds in the impound account to Landlord upon
written request. If Tenant defaults under this Lease, Landlord may apply any
funds in the impound account to any obligation then due under this Lease.
ARTICLE FIVE: USE OF PROPERTY
SECTION 5.01 PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
SECTION 5.02 MANNER OF USE. Tenant shall not cause or permit the
property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of other tenants of Landlord, or which constitutes a nuisance or
waste. Tenant shall obtain and pay for all permits, including a Certificate of
Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statutes, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
SECTION 5.03 HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Tenant shall not cause or permit any Hazardous Material to be
generated, produced, brought upon, used, stored, treated or disposed of in or
about the Property by Tenant, its agents, employees, contractors, sublessees or
invitees without the prior written consent of Landlord. Landlord shall be
entitled to take into account such other factors or facts as Landlord may
reasonably determine to be relevant in determining whether to grant or withhold
consent to Tenant's proposed activity with respect to Hazardous Material. In no
event, however, shall Landlord be required to consent to the installation or use
of any storage tanks on the Property.
SECTION 5.04 SIGNS AND AUCTIONS. Tenant shall not place any signs on the
Property without Landlord's prior written consent. Tenant shall not conduct or
permit any auctions or sheriff's sales at the Property.
SECTION 5.05 INDEMNITY. Tenant shall indemnify Landlord against and hold
Landlord harmless from any and all costs, claims or liability arising from: (a)
Tenant's use of the Property; (b) the conduct of Tenant's business or anything
else done or permitted by Tenant to be done in or about the Property, including
any contamination of the Property or any other property resulting from the
presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any misrepresentation or breach of warranty by Tenant under this Lease; or
(e) other acts or omissions of Tenant. Tenant shall defend Landlord against any
such cost, claim or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection with any
such claim. As a material part of the consideration to Landlord, Tenant assumes
all risk of damage to property or
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injury to persons in or about the Property arising from any cause, and Tenant
hereby waives all claims in respect thereof against Landlord, except for any
claim arising out of Landlord's negligence or willful misconduct. As used in
this Section, the term "Tenant" shall include Tenant's employees, agents,
contractors and invitees, if applicable.
SECTION 5.06 LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazard
Material; or for any other purpose Landlord deems necessary. Landlord shall give
Tenant prior notice of such entry, except in the case of an emergency. Landlord
may place customary "For Sale" or "For Lease" signs on the Property.
SECTION 5.07 QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
SECTION 6.01 EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of any inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease.
SECTION 6.02 EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant. Tenant's
employees, invitees, customers or any other person in or about the Property,
whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause; (c) conditions arising in or about the
Property or upon other portions of the Project; or from other sources or places;
or Landlord shall not be liable for any such damage or injury even though the
cause of or the means of repairing such damage or injury are not accessible to
Tenant. The provisions of this Section 6.02 shall not, however, exempt Landlord
from liability or Landlord's negligence or willful misconduct.
SECTION 6.03 LANDLORD'S OBLIGATIONS. Subject to the provisions of
Article Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord
shall have absolutely no responsibility to repair, maintain or replace any
portion of the Property at any time. Tenant waives the benefit of any present or
future law which might give Tenant the right to repair the Property at
Landlord's expense or to terminate the Lease due to the condition of the
Property.
SECTION 6.04 TENANT'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction)
and Article Eight (Condemnation), Tenant shall keep all portions of the Property
(including structural, nonstructural, interior, exterior, and landscaped areas,
portions, systems and equipment) in good order, condition and repair (including
interior repainting and refinishing, as needed). If any portion of the Property
or any system or equipment on the Property which Tenant is obligated to repair
cannot be fully repaired or restored, Tenant shall promptly replace such portion
of the Property or system or equipment in the Property, regardless of whether
the benefit of such replacement extends beyond the Lease Term; but if the
benefit or useful life of such replacement extends beyond the Lease Term (as
such term may be extended by exercise of any options), the useful life of such
replacement shall be prorated over the remaining portion of the Lease Term (as
extended), and Tenant shall be liable only for that portion of the cost which is
applicable to the Lease Term (as extended). Tenant shall maintain a preventive
maintenance contract providing for the regular inspection and maintenance of the
heating and air conditioning system by a licensed heating and air conditioning
contractor. If any part of the Property is damaged by any act or omission of
Tenant, Tenant shall pay Landlord the cost of repairing or replacing such
damaged property, whether or not Landlord would otherwise be obligated to pay
the cost of maintaining or
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repairing such property. It is the intention of Landlord and Tenant that at all
times Tenant shall maintain the portions of the Property which Tenant is
obligated to maintain in an attractive, first-class and fully operative
condition.
(b) Tenant shall fulfill all of Tenant's obligations under this
Section 6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or
replace the Property as required by this Section 6.04, Landlord may, upon ten
(10) days' prior notice to Tenant (except that no notice shall be required in
the case of an emergency), enter the Property and perform such maintenance or
repair (including replacement, as needed) on behalf of Tenant. In such case,
Tenant shall reimburse Landlord for all costs incurred in performing such
maintenance or repair immediately upon demand.
SECTION 6.05 ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or
improvements to the Property without Landlord's prior written consent. Landlord
may require Tenant to provide demolition and/or lien and completion bonds in
form and amount satisfactory to Landlord. Tenant shall promptly remove any
alterations, additions, or improvements constructed in violation of this
Paragraph 6.05(a) upon Landlord's written request. All alterations, additions,
and improvements shall be done in a good and workmanlike manner, in conformity
with all applicable laws and regulations, and by a contractor approved by
Landlord. Upon completion of any such work, Tenant shall provide Landlord with
"as built" plans, copies of all construction contracts, and proof of payment for
all labor and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20) days'
prior written notice of the commencement of any work on the Property. Landlord
may elect to record and post notices of non-responsibility on the Property.
SECTION 6.06 CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the expiration of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or earlier termination of the Lease, except that Tenant may
remove any of Tenant's machinery or equipment which can be removed without
material damage to the Property. Tenant shall repair, at Tenant's expense, any
damage to the Property caused by the removal of any such machinery or equipment.
In no event, however, shall Tenant remove any of the following materials or
equipment (which shall be deemed Landlord's property) without Landlord's prior
written consent: any power wiring or power panels; lighting or lighting
fixtures; wall coverings; drapes, blinds or other window coverings; carpets or
other floor coverings; heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates; or other similar building
operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
SECTION 7.01 PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable as
a result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage as soon as reasonably possible. Landlord may elect (but is not
required) to repair any damage to Tenant's fixtures, equipment, or improvements.
(b) If the insurance proceeds recorded by Landlord are not
sufficient to pay the entire cost of repair, or if the cause of the damage is
not covered by the insurance policies which Landlord maintains under Paragraph
4.04(b), Landlord may elect either to (i) repair the damage as soon as
reasonably possible, in which case this Lease shall remain in full force and
effect, or (ii) terminate this Lease as of the date the damage occurred.
Landlord shall notify Tenant within thirty (30) days after receipt of notice of
the occurrence of the damage whether Landlord elects to repair
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the damage or terminate the Lease. If Landlord elects to repair the damage,
Tenant shall pay Landlord the "deductible amount" (if any) under Landlord's
insurance policies and if the damage was due to an act or omission of Tenant, or
Tenant's employees, agents, contractors or invitees, the difference between the
actual cost of repair and any insurance proceeds received by Landlord. If
Landlord elects to terminate the Lease, Tenant may elect to continue this Lease
in full force and effect, in which case Tenant shall repair any damage to the
Property and any building in which the Property is located. Tenant shall pay the
cost of such repairs, except that upon satisfactory completion of such repairs.
Landlord shall deliver to Tenant any insurance proceeds received by Landlord for
the damage repaired by Tenant. Tenant shall give Landlord written notice of such
election within ten (10) days after receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6)
months of the Lease Term and such damage will require more than thirty (30) days
to repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02 SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally damaged by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage is described in Section 7.01)
whether Landlord receives any insurance proceeds, this Lease shall terminate as
of the date the destruction occurred. Notwithstanding the preceding sentence, if
the Property can be rebuilt within six (6) months after the date of destruction,
Landlord may elect to rebuild the Property at Landlord's own expense, in which
case this Lease shall remain in full force and effect. Landlord shall notify
Tenant of such election within thirty (30) days after Tenant's notice of the
occurrence of total or substantial destruction. If Landlord so elects, Landlord
shall rebuild the Property at Landlord's sole expense, except that if the
destruction was caused by an act or omission of Tenant, Tenant shall pay
Landlord the difference between the actual cost of rebuilding and any insurance
proceeds received by Landlord.
SECTION 7.03 TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. However, the reduction
shall not exceed the sum of one year's payment of Base Rent, insurance premiums
and real property taxes. Except for such possible reduction in Base Rent,
insurance premiums and real property taxes, Tenant shall not be entitled to any
compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair or restoration of or to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building in which the
Property is located, or which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the other
within ten (10) days after receipt of written notice of such taking (or in the
absence of such notice within ten (10) days after the condemning authority takes
title or possession). If neither Landlord not Tenant terminates this Lease, this
Lease shall remain in effect as to the portion of the Property not taken, except
that the Base Rent and Additional Rent shall be reduced in proportion to the
reduction in the floor area of the Property. Any Condemnation award or payment
shall be distributed in the following order: (a) first, to any ground lessor,
mortgagee or beneficiary under a deed of trust encumbering the Property, the
amount of its interest in the Property; (b) second, to Tenant, only the amount
of any award specifically designated for loss of or damage to Tenant's trade
fixtures or removable personal property; and (c) third, to Landlord, the
remainder of such award, whether as compensation for reduction in the value of
the leasehold, the taking of the fee, or otherwise. If this Lease is not
terminated, Landlord shall repair any damage to the Property caused by the
Condemnation, except that Landlord shall not be obligated to repair any damage
for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
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ARTICLE NINE: ASSIGNMENT AND SUBLETTING
SECTION 9.01 LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent. It Tenant
is a corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.
SECTION 9.02 TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or consolidation with Tenant ("Tenant's
Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of
Tenant's obligations under this Lease.
SECTION 9.03 NO RELEASE OF TENANT. No transfer permitted by this Article
Nine, whether with or without Landlord's consent, shall release Tenant or change
Tenant's primary liability to pay the rent and to perform all other obligations
of Tenant under this Lease. Landlord's acceptance of rent from any other person
is not a waiver of any provision of this Article Nine. Consent to one transfer
is not a consent to any subsequent transfer. If Tenant's transferee defaults
under this Lease, Landlord may proceed directly against Tenant without pursuing
remedies against the transferee. Landlord may consent to subsequent assignments
or modifications of this Lease by Tenant's transferee, without notifying Tenant
or obtaining its consent. Such action shall not relieve Tenant's liability under
this Lease.
SECTION 9.04 OFFER TO TERMINATE. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until otherwise terminated and
the provisions of Section 9.05 with respect to any proposed transfer shall
continue to apply.
SECTION 9.05 LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in
Section 9.01 shall set forth in writing the details of the proposed transfer,
including the name, business and financial condition of the prospective
transferee, financial details of the proposed transfer (e.g., the term of and
the rent and security deposit payable under any proposed assignment or
sublease), and any other information Landlord deems relevant. Landlord shall
have the right to withhold consent, if reasonable, or to grant consent, based on
the following factors: (i) the business of the proposed assignee or subtenant
and the proposed use of the Property; (ii) the net worth and financial
reputation of the proposed assignee or subtenant, (iii) Tenant's compliance with
all of its obligations under the Lease; and (iv) such other factors as Landlord
may reasonably deem relevant. If Landlord objects to a proposed assignment
solely because of the net worth and/or financial reputation of the proposed
assignee, Tenant may nonetheless sublease (but not assign), all or a portion of
the Property to the proposed transferee, but only on the other terms of the
proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i)Tenant shall pay to Landlord as Additional Rent under
the Lease the Landlord's Share (stated in Section 1.13) of the Profit (defined
below) on such transaction as and when received by Tenant, unless Landlord gives
written notice to Tenant and the assignee or subtenant that Landlord's Share
shall be paid by the assignee or subtenant to Landlord directly. The "Profit"
means (A) all amounts paid to Tenant for such assignment or sublease, including
"key" money, monthly rent in excess of the monthly rent payable under the Lease,
and all fees and other consideration paid for the assignment or sublease,
including fees under any collateral agreements, less (B) costs and expenses
directly incurred by Tenant in connection with the execution and performance of
such assignment or sublease for real estate broker's commissions and costs of
renovation or construction of tenant improvements required under such assignment
or sublease. Tenant is entitled to recover such costs and expenses before Tenant
is obligated to pay the
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Landlord's Share to Landlord. The Profit in the case of a sublease of less than
all the Property is the rent allocable to the subleased space as a percentage on
a square footage basis.
(ii) Tenant shall provide Landlord a written statement
certifying all amounts to be paid from any assignment or sublease of the
Property within thirty (30) days after the transaction documentation is signed.
and Landlord may inspect Tenant's books and records to verity the accuracy of
such statement. On written request, Tenant shall promptly furnish to Landlord
copies of all the transaction documentation, all of which shall be certified by
Tenant to be complete, true and correct. Landlord's receipt of Landlord's Share
shall not be a consent to any further assignment or subletting. The breach of
Tenant's obligation under this Paragraph 9.05(b) shall be a material default of
the Lease.
SECTION 9.06 NO MERGER. No merger shall result from Tenant's sublease of
the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
SECTION 10.01 COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance.
SECTION 10.02 DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of
the Property results in the cancellation of any insurance described in Section
4.04;
(b) If Tenant fails to pay rent or any other charge when due;
(c) If Tenant fails to perform any of Tenant's non-monetary
obligations under this Lease for a period of thirty (30) days after written
notice from Landlord; provided that if more than thirty (30) days are required
to complete such performance, Tenant shall not be in default if Tenant commences
such performance within the thirty (30)-day period and thereafter diligently
pursues its completion. However, Landlord shall not be required to give such
notice if Tenant's failure to perform constitutes a non-curable breach of this
Lease. The notice required by this Paragraph is intended to satisfy any and all
notice requirements imposed by law on Landlord and is not in addition to any
such requirement.
(d) (i) If Tenant makes a general assignment or general
arrangement for the benefit of creditors; (ii) if a petition for adjudication of
bankruptcy or for reorganization or rearrangement is filed by or against Tenant
and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is
appointed to take possession of substantially all of Tenant's assets located at
the Property or of Tenant's interest in this Lease and possession is not
restored to Tenant within thirty (30) days; or (iv) if substantially all of
Tenant's assets located at the Property or of Tenant's interest in this Lease is
subjected to attachment, execution or other judicial seizure which is not
discharged within thirty (30) days. If a court of competent jurisdiction
determines that any of the acts described in this subparagraph (d) is not a
default under this Lease, and a trustee is appointed to take possession (or if
Tenant remains a debtor in possession) and such trustee or Tenant transfers
Tenant's interest hereunder, then Landlord shall receive, as Additional Rent,
the excess, if any, of the rent (or any other consideration) paid in connection
with such assignment or sublease over the rent payable by Tenant under this
Lease.
(e) If any guarantor of the Lease revokes or otherwise
terminates, or purports to revoke or otherwise terminate, any guaranty of all or
any portion of Tenant's obligations under the Lease. Unless otherwise expressly
provided, no guaranty of the Lease is revocable.
SECTION 10.03 REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
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(a) Terminate Tenant's right to possession of the Property by
any lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Property to Landlord. In such event,
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default, including (i) the worth at the time of
the award of the unpaid Base Rent, Additional Rent and other charges which
Landlord had earned at the time of the termination: (ii) the worth at the time
of the award of the amount by which the unpaid base Rent, Additional Rent and
other charges which Landlord would have earned after termination until the time
of the award exceeds the amount of such rental loss that Tenant proves Landlord
could have reasonably avoided; (iii) the worth at the time of the award of the
amount by which the unpaid Base Rent, Additional Rent and other charges which
Tenant would have paid for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves Landlord could have
reasonably avoided; and (iv) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under the Lease or which in the ordinary course of things would be
likely to result therefrom, including, but not limited to, any costs or expenses
Landlord incurs in maintaining or preserving the Property after such default,
the cost of recovering possession of the Property, expenses of reletting,
including necessary renovation or alteration of the Property. Landlord's
reasonable attorneys' fees incurred in Connection therewith, and any real estate
commission paid or payable. As used in subparts (i) and (ii) above, the "worth
at the time of the award" is computed by allowing interest on unpaid amounts at
the rate of fifteen percent (15%) per annum, or such lesser amount as may then
be the maximum lawful rate. As used in subpart (iii) above, the "worth at the
time of the award" is computed by discounting such amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time of the award, plus one
percent (1%). If Tenant has abandoned the Property, Landlord shall have the
option of (i) retaking possession of the Property and recovering from Tenant the
amount specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this
Lease shall continue in effect whether or not Tenant has abandoned the Property.
In such event, Landlord shall be entitled to enforce all of Landlord's rights
and remedies under this Lease, including the right to recover the rent as it
becomes due;
(c) Pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of the state in which the Property
is located.
SECTION 10.04 REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated Rent,"
Tenant shall be credited with having paid all of the Abated Rent on the
expiration of the Lease Term only if Tenant has fully, faithfully, and
punctually performed all of Tenant's obligations hereunder, including the
payment of all rent (other than the Abated Rent) and all other monetary
obligations and the surrender of the Property in the physical condition required
by this Lease. Tenant acknowledges that its right to receive credit for the
Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual
performance of its obligations under this Lease. If Tenant defaults and does not
cure within any applicable grace period, the Abated Rent shall immediately
become due and payable in full and this Lease shall be enforced as if there were
no such rent abatement or other rent concession. In such case Abated Rent shall
be calculated based on the full initial rent payable under this Lease.
SECTION 10.05 AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default shall
include all costs and fees, including reasonable attorneys' fees that Landlord
incurs in connection with the filing, commencement, pursuing and/or defending of
any action in any bankruptcy court or other court with respect to the Lease; the
obtaining of relief from any stay in bankruptcy restraining any action to evict
Tenant; or the pursuing of any action with respect to Landlord's right to
possession of the Property. All such damages suffered (apart from Base Rent and
other rent payable hereunder) shall constitute pecuniary damages which must be
reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
SECTION 10.06 CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
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ARTICLE ELEVEN: PROTECTION OF LENDERS
SECTION 11.01 SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such lender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Property during the Lease Term shall
not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.
SECTION 11.02 ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale. Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
SECTION 11.03 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten (10)
days after written request, Tenant hereby makes, constitutes and irrevocably
appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
SECTION 11.04 ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute,
acknowledge and deliver to Landlord a written statement certifying: (i) that
none of the terms or provisions of this Lease have been changed (or if they have
been changed, stating how they have been changed); (ii) that this Lease has not
been cancelled or terminated; (iii) the last date of payment of the Base Rent
and other charges and the time period covered by such payment; (iv) that
Landlord is not in default under this Lease (or, if Landlord is claimed to be in
default, stating why); and (v) such other representations or information with
respect to Tenant or the Lease as Landlord may reasonably request or which any
prospective purchaser or encumbrancer of the Property may require. Tenant shall
deliver such statement to Landlord within ten (10) days after Landlord's
request. Landlord may give any such statement by Tenant to any prospective
purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may
rely conclusively upon such statement as true and correct.
If Tenant does not deliver such statement to Landlord within such
ten(10) day period, Landlord, and any prospective purchaser or encumbrancer, may
conclusively presume and rely upon the following facts: (i) that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; (ii) that this Lease has not been cancelled or terminated except as
otherwise represented by Landlord; (iii) that not more than one month's Base
Rent or other charges have been paid in advance; and (iv) that Landlord is not
in default under the Lease. In such event, Tenant shall be estopped from denying
the truth of such facts.
SECTION 11.05 TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
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ARTICLE TWELVE: LEGAL COSTS
SECTION 12.01 LEGAL PROCEEDINGS. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgment is entered, a reasonable sum as attorneys' fees and
costs. The losing party in such action shall pay such attorneys' fees and costs.
Tenant shall also indemnify Landlord against and hold Landlord harmless from all
costs, expenses, demands and liability Landlord may incur if Landlord becomes or
is made a party to any claim or action (a) instituted by Tenant against any
third party, or by any third party against Tenant, or by or against any person
holding any interest under or using the Property by license of or agreement with
Tenant; (b) for foreclosure of any lien for labor or material furnished to or
for Tenant or such other person; (c) otherwise arising out of or resulting from
any act or transaction of Tenant or such other person; or (d) necessary to
protect Landlord's interest under this Lease in a bankruptcy proceeding, or
other proceeding under Title 11 of the United States Code, as amended. Tenant
shall defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election. Tenant
shall reimburse Landlord for any legal fees or costs Landlord incurs in any such
claim or action.
SECTION 12.02 LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
SECTION 13.01 NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
SECTION 13.02 LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the
current owner or owners of the fee title to the Property or the leasehold estate
under a ground lease of the Property at the time in question. Each Landlord is
obligated to perform the obligations of Landlord under this Lease only during
the time such Landlord owns such interest or title. Any Landlord who transfers
its title or interest is relieved of all liability with respect to the
obligations of Landlord under this Lease to be performed on or after the date of
transfer. However, each Landlord shall deliver to its transferee all funds that
Tenant previously paid if such funds have not yet been applied under the terms
of this Lease.
(b) Tenant shall give written notice of any failure by Landlord
to perform any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance
within thirty (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure, Landlord
shall not be in default if such cure is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
(c) Notwithstanding any term or provision herein to the
contrary, the liability of Landlord for the performance of its duties and
obligations under this Lease is limited to Landlord's interest in the Property,
and neither the Landlord nor its partners, shareholders, officers or other
principals shall have any personal liability under this Lease.
SECTION 13.03 SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
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SECTION 13.04 INTERPRETATION. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
SECTION 13.05 INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
SECTION 13.06 NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
SECTION 13.07 WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
SECTION 13.08 NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded. The party requiring such recording shall pay all transfer taxes and
recording fees.
SECTION 13.09 BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
SECTION 13.10 CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is singed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
SECTION 13.11 JOINT AND SEVERAL LIABILITY. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
SECTION 13.12 FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
SECTION 13.13 EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
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to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
SECTION 13.14 SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
SECTION 14.01 BROKER'S FEE. When this Lease is signed by and delivered
to both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, as provided in the
written agreement between Landlord and Landlord's Broker, or the sum stated in
Section 1.09 above for services rendered to Landlord by Landlord's Broker in
this transaction. Landlord shall pay Landlord's Broker a commission if Tenant
exercises any option to extend the Lease Term or to buy the Property, or any
similar option or right which Landlord may grant to Tenant, or if Landlord's
Broker is the procuring cause of any other lease or sale entered into between
Landlord and Tenant covering the Property. Such commission shall be the amount
set forth in Landlord's Broker's commission schedule in effect as of the
execution of this Lease. If a Tenant's Broker is named in Section 1.08 above,
Landlord's Broker shall pay an appropriate portion of its commission to Tenant's
Broker if so provided in any agreement between Landlord's Broker and Tenant's
Broker. Nothing contained in this Lease shall impose any obligation on Landlord
to pay a commission or fee to any party other than Landlord's Broker.
SECTION 14.02 PROTECTION OF BROKERS. If Landlord sells the Property, or
assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyance of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
shall have the right to bring a legal action to enforce or declare rights under
this provision. The prevailing party in such action shall be entitled to
reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees
shall be fixed by the court in such action. This Paragraph is included in this
Lease for the benefit of Landlord's Broker.
SECTION 14.03 AGENCY DISCLOSURE; NO OTHER BROKERS.
Landlord and Tenant each warrant that they have dealt with no other real estate
broker(s) in connection with this transaction except: CB Richard Ellis, Inc. who
represents the Landlord and Lee & Associates, who represents the Tenant.
In the event that CB Richard Ellis represents Landlord and Tenant,
Landlord and Tenant hereby confirm that they were timely advised of the dual
representation and that they consent to the same, and that they do not expect
said broker to disclose to either of them the confidential information of the
other party.
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
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Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on February 9 , 1999 WESTCAP PROPERTIES, INC.
-------------------------
at a California Corporation
---------------------------------
By:/s/ William B. Patch
-------------------------------
William B. Patch
Its: Secretary
------------------------------
By:
-------------------------------
Its:
------------------------------
"TENANT"
Signed on , 1999 DOCUMENT SCIENCES
-------------------------- CORPORATION,
at a Delaware Corporation
---------------------------------
By:/s/ Charles R. Harris
-------------------------------
Mr. Charles R. Harris
Its: President/CEO
------------------------------
By:
-------------------------------
Its:
------------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS, INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS,
INC., ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR
EMPLOYEES OR AGENTS. AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD
RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE
ADVICE OF SUCH LEGAL COUNSEL.
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ADDENDUM TO LEASE DATED JANUARY 27, 1999, BY AND BETWEEN WESTCAP PROPERTIES,
INC., A CALIFORNIA CORPORATION, AS LANDLORD AND DOCUMENT SCIENCES CORPORATION, A
DELAWARE CORPORATION, AS TENANT.
1. RENT SCHEDULE
Accordingly, the net rent shall be as follows:
Months 1-12: $18,531.00
Months 13-24: $19,272.24
Months 25-36: $20,043.13
Months 37-48 $20,844.85
Months 49-60: $21,678.65
Months 61-72: $22,545.80
2. TENANT IMPROVEMENTS
Landlord shall provide a tenant improvement allowance to Tenant in the
form of a rent credit, in an amount not to exceed Three and no/100
($3.00) Dollars per square foot ($63,900.00).
It is the intention of the Tenant to make only minor modifications to
the building. The bulk of the allowance will go towards new carpeting
and painting in needed areas, solar tubes in the most southern open area
and expansion of the kitchen. Landlord shall approve all tenant
improvements prior to commencement of work. This rent credit shall be
given to Tenant at the time Tenant delivers to Landlord a paid bill, by
Tenant, from a licensed California Contractor. This rent credit shall
not exceed $63,900.00
3. ADDITIONAL HAZARDOUS MATERIALS PROVISIONS
Tenant shall comply will all laws, ordinances and regulations in the
state where the property is located regarding the disclosure of the
presence or danger of hazardous materials. Tenant shall immediately
notify Landlord in writing if Tenant is aware of (a) any enforcement,
cleanup, removal or other governmental or regulatory action instituted,
completed or threatened pursuant to any laws, ordinances or regulations
concerning hazardous materials ("Hazardous Materials Laws"); (b) any
claim made or threatened by any person against Landlord, or the
property, relating to damage, contribution, cost recovery, compensation,
loss or injury resulting from or claimed to result from any Hazardous
Materials; and (c) any release of a Hazardous Material that Tenant knows
or has reason to believe has or will come to be related or located
within, on, under or about the property. Tenant shall also provide to
Landlord, within five (5) days after Tenant first receives or sends the
same, copies of all claims, reports, complaints, notices, warnings or
asserted violations relating in any way to the property or Tenant's use
thereof. Tenant shall not perform or cause to be performed any hazardous
materials surveys, studies, reports or inspections, relating to the
property, without obtaining Landlord's prior written consent. The rights
and obligations under this section shall survive the expiration or
termination of this Lease.
- --------------------------------------------------------------------------------
CONSULT YOUR ATTORNEY/ADVISOR -- This document has been prepared for approval by
your attorney. No representation or recommendation is made by CB RICHARD ELLIS,
INC. or the agents or employees as to the legal sufficiency, legal effect, or
tax consequences of this document or the transaction to which it relates. These
are questions for your attorney.
- --------------------------------------------------------------------------------
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.
- ---------------------------------- ------------------------------------
LANDLORD'S INITIALS TENANT'S INITIALS
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<PAGE> 19
Richard Ellis CB Commercial Real Estate Group
Brokerage and Management
Licensed Real Estate Broker
This Rider is attached to and made part of that certain Lease (the
"Lease") dated January 27, 1999 between WESTCAP PROPERTIES, a California
Corporation, as Landlord, and DOCUMENT SCIENCES CORPORATION, a Delaware
Corporation, as Tenant, covering the Property commonly known as 6339 Paseo Del
Lago, Carlsbad, CA 92009 (containing approximately 21,300 rentable square feet)
(the "Property"). The terms used herein shall have the same definitions as set
forth in the Lease. The provisions of this Rider shall supersede any
inconsistent or conflicting provisions of the Lease.
A. OPTION(S) TO EXTEND TERM.
1. GRANT OF OPTION.
Landlord hereby grants to Tenant one (1) option(s) (the "Option(s)") to
extend the Lease Term for additional term(s) of five (5) years each (the
"Extension(s)"), on the same terms and conditions as set forth in the Lease, but
at an increased rent as set forth below. Each Option shall be exercised only by
written notice delivered to Landlord at least one hundred and eighty (180) days
before the expiration of the Lease Term or the preceding Extension of the Lease
Term, respectively. If Tenant fails to deliver Landlord written notice of
exercise of an Option within prescribed time period, such Option and any
succeeding Options shall lapse, and there shall be no further right to extend
the Lease Term. Each Option shall be exercisable by Tenant on the express
conditions that (a) at the time of the exercise, and at all times prior to the
commencement of such Extension, Tenant shall not be in default under any of the
provisions of the Lease and (b) Tenant has not been ten (10) or more days late
in the payment of rent more than a total of three (3) times during the Lease
Term and all preceding Extensions.
2. PERSONAL OPTIONS.
The Option(s) are personal to the Tenant named in Section 1.03 of the
Lease or any Tenant's Affiliate described in Section 9.02 of the Lease. If
Tenant subleases any portion of the Property or assigns or otherwise transfers
any interest under the Lease to an entity other than a Tenant Affiliate prior to
the exercise of an Option (whether with or without Landlord's consent), such
Option and any succeeding Options shall lapse. If Tenant subleases any portion
of the Property or assigns or otherwise transfers any interest of Tenant under
the Lease to an entity other than a Tenant Affiliate after the exercise of an
Option but prior to the commencement of the respective Extension (whether with
or without Landlord's consent), such Option and any succeeding Options shall
lapse and the Lease Term shall expire as if such Option were not exercised. If
Tenant subleases any portion of the Property or assigns or otherwise transfers
any interest of Tenant under the Lease in accordance with Article 9 of the Lease
after the exercise of an Option and after the commencement of the Extension
related to such Option, then the term of the Lease shall expire upon the
expiration of the Extension during which such sublease or transfer occurred and
only the succeeding Options shall lapse.
B. CALCULATION OF RENT.
The Base Rent during the Extension(s) shall be determined by one or a
combination of the following methods (INDICATE METHOD UPON EXECUTION OF THE
LEASE):
[ ] 1. COST OF LIVING ADJUSTMENT (Section B.1, below)
Rental Adjustment Date(s): The first day of the N/A months(s)
of the _______ Extension(s) of the Lease Term.
[ ] 2. FAIR RENTAL VALUE ADJUSTMENT (Section B.2, below) as
determined by appraiser [ ] or broker [ ]. Rental Adjustment
Date(s): The first day of the 1st month of the first Extension(s)
of the Lease Term at 4% fixed income.
<PAGE> 20
[ ] 3. FIXED ADJUSTMENT
The Base Rent shall be increased to the following amounts (the
"Adjusted Base Rent(s)") on the dates (the "Rental Adjustment
Date(s)") set forth below:
<TABLE>
<S> <C>
RENTAL ADJUSTMENT DATE(S) ADJUSTED BASE RENT(S)
13th month $ four percent (4%) fixed increase
---------------------------- ------------------------------------
25th month $ four percent (4%) fixed increase
---------------------------- ------------------------------------
37th month $ four percent (4%) fixed increase
---------------------------- ------------------------------------
49th month $ four percent (4%) fixed increase
---------------------------- ------------------------------------
</TABLE>
1. COST OF LIVING ADJUSTMENT.
The Base Rent shall be increased on the dates specified in Section B.1,
above (the "Rental Adjustment Date(s)") by reference to the Index defined in
Section 3.02 of the Lease or the substitute index described in Paragraph 3.02(b)
of the Lease, as follows: The Base Rent in effect immediately prior to the
applicable Rental Adjustment Date (the "Comparison Base Rent") shall be
increased by the percentage that the index has increased from the month in which
the payment of the Comparison Base Rent commenced through the month in which the
applicable Rental Adjustment Date occurs. In no event shall the Base Rent be
reduced by reason of such computation.
2. FAIR RENTAL VALUE ADJUSTMENT.
The Base Rent shall be increased on the date(s) specified in Section B.2, above
(the "Rental Adjustment Date(s)") to the "fair rental value" of the Property,
determined in the following manner:
(a) Not later than one hundred (100) days prior to any applicable Rental
Adjustment Date, Landlord and Tenant shall meet in an effort to negotiate, in
good faith, the fair rental value of the Property as of such Rental Adjustment
Date. If Landlord and Tenant have not agreed upon the fair rental value of the
Property at least ninety (90) days prior to the applicable Rental Adjustment
Date, the fair rental value shall be determined by appraisal, by one or more
appraisers or brokers (herein called "Appraisers(s)"), as provided in Section
B.2(b), below. If appraiser(s) are used, such appraiser(s) shall have at least
five (5) years' experience in the appraisal of commercial/industrial real
property in the area in which the Property is located and shall be members of
professional organizations such as MAI or equivalent. If broker(s) are used,
such broker(s) shall have at least five (5) years' experience in the sales and
leasing of commercial/industrial real property in the area in which the Property
is located and shall be members of professional organizations such as the
Society of Industrial and Officer Realtors or equivalent.
(b) If Landlord and Tenant are not able to agree upon the fair rental
value of the Property within the prescribed time period, then Landlord and
Tenant shall attempt to agree in good faith upon a single Appraiser not later
than seventy-five (75) days prior to the applicable Rental Adjustment Date. If
Landlord and Tenant are unable to agree upon a single Appraiser within such time
period, then Landlord and Tenant shall each appoint one Appraiser not later than
sixty-five (65) days prior to the applicable Rental Adjustment Date. If Landlord
and Tenant are unable to agree upon a single Appraiser within such time period,
then Landlord and Tenant shall each appoint one Appraiser not later than
sixty-five (65) days prior to the applicable Rental Adjustment Date. Within ten
(10) days thereafter, the two (2) appointed Appraisers shall appoint a third
(3rd) Appraiser. If either Landlord or Tenant fails to appoint its Appraiser
within the prescribed time period, the single Appraiser appointed shall
determine the fair rental value of the Property. If both parties fail to appoint
Appraisers within the prescribed time periods, then the first Appraiser
thereafter selected by a party shall determine the fair rental value of the
Property. Each party shall bear the cost of its own Appraiser and the parties
shall share equally the cost of the single or third Appraiser, if applicable.
(c) For the purposes of such appraisal, the term "fair market value"
shall mean the price that a ready and willing tenant would pay, as of the
applicable Rental Adjustment Date, as monthly rent to a ready and willing
landlord of property comparable to the Property if such property were exposed
for lease on the open market for a reasonable period of time and taking into
account all of the purposes for which such property may be used. If a single
Appraiser is chosen, then such Appraiser shall determine the fair rental value
of the Property. Otherwise, the fair rental value of the Property shall be the
arithmetic average of the two (2) of the three (3) appraisals which are closest
in amount, and the third appraisal shall be disregarded. In no event, however,
shall the Base Rent be reduced by reason of such computation.
2
<PAGE> 21
Landlord and Tenant shall instruct the Appraiser(s) to complete the
determination of the fair rental value not later than thirty (30) days prior to
the applicable Rental Adjustment Date. If the fair rental value is not
determined prior to the applicable Rental Adjustment Date, then Tenant shall
continue to pay to Landlord the Base Rent applicable to the Property immediately
prior to such Extension, until the fair rental value is determined. When the
fair rental value of the Property is determined, Landlord shall deliver notice
thereof to Tenant, and Tenant shall pay to Landlord, within ten (10) days after
receipt of such notice, the difference between the Base Rent actually paid by
Tenant to Landlord and the new Base Rent determined hereunder.
3
<PAGE> 22
DISCLOSURES AND ACKNOWLEDGMENT
Addendum to Lease Listing Agreement/Proposal to Lease
CB RICHARD ELLIS, INC.
LICENSED REAL ESTATE BROKER
Date: January 27, 1999
Landlord Westcap Properties, Inc., (a California Corporation)
------------------------------------------------------------------------
Tenant Document Sciences Corporation (a Delaware Corporation)
------------------------------------------------------------------------
Property 6339 Paseo Del Lago, Carlsbad, CA
------------------------------------------------------------------------
Street Address, City, State
Also known as: Containing approximately 21,300 rentable square feet
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
I. NOTIFICATION RE: NATIONAL FLOOD INSURANCE PROGRAM (CBRE FORM 5230)
According to FIRM* [specify source], this Property IS / X IS NOT
--- ---
located in a Special Flood Hazard Area on United States Department of Housing
and Urban Development (HUD) "Special Flood Zone Area Maps." Federal law requires
that as a condition of obtaining federally related financing on most properties
located in "flood zones," banks, savings and loan associations, and some
insurance lenders require flood insurance to be carried where the Property, real
or personal, is security for a loan. This requirement is mandated by the
National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of
1973. The purpose of the program is to provide flood insurance to property
owners at a reasonable cost. Cities or counties participating in the National
Flood Insurance Program may have adopted building or zoning restrictions, or
other measures, as part of their participation in the program. You should
contact the city or county in which the Property is located to determine any
such restrictions. The extent of coverage available in your area and the cost of
this coverage may vary, and for further information, you should consult your
lender or insurance carrier. Tenant shall be solely responsible for confirming
the above stated Special Flood Hazard Area designation, and for investigation of
the impact of such designation on Tenant's intended use of the Property. FLOOD
ZONE DESIGNATION: ZONE __
II. ALQUIST-PRIOLO NOTIFICATION; ALQUIST-PRIOLO SPECIAL EARTHQUAKE FAULT
ZONING ACT (CBRE FORM 5228-5229)
According to Fault-Rupture Hazard Zones in California Special
Publication 42 [specify source] the Property described above IS / X IS NOT
--- ---
__ MAY OR MAY NOT be situated in an Earthquake Fault Zone as designated under
the Alquist-Priolo Earthquake Fault Zoning Act, Sections 2621-2630, inclusive,
of the California Public Resources Code; and, as such, the construction or
development on the Property of any structure for human occupancy may be subject
to the findings of a geologic report prepared by a geologist registered in the
State of California, unless such report is waived by the city or county under
the terms of that Act. No representations on the subject are made by Landlord or
by CB RICHARD ELLIS, INC. or its agents or employees, and the Tenant should make
his/her/its own inquiry or investigation. Tenant shall be solely responsible for
confirming the above stated Special Flood Hazard Area designation, and for
investigation of the impact of such designation on Tenant's intended use of the
Property.
For further information you may wish to contact appropriate city or
county agencies:
III. HAZARDOUS WASTES OR SUBSTANCES AND UNDERGROUND STORAGE TANKS
Comprehensive federal and state laws and regulations have been enacted
in the past several years in an effort to control the use, storage, handling,
clean-up, removal and disposal of hazardous wastes or substances. Some of these
laws and regulations (such as, for example, the Comprehensive Environmental
Response Compensation and Liability Act [CERCLA]) provide for broad liability on
the part of owners, tenants, or other users of property for clean-up costs and
damages, regardless of fault. Another such statute is California Health and
Safety Code Section 25359.7(a), which provides in part that a seller/landlord of
nonresidential real property who knows, or has reasonable cause to believe, that
any release of a hazardous substance has come to be located on or beneath that
real property shall, prior to the sale or
- --------
* Flood Insurance Rate Map #06073C/031 F
<PAGE> 23
lease, give written notice of that condition to the purchaser/tenant; and that
failure of the seller/landlord to provide written notice as required shall
subject the seller/landlord to liability for damages. Other laws and regulations
set standards for the handling of asbestos, and establish requirements for the
use, modification, abandonment, and closure of underground storage tanks.
It is not practical or possible to list all such laws and regulations in
this Notice. Therefore, Landlords and Tenants are urged to consult legal counsel
to determine their respective rights and liabilities with respect to the issues
described in this Notice, as well as all other aspects of the proposed
transaction. If hazardous wastes or substances have been, or are going to be
used, stored, handled or disposed on the Property, or if the Property has been
or may have underground storage tanks, it is essential that legal and technical
advice be obtained to determine, among other things, the nature of permits and
approvals which have been obtained or may be required; the estimated costs and
expenses associated with the use, storage, handling, clean-up, disposal or
removal of hazardous wastes or substances; and the nature and extent of
contractual provisions necessary or desirable in this transaction. Broker
recommends expert assistance and site investigation to determine past uses of
the Property, which may provide valuable information as to the likelihood of
hazardous wastes or substances, or underground storage tanks, being on the
Property.
Landlord agrees to disclose to Broker and to Tenant any and all
information which he/she/it has regarding present and future zoning and
environmental matters affecting the Property and regarding the condition of the
Property, including, but not limited to structural, mechanical and soils
conditions, the presence and location of asbestos, PCB transformers, other
toxic, hazardous or contaminated substances, and underground storage tanks, in,
on, or about the Property. Broker hereby requests that such information be
provided immediately so that it may be timely communicated to the Tenant.
Broker has conducted no investigation regarding the subject matter
hereof, except as may be contained in a separate written document signed by
Broker. Broker makes no representations concerning the existence or nonexistence
of hazardous wastes or substances, or underground storage tanks, in, on, or
about the Property. Tenant should contact a professional, such as a civil
engineer, industrial hygienist or other persons with experience in these
matters, to advise on these matters.
The term "hazardous wastes or substances" is used herein in its very
broadest sense and includes, but is not limited to, petroleum based products,
paints and solvents, lead, cyanide, DDT, printing inks, acids, pesticides,
ammonium compounds, asbestos, PCBs and other chemical products. Hazardous wastes
or substances and underground storage tanks may be present on all types of real
property. This Notice is intended to apply to any transaction involving any type
of real property, whether improved or unimproved.
IV. BROKERS DISCLOSURE
The parties hereby expressly acknowledge that Broker has made no
independent determination or investigation regarding the following: present or
future use or zoning of the Property; environmental matters affecting the
Property; the condition of the Property, including, but not limited to
structural, mechanical and soils conditions, as well as issues surrounding
hazardous wastes or substances as set out above; violations of the Occupational
Safety and Health Act or any other federal, state, county or municipal laws,
ordinances, or statutes; measurements of land and/or buildings. Tenant agrees to
make its own investigation and determination regarding such items. A REAL ESTATE
BROKER IS QUALIFIED TO ADVISE ON REAL ESTATE. IF YOU DESIRE LEGAL ADVICE,
CONSULT YOUR ATTORNEY.
V. AMERICANS WITH DISABILITIES ACT (ADA)
Owners or tenants of real property may be subject to the Americans with
Disabilities Act (ADA), a federal law codified at 42 USC Section 12010 et seq.
Among other requirements of the ADA that could apply to your Property, Title III
of the Act requires owners and tenants of "public accommodations" to remove
barriers to access by disabled persons and provide auxiliary aids and services
for hearing, vision or speech impaired persons. The regulations under Title III
of the ADA are codified at 28 CFR Part 36.
Broker recommends that you and your attorney review the ADA and the
regulations, and, if appropriate, your proposed lease agreement, to determine if
this law would apply to you and the nature of the requirements. These are legal
issues. You are responsible for conducting your own independent investigation of
these issues.
2
<PAGE> 24
VI. RESIDENTIAL LEAD PAINT HAZARD REDUCTION ACT
LEAD WARNING: Every landlord of any interest in real property on which a
residential dwelling was built prior to 1978 is hereby notified that such
Property may present exposure to lead from lead-based paint that may place young
children at risk of developing lead poisoning. Lead poisoning in young children
may produce permanent neurological damage, including learning disabilities,
reduced intelligence quotient, behavioral problems, and impaired memory. Lead
poisoning also poses a particular risk to pregnant women.
Federal law (42 USC Section 4851 et seq.) requires that the landlord of
all "residential property" constructed prior to 1978 must provide to tenants any
information on lead-based paint hazards from risk assessments or inspections in
the landlord's possession, and must notify the Tenant of any known lead-based
paint hazards. For purposes of these statutes, "residential property" is defined
as any property which includes any residential dwelling unit(s).
A RISK ASSESSMENT OR INSPECTION FOR POSSIBLE LEAD-BASED PAINT HAZARDS IS
RECOMMENDED PRIOR TO LEASE.
Landlords are required to sign a lead-based paint disclosure form(s),
and the tenant must be provided with a copy of a booklet entitled "Protect Your
Family from Lead in Your Home."
Landlord hereby certifies that the above described Property IS /
---
X IS NOT is not "residential property" constructed prior to 1978, as described
- ---
by the statute.
LEAD DISCLOSURE: Landlord hereby certifies that, to the best of
Landlord's knowledge, the Property __DOES / __DOES NOT contain lead-based paint;
and that Landlord ___DOES / ___DOES NOT possess risk assessment or inspection
reports relating thereto. Landlord hereby certifies to have disclosed to the
Tenant and Broker all information known to the Landlord regarding the presence
of lead-based paint and lead-based paint hazards within this target housing, as
follows:
Date(s) of inspection(s) or report(s):________________[ ]report attached
Additional information regarding lead-based paint hazards regarding this
Property: additional pages attached
Landlord hereby agrees that it will provide the Tenant with any reports
or information related thereto now in its possession, or which it acquires prior
to the consummation of the transaction contemplated hereby.
The undersigned Tenant and Landlord acknowledge that CB RICHARD ELLIS,
INC. has delivered this disclosure to the undersigned; that they have read and
understand the LEAD WARNING contained herein; and, if this Property is
residential property constructed prior to 1978, the Tenant hereby acknowledges
receipt of "Protect Your Family from Lead in Your Home".
VII. COMPLIANCE WITH LAWS
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, Property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment, in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
3
<PAGE> 25
RECEIPT OF A COPY OF THESE DISCLOSURES IS HEREBY ACKNOWLEDGED.
LANDLORD TENANT
WESTCAP PROPERTIES, INC. DOCUMENT SCIENCES CORPORATION
- ---------------------------------- ------------------------------------
A California Corporation A Delaware Corporation
By: /s/ William B. Patch By: Charles R. Harris
- ---------------------------------- ------------------------------------
William B. Patch Charles R. Harris
President/CEO
Its: Secretary Its: President/CEO
- ---------------------------------- ------------------------------------
Dated: February 9, 1999 Dated:
- ---------------------------------- ------------------------------------
This portion to be completed in conjunction with negotiation and/or
consummation of lease agreement:
VIII. BROKER REPRESENTATION DISCLOSURE AND ACKNOWLEDGMENT
CB Richard Ellis, Inc. herein represents Landlord.
Lee & Associates represents Tenant.
____ Landlord's initials ____ Tenant's initials
- --------------------------------------------------------------------------------
CONSULT YOUR ADVISORS NO REPRESENTATION OR RECOMMENDATION IS MADE BY CB RICHARD
ELLIS, INC. OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL EFFECT, INTERPRETATION,
OR ECONOMIC CONSEQUENCES OF THIS AGREEMENT, THE TRANSACTION CONTEMPLATED
HEREUNDER, THE NATIONAL FLOOD INSURANCE PROGRAM AND RELATED LEGISLATION, NOR OF
OTHER LEGISLATION REFERRED TO HEREIN. THESE ARE QUESTIONS THAT YOU SHOULD
ADDRESS WITH YOUR CONSULTANTS AND ADVISORS.
- --------------------------------------------------------------------------------
4
<PAGE> 1
[DOCUMENT SCIENCES LETTERHEAD]
EXHIBIT 10.28
September 30, 1998
Mr. Thomas Anthony
2 Rollingview Lane
Fallbrook, CA 92028
RE: SEPARATION AGREEMENT AND RELEASE OF CLAIMS
Tom,
This letter agreement confirms the mutual understanding and agreement between
you and Document Sciences Corporation (the "Company"), regarding your
resignation as an officer and employee of the Company as follows:
Resignation. You have resigned from your position as Vice President - Sales, and
any other title or position, and as an employee of the Company effective
September 30, 1998 (the "Resignation Date").
Company Payments and Benefits.
(a) in consideration of the mutual promises and agreements described herein and
as severance pay and in lieu of any other monies payable, the Company will
pay you compensation in the amount of one month's salary (less applicable
withholding for taxes), payable in a lump-sum cash payment on the effective
date of this agreement. From and after the Resignation Date, you will not be
entitled to accrual of any employee benefits, including but not limited to,
vacation benefits or bonuses, and you will not participate in any executive
incentive compensation or bonus plan, or any other officer or employee
compensation plan.
(b) the Parties agree that the exercise of any stock options shall continue to
be subject to the terms and conditions of the Company's Stock Option Plan
and the applicable Stock Option Agreement between you and the Company.
(c) for a period of 18 months after the Resignation Date, or shorter if you
terminate such arrangement in writing with the Director of Human Resources,
you will be entitled to continue to receive 100% Company-paid health, dental
and vision coverage as provided to you [and your dependents] immediately
prior to the Resignation Date (the "Company-Paid Coverage").
<PAGE> 2
Reimbursement of Expenses. The Company will reimburse you for all applicable
business expenses incurred by you through September 30, 1998, in the course of
performance of your duties for the Company, in accordance with the Company's
expense reimbursement policies. Such expenses must be submitted within 30 days
of the effective date of this agreement.
Confidential Information. You will continue to maintain the confidentiality of
all confidential and proprietary information of the Company and will continue to
comply with the terms of any proprietary information agreement, confidentiality
agreement or similar agreement between you and the Company.
Return of Property. Within five days of the Resignation Date, you will return to
the Company and physical or intellectual property of the Company or any property
leased or rented by the Company in your possession. Per the terms of your
agreement with Al Lynchosky and Chuck Harris, the Company has agreed to allow
you to retain your computer.
Acknowledgment and Release of Claims. Except with respect to the express
obligations of the Company as set forth in this Agreement, you agree that the
foregoing consideration represents settlement in full of all outstanding
obligations owed to you by the Company and that you will not seek any further
compensation from the Company for any other claim, damage, cost or attorney's
fees. The Company on one hand and you on the other hereby fully and forever
release each other and each's respective heirs, family members, board members,
executors, officers, directors, employees, shareholders, administrators,
affiliates, divisions, subsidiaries, predecessor and successor corporations, and
assigns, form, and agree not to sue concerning, any claim, duty, obligation or
cause of action relating to any matters of any kind, whether presently known or
unknown, suspected or unsuspected, that either you or the Company may possess
arising from any omissions, acts or facts that have occurred up to and including
the effective date of this Agreement including, without limitation:
(a) any and all claims relating to or arising from your employment relationship
with the Company and the termination of that relationship;
(b) any and all claims relating to, or arising from, your right to purchase, or
actual purchase of shares of stock of the Company, including, without
limitation, any claims for fraud, misrepresentation, breach of fiduciary
duty, breach of duty under applicable state corporate law, and securities
fraud under any state or federal law;
(c) any and all claims for wrongful discharge of employment; breach of contract,
both express and implied; breach of a covenant of good faith and fair
dealing, both express and implied; negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage;
defamation; negligence; personal injury; assault; batter; invasion of
privacy; false imprisonment; and conversion;
<PAGE> 3
(d) any and all claims for violation of any federal, state or municipal statute,
including, but not limited to, Title VII of the Civil Rights Act of 1964,
the Civil Rights Act of 1991, the Americans with Disabilities Act of 1990,
the Family and Medical Leave Act, the Fair Labor Standards Act, the
California Fair Employment and Housing Act, and Labor Code section 201, et
seq.;
(e) any and all claims arising out of any other laws and regulations relating to
employment or employment discrimination; and
(f) any and all claims for attorney's fees and costs.
You agree that the release set forth in this section shall be and will remain in
effect in all respects as a complete general release as to the matters released.
This release does not extend to any obligations incurred under this Agreement.
Acknowledgment of Waiver of Claims, including Claims Under ADEA. You acknowledge
that you are waiving and releasing any rights you may have against the Company,
including claims under the Age Discrimination in Employment Act ("ADEA"). [You
and the Company agree that this waiver and release does not apply to any rights
or claims that may arise under the ADEA after the effective date of this
agreement.] You acknowledge that the consideration given for this waiver and
release is in addition to anything of value to which you are already entitled.
You further acknowledge that you have been advised by this writing and
understand and agree that:
(a) you are advised to consult with an attorney prior to executing this letter
agreement;
(b) you have carefully read and fully understand this letter;
(c) you are, through this letter agreement, releasing the Company from any and
all claims you may have against it;
(d) you knowingly and voluntarily agree to all of the terms set forth in this
letter agreement;
(e) you knowingly and voluntarily intend to be legally bound by the provisions
of this letter agreement;
(f) you have at least twenty-one (21) days within which to consider this letter
agreement;
(g) you have a full seven (7) days following the execution of this letter
agreement by the parties to revoke this letter agreement; and
(h) this letter agreement shall not be effective or enforceable until the
revocation period has expired.
<PAGE> 4
Civil Code Section 1542. You and the Company represent that the parties are not
aware of any claim by either of them other than the claims that are released by
this Agreement. You and the Company acknowledge that the parties have had the
opportunity to consult legal counsel, have read, are familiar with, and
understand the provisions of California Civil Code Section 1542, which provides
as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
You and the Company, being aware of said code section, voluntarily agree to
expressly waive any rights each may have thereunder, as well as under any other
statute or common law principles of similar effect, including both known and
unknown claims.
Publicity. The Company and you agree to use your respective best efforts to
maintain in confidence the contents and terms of this Agreement.
Disparagement. The Company and you agree to refrain from any disparagement,
criticism, defamation, slander of the other, or tortious interference with the
contracts and relationships of the other.
No Admission of Liability. You understand and acknowledge that this Agreement
constitutes a compromise and settlement of disputed claims. No action taken by
you or the Company, either previously or in connection with this Agreement,
shall be deemed or construed to be (a) an admission of the truth or falsity of
any claims heretofore made or (b) acknowledgment or admission by either party of
any fault or liability whatsoever to the other party or to any third party.
Severability. In the event that any provision hereof becomes or is declared by a
court of competent jurisdiction to be illegal, unenforceable or void, this
agreement shall continue in full force and effect without said provision.
No Oral Modification. This Agreement may only be amended in writing signed by
you and a duly authorized officer of the Company.
Counterparts. This Agreement may be executed in counterparts, and each
counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
<PAGE> 5
Voluntary Execution of Agreement. This Agreement is executed voluntarily and
without any duress or undue influence on the part or behalf of the parties
hereto, with the full intent of releasing all claims. The parties acknowledge
that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation, and execution of
this Agreement by legal counsel of their own choice or that they have
voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement and of the
releases it contains; and
(d) They are fully aware of the legal and binding effect of this Agreement.
Arbitration. The Parties agree that any and all disputes arising out of the
terms of this Agreement, their interpretation, and any of the matters herein
released, shall be subject to binding arbitration in San Diego County before the
American Arbitration Association under its California Employment Dispute
Resolution Rules, or by a judge to be mutually agreed upon. The Parties agree
that the prevailing party in any arbitration shall be entitled to injunctive
relief in any court of competent jurisdiction to enforce the arbitration award.
The Parties agree that the prevailing party in any arbitration shall be awarded
its reasonable attorney's fees and costs.
Other. This Agreement shall be governed by and construed in accordance with the
laws of the State of California applicable to agreements made and to be
performed entirely within this state.
This Agreement represents the entire understanding and agreement between the
Company and you concerning your separation from the Company as an officer and
employee, and supersedes and replaces any and all prior agreements and
understandings concerning your employment relationship with the Company and your
compensation by the Company.
You represent that you have carefully read and understand the scope and effect
of the provisions of this Agreement, and that you have not relied upon any
representations or statements made by the Company that are not specifically set
forth herein. You acknowledge that you have had the opportunity to consult with
legal counsel regarding the provisions of this Agreement and that you understand
the terms and effect of this Agreement.
This Agreement shall be effective and enforceable seven (7) days after it has
been signed by you and the Company.
<PAGE> 6
If the foregoing correctly sets forth our understanding and agreement, please
sign the duplicate enclosed copy of this letter Agreement in the space provided
below, and return a fully signed copy to me.
Very truly yours,
Document Sciences Corporation
By: /s/ CHARLES R. HARRIS
-------------------------------
Charles R. Harris
President & CEO
ACCEPTED AND AGREED TO
AS OF SEPTEMBER _______, 1998
- ----------------------------------
Thomas J. Anthony
Should you have any additional questions, please do not hesitate to contact me
directly at (619) 643-5258.
Best Regards,
/s/ BILL DOWLER
Bill Dowler
Director, Human Resources
<PAGE> 1
[DOCUMENT SCIENCES LETTERHEAD]
EXHIBIT 10.29
December 11, 1998
Robert Pryor
1648 Orchard Wood Road
Encinitas, CA 92024
Bob,
As a result of the restructuring of our work force, your employment with
Document Sciences Corporation ("the Company") will be terminated as of December
11, 1998. The purpose of this letter is to explain the basic severance program
and set forth the terms and conditions for receiving an enhanced severance
package.
All employees laid off as a result of the restructuring are entitled to a basic
severance package. In order to receive the enhanced package, you will need to
sign this letter agreement.
Your basic severance package will consist of (a) a lump-sum payment representing
your normal salary through December 31, 1998, (b) continuation of health
insurance through December 31, 1998, (c) a lump-sum bonus payment in the amount
of $25,000, minus all applicable state and federal withholdings, and (d)
outplacement services made available to you through December 31, 1998. If you
decide not to accept the remaining terms of this letter, then this pay, benefits
and the outplacement services outlined above will be the only severance you will
receive from the Company. In this event, your COBRA eligibility date under the
Company's health plan will be January 1, 1999.
If you are willing to agree to the terms and conditions set forth below, you
will also receive the following enhanced severance package:
1. SALARY CONTINUATION. Beginning January 1, 1999, you will receive guaranteed
continuation of your regular salary, on the normal payroll cycle, for a
period of six (6) months. If you have not found full-time, non-temporary
employment with an established company by the end of the guarantee period,
you will receive continuing salary on a month-by-month basis not to exceed
an additional six (6) months. Under no circumstances will the salary
continuation period extend beyond 12 months.
2. BENEFITS. During the salary continuation period, you will be permitted to
continue your participation in the Company's group health benefits at the
regular employee premium rate based on your benefit elections in force at
the time of your termination. As a non-active employee effective January 1,
1999, you are not eligible to participate in any other benefit
<PAGE> 2
programs available to the Company's employees, including but not limited to
the 401(k) Plan, the Employee Stock Purchase Plan and paid time off. If you
choose to elect to receive the benefits as outlined in this enhanced
severance package, your COBRA eligibility date will occur at the completion
of your salary continuation period, which may be as early as July 1, 1999
or as late as January 1, 2000.
3. OUTPLACEMENT SERVICES. The Company will provide you with a six-month
Executive Outplacement Package through Lee Hecht Harrison (LHH) at no cost
to you. Upon signing this Agreement, you may contact Corliss Carroll
at LHH's La Jolla Village office at (619) 622-3406 to schedule an
appointment and begin these services.
In order to receive the enhanced severance package, you agree to release
Document Sciences Corporation, its stockholders, subsidiaries, affiliated
companies and all successors, assigns, predecessors, and their agents, officers,
attorneys, directors, employees and representatives from any and all claims or
lawsuits including, for example, claims for unpaid compensation, claims arising
under state or federal equal employment laws, the Age Discrimination in
Employment Act, the Americans With Disabilities Act, wrongful discharge claims,
tort claims and contract claims) arising from or attributable to the Company's
employment of you, your termination or any other matter or event occurring prior
to the date of termination. By agreeing to this release, you do not waive any
rights you may have to pursue unemployment benefits. You should realize that
this release waives any and all rights under California Civil Code Section 1542
or any analogous state or federal law and therefore extends to all claims of
every nature, known or unknown, suspected or unsuspected, that you may have
against the Company as of the date of this Agreement, and that by signing this
Agreement you will be precluded from filing a claim or lawsuit against the
Company for these reasons. Section 1542 of the California Civil Code reads as
follows:
"Certain claims not affected by general release. A general release does
not extend to claims which the creditor does not know or suspect to
exist in his favor at the time of executing the release which if known
to him must have materially affected his settlement with the debtor."
By this letter, we are advising you to consult with an attorney prior to
executing this Agreement and entering into a release. You should discuss all
aspects of this Agreement with an attorney, if you so desire, and you should
carefully read and understand all of the provisions of this Agreement before
signing it.
In addition to the aforementioned items, you and the Company further agree to
the following:
1. You will receive a Letter of Reference prepared and signed by the President
& CEO (Exhibit A).
2. Upon the regular Company-mandated announcement of its change in executive
staff, wording will be included to state that you have "left the Company to
pursue other interests." The Company agrees to incorporate this wording at
your request.
<PAGE> 3
3. You may retain the use of your Company-issued laptop computer for a period
of one week for the purpose of removing any material of a personal nature.
The laptop must be returned to Bill Dowler by no later than Friday, December
18, 1998.
4. Both parties agree to comply with the Company's policy regarding
confidentiality and proprietary information. You hereby agree to uphold the
highest standards of confidentiality, and you agree not to remove any
materials of a proprietary nature from the Company without the expressed
written authorization of the President & CEO.
You are being given a copy of this letter on December 11, 1998. You will have
until December 22, 1998 to consider this letter agreement and whether to sign
it. If it is your decision to sign this agreement, please do so where indicated
below and return it to Bill Dowler so that it is received no later than December
23, 1998.
Best Regards,
/s/ Charles R. Harris
Charles R. Harris
President & CEO
Document Sciences Corporation
<PAGE> 4
[DOCUMENT SCIENCES LETTERHEAD]
Exhibit A - Letter of Reference
The following represents the Letter of Reference that will be drafted on Robert
Pryor's behalf at his future request. The actual letter will contain specific
information as provided by Robert to identify the potential employer, will be
drafted on official Company letterhead and will be executed by the President &
CEO.
RE: LETTER OF REFERENCE FOR ROBERT PRYOR
To whom it may concern,
In December of 1998, Document Sciences Corporation executed a restructuring plan
which necessitated a significant reduction in workforce and available resources
worldwide. As a result, Bob Pryor subsequently decided it was an appropriate
time for him to leave Document Sciences and pursue other interests.
In his tenure at Document Sciences, Bob led the worldwide marketing function
during a difficult period of transition for the company. Bob exhibited executive
leadership in building a highly motivated marketing organization, and helped the
executive team bring focus to our target markets. The model that Bob developed
to help the company analyze its business and customers became the basis for
internally re-focusing the entire company on core target markets.
During the restructuring period, Bob's background as a technology sector
executive, his analytical skills and his experience in operations made him a
valuable member of the executive team, especially during the re-focusing and
planning effort. In addition, he exhibited the skills, decisiveness and business
acumen that would make him an ideal candidate for a general management position.
If you would like to contact me to further discuss Bob's skills and
qualifications, you can reach me at (619) 643-5202.
Sincerely,
Charles R. Harris
President and CEO
Document Sciences Corporation
<PAGE> 5
ACCEPTANCE OF LETTER AGREEMENT
I have read the above letter agreement and have decided to accept the enhanced
severance packaged outlined therein. I understand that in exchange for receiving
the enhanced severance package, I will be bound by the release on Page Two of
this letter agreement and will be waiving any rights I may have to bring any
legal action against Document Sciences Corporation and others.
/s/ ROBERT J. PRYOR December 18,1998
- ---------------------------------- ------------------------------------
Signature Date
Robert J. Pryor
- ----------------------------------
Printed Name
Accepted with changes noted on page 1 (RJP)
<PAGE> 1
Exhibit 10.30
[DOCUMENT SCIENCES LETTERHEAD]
CONSULTING AGREEMENT
GENERAL
This agreement is entered into between John H. Wilson, hereinafter referred to
as "Consultant", Document Sciences Corporation, hereinafter referred to as
"Company", and Alan H. Lynchosky, Acting President and Chief Executive Officer,
hereinafter referred to as "President and CEO". Company agrees to retain
Consultant to serve as an Interim Chief Financial Offer. Responsibilities and
duties of Consultant will be as agreed to between Consultant and President and
CEO, will be in the normal course of business and consistent with similar
responsibilities exacted by and duties performed by Chief Financial Officers, in
general.
PAYMENT
Company agrees to pay Consultant $15,000.00 per month and Consultant agrees to
accept $15,000.00 per month for all services rendered and personal costs
incurred by Consultant in execution of the previously mentioned responsibilities
and duties.
TERM
The term of this agreement will be no less than three (3) months and may be
extended by mutual agreement of President and CEO and Consultant. Services under
the initial term of this agreement will commence on May 18, 1998, and end on
August 17, 1998.
RENEWALS
Renewals of this agreement, if any, will be determined as soon as possible by
President and CEO and Consultant. Fees related to renewals will be decided
between President and CEO and Consultant at least 15 days before the end of the
initial term and any succeeding term. If renewals are made in increments of
three (3) months or less, it is hereby agreed to by Consultant and President and
CEO that the fee for each such increment will be $15,000.00 per month, covering
like items as indicated above for the initial term. If renewals are made in
increments any greater than three (3) months, Consultant and President and CEO
agree to a monthly fee for each month of the first renewal period of $13,500.00,
for up to one six month renewal. This agreement does not contemplate Consultant
being retained as Interim Chief Financial Officer for a period of more that nine
(9) months.
/s/ John H. Wilson
- ---------------------------------------------
John H. Wilson, Consultant
/s/ Alan H. Lynchosky
- ---------------------------------------------
Alan H. Lynchosky, Acting President and CEO
Document Sciences Corporation
<PAGE> 2
[DOCUMENT SCIENCES LETTERHEAD]
July 15, 1998
Mr. John H. Wilson
2280 Avenida Magnifica, Apt E
Carlsbad, CA 92008
Dear John:
Pursuant to a conversation you had today with Chuck Harris, I am hereby
extending your Consulting Agreement through October 31, 1998, in accordance with
the terms specified in the Agreement. Specifically, you will continue to serve
as Interim Chief Financial Officer of Document Sciences Corporation, and on each
of the dates of August 15, September 15, and October 15 we will pay you $15,000
in payment of services to be rendered through October 31, 1998.
/s/ Alan H. Lynchosky
- ---------------------------------------------
Alan Lynchosky
Interim Chief Executive Officer
<PAGE> 3
[DOCUMENT SCIENCES LETTERHEAD]
September 21, 1998
Mr. John H. Wilson
2280 Avenida Magnifica, Apt E
Carlsbad, CA 92008
Dear John:
Pursuant to our conversation on September 9, 1998, your Consulting Agreement is
extended through January 31, 1999, in accordance with the terms specified in the
Agreement which began May 18, 1998. Specifically, you will continue to serve as
Interim Chief Financial Officer of Document Sciences Corporation. On each of the
dates of October 15, 1998; November 15, 1998; December 15, 1998; and January 15,
1999, you will receive pay at a rate of $15,000.00 per month in payment of
services to conclude January 31, 1999.
/s/ Charles R. Harris
- -----------------------------------
Charles R. Harris
President and CEO
/s/ John H. Wilson
- -----------------------------------
John H. Wilson
Agreed and accepted
<PAGE> 4
[DOCUMENT SCIENCES LETTERHEAD]
February 5, 1999
Mr. John H. Wilson
2280 Avenida Magnifica, Apt E
Carlsbad, CA 92008
Dear John:
Pursuant to our conversation on February 2, 1999, I am extending your Consulting
Agreement through July 31, 1999, in accordance with the terms specified in the
Agreement, notwithstanding the original anticipated "no longer than date".
Specifically, you will continue to serve as Interim Chief Financial Officer of
Document Sciences Corporation. We will pay you at the new rate of $20,000 per
month. That amount will be paid to you on February 15, March 15, April 15, May
15, June 15, and July 15, 1999, in payment for services to be rendered. This
extension replaces the extension granted to you on January 4, 1999.
/s/ Charles R. Harris
- -------------------------------------
Charles R. Harris
President and CEO
/s/ John H. Wilson
- -------------------------------------
Agreed and accepted
John H. Wilson
Contractor
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 of Document Sciences Corporation of our report dated January 25, 1999,
with respect to the consolidated financial statements of Document Sciences
Corporation included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ ERNST & YOUNG LLP
March 31, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,694,420
<SECURITIES> 13,220,581
<RECEIVABLES> 6,569,370
<ALLOWANCES> 725,561
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<CURRENT-ASSETS> 27,001,227
<PP&E> 2,699,398
<DEPRECIATION> 1,030,543
<TOTAL-ASSETS> 30,988,659
<CURRENT-LIABILITIES> 12,118,152
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<COMMON> 10,858
<OTHER-SE> 18,409,790
<TOTAL-LIABILITY-AND-EQUITY> 30,988,659
<SALES> 13,075,657
<TOTAL-REVENUES> 20,107,350
<CGS> 2,229,997
<TOTAL-COSTS> 6,574,893
<OTHER-EXPENSES> 23,892,978
<LOSS-PROVISION> 507,283
<INTEREST-EXPENSE> 11,135
<INCOME-PRETAX> (9,459,766)
<INCOME-TAX> (306,168)
<INCOME-CONTINUING> (9,153,598)
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