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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: DECEMBER 31, 1998 Commission File Number: 000-23384
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INSO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3216243
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
31 ST. JAMES AVENUE, BOSTON, MA 02116
(Address of principal executive offices) (Zip code)
(617) 753-6500
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(g) of the Act: None
COMMON STOCK, PAR VALUE $.01 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: / / No: /X/
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 the 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. / /
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OUTSTANDING AT MARCH 29,
CLASS 1999
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Common Stock (par value $.01 per share) 15,508,265
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As of March 29, 1999, the aggregate market value of common stock held by
non-affiliates of the registrant was $109,525,496.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference into Part III.
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INSO CORPORATION
FORM 10-K
This report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of factors
of which we are aware that may cause our actual results to vary materially from
those forecasted or projected in any such forward-looking statement. Please see
"Certain Factors that May Affect Future Operating Results" for a discussion of
certain, but not necessarily all, of the factors that we believe could cause our
actual operating results to be materially less than those forecasted or
projected in any forward-looking statement.
PART I
ITEM 1. BUSINESS
Inso Corporation ("Inso" or "We") supplies software solutions to store,
manage, share, and publish electronic information. We provide software solutions
to manage and distribute all forms of electronic information, from simple memos
to complex technical manuals, in environments ranging from desktop computers to
the Internet. Through enterprise license agreements, integration in popular
software products, and bundling agreements, Inso technology is installed on more
than 70 million desktops worldwide. Our products are currently focused on three
main areas: Electronic Publishing Solutions, Document Exchange, and Product Data
Management. During 1998, we operated in four segments: Electronic Publishing
Solutions, Dynamic Document Exchange, Lexical and Linguistic Products, and
Product Data Management. During 1998, we disposed of our Lexical and Linguistic
Products operating segment, and acquired businesses that now comprise all of the
Product Data Management and some of the Electronic Publishing Solutions and
Dynamic Document Exchange operating segments.
ELECTRONIC PUBLISHING SOLUTIONS PRODUCTS
Our Electronic Publishing Solutions ("EPS") products enable publishers to
manage and distribute electronic content from a wide variety of sources through
the World Wide Web, intranets, CD-ROM, and print. Our EPS products are
compatible with content standards for information storage, distribution, and
exchange, including extensible Markup Language (XML). We also participate in the
development of worldwide standards for XML.
We designed our Electronic Publishing Solutions products to meet the
electronic publishing and content management needs of software developers and
end-users in a wide variety of situations. Our products serve various electronic
publishing needs, from individual document access and navigation to the
distribution of large and technically complex data sets to thousands of users.
We designed these products for use in desktop, proprietary networks, and
Internet environments, including intranets and the World Wide Web. Starting in
1996 and continuing through 1998, we invested in the development of an
integrated set of Electronic Publishing Solutions that cover a broad spectrum of
our customers' needs. We expect to make significant investments in research and
development in support of these efforts, and we believe that research and
development expenditures for our Electronic Publishing Solutions products, as a
percentage of our revenues, will continue to be higher than in other businesses
and industry averages in 1999.
With substantial expertise using structured information, our EPS segment has
become a leading provider of standards-based electronic publishing solutions for
large-volume publishers. As a result of the more recent adoption of XML for
distribution and manipulation of content over the World Wide Web, EPS has also
become a leader in Web site development, management, and delivery. Our
DynaBase-Registered Trademark-Dynamic Web Publishing System is a comprehensive,
integrated solution for professional Web publishing, focusing on the management
and delivery of information for large, dynamic Web sites. Our
DynaText-Registered Trademark- Professional Publishing System provides
publishers with a single, automated production process to create
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and deliver electronic documents that can be easily found and searched on the
Web, CD-ROM, and LANs. The Electronic Publishing Solutions segment also develops
a number of tools for the conversion of common document information into
structured content suitable for distribution over the Web.
Our EPS employees are involved in electronic publishing standards
development. Staff members include early pioneers in developing Standard
Generalized Markup Language ("SGML"), the international standard for open
interchange of documents; HyperText Markup Language ("HTML"), the first language
for interchange of text on the Web; and XML. XML has been widely endorsed and is
currently the most accepted standard for data distribution and interchange over
the Web.
Our EPS products' use of XML helps users to find and sort complex
information and to present user-specific, dynamically generated information on
demand. Users may combine this information with information from other
documents, and automatically assemble a new "virtual document" customized using
criteria, such as user preference, profile, browser and other criteria
determined by the content creator. During 1998, the EPS operating segment
released a major revision of DynaBase 3.0 and also released new versions of its
publishing tools.
We sell our EPS products throughout the world through direct and reseller
channels. Our ultimate customers are corporations and other enterprise
publishers. Our direct selling efforts focus on large companies within
industries that include Aerospace and Defense, Heavy Manufacturing, High
Technology Manufacturing, Communications and Electronics, Transportation,
Commercial Publishing, and Computer Hardware and Software. These vertical
markets are served by a direct sales force focused on major accounts, dedicated
to EPS and Product Data Management products (see "Acquisition of Sherpa"), and
divided into teams that concentrate on the particular vertical markets. In
addition, through indirect channels, including resellers, systems integrators,
and alliances with other firms, we sell or market our EPS products to a broad
range of customers and industries.
On March 12, 1998, to complement our existing EPS operating segment, we
acquired ViewPort Development AB, the owner of Synex Information AB, a Swedish
corporation specializing in the development of browser engines and related
application development toolkits for SGML information viewing. (See "Acquisition
of Synex".) Synex has been operating as part of the EPS operating segment since
its acquisition. On August 28, 1998, we acquired the intellectual property and
other assets of Bitstream Inc.'s Media Asset Management business, known as
MediaBank, including related customer agreements. As part of this transaction,
we also licensed certain rights to page composition technology under development
at Bitstream. (See "Acquisition of MediaBank".) MediaBank enables workgroup
productivity, workflow, and content management associated with a wide range of
media elements including text, documents, images, movies, graphics, sounds, and
fonts used in the publishing process for corporations, publishers, and digital
service providers. The MediaBank product has been sold primarily through
indirect channels, including value-added resellers ("VARs"). We anticipate that
we will distribute certain of the existing EPS products, other than MediaBank,
through these indirect distribution channels in 1999.
RESEARCH AND DEVELOPMENT
EPS operates in an industry that changes technology rapidly, and its ability
to compete and operate successfully depends on, among other factors, its ability
to anticipate such change. In addition, EPS relies upon the rapid development of
products that support standards such as SGML and XML to differentiate itself
from others. Accordingly, we are committed to the development of new products,
to the continuing evaluation of new technologies, and to participating in
standard setting, such as through the World Wide Web Consortium. During 1998,
EPS made significant investments in research and development in new products for
use on or in conjunction with the Internet and the Web, particularly
improvements to our DynaBase Dynamic Web Publishing System. The rapid changes
that characterize these markets may require that we make substantial additional
investments in research and development in order to respond to unforeseen market
or technological developments. We expect to make significant investments in 1999
in
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a new architecture for all our EPS products and in the integration of our EPS,
MediaBank, and PDM product lines.
INTELLECTUAL PROPERTY RIGHTS
The EPS operating segment has obtained patents on certain aspects of its
technology and registers copyrights to certain of its products on an ongoing
basis. However, we believe that, in general, patents, copyrights, and similar
intellectual property rights are less important to the ability of the EPS
operating segment to compete successfully in its markets than are the currency
of the technology and the know-how and ability of its development personnel.
Certain of our EPS technologies include database technology from third parties,
which we license pursuant to royalty-free licenses expiring in 2003.
COMPETITION
The market for Electronic Publishing Solutions is characterized by a number
of large participants offering full or partial solutions, based on both
proprietary formats and open standards-based formats. Participants in this
market include Adobe Systems, Inc. and its affiliates, an affiliate of Open
Market Inc., Quark Inc., SoftQuad International, Inc., Vignette Corporation, and
Enigma. As EPS's products have expanded to encompass aspects of content and
document management, EPS has faced competition from organizations such as
Documentum, Inc. and Lotus Development Corporation in certain parts of its
markets. As the market for Electronic Publishing Solutions grows, we expect to
face additional competition from participants offering standards-based solutions
such as those offered by us. We also face limited competition in certain market
segments from large companies such as Oracle Corporation, International Business
Machines Corporation, and so-called "Big Five" consulting organizations, with
specialized product or combined product and service offerings. Many of these
competitors have substantially greater development, marketing, sales, and
financial resources than does Inso. We believe that the principal competitive
factors in this market are product quality, scalability, functionality, and
completeness of solution, with price being a secondary factor.
PRODUCT DATA MANAGEMENT PRODUCTS
In December 1998, we acquired all of the outstanding stock of Sherpa Systems
Corporation. (See "Acquisition of Sherpa".) Sherpa is a leading provider of
product data management solutions that manage mission-critical information about
an enterprise's most important assets, its products, through the product
lifecycle process of design, testing, manufacturing, and delivery. Sherpa's
solutions allow customers to administer networks of design centers and
manufacturing sites within a single process that insures quality and design
integrity throughout the production process. Sherpa forms the core of the new
Product Data Management ("PDM") operating segment within Inso.
Our PDM products consist of a line of products designed to meet the needs of
large manufacturers and other businesses that need to efficiently and
effectively manage product-related information and the deployment of that
information in product development, manufacturing, sales, service, and other
departments of their extended enterprises. Our PDM products provide document
management, change control, and workflow functionality, and frequently are
integrated with other software applications in the enterprise, including
Computer Aided Design ("CAD") tools and Manufacturing Resource
Planning/Enterprise Resource Planning (MRP/ERP) systems.
The primary products of the PDM operating segment are the Sherpa Design
Management System ("DMS"), the repository in which product information is
stored, and the applications that interface with that repository. Sherpa DMS is
available on Windows NT and a variety of UNIX platforms. Our latest PDM
applications suite is SherpaWorks 2.0, which is available with either a Windows
client or a Web interface to internet browsers, such as Netscape Navigator and
Microsoft Explorer. Our other application
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interfaces to Sherpa DMS are the Sherpa PIMS toolkit and Sherpa IPD both
available for a variety of UNIX platforms.
RESEARCH AND DEVELOPMENT
PDM operates in an industry that is subject to considerable technological
evolution, and its ability to compete successfully in its markets requires that
it be able to forecast and develop products in anticipation of such change. In
addition, the PDM products are used in mission-critical business processes of
many of the world's largest businesses. Accordingly, we must continue to invest
in our products to improve our scalability and reliability as the scope and
importance of our customers' implementations grows. Our position as an
enterprise software vendor to large enterprises also requires that we constantly
invest in making our products adhere to open standards for communication and
data interchange with other applications. We expect to make significant
investments in 1999 in the SherpaWorks products.
INTELLECTUAL PROPERTY RIGHTS
The PDM operating segment does not have patents on its technologies,
although we do intend to register copyrights to certain of its products on an
ongoing basis. Due to the nature of its business, we believe that the domain
expertise of its personnel and its knowledge of its customers' processes are
more important competitive factors than such intellectual property rights. The
PDM operating segment also licenses database technology from Oracle Corporation,
which is included in its products, and the loss of this license could have a
material adverse effect on our ability to meet our customers' needs.
COMPETITION
Competition in the markets for PDM products is significant. PDM's products
compete with those of a number of other vendors, including an affiliate of SDRC,
Parametric Technology Corporation, and Matrix-One, Inc. In addition, there are a
number of significant enterprise software vendors, including SAP and Oracle
Corporation that are potential entrants into the market currently served by the
PDM operating segment. We believe that the primary competitive factors in PDM's
markets are scalability, configurability, implementation cost, implementation
support, and support for multiple product design environments, with price being
a secondary factor. Most of PDM's competitors have substantially greater
financial, marketing, and sales resources than does Inso.
DYNAMIC DOCUMENT EXCHANGE PRODUCTS
Dynamic Document Exchange ("DDE") products enable users to filter, view,
copy, print, and distribute electronic information over LANs, WANs, and the Web,
regardless of format or structure. These products permit users to access native
documents without the originating application, to convert information from one
format to another, and to publish information on demand to the Web directly from
the original document, without any conversion or transformation.
Our DDE products include our file-viewing and conversion products and our
"on demand" Web publishing products. These products allow organizations to share
documents across networks, intranet, and Internet environments and electronic
mail systems with different applications and operating system platforms. These
products include our Quick View Plus-Registered Trademark- enterprise viewing
product, the Outside In-Registered Trademark- OEM Viewing Technology, and the
Outside In-Registered Trademark- HTML Export OEM product. Quick View Plus
provides businesses and consumers with the ability to view, copy, and print
files originating in more than 250 applications and in disparate operating
system environments. Our Outside In-Registered Trademark- Viewing Technology and
HTML Export OEM products provide file viewing and Web delivery functionality to
software vendors and corporate software developers. During 1998 we released i)
the first version of Outside In-Registered Trademark- Server, an application
that provides systems integrators and corporate developers with the ability to
publish native format types directly to the Web, ii) the first version of the
Outside In OEM Viewing Technology that runs
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on the Windows CE operating system for handheld devices, and iii) a new version
of Quick View Plus, including the version that runs on certain types of UNIX
operating systems. Also during 1998 we began development on a new version of
HTML Export that is intended to support XML output.
The DDE products are marketed worldwide to original equipment manufacturers
("OEMs") of computer hardware, software, and consumer electronics products as
well as directly and indirectly to corporations and government organizations.
The DDE operating segment is served by an OEM sales organization that primarily
sells DDE products and by a dedicated direct sales force. The DDE business also
uses a worldwide network of channel partners to reach the retail and low-volume
market segments. These channel partners are typically responsible for the
manufacturing and distribution of Quick View Plus for retail sale in a
particular geographic region.
On December 22, 1998, we acquired the outstanding stock of Venture Labs,
Inc., owner of Paradigm Development Corporation, a developer of Java-based
document conversion and viewing products. (See "Acquisition of Paradigm".)
Paradigm, which is headquartered in Vancouver, British Columbia, is being
integrated into the DDE operating segment. Paradigm's main product is the
DOQView-TM- Java file filtering and viewing technology for both OEM and direct
corporate use, which will be released in 1999.
RESEARCH AND DEVELOPMENT
Since DDE operates in an industry that changes technology rapidly and has
significant competition, continued product acceptance requires rapid response to
changing technology and market conditions. Product currency, particularly with
respect to new versions of popular desktop products, such as Microsoft Office,
is a requirement of both the OEM and direct markets served by the DDE products.
As a result, the DDE operating segment must continue to invest in rapid support
for new application formats. In addition, the OEM portion of DDE's market
requires that DDE products run on new operating system platforms, such as
Windows CE, and new languages, such as Java, on a continuing basis. Accordingly,
we must continue to invest on an ongoing basis in our products. During 1998, DDE
made significant investments in development related to the creation of a new
product architecture, which is designed to permit rapid response to new
requirements for application format and operating system support. We expect to
continue to make significant investments in 1999 in this new architecture.
INTELLECTUAL PROPERTY RIGHTS
The DDE operating segment does not have patents on its technologies,
although we register copyrights to certain of its products on an ongoing basis.
Due to the nature of its business, we believe that product currency and
timeliness of upgrades and platform support are more important to our
competitive position than are patents or other intellectual property rights.
COMPETITION
Competition in the markets for DDE products is significant. Our viewing and
conversion products and our on demand Web publishing system compete with
offerings from Verity Inc. in the OEM market and from other proprietary file
viewing products. This competition intensified during 1998. We believe that the
principal competitive factors in the direct corporate and government market are
product quality, compatibility with multiple applications and operating systems,
and update frequency, with price being a secondary factor. We believe that the
principal competitive factors in the OEM market for Dynamic Document Exchange
products are price, format and operating system coverage, and ease of
implementation.
LEXICAL AND LINGUISTIC PRODUCTS
Until April 23, 1998, we operated a segment that sold Lexical and Linguistic
products. On April 23, 1998, we sold those assets, including the proofing tools,
reference works, and information management tools products as well as all
customer and supplier agreements related to the products to Lernout &
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Hauspie Speech Products, NV ("Lernout & Hauspie"). Lernout & Hauspie specializes
in the development of linguistic tools for various purposes, including voice
recognition and processing. (See "Sale of Linguistic Assets".)
The products of the Lexical and Linguistic operating segment included
International CorrectSpell-TM-, a spelling correction system;
CorrectText-Registered Trademark- Grammar Correction System, an English grammar
correction technology used in word processors; International ProofReader-TM-, a
multilingual proofreading system available in 10 languages; and the
IntelliScope-Registered Trademark- family of linguistic search and retrieval
tools. Included in the disposition was Level 5 Research, Inc., maker of the
Quest database search product, which had been incorporated into the Lexical and
Linguistic operating segment.
Lexical and Linguistic products were sold almost exclusively on a direct
basis to OEMs to embed in common desktop applications and consumer electronic
devices. Prior to the disposition of the Lexical and Linguistic operating
segment, our OEM sales force sold both Dynamic Document Exchange and Lexical and
Linguistic products.
RESEARCH AND DEVELOPMENT
We operated the Lexical and Linguistic operating segment in two parts of the
software industry: the mature proofing tools and reference works markets that
were not as susceptible to rapid technological change as other parts of the
industry, and the rapidly changing and evolving linguistic search market.
Product development issues in the proofing tools and reference works markets
were focused on platform support and currency with European language changes. In
the linguistic search market, product development issues were predominantly
associated with improving accuracy and speed of retrieval against increasingly
large data collections. Overall, the level of development expenditure required
for Lexical and Linguistic products was lower than that in our current operating
segments. During the period of our ownership in 1998, we did not make
significant investments in new technology initiatives for the Lexical and
Linguistic products.
INTELLECTUAL PROPERTY RIGHTS
The Lexical and Linguistic operating segment obtained, prior to its
disposition, a number of patents on its proofing tools and search technologies,
and registered copyrights to its products on a regular basis. However, it was
our experience that continued improvement of lexical information and ease of
implementation were more important to our competitive position than were
patents, copyrights, and similar intellectual property rights. The Lexical and
Linguistic operating segment licensed significant lexical and linguistic content
from third party suppliers, and these license agreements were very important to
maintaining its competitive position. It was our experience that there were
sufficient potential suppliers of such content, alternative sources were
generally available, and that the Lexical and Linguistic operating segment was
not reliant on any particular vendor.
COMPETITION
During the period of our ownership of the Lexical and Linguistic operating
segment, the most significant competition came from the internal development
capabilities of large OEM customers, such as Microsoft Corporation. We believe
that the principal competitive factors in the markets for our Lexical and
Linguistic products were price, product quality, ease of implementation,
language coverage, and platform support.
RESEARCH AND DEVELOPMENT
During 1998, 1997, and 1996, our expenditures for developing new products
and product enhancements were $24,435,000, $28,449,000, and $18,751,000,
respectively. These expenditures represented 41%, 35%, and 27%, respectively, of
total revenues for those periods. Of these amounts, $4,906,000, $6,355,000,
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and $2,865,000, respectively, were capitalized in accordance with applicable
accounting principles and are subject to amortization over subsequent periods.
The balance was charged as product development expense.
ACQUISITION OF SYNEX
On March 12, 1998, we acquired Synex Information AB, of Stockholm, Sweden,
through a purchase of all the stock of its parent, ViewPort Development AB, for
$2,500,000 using available cash. Synex is the developer of the Synex ViewPort
browser engine and related application development toolkits for the viewing of
SGML information. The transaction was accounted for as a purchase and included
certain technology under research and development, which resulted in a charge to
our consolidated results for the quarter ended March 31, 1998 of $600,000, or
$0.04 per share. (See Note 4 of "Notes to Consolidated Financial Statements" for
additional information with respect to acquisitions.) Synex operates as part of
the Electronic Publishing Solutions business under the Inso name.
ACQUISITION OF MEDIABANK
On August 28, 1998, we acquired the MediaBank Media Asset Management system
and related technologies from Bitstream Inc. for $11,900,000 using available
cash. MediaBank enables workgroup productivity, workflow, and content management
associated with a wide range of media elements, including text, documents,
images, movies, graphics, sounds, and fonts used in the publishing process for
businesses, publishers, and digital service providers. The transaction also
included a license to Bitstream's PageFlex page composition technology for an
additional $600,000. The transaction was accounted for as a purchase and
included certain technology under research and development, which resulted in a
charge to our consolidated results for the quarter ended September 30, 1998 of
$7,500,000, or $0.49 per share. (See Note 4 of "Notes to Consolidated Financial
Statements" for additional information with respect to acquisitions.)
ACQUISITION OF SHERPA
In December 1998, we acquired all of the outstanding stock of privately held
Sherpa Systems Corporation for cash of approximately $28,700,000 and warrants to
purchase 1,456,458 shares of Inso common stock. The warrants have a 24-month
term and the right to purchase shares of common stock at an exercise price of
$23.50 per share. The total consideration paid for the acquisition was
approximately $36,000,000 and it was accounted for as a purchase. The
acquisition included certain technology under research and development, which
resulted in a charge to our consolidated results for the quarter ended December
31, 1998 of $12,000,000, or $0.78 per share. (See Notes 4 and 15 of "Notes to
Consolidated Financial Statements" for additional information with respect to
acquisitions.)
ACQUISITION OF PARADIGM
On December 22, 1998, we acquired Venture Labs Inc. and its subsidiary
Paradigm Development Corporation for $4,800,000 in cash and the assumption of
certain liabilities. The acquisition was financed using available cash.
Paradigm, based in Vancouver, British Columbia, is the developer of the
DOQView-TM- Java file filtering and viewing technology for both OEM and direct
corporate use. The acquisition was accounted for as a purchase, and included
certain technology under research and development, which resulted in a charge to
our consolidated results for the quarter ended December 31, 1998 of $1,800,000,
or $0.12 per share. (See Note 4 of "Notes to Consolidated Financial Statements"
for additional information with respect to acquisitions.) Paradigm operates as
part of the Dynamic Document Exchange segment under the Inso name.
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ACQUISITION OF AIS
On January 12, 1999, we acquired AIS Software S.A. (AIS Software) from
Berger-Levrault S.A., a leading French publisher, for approximately $3,000,000
using available cash. AIS Software, based in Paris, France is the developer of
Balise, an SGML and XML transformation tool and scripting language, as well as
Dual Prism, a Web-based XML and SGML publishing system. (See Note 15 of "Notes
to Consolidated Financial Statements" for additional information.) AIS will
operate as part of the Electronic Publishing Solutions segment under the Inso
name.
SALE OF LINGUISTIC ASSETS
On April 23, 1998, we sold our linguistic software assets to Lernout &
Hauspie Speech Products N.V. for $19,500,000, plus an additional amount for
certain receivables net of certain liabilities. The purchase price was paid 50%
in cash and 50% in the form of a note, which was converted into shares of
Lernout & Hauspie common stock in June 1998. We sold the Lernout & Hauspie
common stock in June 1998. The additional consideration for the other net assets
was paid in cash. Included in the assets transferred to Lernout & Hauspie were
all of Inso's linguistic software products, including its proofing tools,
reference works, and information management tools; the Quest database search
technology acquired with the Level Five Research, Inc. 1997 acquisition, and all
customer and supplier agreements related to those products. In connection with
the sale, we recorded direct transaction costs, costs to write-off capitalized
software and other assets, estimated lease and facility costs, and other
accruals for costs directly associated with the sale. As a result, we reported a
pre-tax gain of $13,289,000.
INTERNATIONAL OPERATIONS
Our international operations primarily support direct and indirect
distribution of products to corporate and governmental customers. We increased
the marketing of our products to customers outside the United States but did not
achieve growth in revenues from foreign customers in 1998. The marketing of
products to customers outside the United States increases the risk to our
revenues associated with fluctuations of the U.S. dollar in relation to foreign
currencies. Such fluctuations could also result in increased operating expenses
associated with foreign operations.
MARKETING, SALES, AND DISTRIBUTION
Our sales and marketing organization, consisting of 274 individuals, is
managed from our headquarters in Boston, Massachusetts, and includes sales
representatives or account managers in several major markets worldwide. Our
corporate and governmental sales efforts are conducted through sales forces
dedicated to each of our product lines, under unified geographic sales
management. We conduct our OEM sales through a dedicated account management
program for large customers and through worldwide new business development
efforts.
Inso, through its various subsidiaries, currently has operations in many
major European countries, as well as in Japan and Australia. These operations
manage sales of our products to end-users directly and through networks of
value-added resellers and distributors, as well as to OEMs. Approximately 24% of
our revenues during 1998 originated with customers outside the United States.
EMPLOYEES
As of December 31, 1998, we had 654 employees, including 277 in research and
development, 274 in sales and marketing, and 103 in financial and administrative
positions.
We believe that our future success will depend in large part upon our
continued ability to recruit and retain highly qualified technical, managerial,
and marketing personnel. To date, we have been successful in
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attracting and retaining skilled employees. None of our employees is represented
by a labor union, and we consider our relationship with our employees to be
satisfactory.
ITEM 2. PROPERTY
Our corporate headquarters is located in Boston, Massachusetts, where we
lease approximately 42,500 square feet of space. This lease term expires
November 30, 2005. The DDE business leases approximately 28,230 square feet of
space in downtown Chicago, Illinois, with a lease term expiring September 2006.
The EPS segment leases approximately 44,300 square feet of space in Providence,
Rhode Island. This lease has a term expiring in January 2007, and includes
options on contiguous space at fixed rate as well as extension provisions. The
PDM segment leases approximately 49,954 square feet of space in Milpitas,
California, with a lease term expiring November 2003, with an option to extend
the term for a period of five years. The DDE segment also leases approximately
15,223 square feet of space in Vancouver, British Columbia, with a lease term
expiring September 2003. We lease an aggregate of approximately 24,000 square
feet of office space in Kansas City, Missouri, and Scottsdale, Arizona for the
DDE segment and in Portland, Oregon, Boulder, Colorado, and Paris, France for
the EPS segment. In addition, we lease office space in the United States and
overseas for our worldwide marketing and sales activities. We do not own any
real property.
We believe that the space currently under lease to us is adequate for our
current needs and that suitable additional or substitute space will be available
as needed to accommodate further physical expansion of our operations and for
additional sales offices.
ITEM 3. LEGAL PROCEEDINGS
During February 1999, certain shareholders of Inso filed seven putative
class action lawsuits against Inso and certain of Inso's officers and employees
in the United States District Court for the District of Massachusetts. The
lawsuits are captioned as follows: MICHAEL ABRAMSKY V. INSO CORPORATION, ET AL.,
Civ. Action No. 99-10193; RICHARD B. DANNENBERG V. INSO CORPORATION, ET AL.,
Civ. Action No. 99-10195; JACK SMITH V. INSO CORPORATION ET AL., Civ. Action No.
99-10208; CHAVY WEISZ V. INSO CORPORATION, ET AL., Civ. Action No. 99-10200;
ROBERT C. KRAUSER V. INSO CORPORATION, ET AL., Civ. Action No. 99-10366;
JEAN-MARIE LARCHEVEQUE V. INSO CORPORATION, ET AL., Civ. Action No. 99-10299;
and THOMAS C. MCGRATH V. INSO CORPORATION, ET AL., Civ. Action No. 99-10389.
These lawsuits were filed following our announcement on February 1, 1999
that we planned to restate our revenues for the first three quarters of 1998.
Each of the complaints assert claims for violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange
Commission as well as a claim for the violation of Section 20(a) of the Exchange
Act. The plaintiffs allege that the defendants prepared and issued deceptive and
materially false and misleading statements to the investing public. They seek
unspecified damages. We have been informed that the plaintiffs will seek to
consolidate the above lawsuits into one consolidated action. We believe the
claims are subject to meritorious defenses, which we plan to assert during the
lawsuit. We cannot predict the ultimate resolution of these actions at this
time, and there can be no assurance that the litigation will not have a material
adverse impact on our financial condition and results of operations.
As soon as we discovered that it could be necessary to restate certain of
our financial results, we immediately and voluntarily provided this information
to the U.S. Securities and Exchange Commission, which is in the process of
conducting an informal inquiry.
We are also subject to various legal proceedings and claims that arise in
the ordinary course of business. We currently believe that resolving these
matters will not have a material adverse impact on our financial condition or
our results of operations.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Paul R. Anderson, who is 39 years old, has been Vice President, General
Manager of Product Data Management since December 1998. He joined Inso in
November 1998 as Vice President, Corporate Development. Prior to joining Inso,
Mr. Anderson held various senior management positions with Adobe Systems
Incorporated, beginning in 1988, most recently as Vice President of Type and
Content Products and Vice President and General Manager of the Publishing
Division.
Bruce G. Hill, who is 35 years old, was Vice President, General Counsel, and
Secretary of Inso from March 1994 until February 1999 and has been Vice
President of Business Development since July 1997. Prior to joining Inso, Mr.
Hill had been an associate attorney specializing in corporate and mergers and
acquisitions matters at the law firm of Skadden, Arps, Slate, Meagher & Flom in
Boston, Massachusetts, from 1988 until March 1994.
Stephen O. Jaeger, who is 54 years old, has been Chief Executive Officer
since the end of March 1999. In mid-March 1999, Mr. Jaeger was elected Chairman
of the Board and continues to serve in that capacity. After a brief period as an
independent consultant, Mr. Jaeger joined privately held PharmaCom Group, Inc.
in February 1999 as a principal, director, and officer. From December 1997 until
October 1998, Mr. Jaeger was Executive Vice President and Chief Financial
Officer and a director at Clinical Communications Group, Inc. From March 1995
until September 1997, Mr. Jaeger served as Vice President and Chief Financial
Officer and Treasurer of The Perkin-Elmer Corporation. Mr. Jaeger was Chief
Financial Officer of Houghton Mifflin Company from 1988 until March 1995.
Kirby A. Mansfield, who is 44 years old, has been President of the Company
since March 1999. From January 1999 through February 1999, Mr. Mansfield was
Executive Vice President of Inso. From July 1997 through December 1998, Mr.
Mansfield was Vice President and General Manager of Inso Boston. From June 1994
through June 1997, Mr. Mansfield was Vice President of Business Development.
From the inception of Inso until June 1994, Mr. Mansfield was Vice President of
Marketing and Business Development. Mr. Mansfield joined Houghton Mifflin
Company in July 1989 initially as a consultant to the Software Division and
subsequently as the Division's Director of Technical Development. Mr. Mansfield
was appointed a Vice President of the Software Division in February 1992 and
became Vice President and Director of Marketing and Business Development of the
Software Division in October 1993.
Graham Marshall, who is 51 years old, has been Vice President, General
Manager of Electronic Publishing Solutions since January 1997. Prior to joining
Inso, Mr. Marshall held various key international electronic publishing
positions within Reed Elsevier beginning in 1981. Mr. Marshall held the
positions of Managing Director of Butterworth Asia from September 1996 to
January 1997, President of Butterworth Legal Publishers from April 1995 to
September 1996, and manager of business units in the United Kingdom, United
States, and Asia from January 1988 to April 1995.
Michael E. Melody, who is 55 years old, has been Vice President, Strategic
Planning and Operations of Inso since January 1997. Mr. Melody was Vice
President and General Manager of Information Products of Inso from March 1996
until January 1997. From October 1994 through February 1996, Mr. Melody was
Principal of Michael E. Melody, Consulting. From October 1990 through September
1994, Mr. Melody was Executive Vice President, College and Software Publishing
of Houghton Mifflin. Prior to joining Houghton Mifflin, Mr. Melody held various
executive positions with Simon & Schuster, Macmillan Publishing Company, and
Prentice-Hall, Inc.
Patricia A. Michaels, who is 32 years old, has been Assistant Vice President
and Corporate Controller of Inso since September 1997. From April 1997 to
September 1997, Ms. Michaels was the Director of
11
<PAGE>
Accounting and Finance. From January 1996 to April 1997, Ms. Michaels was the
Finance Manager. Prior to joining Inso, Ms. Michaels had been employed with
Ernst & Young LLP since 1989.
Scott D. Norder, who is 33 years old, has been Vice President, General
Manager of Dynamic Document Exchange since January 1997. Mr. Norder became Vice
President and General Manager of Inso Chicago in June 1995. Mr. Norder was Vice
President of Engineering for Systems Compatibility Corporation, now Inso
Chicago, from April 1991 to June 1995. Prior to that time Mr. Norder held key
leadership positions within the development organization of Systems
Compatibility Corporation since 1987.
Betty J. Savage, who is 40 years old, has been Vice President, Chief
Financial Officer, and Treasurer of Inso since March 1994. Prior to joining
Inso, Ms. Savage had been employed with Ernst & Young LLP since 1980.
Paul A. Savage, who is 48 years old, has been Vice President of Worldwide
Sales and Service since October 1997. Previously, Mr. Savage was Vice President
of Sales and Service with Inso's Electronic Publishing Solutions group in
Providence, Rhode Island. Prior to joining Inso in October 1996, Mr. Savage
spent more than 17 years at Digital Equipment Corporation. His most recent
assignment at Digital was Director of Worldwide Sales Operations for the Network
and Systems Integration Services business unit.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Inso trades on the Nasdaq National Market of The Nasdaq
Stock Market under the symbol "INSO." The following table sets forth the high
and low sale prices of Inso's common stock for the fiscal periods listed below
as reported on the Nasdaq National Market. Such information reflects interdealer
prices, without retail markup, markdown, or commission, and may not represent
actual transactions.
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
QUARTER ENDED HIGH LOW HIGH LOW
- --------------------------------------------------------------------------- --------- --------- --------- ---------
March 31................................................................... $ 19.25 $ 11.13 $ 43.25 $ 28.50
June 30.................................................................... 21.63 10.63 44.63 17.88
September 30............................................................... 22.25 13.63 21.75 9.88
December 31................................................................ 29.00 15.25 13.63 9.38
</TABLE>
As of March 29, 1999, Inso's common stock was held by 427 holders of record.
Inso has paid no dividends on its common stock since its formation and has no
current plans to do so.
In December 1998 Inso acquired all of the outstanding stock of privately
held Sherpa Systems Corporation ("Sherpa"). In connection with the acquisition,
Inso issued warrants to purchase 1,456,458 of Inso's common stock to the
stockholders of Sherpa. The warrants have a 24-month term and the right to
purchase shares of Inso's common stock at an exercise price of $23.50 per share.
(See Notes 4 and 15 of "Notes to Consolidated Financial Statements" for
additional information.)
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1998(1) 1997(1) 1996(1) 1995(1) 1994
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
Net revenues.......................................... $ 60,094 $ 81,869 $ 70,534 $ 43,387 $ 23,463
Gross profit.......................................... 47,444 72,058 61,362 37,595 20,389
Restructuring expenses................................ 0 5,848 0 0 0
Purchased in-process research and development......... 21,900 6,100 38,700 5,500 0
Total operating expenses (3).......................... 86,019 73,930 75,439 26,017 11,856
Operating (loss) income............................... (38,575) (1,872) (14,077) 11,578 8,533
Gain on sale of linguistic software net assets (2).... 13,289 0 0 0 0
(Loss) income before provision for income taxes....... (20,604) 2,504 (11,073) 13,046 8,852
Provision for income taxes............................ (1,035) 2,944 10,207 7,052 3,189
Net (loss) income (2,3)............................... (19,569) (440) (21,280) 5,994 5,663
(Loss) earnings per common share...................... $ (1.30) $ (0.03) $ (1.61) $ .49 $ . 49
(Loss) earnings per common share-assuming dilution.... $ (1.30) $ (0.03) $ (1.61) $ .49 $ .48
</TABLE>
13
<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ------------------------------------------------------ -------------- --------- --------- --------- ---------
Working capital....................................... $ 42,277 $ 85,558 $ 84,261 $ 55,460 $ 15,522
Deferred income tax benefit, net...................... 0 5,917 4,930 3,847 4,175
Total assets.......................................... 163,219 138,083 136,272 91,129 33,494
Long-term debt........................................ 450 0 0 0 0
Stockholders' equity.................................. 109,174 115,478 113,413 75,163 27,614
</TABLE>
(1) Inso's 1995 results include the operations of Systems Compatibility
Corporation since its acquisition on April 1, 1995. Inso's 1996 results
include the operations of Electronic Book Technologies, Inc. and ImageMark
Software Labs since their acquisition dates of July 16, 1996 and January 9,
1996, respectively. Inso's 1997 results include the operations of
Mastersoft, Level Five Research, Inc., and Henderson Software, Inc. since
their acquisition dates of February 6, 1997, April 22, 1997, and November
24, 1997, respectively. Level Five Research, Inc. was subsequently sold on
April 23, 1998. Inso's 1998 results include the operations of ViewPort
Development AB, MediaBank, Sherpa Systems Corporation, and Venture Labs,
Inc. since their acquisitions dates of March 12, 1998, August 28, 1998,
December 4, 1998 and December 22, 1998, respectively. (See Notes 4 and 15 of
"Notes to Consolidated Financial Statements".)
(2) Inso's 1998 results include a gain of $13,289,000 on the sale of Inso's
linguistic software net assets to Lernout & Hauspie Speech Products N.V. on
April 23, 1998. (See Note 5 of "Notes to Consolidated Financial
Statements").
(3) Inso's 1998 results include a charge of $4,000,000 relating to an
international distributor relationship (See Note 13 of "Notes to
Consolidated Financial Statements").
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
We derive our revenues primarily from one-time and annual licenses with
corporate, government, and OEM customers and channel-partners; software
maintenance fees from site-license agreements with corporate and government
customers; one-time fees for direct licenses to consumers; and royalties,
including initial nonrefundable royalties, from license arrangements with
channel-partners and OEMs. Revenues from site-license agreements generally
consist of a one-time license fee based on the number of individual users
licensed or an annual distribution license fee based on the extent of the
customer's distribution. For each site license agreement, an annual software
maintenance fee is calculated based upon a percentage of the one-time or annual
license fee. Payment of the maintenance fee permits customers to receive updates
and enhancements to the software licensed for the duration of the maintenance
agreement. Royalty revenues are earned in one of the following ways: as a
percentage of net revenues from product unit sales by licensees that incorporate
our products, as a fixed per-unit royalty, or as a regular periodic fee based on
estimated shipments or usage over time.
We generate a significant portion of our revenue from customers outside the
United States. Such revenues totaled 24%, 21%, and 22% of total net revenue for
the years ended December 31, 1998, 1997, and 1996, respectively. We expect that
the international market will continue to account for a significant portion of
our total business. Our export revenues are transacted primarily in U.S.
dollars. Therefore, we believe that we are not exposed to significant risk with
respect to changing currency exchange rates in connection with our business with
international customers. We generally denominate the prices for our corporate
and end-user products sold internationally in U.S. dollars. Business with
overseas end-users may
14
<PAGE>
be subject to greater currency exchange rate risk in the future. (See "Certain
Factors that May Affect Future Operating Results.")
Cost of revenues primarily comprises the amortization of capitalized product
development costs and certain assets from acquisitions and license agreements
described in Note 4 of the "Notes to Consolidated Financial Statements"; royalty
expense for the licensing of technology; fulfillment; and service and support
costs. The level of amortization expense of capitalized product development
costs is directly related to the amount of product development costs capitalized
in each year and the time frame in which a specific product is made available
for general release to customers.
The following table sets forth, for the periods indicated, certain income
statement data expressed as a percentage of revenues.
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
------------------
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Net revenues........................................................................................ 100% 100% 100%
Cost of revenues.................................................................................... 21 12 13
---- ---- ----
Gross profit...................................................................................... 79 88 87
Operating expenses:
Sales and marketing............................................................................... 46 29 16
Product development............................................................................... 33 27 23
General and administrative........................................................................ 26 18 12
Amortization of intangible assets................................................................. 3 2 1
Restructuring expenses............................................................................ -- 7 --
Purchased in-process research and development....................................................... 36 7 55
---- ---- ----
Total operating expenses............................................................................ 144 90 107
Operating loss...................................................................................... (65) (2) (20)
Net investment income............................................................................. 8 5 4
Gain on sale of linguistic software net assets.................................................... 22 -- --
---- ---- ----
(Loss) income before provision for income taxes..................................................... (35) 3 (16)
(Benefit) provision for income taxes................................................................ (2) 4 14
---- ---- ----
Net loss............................................................................................ (33)% (1)% (30)%
---- ---- ----
---- ---- ----
</TABLE>
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues for 1998 decreased $21,775,000, or 27%, to $60,094,000 compared to
$81,869,000 for 1997. On April 23, 1998, we sold our linguistic software assets
to Lernout & Hauspie Speech Products N.V. ("Lernout & Hauspie) for $19,500,000,
plus an additional amount for certain receivables net of certain liabilities.
Excluding the revenues associated with the assets sold to Lernout & Hauspie, net
revenues increased approximately 11% to $53,116,000 for 1998 compared to
$47,818,000 for 1997. Excluding the revenues associated with the assets sold to
Lernout & Hauspie, revenues from direct and indirect product licenses to
corporations and other end-users represented approximately 42% of the revenue
total for 1998. Of the total revenues in 1998, approximately 11% were revenues
from the acquisitions of Sherpa Systems Corporation, Paradigm Development
Corporation, MediaBank, and ViewPort Development. Net revenues declined in 1998
over 1997 also as a result of an increase of $2,147,000 in returns, refunds, and
allowances. Revenues from product licenses in 1998 decreased $24,902,000, or
32%, to $51,758,000 compared to $76,660,000 for 1997. The decline was mainly due
to the sale of our linguistic assets to Lernout and
15
<PAGE>
Hauspie as noted above as well as a decline in revenue from our Dynamic Document
Exchange operating segment. Service revenues in 1998 increased $3,127,000, or
60%, to $8,336,000 compared to $5,209,000 for 1997. The increase was mainly due
to an increase in maintenance support and consulting sold with our product
offerings as well as added service revenues from the acquisition of the Product
Data Management segment in December 1998.
Revenues from the Dynamic Document Exchange segment declined by
approximately 9% from $31,362,000 in 1997 to $28,585,000 in 1998. The decline
was mainly due to lower sales of Quick View Plus as we exited our retail
business and experienced lower volume with corporate customers. Revenues from
the Electronic Publishing Solutions and Product Data Management segments
increased 49% from $16,441,000 in 1997 to $24,557,000 in 1998. The increase was
primarily related to our DynaBase product that was launched at the end of 1997
as well as the addition of the PDM products in December 1998. Revenues from the
Lexical and Linguistic segment declined by $27,114,000 from $34,066,000 in 1997
to $6,952,000 in 1998 as a result of the sale to Lernout & Hauspie mentioned
above.
Gross profit decreased $24,614,000, or 34%, from $72,058,000 for 1997 to
$47,444,000 for 1998. Excluding the gross profit associated with the assets sold
to Lernout & Hauspie, gross profit decreased $172,000, or less than 1%, to
$41,385,000 for 1998 from $41,557,000 for 1997. Gross profit as a percentage of
revenues, excluding the gross profit associated with the assets sold to Lernout
& Hauspie, was 78% for 1998 compared to 87% for 1997. The decrease in the gross
margin from 1998 to 1997 was primarily due to an increase in amortization
expense for capitalized software in 1998 as well as amortization related to
certain customer licenses acquired through the acquisition of Sherpa Systems
Corporation of $1,055,000. Additionally, the cost to provide service revenue
increased at a faster rate than the associated revenue thereby contributing to
the decline in the gross margin percentage.
Total operating expenses increased $12,089,000 to $86,019,000 for 1998 from
$73,930,000 for 1997. Included in the total operating expenses for 1998 were
acquisition charges of $21,900,000 for certain purchased technology under
research and development by Sherpa Systems Corporation, Paradigm Development
Corporation, MediaBank media asset management system and ViewPort Development AB
at the time of the 1998 acquisitions. Included in total operating expenses for
1997 were acquisition charges of $6,100,000 for certain purchased technology
under research and development by Level Five Research, Inc., Henderson Software,
and Mastersoft products and technologies at the time of the 1997 acquisitions
and restructuring expenses of $5,848,000 relating to our Information Products
and certain of the Information Management Tools product lines. Excluding the
1998 and 1997 aforementioned special charges as well as the operating expenses
associated with the assets sold to Lernout & Hauspie, operating expenses
increased $10,137,000, or 20%, to $61,556,000 for 1998 compared to $51,419,000
for 1997.
Sales and marketing expenses consist primarily of salaries, commissions, and
bonuses for sales and marketing personnel and promotional expenses. Sales and
marketing expenses increased $3,915,000, or 17%, to $27,463,000 for 1998 from
$23,548,000 for 1997. Excluding the sales and marketing expenses associated with
the assets sold to Lernout & Hauspie, sales and marketing expenses increased
$4,516,000, or 20%, for 1998 compared to 1997. The increase was primarily the
result of costs relating to the reorganization of the sales and marketing
departments as well as a charge of $4,000,000 related to an international
distributor. During 1998, we entered into an international distribution
agreement that provided the distributor with guaranteed levels of net receipts,
as defined by the agreement, of $2,000,000 for each year ended December 31, 1999
and 2000. As of December 31, 1998, we believe that the distributor will not be
able to achieve defined net receipts in either year. Therefore, the Company
recorded a charge to sales and marketing expenses of $4,000,000. Excluding the
sales and marketing expenses associated with the assets sold to Lernout &
Hauspie, sales and marketing expenses were 51% of revenues for 1998 compared to
47% for 1997. The increase in sales and marketing expenses as a percentage of
revenues was primarily due to the aforementioned distributor charge.
16
<PAGE>
Product development costs consist primarily of personnel costs and, to a
lesser extent, fees paid for outside software development and consulting
services. Product development expenses decreased $2,565,000, or 12%, from
$22,094,000 for 1997 to $19,529,000 for 1998. Excluding the product development
expenses associated with the assets sold to Lernout & Hauspie, product
development costs increased by $3,956,000, or 28%, for 1998 compared to 1997.
The increase was primarily due to lower capitalized costs in 1998 due to the
release of DynaBase product at the end of 1997 as well as additional development
expenses for the 1998 acquisitions. Our product development costs, excluding the
product development expenses associated with the assets sold to Lernout &
Hauspie, were 34% of revenues for 1998 compared to 29% of revenues for 1997.
General and administrative expenses increased $718,000, or 5%, from
$14,868,000 in 1997 to $15,586,000 for 1998. Excluding the administrative
expenses associated with the assets sold to Lernout & Hauspie, general and
administrative expenses increased $1,596,000, or 12%, for 1998 compared to 1997.
The increase in general and administrative expenses was primarily due to
increases in personnel costs and facilities costs. General and administrative
expenses, excluding the expenses associated with the assets sold to Lernout &
Hauspie, were 28% of revenues for 1998 and 1997.
As a result of the current year operating loss, we have recorded a benefit
for net operating loss carrybacks for taxes paid in the prior years but have
provided a full valuation allowance on our net operating loss carryforwards and
other deferred tax assets in excess of deferred tax liabilities. In 1997, our
effective tax rate was influenced by in-process research and development charges
of $6,100,000 as discussed above.
Excluding the $13,289,000, or $0.85 per share, gain on sale of the assets
sold to Lernout & Hauspie and the $21,900,000, or $1.43 per share, write-off
related to the Paradigm Development Corporation, Sherpa Systems Corporation,
MediaBank, and ViewPort Development AB in-process research and development
charges, net loss and loss per share for 1998 would have been $10,958,000 and
$0.73 per share, respectively. Excluding the 1997 $6,100,000, or $0.43 per
share, Level Five Research, Inc., Henderson Software, Inc., and Mastersoft
products and technologies purchased in process research and development charge
and restructuring expenses of $3,684,000, net of income taxes, or $0.26 per
share, relating to our Information Products and certain of our Information
Management Tools products, net income and earnings per share for 1997 would have
been $9,344,000 and $0.64 respectively.
We adopted the straight-line depreciation method for all equipment placed in
service on or after January 1, 1998. The equipment under the straight-line
method is being depreciated over the estimated useful life of the assets,
generally three to five years. We believe that the straight-line method of
depreciation provides a preferable matching between expected productivity and
cost allocation since the equipment's operating capacity and consumption
generally remains consistent over time. The change in depreciation methods was
not material to our operating results or our financial position.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for 1997 increased $11,335,000, or 16%, to $81,869,000 compared to
$70,534,000 for 1996. Approximately 4% of revenues in 1997 included revenues
from the acquisitions of Mastersoft, Level Five Research, Inc., and Henderson
Software, Inc. Direct, distribution, and retail sales of products such as Quick
View Plus and DynaText significantly contributed to the increase in revenues
during 1997 as compared to 1996, resulting in direct, distribution, and retail
product licenses representing 30% of total revenues. Revenues from product
licenses in 1997 increased $8,864,000, or 13%, to $76,660,000 compared to
$67,796,000 for 1996. This increase was mainly due to the growth in Quick View
Plus and DynaText revenue as noted above. Service revenues for 1997 increased
$2,471,000, or 90%, to $5,209,000 compared to $2,738,000 for 1996. The increase
was mainly due to an increase in maintenance support and consulting sold with
our product offerings. Hewlett Packard, Lucent Technologies, and Banque Paribas
were among the licensees who entered into site license agreements with us for
Quick View Plus during 1997. American
17
<PAGE>
Honda Motor Company licensed DynaText and Siemens Nixdorf licensed both
DynaText-Registered Trademark- and DynaWeb-Registered Trademark-. Non-refundable
royalty advances and royalty revenues for 1997 decreased 9% as compared to the
same period in 1996. Non-refundable royalty advances and royalty revenues were
both affected in 1997 by weakness in the OEM markets served by certain Lexical
and Linguistic products of Inso as well as a decline
in royalty revenues from Microsoft Corporation.
Revenues from the Dynamic Document Exchange segment increased 37% from
$22,898,000 in 1996 to $31,362,000 in 1997. The increase relates mainly to sales
of Quick View Plus to corporate customers. Revenues from the Electronic
Publishing Solutions segment increased 182% from $5,834,000 in 1996 to
$16,441,000 in 1997. The products comprising the EPS segment were originally
acquired in July 1996.
Gross profit increased $10,696,000, or 17%, from $61,362,000 in 1996 to
$72,058,000 in 1997. Gross profit as a percentage of revenues for 1997 were 88%
compared to 87% for 1996. The increase in gross profit percentage was primarily
attributable to higher revenues from Quick View Plus, Outside In, DynaText, and
Mastersoft's Viewer 95, which carry lower royalty burdens.
Total operating expenses decreased $1,509,000 to $73,930,000 in 1997 from
$75,439,000 in 1996. Included in total operating expenses for 1997 were
acquisition charges of $6,100,000 for certain purchased technology under
research and development by Mastersoft, Level Five Research, Inc., and Henderson
Software, Inc. at the time of their 1997 acquisitions. Also included in the
total operating expenses for 1997 were restructuring expenses of $5,848,000
relating to certain of our Lexical and Linguistic products. Included in total
operating expenses for 1996 were acquisition charges of $38,700,000 for certain
purchased technology under research and development by Electronic Book
Technologies, Inc. and ImageMark Software Labs, Inc. at the time of their 1996
acquisitions. The decline in non-refundable royalty advances and royalty
revenues as discussed above affected our 1997 operating expenses as a percent of
revenue.
Sales and marketing expenses consist primarily of salaries, commissions, and
bonuses for sales and marketing personnel and promotional expenses. Sales and
marketing expenses increased $12,487,000 to $23,548,000 for 1997 from
$11,061,000 for 1996. The increase reflected increased costs for staff
additions, emphasis on new markets (corporate and consumer), new expenses from
acquired companies, and higher commissions due to increased revenues. During
1997, these expenses also included certain one-time charges related to the
reorganization of the sales and marketing departments. Sales and marketing
expenses were 29% of revenues for 1997 compared to 16% for 1996.
Product development costs consist primarily of personnel costs and, to a
lesser extent, fees paid for outside software development and consulting
services. Product development expenses increased $6,208,000 from $15,886,000 for
1996 to $22,094,000 for 1997. The increase in product development costs was
primarily due to our investments in viewing, conversion and other information
sharing, publishing, and distribution products. Examples of these products
included DynaBase, DynaText, Outside In HTML Export, and DynaWeb-Registered
Trademark-. Our total product development costs, including capitalized costs,
were $28,449,000, or 35% of revenues, for 1997 compared to $18,751,000, or 27%
of revenues, for 1996.
General and administrative expenses increased $6,058,000 to $14,868,000 for
1997 compared to $8,810,000 for 1996. The increase in general and administrative
expenses was primarily due to increases in personnel and general expenses
required to support the growth in our operations. General and administrative
expenses increased as a percentage of revenues to 18% for 1997 compared to 12%
for 1996.
The acquisitions of Mastersoft, Level Five Research, Inc., and Henderson
Software, Inc., included the purchase of certain technology under research and
development, which resulted in charges to our 1997 consolidated results of
$6,100,000, or $0.43 per share.
In June 1997, we adopted a plan of restructuring aimed at a continuing focus
on strategic products while reducing costs and streamlining the organization. As
part of the restructuring, we substantially reduced our spending on products in
slower growing markets and redirected our resources to those products with
larger market opportunities. The plan primarily affected certain Lexical and
Linguistic
18
<PAGE>
products. As a result of the restructuring plan, we recorded $5,848,000 of
expenses. The charge included $320,000 of severance for 17 employees in
development; $315,000 of estimated lease obligations, net of estimated sublease
income, for the impact of affected leases; $3,353,000 for the write-off of
capitalized software and other assets; and $1,860,000 for the write-off of
prepaid royalties. As of December 31, 1998, there were no remaining liabilities
accrued.
In 1997 our effective tax rate was influenced by acquisitions, tax planning
initiatives, and certain income tax accruals. Excluding the related income tax
impact, our effective tax rate for 1997 was 34% compared to 37% in 1996,
excluding the 1996 charge for purchased in-process research and development.
Excluding the $6,100,000, or $0.43 per share, Mastersoft, Level Five
Research, Inc., and Henderson Software Inc., purchased in-process research and
development charges and restructuring expenses of $5,848,000, or $0.26 per
share, net income and earnings per share for 1997 would have been $9,344,000 and
$0.64, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our operating activities provided cash of $2,614,000, $19,413,000, and
$17,452,000 for 1998, 1997, and 1996, respectively. The decreased contribution
from operating activities of $16,799,000 from 1998 to 1997 was primarily due to
the overall lower level of earnings in 1998. During 1998, we entered into a
distribution agreement with an international distributor that guaranteed certain
levels of net receipts, as defined by the agreement, for specified geographic
areas (primarily Australia, New Zealand, and certain countries in the Far East).
As of December 31, 1998, we believe that the distributor will be not able to
achieve defined net receipts from the agreement territory. Therefore, we
recorded obligations of $4,000,000 relating to the guarantees.
Our investing activities used cash of $20,724,000, $36,886,000, and
$70,265,000 in 1998, 1997, and 1996, respectively. The decrease of $16,162,000
from 1997 to 1998 was due to the 1998 proceeds of $19,853,000 received from
Lernout & Hauspie for the sale of our linguistic software assets, a decrease in
capitalized product development costs of $1,449,000, and a decline in net
purchases of marketable securities of $25,863,000 offset by an increase in
acquisition activity of $33,208,000. The acquisitions of Paradigm Development
Corporation, Sherpa Systems Corporation, MediaBank, and ViewPort Development AB
were all paid for using available cash. The investing activity in 1998 also
included the payment of $1,467,000 to the former principal stockholder of Inso
Providence.
In December 1998, we acquired all of the outstanding stock of privately held
Sherpa Systems Corporation for total consideration paid of $36,000,000
consisting of $28,700,000 of available cash ($1,800,000, which has been accrued
for at December 31, 1998) and warrants to purchase 1,456,458 shares of common
stock. The warrants at the time of the acquisition were valued at $5.00 per
warrant, or $7,282,000. The warrants have a 24-month term and the right to
purchase shares of the Company's common stock at an exercise price of $23.50 per
share. In January 1999, we paid $1,800,000 of the remaining proceeds for the
Sherpa acquisition. At the time of the acquisition, we also caused Sherpa to
enter into employment and noncompetition agreements with key executives. We will
make aggregate payments of approximately $1,600,000 over the next three years
under those agreements.
On February 1, 1999, we announced that we would restate our financial
results for the quarters ended March 31, June 30 and September 30, 1998,
respectively. Subsequent to the announcement, we initiated discussions with
warrant holders to reprice the warrants or exchange them for cash with the
objective of meeting the intention of the original agreement.
The Sherpa acquisition also included estimated costs of approximately
$5,800,000 for direct transaction costs and costs relating to the elimination of
excess and duplicative activities as a result of the merger. As of December 31,
1998, all of the estimated costs of $5,800,000 were included in accrued
acquisition related liabilities on the related balance sheet. During 1999,
payments against the accruals are expected to
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include severance for elimination of duplicate functions and closure of
duplicate and excess operations; cancellation of facility leases and other
contracts for closed operations; professional fees consisting principally of
appraisal, legal, and accounting fees; and other out of pocket expenses related
to the acquisition. Employee terminations are expected to be in the areas of
sales, marketing, and administrative functions. A majority of the payments
relating to the accrual are expected to be made during 1999.
On January 12, 1999, we acquired all of the outstanding common stock of
privately held AIS Software S.A. for approximately $3,000,000 using available
cash.
Our financing activities provided cash of $9,100,000, $1,705,000, and
$49,858,000 in 1998, 1997, and 1996, respectively. The increase from 1997 to
1998 relates to an increase in the proceeds received from stock option exercises
and proceeds from repayment of notes receivable underlying stock purchase
agreements. Also, in December 1998, we repaid $3,784,000 of indebtedness assumed
during the acquisitions of Sherpa Systems Corporation and Venture Labs, Inc. In
November 1996, we completed a public offering of 1,200,000 shares of common
stock, which provided net proceeds of approximately $56,444,000. On February 1,
1996, we repaid the outstanding promissory notes of $6,037,000 issued in
connection with the acquisition of Inso Chicago. As of December 31, 1998, we had
obligations of $450,000 relating to capital leases.
As a result of our February 1, 1999 announcement as mentioned above, certain
class action lawsuits were filed against Inso and certain of our officers and
employees in the U.S. District Court in Massachusetts claiming violations of the
federal securities laws based on alleged misrepresentations regarding Inso's
revenue and earnings for the first three quarters of fiscal 1998. These actions
seek unspecified damages. We believe the claims are subject to meritorious
defenses, which we plan to assert during the lawsuit. We cannot predict the
ultimate resolution of these actions at this time, and there can be no assurance
that the litigation will not have a material adverse impact on our financial
condition and results of operations.
While it is not feasible to predict the total costs, we expect to incur
significant professional fees in connection with the investigation of the
accounting errors and irregularities that led to our restatement of financial
results for the quarters ended March 31, June 30, and September 30, 1998 as well
as fees with respect to the shareholder litigation filed against us subsequent
to our announcement of the restatement.
We are presently evaluating our organizational and operating structure. The
result of this review could result in changes to our operations, the outcome of
which cannot be predicted at this time.
As of December 31, 1998, we had working capital of $42,277,000. Cash, cash
equivalents, and marketable securities as of December 31, 1998 totaled
$60,583,000, which includes restricted marketable securities of $6,526,000
supporting outstanding letters of credit. (See Note 13 of "Notes to Consolidated
Financial Statements".) We believe that current funds and funds expected to be
generated from operations will be sufficient to finance our operations through
the foreseeable future.
When acquired on December 4, 1998, Sherpa had a line of credit with a bank,
which provided for borrowings based on eligible accounts receivable, up to a
maximum of $5,000,000 with interest therein at the bank's prime rate. This line
of credit facility had a termination date of February 28, 1999. At December 31,
1998, we had no borrowings under this agreement and have no plans to renew the
line of credit.
In November 1998, the Board of Directors approved a change in our fiscal
year to February 1 through January 31, effective for the twelve-month period
ending January 31, 2000. Through December 31, 1998, we reported results on a
calendar year basis.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities" effective for fiscal years beginning after
June 15, 1999. SFAS 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. We do not
believe that this standard will have a material impact on our results.
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In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-9 (SOP
98-9) "Modification of SOP 97-2, Software Revenue Recognition with respect to
Certain Transactions" effective for fiscal years beginning after March 15, 1999.
SOP 98-9 defines vendor specific objective evidence of fair value in connection
with software revenue recognition. The adoption of SOP 98-9 is not expected to
have a material impact on our financial position or results of operations.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
Our 1998 acquisitions included certain material purchased in-process
research and development charges for Venture Labs Inc, Sherpa Systems
Corporation, and MediaBank totaling $21,300,000. These amounts were expensed as
non-recurring charges on the respective acquisition dates as the acquired
technology had not yet reached technological feasibility and therefore had no
alternative future uses. We engaged an independent appraiser to estimate the
fair market value of the assets acquired, to serve as a basis for the allocation
of the purchase price.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification, and testing
activities necessary to establish that the product can be produced to meet its
design specifications, including functions, features, and technical performance
requirements.
The values of the purchased in-process research and development were based
upon future revenues to be earned upon commercialization of the products. These
cash flows were discounted back to their net present value. The resulting
projected net cash flows from such projects were based on management's estimates
of revenues and operating profits related to such projects. The revenue
estimates used to value the in-process research and development were based on
estimates of relevant market sizes and growth factors, expected trends in the
related technology, and the nature and expected timing of new product
introductions by us and our competitors.
The projected net cash flows were discounted to their present value using
the weighted average cost of capital (WACC). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on required rates of return from investments in various areas of the
enterprise. The WACC used in the projections ranged from 23% to 35%.
The estimates used in valuing the in-process research and development were
based upon assumptions we believe to be reasonable but which are inherently
uncertain and unpredictable. Our assumptions may be incomplete or inaccurate,
and no assurance can be given that unanticipated events and circumstances will
not occur. Accordingly, actual results may vary from the projected results. Any
such variances may adversely affect the sales and profitability of future
periods. Additionally, the value of other intangible assets recorded at the time
of the respective acquisitions may become impaired.
VENTURE LABS, INC.
The primary purchased in-process technology acquired in the Venture Labs,
Inc. acquisition were the Java filtering and viewing projects. These were
divided into three projects. DOQKit is a software developers kit written in Java
that permits the incorporation of file viewers and filters into Java
applications. DOQView Server is a Java plug-in that permits documents to be
converted from their formats into HTML "on the fly" and on demand. DOQView is a
document viewing application that primarily allows users of computers using
UNIX-based operating systems to view Microsoft Office documents without the
native Windows application. We estimate that each of these projects was between
75% and 85% complete at the date of the Venture Labs, Inc. acquisition. We
currently estimate that the costs to develop the in-process technology acquired
in the Venture Labs, Inc. acquisition will be approximately $750,000 in fiscal
year 2000.
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SHERPA SYSTEMS CORPORATION
The primary purchased in-process technology acquired in the Sherpa Systems
Corporation acquisition was the SherpaWorks Version 3.0 product. This technology
is planned to implement a three tier architecture which will provide
out-of-the-box, configurable Product Data Management systems that are easy to
use and that support open standards based interfaces. SherpaWorks 3.0 is
expected to provide an open User Interface framework that allows application
developers to implement an application or user role specific interface. We
estimate that this project was approximately 85% complete at the date of the
Sherpa acquisition. Additionally, we estimate that $2,000,000 will be required
to be expended in fiscal year 2000 to complete the remaining development of this
product.
MEDIABANK
The primary purchased in-process technology acquired in the MediaBank
acquisition was the new digital asset management products, which were divided
into two projects. The first project was a media asset management technology
that provides support for standard query language (SQL) databases, such as
Oracle 7 and Microsoft's SQL Server. In addition, this project also provides
server capabilities that allow users to manage and retrieve assets stored in the
asset management systems through a standard Web browser. We estimate that this
project was 85% complete at the time of the MediaBank acquisition.
The second project provides content management capabilities based on the
contents of text embedded in popular text formats which are stored in the
database. In addition, the second project provides support for DB2, a popular
relational database developed by IBM, and IBM's Digital Library product. We
estimate that this project was 30% complete at the time of the MediaBank
acquisition. We currently estimate that the costs to develop the in-process
technology acquired in the MediaBank acquisition will be approximately
$2,000,000 in fiscal year 2000.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT--1997 AND 1996
In connection with our acquisitions of Henderson Software, Inc., Level Five
Research, Inc., and Adobe Systems Inc.'s Mastersoft business during 1997, we
purchased certain technology under research and development totaling $6,100,000.
In connection with our acquisitions of Electronic Book Technologies, Inc. and
ImageMark Software Labs, Inc. during 1996, we purchased certain technology under
research and development totaling $38,700,000. These amounts were expensed as
non-recurring charges on the respective acquisition dates as the acquired
technology had not yet reached technological feasibility, and therefore, had no
alternative future uses. We engaged an independent appraiser to estimate the
fair market value of the assets acquired, to serve as a basis for the allocation
of the purchase price.
The nature of the efforts required to develop the purchase in-process
technology into commercially viable products was substantially completed as of
December 31, 1998. As such, no significant costs remain.
YEAR 2000
Many components of computers and the programs that run on them were designed
with attention to only the last two digits of the calendar year. Any equipment
or program recognizing only two digits may recognize a date using 00 as the year
1900 rather than the year 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Year
2000 issue creates risk for us from unforeseen problems in our products or our
own computer systems and from third parties with whom we transact business
worldwide. Failure of Year 2000 defects in our and/or third parties' computer
systems or Year 2000 defects in our products could have a material impact on our
ability to conduct our business.
In late 1997, we commenced a phased Year 2000 Compliance Plan (the "Plan")
to assess, remediate, test, and implement plans for all applications and
products potentially affected by the Year 2000 issue. To
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accelerate overall completion, Plan activities are often concurrent rather than
serial, but all phases are expected to be completed by mid 1999. Specifically,
the Plan addresses the software we sell and all software on which it depends,
the hardware, operating systems and software on which we run our business and
the third party services on which we also depend. Our costs to date have not
been material to our operations and total costs of implementing the Plan are not
expected to be material to our fiscal year 2000 results. However, there can be
no assurances that we will not incur material costs related to the Year 2000
issue, nor that our Y2000 Compliance Plan will detect all potential Year 2000
issues. Internal staff are the primary resources working on the Plan, although
we do not anticipate having to defer any other IT projects in our effort to
become Y2000 compliant. We expect to fund the cost of completing the Plan
through our operating cash flows.
INSO PRODUCTS
In addition, the Year 2000 issue could affect the products that we license.
All Inso products have been tested for Year 2000 compliance. Additionally, we
have completed our assessment of the products, which we license as components of
products that we sell. The product compliance statements are listed on our
Website, and where necessary, we are in the process of informing customers of
the proper migration path to Year 2000 compliant versions. Our most important
products are not considered date dependent and any work to bring the current
versions of these products to Year 2000 compliance has been incorporated into
the normal update cycle. The cost of this effort and the projected completion
costs have not been material.
INSO INTERNAL SYSTEMS AND FACILITIES
We have inventoried hardware and software on which we develop our products
and run our internal systems. All inventoried items have been categorized as
compliant, compliant with patches, or not compliant. We have begun addressing
the items in the compliant with patches category; schedules are in place to
upgrade these items. In some cases, we are dependent upon vendors completing
their patches to meet our mid-1999 targeted completion date for correcting these
items. We have scheduled retirement and/or replacement of non-compliant items.
The cost of this effort and the projected completion costs have not been
material. However, we may experience material unanticipated problems and costs
by undetected errors of technology used in our internal IT and non-IT systems.
We have contacted all utility and facilities vendors on which we depend.
These vendors have provided compliance statements certifying that they will be
year 2000 compliant by the end of 1999. We acknowledge that we are vulnerable,
as are most organizations, to the inability of these external organizations to
achieve Year 2000 readiness.
CONTINGENCY PLAN
Our technical support group and our professional services group will be made
available to resolve any product issues that may arise. Our information systems
group is developing a comprehensive checklist to verify internal and external
systems. There can be no assurance that our contingency plans will adequately
address all Year 2000 issues that may arise. The most reasonable worst case
scenario has not been clearly identified.
Inso management believes that an effective program to resolve the Year 2000
issue in a timely manner is in place. As noted above, we have not completed all
phases of the Year 2000 Compliance Plan. Based upon current information, we
believe that the correction of the Year 2000 issues should not have a material
adverse effect on our financial position or results of operations. However,
there can be no assurances that we will not incur material costs related to the
Year 2000 issue.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In 1998, we received the majority of our revenues from direct and indirect
sales efforts aimed at corporations and government agencies. The marketing and
distribution of products to these markets, either by Inso or by value-added
resellers or distributors, required higher sales and marketing expenditures as a
percentage of revenues than the OEM distribution channel which we used
previously, and were higher than comparable industry averages, which reduced our
operating margins. We intend to maintain corporate and government sales
activities through continuing direct sales efforts and the marketing of new
solutions for enterprise use. This could burden our level of sales and marketing
expenditures relative to revenues, which could lower our operating margins in
future periods. Additionally, the recent sales force reorganization leaves us
with a number of key positions vacant, especially, in international sales
management. Even with an all-out recruitment effort, we expect that
international sales will be adversely affected during at least the first two
quarters of 1999.
Our ability to remain competitive in the computer software industry is
dependent on the services of a number of key management and technical personnel,
principally software engineers. Personnel costs for technical staff represent a
significant portion of our operating expenses, and increased competition and
related personnel cost increases for such staff could have a material adverse
impact on our operating results. Additionally, because of the recent drop in
Inso's stock price we may need to use larger amounts of cash to compensate our
employees, rather than the equity incentives we have relied on in prior periods.
This could result in reduced operating margins as a result of higher personnel
costs.
We operate in distinct markets. The Product Data Management and Electronic
Publishing Solutions operating segments derive the majority of their revenues
from the market for enterprise software applications and solutions. This market
tends to be dominated by very large entities, such as SAP, Oracle, and IBM,
which have substantially greater resources than we do; and which compete on a
worldwide basis with respect to implementation services, local 7 x 24 support,
and other factors. As we develop solutions for license on an enterprise basis,
we anticipate that we will be required to increase substantially our investment
in such service and support functions, which could have an adverse impact on
future operating results. At the same time, because of our limited size, it is
likely that we will enter into relationships or agreements with large service
providers and integrators in order to provide our customers with the
implementation services and support that they require. The failure to create
such relationships could jeopardize our ability to generate revenues from sales
of enterprise software solutions as our operations expand.
We have invested significant development resources in products utilizing
standards-based publishing formats, such as SGML and XML. Should large numbers
of customers and potential customers not ultimately adopt any such standard, it
is possible that there may be a limited market for the products we are currently
developing, which could have an adverse impact on future revenues and operating
results.
We have historically received a significant portion of our revenues from
OEMs that integrate our products with their own products and market them to
end-users as a single unit. The business of our OEM customers is intensely
competitive, while the computer software industry has continued to consolidate.
As a result, the number of potentially significant OEM customers for our
products has declined and there is increasing competitive pressure for our
existing and potential customers to reduce costs. Also, certain markets for our
products were particularly adversely affected by competitive pressures during
1998, a trend that is likely to continue in future periods. At the same time, we
have achieved a high degree of market penetration in certain OEM markets for our
products, making it more difficult to make new sales to OEM customers. These
factors could result in decreased revenues from OEMs in future periods. We
anticipate that we will begin to market in 1999 a number of OEM products that
have been developed using the Java programming language, and we have made
significant investments in developing Java programs. Should our OEM customers
ultimately choose not to adopt Java as a development platform, our ability to
derive revenue from our investments in Java technology would be materially
adversely affected. In addition, our
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Java products have not been implemented or accepted in the market, and there is
the possibility that undetected defects or errors in those products could result
in unanticipated support costs and product delays, which could adversely affect
future operating results.
It is possible that certain of the major operating system developers,
including Microsoft, may add features and functionality to such operating
systems, including future versions of Windows-Registered Trademark-95 and
Windows NT-Registered Trademark-, that may compete with our products or with
those of our other OEM customers. The concentration of the market for operating
systems makes it difficult or impossible for us or our other OEM customers to
compete on a price basis because purchasers of operating systems would be
required to purchase products as part of the operating system that compete with
our products. In addition, certain OEM customers, such as Microsoft, may choose
to internally develop products that compete with our products in order to reduce
their costs.
We have relied on acquisitions to create growth and provide new
technologies. The majority of our revenues in 1998 were derived from businesses
that were acquired by us during 1995 or thereafter, and it is anticipated that
all our revenues will come from such acquired businesses in 1999. As a result of
recent adverse trends in the price of our common stock, it may be more difficult
for us to engage in acquisitions in the future, which could slow our revenue
growth. In addition, there is no assurance that we will be able to integrate and
manage successfully businesses or assets that we have acquired or may acquire in
the future. If our management is unable to manage such acquisitions effectively,
the quality of our products; our ability to identify, hire, and retain key
personnel; and the results of operations could be materially adversely affected.
We have restated our previously disclosed financial results for the first
three quarters of 1998 in March 1999, primarily as a result of adjustments to
revenues resulting from transactions with foreign distributors. Immediately
following the first announcement that we intended to restate our financial
results, Inso and certain of its officers and employees were sued by purported
representatives of a class of the Company's current and former stockholders. We
cannot predict the ultimate resolution of these actions at this time, and there
can be no assurance that the litigation will not have a material adverse impact
on our financial condition and results of operations.
While it is not feasible to predict the total costs, we expect to incur
significant professional fees in connection with the investigation that led to
our restatement of financial results for the quarters ended March 31, June 30,
and September 30, 1998 as well as fees with respect to the shareholder
litigation filed against us subsequent to our announcement of the restatement.
We have increased the marketing of our products directly to customers
outside the United States but did not achieve growth in revenues from foreign
customers in 1998. The failure to achieve significant growth in foreign sales
during 1999 could have an adverse impact on our revenue growth and operating
results. The marketing of products directly to customers outside the United
States increases the risk to our revenues associated with fluctuations of the
U.S. dollar in relation to foreign currencies. Such fluctuations could also
result in increased operating expenses associated with foreign operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inso is exposed to the impact of interest rate and foreign currency
fluctuations. Our cash equivalents and available for sale investments are
exposed to financial market risk due to fluctuation in interest rates, which may
affect our interest income and the fair value of our investments. We manage the
exposure to financial market risk by performing ongoing evaluations of our
investment portfolio and investing in short-term investment grade corporate
securities, United States agency bonds, and asset backed securities. In
addition, we do not use investments for trading or other speculative purposes.
We have performed a sensitivity analysis assuming a hypothetical 10% adverse
fluctuation in interest rates. As of December 31, 1998, the analysis indicated
that the change in interest income would not have a material adverse effect on
our financial position or results of operations. Additionally, the carrying
value of our investments
25
<PAGE>
approximates the fair value and therefore the impact of a fluctuation in
interest rates to the carrying value is not material to our financial position
or results of operations. However, actual interest income and gains and losses
in the future may differ materially from our analysis.
We transact business in various foreign currencies, primarily in certain
European countries, Japan and Australia, and therefore are subject to exposure
from movements in foreign currency exchange rates. We primarily license our
technology in U.S. dollars but operating expenses are denominated in the local
currency. For 1998, we do not believe we had significant exposure associated
with movements in foreign currency exchange rates. We will evaluate the
exposures going forward and will implement the appropriate risk management
procedures as deemed necessary.
At December 31, 1998, we had certain forward exchange contracts (primarily
British Pounds Sterling, German Marks, Italian Lira, French Francs, and Swiss
Francs) maturing in January 1999 with a notional amount outstanding of
approximately $2,820,000. The estimated unrealized gains and losses for these
forward exchange contracts were not material to our results of operations or
financial position at December 31, 1998. We presently have no plans to renew the
forward exchange contracts after the January 1999 maturity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and supplementary data are
included under Item 14 of this Annual Report and incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be furnished pursuant to this item is set forth
under the caption "Executive Officers of the Registrant" in Part I hereof and
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's proxy statement ("Proxy
Statement"), to be furnished to stockholders in connection with the solicitation
of proxies for use at the 1999 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item is set forth
under the captions "Directors Compensation," "Summary Compensation Table,"
"Stock Option Grants," "Aggregated Option Exercises and Year-End Option Table,"
and "Severance Agreements" in the Proxy Statement and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished pursuant to this item is set forth
under the caption "Security Ownership" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished pursuant to this item is set forth
under the caption "Certain Transactions" in the Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying Index
to Consolidated Financial Statements and Financial Statement Schedule are
filed as part of this Annual Report.
2. Consolidated Financial Statement Schedule
The consolidated financial statement schedule listed in the accompanying
Index to Consolidated Financial Statements and Financial Statement Schedule
is filed as part of this Annual Report.
3. Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as part
of this Annual Report.
(B) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1998
Registrant filed two (2) reports on Form 8-K during the quarter ended
December 31, 1998.
(i) Current Report on Form 8-K dated November 5, 1998 reporting the
change in the Company's fiscal year end from December 31 of each
year to January 31 of each year under Item 8 ("Change in Fiscal
Year"), which was filed with the Securities and Exchange Commission
on November 19, 1998.
(ii) Current Report on Form 8-K dated December 4, 1998 reporting the
acquisition of privately-held Sherpa Systems Corporation under Item
2 ("Acquisition or Disposition of Assets"), which was filed with
the Securities and Exchange Commission on December 18, 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
REGISTRANT INSO CORPORATION
</TABLE>
<TABLE>
<S> <C>
/s/ STEPHEN O. JAEGER
-------------------------------------------
Date: March 31, 1999 Stephen O. Jaeger
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ BETTY J. SAVAGE
-------------------------------------------
Date: March 31, 1999 Betty J. Savage
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
/s/ PATRICIA A. MICHAELS
-------------------------------------------
Patricia A. Michaels
Date: March 31, 1999 ASSISTANT VICE PRESIDENT AND CORPORATE
CONTROLLER
(CHIEF ACCOUNTING OFFICER)
/s/ JOSEPH A. BAUTE
Date: March 31, 1999 -------------------------------------------
Joseph A. Baute, DIRECTOR
/s/ J. P. BARGER
Date: March 31, 1999 -------------------------------------------
J. P. Barger, DIRECTOR
/s/ SAMUEL H. FULLER
Date: March 31, 1999 -------------------------------------------
Samuel H. Fuller, DIRECTOR
Date: March 31, 1999 -------------------------------------------
John Guttag, DIRECTOR
/s/ STEPHEN O. JAEGER
-------------------------------------------
Date: March 31, 1999 Stephen O. Jaeger
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
/s/ JOANNA T. LAU
Date: March 31, 1999 -------------------------------------------
Joanna T. Lau, DIRECTOR
/s/ RAY SHEPARD
Date: March 31, 1999 -------------------------------------------
Ray Shepard, DIRECTOR
/s/ RAY STATA
Date: March 31, 1999 -------------------------------------------
Ray Stata, DIRECTOR
/s/ WILLIAM J. WISNESKI
Date: March 31, 1999 -------------------------------------------
William J. Wisneski, DIRECTOR
</TABLE>
28
<PAGE>
ITEM 14(A). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................ xx
Consolidated Balance Sheets at December 31, 1998 and 1997................................................. xx
Consolidated Statements of Operations for the years ended December 31, 1998, 1997, xx
and 1996................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, xx
and 1996................................................................................................
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996..... xx
Notes to Consolidated Financial Statements................................................................ xx
Supplementary information:
Unaudited Quarterly Operating Results................................................................... xx
Schedule for the years ended December 31, 1998, 1997, and 1996:
Schedule II--Valuation and Qualifying Accounts.......................................................... xx
</TABLE>
All other schedules have been omitted since the required information is not
present, or the amounts are not sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements.
29
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Inso Corporation
We have audited the accompanying consolidated balance sheets of Inso
Corporation as of December 31, 1998 and 1997 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 and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Inso Corporation at December 31, 1998 and 1997, 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.
/s/ Ernst & Young LLP
--------------------------------------
Ernst & Young LLP
Boston, Massachusetts
March 29, 1999
30
<PAGE>
INSO CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
<S> <C> <C>
1998 1997
---------- ----------
<CAPTION>
(IN THOUSANDS EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 9,502 $ 18,512
Marketable securities................................................................... 44,555 61,945
Restricted marketable securities........................................................ 6,526 --
Accounts receivable, net of allowances of $4,106 in 1998 and $2,111 in 1997............. 27,588 25,889
Prepaid expenses and other current assets............................................... 5,223 1,817
---------- ----------
Total current assets.................................................................... 93,394 108,163
Property and equipment, net............................................................... 9,865 7,073
Product development costs, net of accumulated amortization of $9,589 in 1998 and $14,651
in 1997................................................................................. 21,322 9,015
Excess of costs over net assets acquired, net of accumulated amortization of $3,013 in
1998 and $1,968 in 1997................................................................. 19,891 4,257
Other intangible assets, net of accumulated amortization of $4,605 in 1998 and $4,268 in
1997.................................................................................... 10,783 457
Long-term accounts receivable, net of allowance of $299 in 1997........................... 2,901 337
Licensed technology and advances, net..................................................... 2,408 209
Investment in Information Please LLC...................................................... 2,655 2,655
Deferred income tax benefit, net.......................................................... -- 5,917
---------- ----------
Total Assets.............................................................................. $ 163,219 $ 138,083
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 2,207 $ 924
Accrued liabilities..................................................................... 9,771 3,550
Accrued salaries, commissions, and bonuses.............................................. 6,444 5,478
Acquisition related liabilities, (including in 1998, $7,282 due to Sherpa selling
shareholders)......................................................................... 16,551 1,482
Unearned revenue........................................................................ 13,542 3,522
Royalties payable....................................................................... 1,615 1,266
Capital leases, current portion......................................................... 987 --
Due to Houghton Mifflin Company......................................................... -- 396
Deferred income taxes................................................................... -- 5,987
---------- ----------
Total current liabilities........................................................... 51,117 22,605
Unearned revenue, non-current portion..................................................... 2,478 --
Capital leases, non-current portion....................................................... 450 --
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued Common stock,
$.01 par value; 50,000,000 shares authorized; 15,506,640 and 14,645,611 shares issued
in 1998 and 1997, respectively........................................................ 155 146
Capital in excess of par value.......................................................... 140,130 128,187
Accumulated deficit..................................................................... (29,632) (10,063)
---------- ----------
110,653 118,270
Unamortized value of restricted shares.................................................. (116) (240)
Notes receivable from stock purchase agreements......................................... (1,305) (2,494)
Treasury stock, at cost, 5,075 shares in 1998 and 1997.................................. (58) (58)
---------- ----------
Total stockholders' equity................................................................ 109,174 115,478
Total Liabilities and Stockholders' Equity................................................ $ 163,219 $ 138,083
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
INSO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
Revenues:
Product licenses............................................................. $ 51,758 $ 76,660 $ 67,796
Service...................................................................... 8,336 5,209 2,738
---------- --------- ----------
Total revenues............................................................... 60,094 81,869 70,534
Cost of revenues:
Cost of product licenses..................................................... 9,362 7,950 8,309
Cost of service.............................................................. 3,288 1,861 863
---------- --------- ----------
Total cost of revenues....................................................... 12,650 9,811 9,172
---------- --------- ----------
Gross profit................................................................... 47,444 72,058 61,362
Operating expenses:
Sales and marketing.......................................................... 27,463 23,548 11,061
Product development.......................................................... 19,529 22,094 15,886
General and administrative................................................... 15,586 14,868 8,810
Amortization of intangible assets............................................ 1,541 1,472 982
Restructuring expenses....................................................... -- 5,848 --
Purchased in-process research and development................................ 21,900 6,100 38,700
---------- --------- ----------
Total operating expenses................................................. 86,019 73,930 75,439
---------- --------- ----------
Operating loss................................................................. (38,575) (1,872) (14,077)
Net investment income.......................................................... 4,682 4,376 3,004
Gain on sale of linguistic software net assets................................. 13,289 -- --
---------- --------- ----------
(Loss) income before provision for income taxes................................ (20,604) 2,504 (11,073)
(Benefit) provision for income taxes........................................... (1,035) 2,944 10,207
---------- --------- ----------
Net loss....................................................................... $ (19,569) $ (440) $ (21,280)
---------- --------- ----------
---------- --------- ----------
Loss per share................................................................. $ (1.30) $ (0.03) $ (1.61)
---------- --------- ----------
---------- --------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
32
<PAGE>
INSO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Cash flows from (used in) operating activities:
Net loss.................................................................... $ (19,569) $ (440) $ (21,280)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation.............................................................. 3,371 3,664 2,064
Amortization expense...................................................... 7,086 4,851 4,768
Deferred income taxes..................................................... (70) 108 4,547
Restructuring expenses.................................................... -- 5,045 --
Gain on sale of linguistic software net assets............................ (13,289) -- --
Purchased in-process research and development............................. 21,900 6,100 38,700
---------- ---------- ----------
(571) 19,328 28,799
Changes in operating assets and liabilities:
Accounts receivable....................................................... 3,501 (2,796) (12,566)
Accounts payable and accrued liabilities.................................. (1,084) 4,016 1,697
Royalties payable......................................................... (1,036) (595) 463
Due to Houghton Mifflin Company........................................... (396) (283) 435
Other assets and liabilities.............................................. 2,200 (257) (1,376)
---------- ---------- ----------
Net cash provided by operating activities................................. 2,614 19,413 17,452
Cash flows from (used in) investing activities:
Property and equipment expenditures......................................... (2,982) (5,187) (3,393)
Capitalized product development costs....................................... (4,906) (6,355) (2,865)
Acquisitions, net of cash acquired.......................................... (43,553) (10,345) (42,458)
Proceeds from the sale of linguistic software net assets.................... 19,853 -- --
Net change in marketable securities......................................... 10,864 (14,999) (21,549)
---------- ---------- ----------
Net cash used in investing activities..................................... (20,724) (36,886) (70,265)
Cash flows from (used in) financing activities:
Net proceeds from issuance of common stock.................................. 11,695 1,705 58,117
Proceeds from the payment of notes receivable underlying Stock Purchase
Agreements................................................................ 1,189 -- --
Repayment of promissory notes............................................... -- -- (6,037)
Repayment of acquired company debt.......................................... (3,784) -- (2,222)
---------- ---------- ----------
Net cash provided by financing activities................................. 9,100 1,705 49,858
---------- ---------- ----------
Net decrease in cash and cash equivalents..................................... (9,010) (15,768) (2,955)
Cash and cash equivalents at beginning of the period.......................... 18,512 34,280 37,235
---------- ---------- ----------
Cash and cash equivalents at end of the period................................ $ 9,502 $ 18,512 $ 34,280
---------- ---------- ----------
---------- ---------- ----------
Supplementary information:
Issuance of Notes Receivable from Stock Purchase Agreements................. -- $ 2,494 --
---------- ---------- ----------
---------- ---------- ----------
Investment in Information Please LLC........................................ -- $ 2,620 --
---------- ---------- ----------
---------- ---------- ----------
Income taxes paid........................................................... $ 230 $ 3,290 $ 4,081
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
<PAGE>
INSO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
(ACCUMULATED
COMMON STOCK CAPITAL IN DEFICIT) UNAMORTIZED
------------------ EXCESS OF RETAINED VALUE OF
SHARES AMOUNT PAR VALUE EARNINGS RESTRICTED SHARES
---------- ------ ---------- ------------ -----------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............ 12,965,700 $130 $ 64,096 $ 11,657 ($ 669)
Issuance of Shares pursuant to Employee
Stock Purchase Plan................... 21,399 658
Net proceeds from public offering....... 1,200,000 12 56,432
Stock options exercised................. 98,950 1 1,021
Issuance of restricted shares........... 1,200 48 (48)
Other issuances and
repurchases........................... 6,000 223
Amortization of restricted
shares................................ 196
Tax benefit of stock option exercises... 994
Net loss*............................... (21,280)
---------- ------ ---------- ------------ -----
Balance at December 31, 1996............ 14,293,249 $143 $123,472 ($ 9,623) ($ 521)
Issuance of shares pursuant to Employee
Stock Purchase Plan................... 43,912 998
Notes Receivable from Stock Purchase
Agreements............................ 243,291 2 2,492
Stock options exercised................. 62,500 1 713
Cancellation of restricted
shares................................ (5,341) (87) 87
Other issuances and
repurchases........................... 8,000 199
Amortization of restricted
shares................................ 194
Tax benefit of stock option exercises... 400
Net loss*............................... (440)
---------- ------ ---------- ------------ -----
Balance at December 31, 1997............ 14,645,611 $146 $128,187 ($10,063) ($ 240)
Issuance of shares pursuant to Employee
Stock Purchase Plan................... 128,199 1 1,354
Proceeds from Notes Receivable from
Stock Purchase Agreements.............
Stock options exercised................. 716,330 8 10,332
Issuance of restricted shares........... 7,500 135 (135)
Other issuances and
repurchases........................... 9,000 122
Amortization of restricted
shares................................ 259
Net loss*............................... (19,569)
---------- ------ ---------- ------------ -----
Balance at December 31, 1998............ 15,506,640 $155 $140,130 ($29,632) ($ 116)
---------- ------ ---------- ------------ -----
---------- ------ ---------- ------------ -----
<CAPTION>
NOTES RECEIVABLE
FROM STOCK TREASURY STOCK
PURCHASE --------------
AGREEMENTS SHARES AMOUNT TOTAL
---------------- ------ ------ --------
<S> <C> <C> <C> <C>
Balance at December 31, 1995............ 0 4,975 ($51) $ 75,163
Issuance of Shares pursuant to Employee
Stock Purchase Plan................... 658
Net proceeds from public offering....... 56,444
Stock options exercised................. 1,022
Issuance of restricted shares........... 0
Other issuances and
repurchases........................... 100 (7) 216
Amortization of restricted
shares................................ 196
Tax benefit of stock option exercises... 994
Net loss*............................... (21,280)
------- ------ ------ --------
Balance at December 31, 1996............ 0 5,075 ($58) $113,413
Issuance of shares pursuant to Employee
Stock Purchase Plan................... 998
Notes Receivable from Stock Purchase
Agreements............................ (2,494) --
Stock options exercised................. 714
Cancellation of restricted
shares................................
Other issuances and
repurchases........................... 199
Amortization of restricted
shares................................ 194
Tax benefit of stock option exercises... 400
Net loss*............................... (440)
------- ------ ------ --------
Balance at December 31, 1997............ ($ 2,494) 5,075 ($58) $115,478
Issuance of shares pursuant to Employee
Stock Purchase Plan................... 1,355
Proceeds from Notes Receivable from
Stock Purchase Agreements............. 1,189 1,189
Stock options exercised................. 10,340
Issuance of restricted shares........... --
Other issuances and
repurchases........................... 122
Amortization of restricted
shares................................ 259
Net loss*............................... (19,569)
------- ------ ------ --------
Balance at December 31, 1998............ ($ 1,305) 5,075 ($58) $109,174
------- ------ ------ --------
------- ------ ------ --------
</TABLE>
- ------------------------------
* Net loss equals comprehensive income for each period presented.
See accompanying Notes to Consolidated Financial Statements
34
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. INCOME TAXES
The provision (benefit) for income taxes comprised the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current:
Federal.......................................................................... $ (1,203) $ 1,206 $ 4,918
Foreign.......................................................................... 90 263 165
State............................................................................ 148 274 540
--------- --------- ---------
Total current................................................................ (965) 1,743 5,623
Deferred:
Federal.......................................................................... (843) 1,167 4,360
State............................................................................ 773 34 224
--------- --------- ---------
Total deferred............................................................... (70) 1,201 4,584
--------- --------- ---------
Total provision/(benefit).......................................................... $ (1,035) $ 2,944 $ 10,207
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of income tax (benefit) expense to the statutory federal
income tax rate was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Federal statutory rate............................................................. $ (7,005) $ 851 $ (3,876)
State income taxes, net of federal effect.......................................... 608 103 497
Change in valuation allowance...................................................... 493 (340) (340)
Purchased in-process research and development...................................... 4,692 13,545
Income tax accruals................................................................ 1,575
Amortization of intangible assets acquired through stock purchase.................. 712 696 564
Research and development credit.................................................... (187)
Other.............................................................................. (535) 59 4
--------- --------- ---------
Total.............................................................................. $ (1,035) $ 2,944 $ 10,207
--------- --------- ---------
--------- --------- ---------
</TABLE>
46
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. INCOME TAXES (CONTINUED)
Significant components of the Company's net deferred income tax
assets/(liabilities) were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards and tax credits............................... $ 9,335
Intangible assets.............................................................. $ 10,311 $ 8,746
Accrued liabilities not currently deductible for tax........................... 3,940 927
Compensation expense........................................................... 1,678 2,015 1,700
Depreciation expense........................................................... 1,230 303 18
Bad debt reserve............................................................... 1,110 809 619
Deferred state taxes........................................................... 1,171 1,310
Other.......................................................................... 60
Valuation allowance............................................................ (9,901) (4,504) (4,866)
--------- --------- ---------
7,452 10,105 8,454
Deferred tax liabilities:
Deferred income................................................................ 2,094 7,389 8,371
Capitalized development costs.................................................. 5,194 1,965 907
Deferred state taxes........................................................... 60
Other.......................................................................... 104 821 206
--------- --------- ---------
7,452 10,175 9,484
--------- --------- ---------
Net deferred income taxes...................................................... $ 0 $ (70) $ (1,030)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The valuation allowance of $9,901,000 (which includes net operating losses
and other deductions subject to limitations in future years) and $4,504,000 at
December 31, 1998 and 1997, respectively, was determined after evaluating the
Company's historical operating results and anticipated performance over its
normal planning horizon. The Company periodically evaluates the valuation
allowance and makes adjustments to the extent that actual and anticipated
operating results vary from those initially estimated at the time the valuation
allowance was established. The valuation allowance at December 31, 1997, which
primarily related to intangible assets associated with the formation of the
Company, was eliminated during 1998 as the related intangible assets were sold
in conjunction with the Company's sale of its linguistic software assets. At
December 31, 1998, a valuation allowance has been recorded due to the
uncertainty associated with the recoverability of the Company's net deferred tax
assets. During 1998, the Company reduced its valuation allowance by
approximately $4,388,000 by adjusting goodwill which had been recorded in
connection with the Company's 1998 acquisitions. This reduction of the valuation
allowance was made as a result of the recognition of deferred tax assets to the
extent of certain deferred tax liabilities recorded in connection with the 1998
acquisitions.
The Company has available net operating loss carryforwards and other tax
credits totaling approximately $28,667,000, most of which were acquired in
connection with the Sherpa Systems Corporation acquisition, which expire in the
years 2008 to 2018. Because of acquisitions the Company has consummated and due
to certain provisions of the Internal Revenue Code concerning changes in
ownership, the use of most of the Company's net operating loss carryforwards may
be limited.
47
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. TRANSACTIONS WITH HOUGHTON MIFFLIN
The Company and Houghton Mifflin had various license agreements (the
"License Agreements") for the purpose of licensing certain database content from
published reference products of Houghton Mifflin's Trade and Reference Division
for use in certain of the Company's products. Included in the Company's cost of
revenues for the years ended December 31, 1998, 1997, and 1996, were royalties
to Houghton Mifflin for the licensing of this database content amounting to
approximately $300,000, $1,234,000, and $1,189,000, respectively. The terms of
the License Agreements are substantially the same as those in effect while the
Company operated as a division of Houghton Mifflin, except that the minimum
royalty for certain licenses of reference work content was increased to 15% from
10% only with respect to new OEM licenses entered into after January 1, 1994.
During 1996, the book rights for the series of Information Please Almanacs
were licensed to Houghton Mifflin. In connection with the book right licensing
arrangement, the Company recognized approximately $700,000 in 1996. At December
31, 1997, Houghton Mifflin had made all payments relating to the book right
licensing agreement.
NOTE 8. RESTRUCTURING EXPENSES
In June 1997, the Company adopted a plan of restructuring aimed at a
continuing focus on strategic products while reducing costs and streamlining the
organization. The plan primarily affected certain Lexical and Linguistic
products of the Company. As a result of the restructuring plan, the Company
recorded $5,848,000 of expenses. The charge included $320,000 of severance for
17 employees in development; $315,000 of estimated lease obligations, net of
estimated sublease income, for the impact of affected leases; $3,353,000 for the
write-off of capitalized software and other assets; and $1,860,000 for the
write-off of prepaid royalties. As of December 31, 1998 and 1997, accrued
liabilities of $0 and $360,000 were remaining relating to this restructuring
charge.
NOTE 9. COMMON STOCK
On July 11, 1997, the Board of Directors adopted a Shareholders' Rights Plan
and declared a dividend distribution of one preferred stock purchase right (a
"Right") for each outstanding share of the Company's Common Stock to
stockholders of record at the close of business on July 24, 1997 (the "Record
Date"). Each Right entitles the registered holder to purchase from the Company a
unit consisting of one one-thousandth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, $0.01 par value per share (the "Preferred
Stock"), at a purchase price of $145 in cash per Unit (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement dated as of July 11, 1997 (the "Rights Agreement") between
the Company and State Street Bank & Trust Company, as Rights Agent. The Rights
will become exercisable after a person or group has acquired or obtained the
right to acquire beneficial ownership of 20% or more of the outstanding common
stock, or following the commencement of a tender or exchange offer that would
result in a person or group owning 30% or more of the shares of common stock.
Generally, if any person becomes the beneficial owner of 20% or more of the
shares of Common Stock of the Company, except pursuant to a tender or exchange
offer for all shares at a fair price as determined by the outside Board members,
each Right not owned by the 20% or more stockholder will enable its holder to
purchase that number of shares of the Company's Common Stock, in lieu of
preferred stock, which equals the exercise price of the Right divided by
one-half of the current market price of such Common Stock at the date of the
occurrence of the event. In addition, if the Company is involved in a merger or
other business combination transaction with another person or group in which it
is not the surviving corporation or in connection with which its Common Stock is
changed or
48
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. COMMON STOCK (CONTINUED)
converted, or it sells or transfers 50% or more of it assets or earning power to
another person, each Right that has not previously been exercised will entitle
its holder to purchase that number of shares of Common Stock of such other
person which equals the exercise price of the Right divided by one-half of the
current market price of such Common Stock at the date of the occurrence of the
event. In general, the Company may redeem the Rights in whole at a price of
$0.01 per Right at any time prior to the tenth day after a person or group
acquires 20% or more of the outstanding common stock. The Rights will expire in
July 2007.
NOTE 10. EARNINGS PER SHARE
Earnings per share is calculated based upon the weighted average number of
common shares outstanding for each period presented. The weighted average number
of shares outstanding for 1998, 1997 and 1996 were 15,062,000, 14,362,000, and
13,214,000, respectively.
Options to purchase 4,471,023, 3,873,666 and 4,025,964 shares of common
stock during 1998, 1997, and 1996, respectively and warrants to purchase
1,456,458 shares of common stock during 1998 were outstanding but were not
included in the computation of diluted earnings per share because the effect
would be antidilutive.
NOTE 11. STOCK COMPENSATION PLANS
STOCK INCENTIVE PLANS
The Company has reserved 3,000,000 shares for issuance under the 1993 Stock
Incentive Plan ("1993 Plan") and 5,000,000 shares for issuance under the 1996
Stock Incentive Plan, as amended ("1996 Plan"). The 1993 Plan and the 1996 Plan
("the Plans") provide for the issuance of incentive stock options, non-qualified
stock options, unrestricted stock, restricted stock, and performance share
awards. Under the Plans, both incentive options and non-qualified options may be
granted to employees and consultants. The option exercise price shall not be
less than 100% of the fair market value of the shares on date of grant in the
case of incentive options and not less than 85% of the fair market value of the
shares on the date of grant in the case of non-qualified options. The Plans also
provide for the grant of performance share awards to employees entitling the
recipient to receive shares of common stock based upon achievement of individual
or Company performance goals. The term of each option and the vesting periods
for options and stock awards is fixed by the Compensation Committee of the
Company's Board of Directors. The term for incentive stock option grants may not
exceed 10 years from the date of grant. Options granted to purchase common stock
and restricted stock awarded under the Plans become fully vested and exercisable
in full upon a change in control, whether or not vested or exercisable in
accordance with their terms.
The Company's 1996 Non-employee Director Plan, as amended ("Director Plan")
provides for the automatic grant of non-qualified stock options and unrestricted
stock to members of the Board of Directors who are not employees of the Company.
The Company has reserved 415,000 shares for issuance under the Director Plan.
The Director Plan provides for an initial grant of options to each Non-employee
Director to purchase 20,000 shares of Common Stock at the fair market value on
the date that such Non-employee Director first becomes a director of the
Company; an annual grant of a non-qualified stock option to purchase 5,000
shares of Common Stock at the fair market value on the date of the Corporation's
annual meeting; and an award of 1,000 shares of the Company's unrestricted stock
on January 27 of each year. The term for the option grants may not exceed 10
years from the date of grant. Options granted to purchase common stock and
restricted stock awarded under the Director Plan become fully vested and
49
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. STOCK COMPENSATION PLANS (CONTINUED)
exercisable in full upon a change in control, whether or not vested or
exercisable in accordance with their terms.
On August 6, 1997, the Board of Directors approved a stock option exchange
program (the "Exchange Program") pursuant to which full-time permanent employees
holding stock options under the Plans were given the opportunity to exchange the
unexercised portion of such options (the "Existing Options") under the Plans for
new options (the "New Options") on a basis of four shares of common stock for
every five shares covered by the Existing Options. As a result of the Exchange
Program, eligible employees surrendered options for approximately 528,000
shares. The exercise price of the New Options was equal to the market value of
the Company's common stock on the date of grant, or $12.00. Additionally,
certain officers were eligible to participate in the Exchange Program for an
exercise price of $18.00. The New Options have the same contractual life,
vesting schedule, and other terms as the Existing Options canceled in exchange
therefore. Additionally, during the exchange program, certain employees
exchanged non-qualified options for incentive stock options covering 835,000
shares. The then non-executive Directors were excluded from the Exchange
Program.
NOTES RECEIVABLE FROM STOCK PURCHASE AGREEMENTS
As of December 31, 1998 and 1997, the Company holds notes receivable for a
total of $1,305,000 and $2,494,000, respectively from certain of its corporate
officers. The Company provided financing in 1997 to effect the purchase of an
aggregate 243,291 shares of the Company's common stock pursuant to the 1996
Stock Incentive Plan at the fair market value on December 16, 1997, of $10.25
per share. Interest on such loans accrue at 6.0% per annum until maturity. The
principal and interest amounts of such loans is repayable in full upon the
earlier of (i) the fifth anniversary of the loan (ii) the date the officer
leaves the Company or (iii) if and to the extent that the officer sells the
stock. These loans, which are shown as a reduction to stockholders' equity on
the balance sheet, are secured by the common stock purchased.
50
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INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. STOCK COMPENSATION PLANS (CONTINUED)
The following table summarizes the stock option activity under the 1993
Plan, the 1996 Plan, and the Director Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING PRICE
----------- ----------- -----------
<S> <C> <C> <C>
AT DECEMBER 31, 1995........................................................ 693,750 2,159,214 $ 19.48
1996
Additional authorized....................................................... 2,250,000
Granted..................................................................... (2,262,800) 2,262,800 $ 41.97
Exercised................................................................... (98,950) $ 9.64
Forfeited................................................................... 297,100 (297,100) $ 33.92
Restricted stock grant...................................................... (1,200) $ 39.75
Unrestricted stock grant.................................................... (6,000) $ 37.50
----------- ----------- -----------
At December 31, 1996........................................................ 970,850 4,025,964 $ 31.30
1997
Granted..................................................................... (1,030,100) 1,030,100 $ 12.56
Exercised................................................................... (62,500) $ 10.27
Forfeited................................................................... 592,098 (592,098) $ 31.56
Shares issued in connection with Notes Receivable from Stock Purchase
Agreements................................................................ (243,291) $ 10.25
Shares forfeited from Exchange Program...................................... 527,800 (527,800) $ 35.11
Unrestricted stock grant.................................................... (8,000) $ 39.63
----------- ----------- -----------
At December 31, 1997........................................................ 809,357 3,873,666 $ 15.20
1998
Additional authorized....................................................... 3,165,000
Granted..................................................................... (1,952,886) 1,952,886 $ 15.78
Exercised................................................................... (716,330) $ 11.99
Forfeited................................................................... 639,199 (639,199) $ 17.42
Restricted stock grant...................................................... (7,500) $ 17.95
Unrestricted stock grant.................................................... (9,000) $ 13.56
----------- ----------- -----------
At December 31, 1998........................................................ 2,644,170 4,471,023 $ 15.65
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
At December 31, 1998, 1997, and 1996, options to purchase 915,306, 978,408,
and 459,023, shares, respectively were exercisable. The weighted average
exercise price for options exercisable at December 31, 1998, 1997, and 1996 were
$16.81, $16.24, and $11.87, respectively.
51
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INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. STOCK COMPENSATION PLANS (CONTINUED)
Related information for options outstanding and exercisable as of December
31, 1998 under the Plans is as follows:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
-------------------------------- -----------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGES OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
------------------------------ --------- ----------- -------- ------- --------
$ 7.50-$11.75................. 1,273,068 8.0 $10.61 347,568 $ 8.65
$12.00-$13.50................. 1,221,736 8.1 12.22 188,248 12.09
$16.81-$28.00................. 1,825,619 8.2 19.07 255,750 20.14
$31.00-$54.25................. 150,600 7.1 44.70 123,740 43.63
--------- -------
Total................... 4,471,023 8.1 $15.65 915,306 $16.81
--
--
--------- -------- ------- --------
--------- -------- ------- --------
</TABLE>
The market value of the restricted shares awarded has been recorded as
unearned compensation and is shown as a separate component of stockholders'
equity. Unearned compensation is being amortized to expense over the vesting
periods that range from one to five years. Amortization totaled $259,000,
$194,000, and $196,000, for the years ending December 31, 1998, 1997, and 1996,
respectively.
STOCK PURCHASE PLAN
Under the Company's 1993 Stock Purchase Plan, employees have the opportunity
to purchase the Company's common stock. The price at which the employee may
purchase the common stock is 85% of the last reported sale price of the
Company's common stock on the Nasdaq National Market on the date the offering
period commences or concludes, whichever is lower when rounded to the next
highest sixteenth percentage. In 1998, the offering period was changed. During
1998, offerings began on January 1 and July 1 and concluded June 30 and November
30. Offerings prior to 1998 began on January 1 and July 1 of each year and
concluded on June 30 and December 31, respectively. After 1998 offerings will
begin on June 1 and December 1 of each year and conclude on May 31 and November
30. A total of 450,000 shares of common stock have been reserved under this
plan.
52
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INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. STOCK COMPENSATION PLANS (CONTINUED)
Activity in the plan was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES PRICE
--------- -----------
<S> <C> <C>
Shares Available for issuance at December 31, 1995.......................................... 161,122
1996
Purchased during 1996....................................................................... 21,399 $ 30.74
---------
Available for issuance at December 31, 1996................................................. 139,723
1997
Purchased during 1997....................................................................... 43,912 $ 22.75
---------
Available for issuance at December 31, 1997................................................. 95,811
1998
Additional authorized....................................................................... 250,000
Purchased during 1998....................................................................... 128,199 $ 10.57
---------
Available for issuance at December 31, 1998................................................. 217,612
---------
---------
</TABLE>
FAIR VALUE
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock plans based on the fair value method provided under SFAS 123. The
fair value for the options described below was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for awards in 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate...................................................... 5.05% 5.95% 6.43%
Expected life................................................................ 3.7 years 4.3 years 4.3 years
Expected volatility.......................................................... 66% 66% 45%
Expected dividends........................................................... 0.0% 0.0% 0.0%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The total value of the awards granted during the years ended December 31,
1998, 1997, and 1996 were computed as approximately $16,005,000, $6,780,000, and
$23,600,000, respectively, which would be amortized over the vesting period of
the options. As a result of the phase-in period allowed under SFAS 123, the
53
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INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. STOCK COMPENSATION PLANS (CONTINUED)
effects on reported net income for 1998, 1997, and 1996 will not likely be
representative of the effects in future years. The weighted average fair value
of awards granted in 1998, 1997, and 1996 was estimated to be $8.09, $6.58, and
$18.56, respectively. If the Company had accounted for these awards in
accordance with fair value accounting proscribed under SFAS 123, the Company's
pro forma net loss and loss per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- --------- ----------
<CAPTION>
(IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma net loss.............................................................. $ (28,380) $ (5,598) $ (25,549)
Pro forma loss per share........................................................ $ (1.88) $ (0.39) $ (1.93)
</TABLE>
NOTE 12. BENEFIT PLAN
The Company has a 401(k)-retirement savings plan ("401(k) Plan"), covering
substantially all of the Company's domestic employees. The Company has
authorized 100,000 shares for issuance under the Plan. Eligible employees are
permitted to make pre-tax contributions, up to 15% of their compensation subject
to an annual limit. Under the 401(k) Plan, the Company may make contributions
either in cash or common stock of the Company at the discretion of the Company's
Board of Directors. The contribution may match in whole or in part the salary
deferral contributions of the participants and/or represent additional profit-
sharing contributions tied to the Company's net income performance. During 1998,
1997, and 1996, the Company's total cash contribution amounted to approximately
$873,000, $824,000, and $472,000, respectively.
NOTE 13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has various lease agreements for office space and certain
equipment under operating leases that expire between 1999 and 2007. The
Company's office space leases include certain renewal and expansion options,
escalation clauses for the Company's proportionate share of increases in
building maintenance costs, and periods of free rent. At December 31, 1998,
future minimum lease commitments for noncancelable leases are as follows:
<TABLE>
<S> <C>
1999................................................................ $ 6,535
2000................................................................ 6,091
2001................................................................ 5,462
2002................................................................ 3,257
2003................................................................ 3,064
Thereafter.......................................................... 5,967
</TABLE>
Rent expense was approximately $3,251,000, $2,732,000, and $1,448,000, in
1998, 1997, and 1996, respectively.
54
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INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAPITAL LEASE OBLIGATIONS
The Company leases certain machinery and equipment under capital leases
which are secured by all of the equipment acquired. Individual leases under
these lease agreements have interest rates ranging from 8.86% to 12.47% per
annum and expire at various dates through 2000. As of December 31, 1998,
scheduled future minimum payments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998
-------------
<S> <C>
(IN THOUSANDS
OF DOLLARS)
1999........................................................................... $ 1,091
2000........................................................................... 471
------
1,562
Less amounts representing interest............................................. (125)
------
1,437
Less current portion........................................................... (987)
------
Total.......................................................................... $ 450
------
------
</TABLE>
Equipment subject to capital leases totaled $3,476,000 and accumulated
depreciation and amortization totaled $2,508,000 at December 31, 1998.
COMMITMENTS UNDER DISTRIBUTOR ARRANGEMENT
During 1998, the Company entered into a distribution agreement with an
international reseller that provided the reseller with guaranteed levels of net
receipts, as defined by the agreement, for specified geographic areas (primarily
Australia, New Zealand, and certain countries in the Far East), of $2,000,000
for each calendar year ended December 31, 1999 and 2000. As of December 31,
1998, management believes that the distributor will not be able to achieve the
defined level of net receipts from the agreement territory in either year.
Therefore, the Company recorded a charge to sales and marketing expense of
$4,000,000. This obligation is included in accrued liabilities on the
accompanying balance sheet. The Company had outstanding irrevocable stand-by
letters of credit with terms of one to two years totaling $4,004,000 at December
31, 1998 supporting this guarantee. The Company had restricted marketable
securities totaling $6,526,000 at December 31, 1998 supporting the letters of
credit.
NOTE 14. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company has three reportable segments: Lexical and Linguistic, Dynamic
Document Exchange ("DDE"), and Electronic Publishing Solutions/Product Data
Management ("EPS/PDM"). The Company's reportable segments are business units
that offer different products and are each managed separately. The Company
evaluates performance and allocates resources based on profit and loss before
income taxes,
55
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (CONTINUED)
sales and marketing expenses, certain administrative expenses, and interest
earned on Company's investments. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------
<S> <C> <C> <C> <C>
LEXICAL
AND
LINGUISTIC DDE EPS/PDM TOTALS
----------- --------- ----------- ---------
<CAPTION>
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues from external customers..................................... $ 6,952 $ 28,585 $ 24,557 $ 60,094
Depreciation and amortization expense................................ 486 1,610 4,994 7,090
Segment profit....................................................... 4,367 18,464 8,075 30,906
Segment assets....................................................... 0 54,758 34,437 89,195
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------
<S> <C> <C> <C> <C>
LEXICAL
AND
LINGUISTIC DDE EPS/PDM TOTALS
----------- --------- ----------- ---------
<CAPTION>
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues from external customers..................................... $ 34,066 $ 31,362 $ 16,441 $ 81,869
Depreciation and amortization expense................................ 1,362 1,945 2,221 5,528
Segment profit....................................................... 22,734 21,267 7,473 51,474
Segment assets....................................................... 14,101 35,649 14,631 64,381
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------
<S> <C> <C> <C> <C>
LEXICAL
AND
LINGUISTIC DDE EPS/PDM TOTALS
----------- --------- ----------- ---------
<CAPTION>
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues from external customers..................................... $ 41,802 $ 22,898 $ 5,834 $ 70,534
Depreciation and amortization expense................................ 2,416 1,146 968 4,530
Segment profit....................................................... 26,662 16,431 2,575 45,668
Segment assets....................................................... 19,792 23,000 7,456 50,248
</TABLE>
Enterprise-Wide Disclosures
Geographic Information
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
United States.................................................... $ 45,696 $ 64,790 $ 55,219
Canada........................................................... 2,982 2,597 7,569
Other foreign countries.......................................... 11,416 14,482 7,746
--------- --------- ---------
Consolidated Total............................................... $ 60,094 $ 81,869 $ 70,534
--------- --------- ---------
--------- --------- ---------
</TABLE>
Revenues are attributed to countries based on the location of the customer.
56
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (CONTINUED)
As of December 31, 1998, 1997, and 1996, the Company's long-lived assets
were primarily located in the Company's United States operations. The long-lived
assets located in foreign countries were less than 5% of consolidated assets.
RECONCILIATION INFORMATION
Profit or loss
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Total external profit or loss for reportable segments.......................... $ 30,906 $ 51,474 $ 45,668
Purchased in-process research and development.................................. (21,900) (6,100) (38,700)
Restructuring expenses......................................................... -- (5,848) --
Gain on sale of linguistic software net assets................................. 13,289 -- --
Unallocated corporate and other expenses....................................... (42,899) (37,022) (18,041)
---------- --------- ----------
Consolidated loss (income) before provision for income taxes................... $ (20,604) $ 2,504 $ (11,073)
---------- --------- ----------
---------- --------- ----------
</TABLE>
RECONCILIATION INFORMATION
Assets
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS)OF
DOLLARS
Total assets for reportable segments...................................................... $ 89,195 $ 64,381
Marketable securities..................................................................... 44,555 61,945
Restricted marketable securities.......................................................... 6,526 --
Total assets for unallocated corporate and other functions................................ 22,943 11,757
---------- ----------
Consolidated total assets................................................................. $ 163,219 $ 138,083
---------- ----------
---------- ----------
</TABLE>
NOTE 15. SUBSEQUENT EVENTS
On January 12, 1999, the Company acquired all the outstanding common stock
of AIS Software S.A. for approximately $3,000,000 using available cash. AIS
Software is the developer of Balise, an SGML and XML transformation tool and
scripting language. The acquisition will be accounted for as a purchase and is
expected to result in an acquisition charge for certain technology under
research and development, which is in-process.
On February 1, 1999, the Company announced that it would restate its
financial results for the quarters ended March 31, June 30, and September 30,
1998, respectively due to discovered errors and irregularities that ultimately
affected the timing and dollar amounts of previously reported revenues,
principally related to foreign distributors. The irregularities related
primarily to side agreements and other terms and conditions that have resulted
or could result in significant concessions or allowances that were not known or
accounted for when the revenue was previously reported as earned.
On December 4, 1998, pursuant to the terms of an acquisition agreement
signed on November 11, 1998, the Company issued warrants to purchase a total of
1,456,458 shares of the Company's common stock at a purchase price of $23.50 per
share, exercisable until December 4, 2000. The warrants were valued at $5.00 per
warrant. Subsequent to the announcement of its intention to restate results, the
57
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SUBSEQUENT EVENTS (CONTINUED)
Company initiated discussions with warrant holders to reprice the warrants or
exchange them for cash with the objective of meeting the intention under the
original agreement. As a result, $7,282,000 is included within acquisition
related liabilities on the accompanying consolidated balance sheet.
Also subsequent to the announcement of the restatement of financial results,
certain putative class action lawsuits were filed against the Company and
certain of its officers and employees by purported representatives of a class of
the Company's current and former stockholders in the U.S. District Court for the
District of Massachusetts, claiming violations of the Federal securities laws
based on alleged misrepresentations regarding the Company's anticipated revenue
and earnings and interim financial statements for the first three quarters of
fiscal 1998. The lawsuits seek unspecified damages. The Company has been
informed that the plaintiffs will seek to consolidate the above lawsuits into
one consolidated action. The Company believes the claims are subject to
meritorious defenses which the Company plans to assert during the lawsuit. The
Company cannot predict the ultimate resolution of these actions at this time,
and there can be no assurance that the litigation will not have a material
adverse impact on our financial condition and results of operations.
58
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Inso Corporation (the "Company") is a supplier of software solutions to
store, manage, share, and publish electronic information. The Company provides
solutions for the management and distribution of all forms of electronic
information, from simple memos to complex technical manuals, in environments
ranging from desktop computers to the Internet. Through enterprise license
agreements, integration in popular software products, and bundling agreements,
the Company's products enable corporate and commercial publishers to effectively
convert, manage, store, and distribute electronic content; and enable users to
easily view, copy, print, and publish electronic information. The Company
markets certain of its products worldwide to original equipment manufacturers
(OEMs) of computer hardware, software, and consumer electronics products. The
Company also directly and indirectly markets software applications and systems
to major corporations, government agencies, and other end-users.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in less than 20% owned affiliates
are accounted for under the cost method.
CHANGE IN YEAR END
In November 1998, the Board of Directors approved a change in the Company's
fiscal year to February 1 through January 31, effective for the twelve-month
period ending January 31, 2000. Through December 31, 1998, the Company reported
results on a calendar year basis.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
INVESTMENTS
The Company accounts for its investments in securities, including certain
cash equivalents and marketable securities, in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The appropriate classification of debt securities
is determined at the time of purchase and is reevaluated at each balance sheet
date (see Note 2). The Company also had restricted marketable securities of
$6,526,000 at December 31, 1998 supporting outstanding letters of credit (see
Note 13).
FOREIGN CURRENCY TRANSLATION AND HEDGING
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with Financial Accounting Standards Board No. 52
"Foreign Currency Translation". All balance sheet accounts have been translated
using the exchange rate in effect at the balance sheet date. Income statement
amounts have been translated using average exchange rates in effect during the
year. The gains and losses resulting from the changes in exchange rates from
year to year are insignificant for all years presented. Additionally, the effect
on the statements of operations for transaction gains and losses is
insignificant for all years presented.
35
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1998, the Company had certain forward exchange contracts
(primarily British Pounds Sterling, German Marks, Italian Lira, French Francs,
and Swiss Francs) outstanding to hedge the economic exposure against currency
fluctuations affecting certain foreign assets and liabilities maturing in
January 1999 with a notional amount outstanding of approximately $2,820,000.
These forward exchange contracts are marked to market at each reporting date.
Any resulting foreign exchange transaction gains or losses are recorded in net
investment income in the statement of operations. For contracts fulfilled in the
year ended December 31, 1998, the foreign currency gains and losses were not
material to the operating results or financial position of the Company. The
estimated unrealized gains and losses for these forward exchange contracts were
not material to the Company's results of operations or financial position at
December 31, 1998. We presently have no plans to renew the forward exchange
contracts after the January 1999 maturity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's cash equivalents, marketable securities, accounts receivables,
and foreign forward exchange contracts are carried at cost, which approximates
fair value.
REVENUE RECOGNITION
The Company derives its revenues from one-time and annual license fees with
corporate, government, OEM customers and channel-partners; software maintenance
fees from site-license agreements with corporate and government customers;
one-time fees for direct licenses to consumers; and royalties, including initial
nonrefundable royalties from license arrangements with OEMs and
channel-partners.
In 1998, the Company adopted Statement of Position 97-2, "Software Revenue
Recognition," as amended by 98-4, "Deferral of the Effective Date of a Provision
of SOP 97-2, Software Revenue Recognition" issued by the American Institute of
Certified Public Accountants (SOP 97-2, as amended). The adoption of SOP 97-2,
as amended, did not have a material impact on the Company's financial position
or results of operations. Revenue from software licenses for corporate and
government site-licenses, annual distribution licenses, and direct licenses to
customers is recognized when there is evidence of an arrangement for a fixed and
determinable fee that is probable of collection and the software has been
delivered to the customer. Royalty revenues are generally recognized in the
Company's financial statements in the quarter in which the amounts due to the
Company have been determined. Typically, the Company's software licenses do not
include significant post-delivery obligations to be fulfilled by the Company and
payments are due within a twelve month period from the date of delivery.
Consequently, license fee revenue is generally recognized upon shipment of the
technology. Revenue for maintenance agreements are recognized as income over the
term of the agreement using the straight-line method. Revenue from training,
consulting, and implementation services is recognized as services are performed.
PRODUCT DEVELOPMENT COSTS
Software and other costs incurred in connection with product development are
charged to expense until such time as specific product technological feasibility
has been established. Thereafter, product development costs specific to the
product are capitalized and reported at the lower of unamortized cost or net
realizable value.
36
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amortization of capitalized product development costs begins when the
related product is available for general release to customers. These costs are
amortized using the shorter of the estimated future product revenue streams or
the straight-line method over not exceeding three years.
Acquired developed software is capitalized as part of the allocation of the
purchase price on the basis of the estimated fair market value. Acquired
developed software is amortized on a straight-line basis over its estimated
useful life ranging from two to ten years.
Amortization of $4,599,000, $5,259,000, and $2,643,000 for the years ended
1998, 1997, and 1996, respectively, is included as a component of cost of
revenues.
LICENSED TECHNOLOGY AND ADVANCES
Licensed technology and royalty advances which pertain to payments by the
Company for the license of technology and/or content used in the Company's
products, are stated at cost less royalty amounts expensed based on revenues
recognized over the life of the related agreement. Costs of purchased licenses
are amortized using the greater of (a) the straight-line method over their
estimated economic lives, generally one to five years, or (b) current period
revenue to anticipated total revenues during the license period.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on
leasehold improvements using the straight-line method over the economic life of
the asset or the lease term, whichever is shorter. For property and equipment
acquired prior to December 31, 1997, depreciation is provided using an
accelerated method over the estimated economic life of the assets, generally
three to five years. The Company adopted the straight-line depreciation method
for all equipment placed in service on or after January 1, 1998. The equipment
under the straight-line method is being depreciated over the estimated useful
life of the assets, generally three to five years. Management of the Company
believes that the straight-line method of depreciation provides a preferable
matching between expected productivity and cost allocation since the equipment's
operating capacity and consumption generally remains consistent over time. The
change in depreciation methods was not material to operating results or the
financial position of the Company.
INTANGIBLE ASSETS
Intangible assets, including excess costs over net assets acquired, are
being amortized on a straight-line method over their estimated economic lives
for periods ranging from one to ten years. If facts and circumstances suggest
that an impairment may have occurred, the unamortized balances of these assets
are reviewed under the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." If this review indicates that the remaining balance
is not recoverable, as determined based upon the estimated undiscounted cash
flows of the asset during its remaining economic life, the value assigned to the
asset would be reduced to its fair value.
37
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
In 1997 and 1996, Microsoft Corporation accounted for 28% and 35% of
revenues, respectively. In 1998, Microsoft Corporation accounted for less than
10% of revenues. The economic terms of the Company's agreement with Microsoft,
with respect to certain of the Company's linguistic products expired at the end
of 1997. No other customer accounted for more than 10% of revenues for the
periods shown.
The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses.
The Company licenses its products primarily to customers in North America.
Sales to foreign customers accounted for 24%, 21%, and 22% of total net revenue
for the years ended December 31, 1998, 1997, and 1996, respectively.
International sales to Canada were 5%, 3%, and 11% in 1998, 1997, and 1996,
respectively. No other foreign country accounted for more than 10% of total
sales in any period. Substantially all export sales have been consummated by the
Company's United States operation.
STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based compensation plans
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations rather than the
alternative fair value accounting provided under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Accordingly, the Company has recognized no compensation expense for its
stock option plans and its stock purchase plan.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes new rules for the reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. The adoption in 1998 of SFAS 130 did not have a material
impact on the Company's financial position or results of operations.
In 1997, the FASB issued Statement of Financial Accounting Standards No. 131
"Disclosures about Segment of an Enterprise and Related Information" (SFAS 131),
which establishes standards for the way public enterprises report information
about operating segments in its annual and interim financial statements. The
adoption of SFAS 131 did not impact the Company's consolidated financial
position or results of operations (see Note 14).
In June 1998, the FASB issued Statement of Accounting Standards No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities"
effective for fiscal years beginning after June 15, 1999. SFAS 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company does not believe that this
standard will have a material impact on its financial position or results of
operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1 (SOP
98-1) "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires the capitalization of certain costs related to
the development of software for internal use. The adoption of SOP 98-1 did not
have a material impact on the Company's financial position or results of
operations.
38
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-9 (SOP
98-9) "Modification of SOP 97-2, Software Revenue Recognition with respect to
Certain Transactions" effective for fiscal years beginning after March 15, 1999.
SOP 98-9 defines vendor specific objective evidence of fair value in connection
with software revenue recognition. The adoption of SOP 98-9 is not expected to
have a material impact on the Company's financial position or results of
operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1998 presentation, including
reclassification for certain service and support costs from sales and marketing
expense to cost of revenues.
NOTE 2. AVAILABLE FOR SALE INVESTMENTS
The Company's available-for-sale investments which are carried at cost,
which approximates fair value, and included in cash equivalents and marketable
securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
<CAPTION>
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Commercial paper............................................................................ -- $ 11,877
Corporate notes............................................................................. $ 39,292 36,906
Money market funds.......................................................................... 1,437 432
United States agency bonds.................................................................. 3,013 9,727
Asset-backed securities..................................................................... 8,926 16,951
--------- ---------
Total....................................................................................... $ 52,668 $ 75,893
--------- ---------
--------- ---------
</TABLE>
Interest on securities classified as available-for-sale of $4,883,000,
$4,280,000, and $2,887,000 is included in net investment income in 1998, 1997,
and 1996, respectively.
During the years ended December 31, 1998 and 1997, available-for-sale
securities with values of $144,464,000 and $34,343,000, respectively, were sold.
The gross realized gains and losses on those sales were immaterial to the
Company's financial statements. During the years ended December 31, 1998 and
1997, purchases of available-for-sale securities were $385,154,000 and
$313,661,000, respectively. Maturities of available-for-sale securities were
$265,100,000 and $277,725,000 for the years ended December 31, 1998 and 1997,
respectively.
39
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. AVAILABLE FOR SALE INVESTMENTS (CONTINUED)
The Company's available-for-sale securities have the following maturities:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
<CAPTION>
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Due in one year or less..................................................................... $ 36,844 $ 60,279
Due within two years........................................................................ 15,824 15,614
--------- ---------
Total....................................................................................... $ 52,668 $ 75,893
--------- ---------
--------- ---------
</TABLE>
Included in the above are restricted available for sale securities at
December 31, 1998 of $6,526,000. These securities are in support of irrevocable
stand-by letters of credit for certain performance guarantees under distributor
arrangements (see Note 13).
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS OF
DOLLARS)
Leasehold improvements.................................................................... $ 2,511 $ 950
Computer equipment and software........................................................... 20,579 14,030
Furniture and fixtures.................................................................... 4,803 2,722
---------- ----------
27,893 17,702
Less accumulated amortization and depreciation............................................ (18,028) (10,629)
---------- ----------
$ 9,865 $ 7,073
---------- ----------
---------- ----------
</TABLE>
NOTE 4. ACQUISITIONS AND INVESTMENTS
VENTURE LABS INC.
On December 22, 1998, the Company acquired all of the outstanding stock of
privately held Venture Labs Inc. and its subsidiary Paradigm Development
Corporation (collectively "Paradigm") for a total value of $4,800,000. Paradigm
is the developer of Java file filtering and viewing technology for both OEM and
direct corporate use. In connection with the acquisition, the Company paid
$4,300,000 in December 1998 using available cash and assumed certain
liabilities. The transaction was accounted for as a purchase and has been
included in the consolidated financial statements since the date of acquisition.
The purchase price has been allocated on the basis of the estimated fair market
value of the assets acquired and the liabilities assumed. The acquisition
included the purchase of certain technology under research and development,
which resulted in a charge to the Company's consolidated earnings for the
quarter ended December 31, 1998 of $1,800,000 or $0.12 per share. Intangible
assets totaling $1,266,000 were recorded at the time of the acquisition as well
as noncompetition agreements with key executives for a total value of
$1,500,000. All intangible assets in connection with the acquisition are being
amortized on a straight-line basis over their estimated useful lives, ranging
from one to five years.
40
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACQUISITIONS AND INVESTMENTS (CONTINUED)
SHERPA SYSTEMS CORPORATION
On December 4, 1998 the Company acquired a majority of the outstanding stock
of privately held Sherpa Systems Corporation ("Sherpa") and acquired the
remainder of the outstanding stock prior to December 31, 1998. Sherpa is a
provider of product data management solutions that manage mission-critical
information through the product lifecycle process of design, testing,
manufacturing, and delivery.
The total consideration paid for the Sherpa acquisition was $36,000,000
consisting of $28,700,000 of cash ($1,800,000 of which has been accrued at
December 31, 1998) and warrants to purchase 1,456,458 shares of common stock.
The warrants at the time of the acquisition were valued at $5.00 per warrant, or
$7,282,000. The warrants, which are fully exercisable, have a 24-month term and
the right to purchase shares of the Company's common stock at an exercise price
of $23.50 per share (see Note 15).
The transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The purchase
price has been allocated on a preliminary basis (until the final closing
adjustments under the original agreement are resolved with the sellers) based
upon the estimated fair value of the assets acquired and the liabilities assumed
at the time of acquisition. The acquisition included the purchase of certain
technology under research and development, which resulted in a charge to the
Company's consolidated earnings for the quarter ended December 31, 1998 of
$12,000,000, or $0.78 per share. At the time of the acquisition, the Company
also caused Sherpa to enter into employment and noncompetition agreements with
key executives. The Company will make aggregate payments of approximately
$1,600,000 over the next three years under those agreements. Amounts capitalized
in connection with these agreements are being amortized on a straight-line basis
ranging from one to three years. Additionally, other intangible assets and
capitalized software totaling $30,385,000 were recorded at the time of the
acquisition and are being amortized on a straight-line basis over their
estimated useful lives, ranging from two years to ten years.
The acquisition also included estimated costs of approximately $5,800,000
for direct transaction costs and costs relating to the elimination of excess and
duplicative activities as a result of the merger. As of December 31, 1998, all
of the estimated costs of $5,800,000 were included in accrued acquisition
related liabilities. During 1999, payments against the accruals are expected to
include severance for elimination of duplicate functions and closure of
duplicate and excess operations; cancellation of facility leases and other
contracts for closed operations; professional fees consisting principally of
appraisal, legal, and accounting fees; and other out of pocket expenses related
to the acquisition. Employee terminations are expected to be in the areas of
sales, marketing and administrative functions. A majority of the payments
relating to the accrual are expected to be made during 1999.
At the time of the acquisition, Sherpa had a line of credit with a bank,
which provides for borrowings based on eligible accounts receivable, up to a
maximum of $5,000,000 with interest thereon at the bank's prime rate. This line
of credit facility had a termination date of February 28, 1999. The line of
credit agreement is secured by the Company's assets and the terms of the related
agreement include certain covenants. At December 31, 1998, the Company had no
borrowings under this agreement and has no plans to renew the line of credit.
MEDIABANK
On August 28, 1998, the Company acquired the intellectual property and
certain other assets of Bitstream Inc.'s MediaBank media asset management system
and related technologies for $11,900,000
41
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACQUISITIONS AND INVESTMENTS (CONTINUED)
using available cash. The transaction also included a license to Bitstream's
PageFlex page composition technology for an additional $600,000. The transaction
was accounted for as a purchase and has been included in the consolidated
financial statements since the date of acquisition. The purchase price has been
allocated on the basis of the estimated fair market value of the assets acquired
and the liabilities assumed. The acquisition included the purchase of certain
technology under research and development, which resulted in a charge to the
Company's consolidated earnings for the quarter ended September 30, 1998 of
$7,500,000, or $0.49 per share. Intangible assets totaling $4,460,000 were
recorded at the time of the acquisition and are being amortized on a
straight-line basis over five years.
VIEWPORT DEVELOPMENT AB
On March 12, 1998, the Company acquired all of the outstanding capital stock
of privately held ViewPort Development AB for $2,500,000 using available cash.
ViewPort, through its wholly owned subsidiary Synex Information AB, is a
developer of browser engines and application development toolkits for viewing
Standard Generalized Markup Language information. The transaction was accounted
for as a purchase and has been included in the consolidated financial statements
since the date of acquisition. The purchase price has been allocated on the
basis of the estimated fair market value of the assets acquired and the
liabilities assumed. The acquisition included the purchase of certain technology
under research and development, which resulted in a charge to the Company's
consolidated results for the quarter ended March 31, 1998 of $600,000, or $0.04
per share. Intangible assets of $1,830,000 were recorded at the time of the
acquisition and are being amortized on a straight-line basis over their
estimated useful lives ranging from one to five years.
HENDERSON SOFTWARE, INC.
On November 24, 1997, the Company acquired all of the outstanding stock of
privately held Henderson Software, Inc. for $750,000 using available cash.
Henderson Software is a provider of Computer Graphics Metafile viewing and
filtering solutions. The transaction was accounted for as a purchase and has
been included in the consolidated financial statements since the date of
acquisition. The purchase price has been allocated on the basis of the estimated
fair market value of the assets acquired and liabilities assumed. The
acquisition included the purchase of certain technology under research and
development, which resulted in a charge to the Company's consolidated results
for the quarter ended December 31, 1997 of $700,000, or $0.05 per share.
LEVEL FIVE RESEARCH, INC.
On April 22, 1997, the Company acquired all of the outstanding capital stock
of privately held Level Five Research, Inc. from Information Builders, Inc. for
$5,000,000 using available cash. Level Five Research, Inc., which operated as
Inso Florida Corporation prior to the sale of its assets to Lernout & Hauspie
Speech Products N.V. (see Note 5), is a developer of software and systems that
apply intelligent technologies to data access management. The transaction was
accounted for as a purchase and was included in the consolidated financial
statements from the date of acquisition to the date of disposition. The purchase
price was allocated on the basis of the estimated fair market value of the
assets acquired and liabilities assumed. The acquisition included the purchase
of certain technology under research and development, which resulted in a charge
to the Company's consolidated results for the quarter ended June 30, 1997 of
$3,600,000, or $0.25 per share.
42
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACQUISITIONS AND INVESTMENTS (CONTINUED)
MASTERSOFT
On February 6, 1997, the Company acquired the intellectual property and
certain other assets of Adobe Systems Inc.'s document access and conversion
business, formerly known as Mastersoft, for $2,965,000 using available cash. The
transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The purchase
price has been allocated on the basis of the estimated fair market value of the
assets acquired and liabilities assumed. The acquisition included the purchase
of certain technology under research and development, which resulted in a charge
to the Company's consolidated results for the quarter ended March 31, 1997 of
$1,800,000, or $0.13 per share. Intangible assets of approximately $258,000 were
recorded at the time of the acquisition and are being amortized on a
straight-line basis over their estimated useful lives of five years.
PROFORMA RESULTS
Unaudited pro forma revenue, net loss, and loss per share shown below for
the year ended December 31, 1998 assumes the acquisitions of Venture Labs, Inc.,
Sherpa Systems Corporation, MediaBank and ViewPort Development AB occurred on
January 1, 1998. Unaudited pro forma revenue, net loss, and loss per share shown
below for the year ended December 31, 1997 assumes the acquisitions of Venture
Labs, Inc., Sherpa Systems Corporation, MediaBank, ViewPort Development AB,
Henderson Software, Inc., Level Five Research, Inc., and Mastersoft occurred on
January 1, 1997. Therefore, the 1997 amounts presented below include the
write-off of certain purchased technology under research and development of
$1,800,000 relating to Venture Labs, Inc., $12,000,000 relating to Sherpa
Systems Corporation, $7,500,000 relating to MediaBank and $600,000 relating to
ViewPort Development AB.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
(UNAUDITED)
----------------------
<S> <C> <C>
1998 1997
---------- ----------
<CAPTION>
(IN THOUSANDS OF
DOLLARS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenue................................................................................... $ 97,327 $ 127,080
Net loss.................................................................................. (37,743) (31,127)
Loss per share............................................................................ $ (2.51) $ (2.17)
</TABLE>
ELECTRONIC BOOK TECHNOLOGIES, INC.
On July 16, 1996, the Company acquired all of the outstanding capital stock
of privately held Electronic Book Technologies, Inc. ("EBT"), now Inso
Providence Corporation ("Inso Providence"). In connection with the acquisition,
the Company paid approximately $27,800,000 in July 1996. In addition,
$10,600,000 was paid in October 1996 in connection with the purchase of shares
of EBT stock issued upon the exercise of EBT stock options that survived the
closing. All payments related to the EBT acquisition were made from the
Company's available cash.
The transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The purchase
price has been allocated on the basis of the estimated fair market value of the
assets acquired and liabilities assumed. The acquisition included the purchase
of certain technology under research and development, which resulted in a charge
to the
43
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACQUISITIONS AND INVESTMENTS (CONTINUED)
Company's consolidated earnings for the quarter ended September 30, 1996, of
$34,300,000, or $2.62 per share.
In connection with the Inso Providence acquisition, the Company paid an
additional $1,467,000 to the former principal stockholder of EBT in January,
1998. The acquisition also required, in the event that certain 1997 Inso
Providence financial and operating goals were met, the Company to pay contingent
payments up to an additional $5,300,000. As of December 31, 1998, the Company
did not have a remaining liability with respect to the contingent payments for
1997 Inso Providence financial and operating goals.
The Inso Providence acquisition also included estimated costs of
approximately $2,200,000 for direct transaction costs and costs relating to the
elimination of excess and duplicative activities. Charges against the accrual in
1997 and 1996 were $1,200,000 and $600,000, respectively and consisted of the
following: $573,000 of professional fees consisting principally of appraisal,
legal, and accounting fees; $637,000 of employee severance for elimination of
duplicate functions and closure of duplicate and excess operations; $505,000 of
lease and other facility costs for closed operations; and $85,000 of other
out-of-pocket expenses related to the acquisition. Employee terminations were
essentially in the areas of sales, marketing, and product development. During
1997, the Company reevaluated the estimate of costs relating to the elimination
of excess and duplicative activities and reduced the related accrual and
goodwill by approximately $400,000. As of December 31, 1997, the Company had
made all payments relating to the exit costs associated with this acquisition.
IMAGEMARK SOFTWARE LABS, INC.
On January 9, 1996, the Company acquired all of the outstanding stock of
privately held ImageMark Software Labs, Inc., now Inso Kansas City Corporation
("Inso Kansas City"), for a purchase price of $5,500,000. The purchase price was
paid from available cash. The Company also caused, at the time of acquisition,
Inso Kansas City to enter into employment and noncompetition agreements with two
key executives and made aggregate payments of $1,000,000 under those agreements.
The transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The purchase
price has been allocated on the basis of the estimated fair market value of the
assets acquired and liabilities assumed. The acquisition included the purchase
of certain technology under research and development, which resulted in a charge
to the Company's consolidated results for the quarter ended March 31, 1996 of
$4,400,000, or $0.34 per share. Intangible assets of approximately $351,000 were
recorded at the time of the acquisition and are being amortized on a
straight-line basis over their estimated useful lives of seven years. Amounts
capitalized in connection with the employment and noncompetition agreements are
being amortized on a straight-line basis over three years.
In August 1996, Inso Kansas City exceeded certain performance measures as
set forth in the stock purchase agreement. As a result, during 1997 the Company
paid an additional $950,000 to the former stockholders of Inso Kansas City. The
additional consideration is being amortized on a straight-line basis over the
remaining useful life of intangible assets.
In connection with the acquisitions outlined above, the Company engaged an
independent appraiser to estimate the fair market value of the assets acquired,
to serve as a basis for the allocation of the purchase price. The nature of the
efforts required to develop the purchased in-process technology into
commercially viable products principally relate to the completion of all
planning, designing, prototyping, verification, and testing activities necessary
to establish that the product can be produced to meet its design specifications,
including functions, features, and technical performance requirements.
44
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACQUISITIONS AND INVESTMENTS (CONTINUED)
The values of the purchased in-process research and development were based
upon future revenues to be earned upon commercialization of the products. These
cash flows were discounted back to their net present value. The resulting
projected net cash flows from such projects were based on management's estimates
of revenues and operating profits related to such projects. The revenue
estimates used to value the in-process research and development were based on
estimates of relevant market sizes and growth factors, expected trends in the
related technology, and the nature and expected timing of new product
introductions by the Company and its competitors.
The estimates used by the Company in valuing the in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the projected results. Any such variances may adversely
affect the sales and profitability of future periods. Additionally, the value of
other intangible assets recorded at the time of the respective acquisitions may
become impaired.
INFORMATION PLEASE LLC
On April 23, 1997, the Company entered into an agreement for the further
development and marketing of the Company's Information Please-Registered
Trademark- Almanac Product line, with Information Please LLC (the
"Partnership"). The Company transferred ownership of the Information Please
brand and the intellectual properties that comprise the almanac product line to
the Partnership. In addition, some of the Company's technical and editorial
staff members became employees of the Partnership. The Company retained a 19.8%
ownership position in the new venture. The Company accounts for its investment
in Information Please LLC under the cost method. There was no gain or loss
recognized by the Company on the transfer of the assets to the Partnership. As
of December 31, 1998 and 1997, the Company's investment in Information Please
LLC approximated $2,600,000.
NOTE 5. SALE OF LINGUISTIC SOFTWARE NET ASSETS
On April 23, 1998, the Company sold its linguistic software assets to
Lernout & Hauspie Speech Products N.V. for $19,500,000, plus an additional
amount for certain receivables net of certain liabilities. Lernout & Hauspie
paid the purchase price 50% in cash and 50% in the form of a note that was
converted into shares of Lernout & Hauspie common stock in June 1998. The
Company sold the Lernout & Hauspie common stock in June 1998. Lernout & Hauspie
paid for the other net assets in cash. Included in the assets transferred to
Lernout & Hauspie are all of Inso's linguistic software products, including its
proofing tools, reference works, and information management tools, the Quest
database search technology acquired with the Level Five Research, Inc. 1997
acquisition, and all customer and supplier agreements related to those products.
In connection with the sale, the Company recorded direct transaction costs;
costs to write-off capitalized software and other assets; estimated lease and
facility costs; and other accruals for costs directly associated with the sale.
As a result, the Company reported a pre-tax gain of $13,289,000 in 1998.
45
<PAGE>
INSO CORPORATION
UNAUDITED QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
----------- --------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1998
Revenues........................................... $ 16,810 $ 14,513 $ 14,139 $ 14,632 $ 60,094
Gross profit....................................... 14,027 12,476 11,518 9,423 47,444
Net income (loss).................................. (999) 11,601 (8,122) (22,049) (19,569)
Earnings (loss) per common share................... $ (0.07) $ 0.78 $ (0.53) $ (1.43) $ (1.30)
Earnings (loss) per common share--assuming
dilution......................................... $ (0.07) $ 0.74 $ (0.53) $ (1.43) $ (1.30)
1997
Revenues........................................... $ 19,062 $ 20,058 $ 20,462 $ 22,287 $ 81,869
Gross profit....................................... 17,086 17,112 18,077 19,783 72,058
Net income (loss).................................. 2,508 (6,773) 1,989 1,836 (440)
Earnings (loss) per common share................... $ 0.18 $ (0.47) $ 0.14 $ 0.13 $ (0.03)
Earnings (loss) per common share--assuming
dilution......................................... $ 0.17 $ (0.47) $ 0.14 $ 0.13 $ (0.03)
</TABLE>
Subsequent to the filing of its Quarterly Reports on Form 10-Q with the
Securities and Exchange Commission, the Company discovered certain errors and
irregularities that ultimately affected the timing and dollar amounts of
previously reported revenues, principally related to foreign distributors for
the quarters ended March 31, June 30, and September 30 1998. As a result of
these errors and irregularities, the Company has restated revenues and the
results of operations for those quarters.
The irregularities related primarily to side agreements and other terms and
conditions that have resulted or could result in, significant concessions or
allowances that were not known, or accounted for when the revenue was previously
reported as earned.
Also, the Company, in consultation with its independent accountants, has
determined to adjust the amounts originally allocated to acquired in-process
research and development for the acquisition of ViewPort Development AB for the
nine months ended September 30, 1998 to reflect the new methodology set forth in
the September 15, 1998 letter from the Securities and Exchange Commission Staff
to the American Institute of Certified Public Accountants. As a result, the
Company has decreased the amount of the purchase price allocated to acquired
in-process research and development and increased the amount allocated to
technology, other intangibles, and goodwill. Specifically, the Company reduced
the amount of the previously reported charge for in-process research and
development from $2,100,000 to $600,000, increased purchased technology by
$200,000, increased other intangibles by $230,000, and increased goodwill by
$1,070,000.
As a result of the aforementioned restatements, total revenues and net
income decreased by approximately $7,090,000 and $3,144,000, respectively, for
the nine months ended September 30, 1998.
In conjunction with these restatements, the Company also reclassified
certain support costs to cost of revenues that had previously been reported in
sales and marketing expense.
The first quarter of 1998 includes an acquisition charge of $600,000, or
$0.04 per share, for certain purchased technology under research and development
by ViewPort Development AB at the time of the March 12, 1998, acquisition. See
Note 4 to the "Consolidated Financial Statements" for a description of the
transaction.
59
<PAGE>
The second quarter of 1998 includes a gain of $12,012,000, or $0.77 per
share, relating to the sale of the linguistic software assets to Lernout &
Hauspie Speech Products N.V. The fourth quarter of 1998 includes an additional
gain of $1,277,000, or $0.08 per share, related to the sale. See Note 5 to the
"Consolidated Financial Statements" for a description of the transaction.
The third quarter of 1998 includes an acquisition charge of $7,500,000, or
$0.49 per share, for certain purchased technology under research and development
by Bitstream Inc.'s MediaBank media asset management system at the time of the
August 28, 1998, acquisition. See Note 4 to the "Consolidated Financial
Statements" for a description of the transaction.
The fourth quarter of 1998 includes acquisition charges of $12,000,000, or
$0.78 per share, and $1,800,000, or $0.12 per share, for certain purchased
technology under research and development by Sherpa Systems Corporation and
Venture Labs, Inc, respectively at the time of the December 4, 1998 and December
22, 1998, acquisitions. See Note 4 to the "Consolidated Financial Statements"
for a description of these transactions.
The fourth quarter of 1998 includes a charge of $4,000,000, or $0.27 per
share, relating to an international distributor arrangement. See Note 13 to the
"Consolidated Financial Statements" for a description of this transaction.
The first quarter of 1997 includes an acquisition charge of $1,800,000, or
$0.13 per share, for certain purchased technology under research and development
by Adobe Systems Inc.'s document access and conversion business formerly known
as Mastersoft, at the time of the February 6, 1997, acquisition. See Note 4 to
the "Consolidated Financial Statements" for a description of the transaction.
The second quarter of 1997 includes an acquisition charge of $3,600,000, or
$0.25 per share, for certain purchased technology under research and development
by Level Five Research, Inc. at the time of the April 22, 1997, acquisition. See
Note 4 to the "Consolidated Financial Statements" for a description of the
transaction.
The second quarter of 1997 includes a charge of $3,684,000, net of income
taxes, or $0.26 per share, for a restructuring plan aimed at continuing to focus
on strategic products while reducing costs and streamlining the organization.
See Note 8 to the "Consolidated Financial Statements" for a description of the
transaction.
The fourth quarter of 1997 includes an acquisition charge of $700,000, or
$0.05 per share, for certain purchased technology under research and development
by Henderson Software, Inc. at the time of the November 24, 1997, acquisition.
See Note 4 to the "Consolidated Financial Statements" for a description of the
transaction.
60
<PAGE>
INSO CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ADDITIONS CHARGED TO BALANCE
BEGINNING DUE TO COSTS AMOUNTS AT END
OF YEAR ACQUISITIONS AND EXPENSES WRITTEN OFF OF YEAR
------------ ----------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1998
Allowance for doubtful accounts......... $ 1,662,000 $ 438,000 $ 506,000 $ (563,000) $ 2,043,000
Allowance for returns and refunds....... 748,000 0 2,538,000 (1,223,000) 2,063,000
------------ ----------- --------------- ------------- ------------
Total................................... $ 2,410,000 $ 438,000 $ 3,044,000 $ (1,786,000) $ 4,106,000
1997
Allowance for doubtful accounts......... $ 1,233,000 $ 138,000 $ 721,000 $ (430,000) $ 1,662,000
Allowance for returns and refunds....... 561,000 0 391,000 (204,000) 748,000
------------ ----------- --------------- ------------- ------------
Total................................... $ 1,794,000 $ 138,000 $ 1,112,000 $ (634,000) $ 2,410,000
1996
Allowance for doubtful accounts......... $ 971,000 $ 176,000 $ 184,000 $ (98,000) $ 1,233,000
Allowance for returns and refunds....... 166,000 0 420,000 (25,000) 561,000
------------ ----------- --------------- ------------- ------------
Total................................... $ 1,137,000 $ 176,000 $ 604,000 $ (123,000) $ 1,794,000
</TABLE>
61
<PAGE>
ITEM 14(A)3. EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
2.1 Share Exchange Agreement and Agreement and Plan of Merger among Inso Corporation, Tabasco Corp., *
Sherpa Systems Corporation and The Selling Stockholders named therein, incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Commission on December
18, 1998.
2.2 Asset Purchase Agreement dated March 31, 1998, by and among Inso Corporation, Inso Dallas *
Corporation, Inso Florida Corporation and Lernout & Hauspie Speech Products N.V., incorporated by
reference to the Company's Current Report on Form 8-K filed with the Commission on May 7, 1998.
3.1 Restated Certificate of Incorporation of the Company dated June 21, 1996, incorporated by *
reference to Exhibit 4.1 to Registration Statement Number 333-06845 on Form S-8 filed with the
Commission on June 26, 1996.
3.2 Restated By-laws of the Company.
4.1 Proof of Common Stock Certificate of the Company, incorporated by reference to Exhibit 4 to the *
Registration Statement No. 33-73996 on Form S-1 filed with the Commission on January 12, 1994
(the "Form S-1").
4.2 Rights Agreement, dated July 11, 1997, by and between the Company and State Street Bank & Trust *
Company, as Rights Agent, incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed with the Commission on July 16, 1997.
+10.1 Inso Corporation 1993 Stock Purchase Plan, as amended.
+10.2 Inso Corporation 1993 Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10.4 *
to the Company's Report on Form 10-K for the twelve month period ended December 31, 1995.
+10.3 Inso Corporation 1996 Stock Incentive Plan, as amended.
+10.4 Inso Corporation 1996 Non-employee Director Plan, as amended.
+10.5 Inso Corporation Restated 401(k) Plan dated October 1, 1997.
10.6 Office Lease, dated November 30, 1994, by and between the Company and MBL Life Assurance *
Corporation as incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form
10-K for the twelve month period ended December 31, 1995.
10.7 Lease to Premises, dated December 27, 1995, by and between Inso Chicago Corporation and *
International Business Machines Corporation, as incorporated by reference to Exhibit 10.7 to the
Company's Report on Form 10-K for the twelve month period ended December 31, 1995.
10.8 Lease to Premises, dated March 6, 1997, by and between Inso Providence Corporation and The
Foundry Associates, L.P.
10.9 Lease to Premises, dated April 11, 1996, by and between Sherpa Systems Corporation and Berg &
Berg Developers.
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
+10.10 Pledge Agreements, each dated December 16, 1997, by and between the Company and certain of its *
corporate officers as incorporated by reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the twelve-month period ended December 31, 1997.
+10.11 Form of Management Retention Agreement by and between Inso Corporation and certain of its
corporate officers.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated herein by reference.
+ Management contract or compensatory plan or arrangement filed herewith, or
incorporated by reference, in response to Item 14(a)3 of the instructions to
Form 10-K.
63
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
64
<PAGE>
EXHIBIT 3.2
RESTATED
BY-LAWS
OF
INSO CORPORATION
ARTICLE I
Stockholders
SECTION 1. Annual Meeting. The annual meeting of stockholders shall be
held at the hour, date and place within or without the United States which is
fixed by the Board of Directors, the Chairman of the Board, if one is elected,
or the Vice Chairman of the Board, if one is elected and in the case of the
death, absence, incapacity or refusal of the Chairman of the Board, which time,
date and place may subsequently be changed at any time by vote of the Board of
Directors. If no annual meeting has been held for a period of thirteen months
after the Corporation's last annual meeting of stockholders, a special meeting
in lieu thereof may be held, and such special meeting shall have, for the
purposes of these By-Laws or otherwise, all the force and effect of an annual
meeting. Any and all references hereafter in these By-Laws to an annual meeting
or annual meetings also shall be deemed to refer to any special meeting(s) in
lieu thereof.
SECTION 2. Matters to be Considered at Annual Meeting. At an annual
meeting of stockholders, only such business shall be conducted, and only such
proposals shall be acted upon, as shall have been properly brought before the
annual meeting (a) by, or at the direction of, the Board of Directors or a
designated committee thereof or (b) by any holder of record (both as of the time
notice of such proposal is given by the stockholder as set forth below and as of
the record date for the annual meeting in question) of any shares of capital
stock of the Corporation entitled to vote at such annual meeting who complies
with the procedures set forth in this Section. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a holder of record of any shares of capital stock entitled to vote at
such annual meeting, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation as set forth in this Section and
such stockholder or his or her representative must be present at the annual
meeting. To be timely, a stockholder's notice must be delivered to, or mailed
and received at, the principal executive offices of the Corporation (a) not less
than 75 days nor more than 120 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders (the "Anniversary Date") or
(b) in the event that the annual meeting of stockholders is called for a date
more than seven
<PAGE>
days prior to the Anniversary Date, not later than the close of business on
(i) the 20th day (or if that day is not a business day of the Corporation, on
the next succeeding business day) following the first date on which the date
of such meeting was publicly disclosed or (ii) if such date of public
disclosure occurs more than 75 days prior to such scheduled date of such
meeting, then the later of (1) the 20th day (or if that day is not a business
day for the Corporation, on the next succeeding business day) following the
first date of public disclosure or (2) the 75th day prior to such scheduled
date of such meeting (or if that day is not a business day for the
Corporation, on the next succeeding business day). Any public disclosure of
the scheduled date of the meeting made by the Corporation by means of a press
release, a report or other document filed with the Securities and Exchange
Commission, or a letter or report sent to stockholders of record of the
Corporation, shall be deemed to be sufficient public disclosure of the date
of such meeting for purposes of these By-Laws.
A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting (a) a brief
description of the proposal desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's stock transfer books, of the
stockholder proposing such business and of the beneficial owners (if any) of the
stock registered in such stockholder's name and the name and address of other
stockholders known by such stockholder to be supporting such proposal on the
date of the stockholder notice, (c) the class and number of shares of the
Corporation's capital stock which are held of record, beneficially owned or
represented by proxy by the stockholder and by any other stockholders known by
such stockholder to be supporting such proposal on the record date for the
annual meeting in question (if such date shall then have been made publicly
available) and on the date of such stockholder's notice, and (d) any material
interest of the stockholder in such proposal.
If the Board of Directors, or a designated committee thereof,
determines that any stockholder proposal was not timely made in accordance with
the provisions of this Section, or that the information provided in a
stockholder's notice does not satisfy the informational requirements of this
Section in any material respect, then such proposal shall not be presented for
action at the annual meeting in question. If neither the Board of Directors nor
such committee makes a determination as to the validity of any stockholder
proposal, the presiding officer of the annual meeting shall determine and
declare at the annual meeting whether the stockholder proposal was made in
accordance with the terms of this Section. If the presiding officer determines
that a stockholder proposal was made in accordance with the terms of this
Section, he shall so declare at the annual meeting and ballots shall be provided
for use at the meeting with respect to any such proposal. If the presiding
officer determines that a stockholder proposal was not made in accordance with
the terms of this Section, he shall so declare at the annual meeting and any
such proposal shall not be acted upon at the annual meeting.
The provisions of this By-Law shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, Directors
and committees of the Board of Directors, but in connection with such reports,
no new business shall be acted
<PAGE>
upon at such annual meeting unless stated, filed and received as herein
provided or properly brought before such annual meeting by, or at the
direction of, the Board of Directors or a designated committee thereof.
Notwithstanding the foregoing provisions of this By-Law, a stockholder
shall also comply with all applicable requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the rules and regulations
thereunder with respect to the matters set forth in this By-Law. Nothing in this
By-Law shall be deemed to affect any rights of stockholders to request inclusion
of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under
the Exchange Act.
SECTION 3. Special Meetings. Except as otherwise required by law and
subject to the rights of the holders of any series of preferred stock, special
meetings of the stockholders of the Corporation may be called only by (i) the
Board of Directors pursuant to a resolution approved by the affirmative vote of
any two of the Directors then in office, (ii) the Chairman of the Board, if one
is elected, or (iii) the Vice Chairman of the Board, if one is elected and in
the case of the death, absence, incapacity or refusal of the Chairman of the
Board; provided, however, that if at the time of such call there is an
Interested Stockholder, any such call shall also require the affirmative vote of
a majority of the Continuing Directors then in office.
SECTION 4. Matters to be Considered at Special Meetings. Only those
matters set forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders of the Corporation, unless
otherwise provided by law.
SECTION 5. Notice of Meetings; Adjournments. A written notice of all
annual meetings of stockholders stating the hour, date and place of such annual
meetings shall be given by the Secretary or an Assistant Secretary (or other
person authorized by these By-Laws or by law) not less than 10 days nor more
than 60 days before the meeting, to each stockholder entitled to vote thereat
and to each stockholder who, by law or under the Certificate of Incorporation or
under these By-Laws, is entitled to such notice, by delivering such notice to
him or by mailing it, postage prepaid, addressed to such stockholder at the
address of such stockholder as it appears on the Corporation's stock transfer
books. Such notice shall be deemed to be delivered when hand delivered to such
address or deposited in the mail so addressed, with postage prepaid.
Notice of all special meetings of stockholders shall be given in the
same manner as provided for annual meetings of the stockholders, except that the
written notice of all special meetings shall state the purpose or purposes for
which the meeting has been called.
Notice of an annual or special meeting of stockholders need not be
given to a stockholder if a written waiver of notice is signed before or after
such meeting by such stockholder or if such stockholder attends such meeting,
unless such attendance was for the express purpose of objecting at the beginning
of the meeting to the transaction of any business because the meeting was not
lawfully called or convened. Neither the business
<PAGE>
to be transacted at, nor the purpose of, any annual or special meeting of
stockholders need be specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any previously
scheduled annual or special meeting of stockholders and any record date with
respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to Section 2 of this
Article I or Section 3 of Article II hereof or otherwise. When any meeting is
convened, the presiding officer may adjourn the meeting if (a) no quorum is
present for the transaction of business, (b) the Board of Directors determines
that adjournment is necessary or appropriate to enable the stockholders to
consider fully information which the Board of Directors determines has not been
made sufficiently or timely available to stockholders, or (c) the Board of
Directors determines that adjournment is otherwise in the best interests of the
Corporation. When any annual or special meeting of stockholders is adjourned to
another hour, date or place, notice need not be given of the adjourned meeting
other than an announcement at the meeting at which the adjournment is taken of
the hour, date and place to which the meeting is adjourned; provided, however,
that if the adjournment is for more than 30 days, or if after the adjournment a
new record date is fixed for the adjourned meeting, notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote thereat
and each stockholder who, by law or under the Certificate of Incorporation or
these By-Laws, is entitled to such notice.
SECTION 6. Quorum. The holders of shares of Voting Stock (as defined in
the Certificate of Incorporation) representing a majority of the voting power of
the outstanding shares of Voting Stock issued, outstanding and entitled to vote,
represented in person or by proxy, shall constitute a quorum at any annual or
special meeting of stockholders; but if less than a quorum is present at a
meeting, the holders of Voting Stock representing a majority of the voting power
present at the meeting or the presiding officer may adjourn the meeting from
time to time, and the meeting may be held as adjourned without further notice,
except as provided in Section 5 of this Article I. At such adjourned meeting at
which a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally noticed. The stockholders present at a
duly constituted meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
SECTION 7. Voting and Proxies. Stockholders shall have one vote for
each share of stock entitled to vote owned by them of record according to the
books of the Corporation, unless otherwise provided by law or by the Certificate
of Incorporation. Stockholders may vote either in person or by written proxy,
but no proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period. Proxies shall be filed with the
Secretary of the meeting before being voted. Except as otherwise limited therein
or as otherwise provided by law, proxies shall entitle the persons authorized
thereby to vote at any adjournment of such meeting, but they shall not be valid
after final adjournment of such meeting. A proxy with respect to stock held in
the name of two or more persons shall be valid if executed by or on behalf of
any one
<PAGE>
of them unless at or prior to the exercise of the proxy the Corporation
receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a stockholder shall be
deemed valid, and the burden of proving invalidity shall rest on the
challenger.
SECTION 8. Action at Meeting. When a quorum is present, any matter
before any annual or special meeting of stockholders shall be decided by vote of
the holders of shares of Voting Stock representing a majority of the voting
power of shares of Voting Stock entitled to vote on such matter, except where a
larger vote is required by law, by the Certificate of Incorporation or by these
By-Laws. Any election by stockholders shall be determined by a plurality of the
votes cast, except where a larger vote is required by law, by the Certificate of
Incorporation or by these By-Laws. The Corporation shall not directly or
indirectly vote any shares of its own stock; provided, however, that the
Corporation may vote shares which it holds in a fiduciary capacity to the extent
permitted by law.
SECTION 9. Action by Consent. No action that is required or permitted
to be taken by the stockholders of the Corporation at any annual or special
meeting of stockholders may be effected by written consent of stockholders in
lieu of a meeting of stockholders, unless the action to be effected by written
consent of stockholders and the taking of such action by such written consent
have expressly been approved in advance by the Board of Directors of the
Corporation.
SECTION 10. Stockholder Lists. The Secretary or an Assistant Secretary
(or the Corporation's transfer agent or other person authorized by these By-Laws
or by law) shall prepare and make, at least 10 days before every annual or
special meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least 10 days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the hour, date and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 11. Presiding Officer. The Chairman of the Board, if one is
elected, or if elected but absent, the Vice Chairman shall preside at all annual
or special meetings of stockholders and shall have the power, among other
things, to adjourn such meeting at any time and from time to time, subject to
Sections 5 and 6 of this Article I. The order of business and all other matters
of procedure at any meeting of the stockholders shall be determined by the
presiding officer.
SECTION 12. Voting Procedures and Inspectors of Elections. The
Corporation shall, in advance of any meeting of stockholders, appoint one or
more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or
<PAGE>
more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of
stockholders, the presiding officer shall appoint one or more inspectors to
act at the meeting. Any inspector may, but need not, be an officer, employee
or agent of the Corporation. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his or her ability. The inspectors shall perform such duties as are required
by the General Corporation Law of the State of Delaware, as amended from time
to time, including the counting of all votes and ballots. The inspectors may
appoint or retain other persons or entities to assist the inspectors in the
performance of the duties of the inspectors. The presiding officer may review
all determinations made by the inspector(s), and in so doing the presiding
officer shall be entitled to exercise his or her sole judgment and discretion
and he or she shall not be bound by any determinations made by the
inspector(s). All determinations by the inspector(s) and, if applicable, the
presiding officer shall be subject to further review by any court of
competent jurisdiction.
ARTICLE II
Directors
SECTION 1. Powers. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided by the Certificate of Incorporation or required by law. In the event of
a vacancy in the Board of Directors, the remaining Directors, except as
otherwise provided by law, may exercise the powers of the full Board until the
vacancy is filled.
SECTION 2. Number and Terms. Except as otherwise fixed pursuant to the
provisions of Article IV of the Certificate of Incorporation relating to the
rights of the holders of any series of preferred stock to elect Directors, the
number of Directors of the Corporation shall be fixed by resolution duly adopted
from time to time by the Board of Directors. The Directors shall be classified,
with respect to the time for which they severally hold office, into three
classes, as nearly equal in number as possible as determined by the Board of
Directors, with one class to be elected annually.
The initial Directors of the Corporation shall hold office as follows:
the Class I Directors shall hold office initially for a term expiring at the
annual meeting of stockholders to be held in 1994, the Class II Directors shall
hold office initially for a term expiring at the annual meeting of stockholders
to be held in 1995, and the Class III Directors shall hold office initially for
a term expiring at the annual meeting of stockholders to be held in 1996, with
the members of each class to hold office until their respective successors are
duly elected and qualified or until their earlier resignation or removal. At
each annual meeting of the stockholders of the Corporation, Directors elected to
succeed those whose terms are expiring at that meeting shall be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year
<PAGE>
following the year of their election and until their respective successors
are duly elected and qualified or until their earlier resignation or removal.
SECTION 3. Director Nominations. In order to be eligible for election
as a Director to the Board of Directors, an individual must have been nominated
in accordance with the provisions of these By-Laws. Nominations of candidates
for election as Directors of the Corporation at any annual meeting of
stockholders may be made (a) by, or at the direction of, a majority of the Board
of Directors or a designated committee thereof, or (b) by any holder of record
(both as of the time notice of such nomination is given by the stockholder as
set forth below and as of the record date for the annual meeting in question) of
any shares of the capital stock of the Corporation entitled to vote at such
annual meeting who complies with the procedures set forth in this Section. Any
stockholder who seeks to make such a nomination, or his or her representative,
must be present in person at the annual meeting. Only persons nominated in
accordance with the procedures set forth in this Section shall be eligible for
election as Directors at an annual meeting of stockholders.
Nominations, other than those made by, or at the direction of, the
Board of Directors or a designated committee thereof, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation as set forth in
this Section. To be timely, a stockholder's notice shall be delivered to, or
mailed and received, at the principal executive offices of the Corporation (a)
not less than 75 days nor more than 120 days prior to the Anniversary Date or
(b) in the event that the annual meeting of stockholders is called for a date
more than seven days prior to the Anniversary Date, not later than the close of
business on (i) the 20th day (or if that day is not a business day for the
Corporation, on the next succeeding business day) following the first date on
which the date of such meeting was publicly disclosed or (ii) if such date of
public disclosure occurs more than 75 days prior to such scheduled date of such
meeting, then the later of (1) the 20th day (or if that day is not a business
day for the Corporation, on the next succeeding business day) following the
first date of public disclosure of the date of such meeting or (2) the 75th day
prior to such scheduled date of such meeting (or if that day is not a business
day for the Corporation, on the next succeeding business day). Any public
disclosure of the scheduled date of the meeting made by the Corporation by means
of a press release, a report or other document filed with the Securities and
Exchange Commission, or a letter or report sent to stockholders of record of the
Corporation, shall be deemed to be sufficient public disclosure of the date of
such meeting for purposes of these By-Laws. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person during the past five years, (iii) the class and number of shares of
the Corporation's capital stock which are beneficially owned by such person on
the date of such stockholder notice, (iv) a description of any of the following
events that has occurred within the last five years and that is material to the
evaluation of the ability or integrity of such proposed nominee: (1) a petition
under Federal bankruptcy laws or any state insolvency laws was filed by or
against such person, (2) such person was convicted in a criminal proceeding or
was a named subject of a criminal proceeding
<PAGE>
(excluding traffic violations and other minor offenses), (3) such person was
found by any court of competent jurisdiction to have violated any Federal or
state securities law or Federal commodities law, which judgment or finding
has not been subsequently reversed, suspended or vacated, or (4) such person
was the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction or of any
Federal or state governmental or quasi-governmental agency, authority or
commission enjoining him or otherwise limiting him from engaging in any type
of business practice or in any activity in connection with the purchase or
sale of any security or commodity, and (v) the consent of each nominee to
serve as a Director if so elected, and (b) as to the stockholder giving the
notice, (i) the name and address, as they appear on the Corporation's stock
transfer books, of such stockholder and of the beneficial owners (if any) of
the stock registered in such stockholder's name and the name and address of
other stockholders known by such stockholder to be supporting such nominees,
(ii) the class and number of shares of the Corporation's capital stock which
are beneficially owned by such stockholder and such beneficial owners (if
any) on the date of such stockholder notice and by any other stockholders
known by such stockholder to be supporting such nominees on the date of such
stockholder notice, (iii) a representation that the stockholder or his or her
representative intends to appear in person at the meeting to nominate the
person or persons specified in the notice, (iv) a description of all
arrangements or understandings between such stockholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by such stockholders; provided,
however, that nothing in subsection (a) or (b) of this Section shall require
the stockholder giving such notice to provide to the Corporation copies of
such stockholder's preliminary or definitive proxy, proxy statement, or other
soliciting material filed with the Securities and Exchange Commission. At the
request of the Board of Directors, any person nominated by, or at the
direction of, the Board of Directors for election as a Director at an annual
meeting shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which
pertains to such nominee.
No person shall be elected by the stockholders as a Director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section. Election of Directors at the annual meeting need not be by written
ballot, unless otherwise provided by the Board of Directors or presiding officer
at such annual meeting. If written ballots are to be used, ballots bearing the
names of all the persons who have been nominated for election as Directors at
the annual meeting in accordance with the procedures set forth in this Section
shall be provided for use at the annual meeting.
If the Board of Directors, or a designated committee thereof,
determines that any stockholder nomination was not timely made in accordance
with the terms of this Section or that the information provided in a
stockholder's notice does not satisfy the informational requirements of this
Section in any material respect, then such nomination shall not be considered at
the annual meeting in question. If neither the Board of Directors nor such
committee makes a determination as to the validity of any nominations by a
stockholder as set forth above, the presiding officer of the annual meeting
shall determine and declare at the annual meeting whether a nomination was
<PAGE>
made in accordance with the terms of this Section. If the presiding officer
determines that a nomination was made in accordance with the terms of this
Section, he shall so declare at the annual meeting and ballots shall be
provided for use at the meeting with respect to such nomination. If the
presiding officer determines that a nomination was not made in accordance
with the terms of this Section, he shall so declare at the annual meeting and
such nomination shall be disregarded.
SECTION 4. Qualification. No Director need be a stockholder of the
Corporation.
SECTION 5. Vacancies. Except as otherwise fixed pursuant to the
provisions of Article IV of the Certificate of Incorporation relating to the
rights of the holders of any class or series of preferred stock to elect
Directors, any vacancy occurring on the Board of Directors, including any
vacancy created by reason of an increase in the number of Directors or resulting
from death, resignation, disqualification, removal or other causes, shall be
filled solely by the affirmative vote of a majority of the remaining Directors
then in office, even if less than a quorum of the Board of Directors; provided,
however, that, if there is an Interested Stockholder at the time of such vote,
the filling of such vacancy shall also require the affirmative vote of a
majority of the Continuing Directors then in office. Any Director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. When the number of Directors is increased or decreased, the Board of
Directors shall determine the class or classes to which the increased or
decreased number of Directors shall be apportioned; provided, however, that no
decrease in the number of Directors shall shorten the term of any incumbent
Director. In the event of a vacancy in the Board of Directors, the remaining
Directors, except as otherwise provided by law, may exercise the powers of the
full Board of Directors until the vacancy is filled.
SECTION 6. Removal. Subject to the rights, if any, of any class or
series of preferred stock to elect Directors and to remove any Director whom the
holders of any such stock had the right to elect, any Director (including
persons elected by Directors to fill vacancies in the Board of Directors) may be
removed from office only with cause and by the affirmative vote of at least
two-thirds of the total votes which would be eligible to be cast by stockholders
in the election of such Director only at a duly constituted meeting of
stockholders called expressly for such purpose. A Director may not be removed
from office without cause. At least 30 days prior to any meeting of stockholders
at which it is proposed that any Director be removed from office, written notice
shall be sent to the Director whose removal will be considered at the meeting.
SECTION 7. Resignation. A Director may resign at any time by
giving written notice to the Chairman of the Board, if one is elected, the
President or the Secretary. A resignation shall be effective upon receipt,
unless the resignation otherwise provides.
<PAGE>
SECTION 8. Regular Meetings. The regular annual meeting of the Board of
Directors shall be held, without notice other than this By-Law, on the same date
and at the same place as the annual meeting of stockholders following the close
of such meeting of stockholders. Other regular meetings of the Board of
Directors may be held at such hour, date and place as the Board of Directors may
by resolution from time to time determine without notice other than such
resolution.
SECTION 9. Special Meetings. Special meetings of the Board of Directors
may be called, orally or in writing, by or at the request of a majority of the
Directors, the Chairman of the Board, if one is elected, or the President. The
person calling any such special meeting of the Board of Directors may fix the
hour, date and place thereof.
SECTION 10. Notice of Meetings. Notice of the hour, date and place of
all special meetings of the Board of Directors shall be given to each Director
by the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the President or such other officer designated by the Chairman of
the Board, if one is elected, or the President. Notice of any special meeting of
the Board of Directors shall be given to each Director in person or by
telephone, telex, telecopy or other written form of electronic communication, or
by telegram sent to his business or home address at least 24 hours in advance of
the meeting, or by written notice mailed to his business or home address at
least 48 hours in advance of the meeting. Such notice shall be deemed to be
delivered when hand delivered to such address, read to such Director by
telephone, deposited in the mail so addressed, with postage thereon prepaid if
mailed, dispatched or transmitted if telexed or telecopied, or when delivered to
the telegraph company if sent by telegram.
When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any notice
of the hour, date or place of any meeting adjourned for less than 30 days or of
the business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken of the hour, date and place to which the
meeting is adjourned.
A written waiver of notice signed before or after a meeting by a
Director and filed with the records of the meeting shall be deemed to be
equivalent to notice of the meeting. The attendance of a Director at a meeting
shall constitute a waiver of notice of such meeting, except where a Director
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because such meeting is not lawfully
called or convened. Except as otherwise required by law, by the Certificate of
Incorporation or by these By-Laws, neither the business to be transacted at, nor
the purpose of, any meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
SECTION 11. Quorum. At any meeting of the Board of Directors, a
majority of the Directors then in office shall constitute a quorum for the
transaction of business, but if
<PAGE>
less than a quorum is present at a meeting, a majority of the Directors
present may adjourn the meeting from time to time, and the meeting may be
held as adjourned without further notice, except as provided in Section 10 of
this Article II. Any business which might have been transacted at the meeting
as originally noticed may be transacted at such adjourned meeting at which a
quorum is present.
SECTION 12. Action at Meeting. At any meeting of the Board of Directors
at which a quorum is present, a majority of the Directors present may take any
action on behalf of the Board of Directors, unless otherwise required by law, by
the Certificate of Incorporation or by these By-Laws.
SECTION 13. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
SECTION 14. Manner of Participation. Directors may participate in
meetings of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all Directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-Laws.
SECTION 15. Committees. The Board of Directors, by vote of a majority
of the Directors then in office, may elect from its number one or more
committees, including an Executive Committee, a Compensation Committee and an
Audit Committee, and may delegate thereto some or all of its powers except those
which by law, by the Certificate of Incorporation or by these By-Laws may not be
delegated. Except as the Board of Directors may otherwise determine, any such
committee may make rules for the conduct of its business, but unless otherwise
provided by the Board of Directors or in such rules, its business shall be
conducted so far as possible in the same manner as is provided by these By-Laws
for the Board of Directors. All members of such committees shall hold such
offices at the pleasure of the Board of Directors. The Board of Directors may
abolish any such committee at any time. Any committee to which the Board of
Directors delegates any of its powers or duties shall keep records of its
meetings and shall report its action to the Board of Directors. The Board of
Directors shall have power to rescind any action of any committee, to the extent
permitted by law, but no such rescission shall have retroactive effect.
SECTION 16. Compensation of Directors. Directors shall receive such
compensation for their services as shall be determined by a majority of the
Board of Directors provided that Directors who are serving the Corporation as
employees and who receive compensation for their services as such, shall not
receive any salary or other compensation for their services as Directors of the
Corporation.
<PAGE>
ARTICLE III
Officers
SECTION 1. Enumeration. The officers of the Corporation shall consist
of a President, a Treasurer, a Secretary and such other officers, including
without limitation a Chairman of the Board of Directors, Vice Chairman of the
Board of Directors and one or more Vice Presidents (including Executive Vice
Presidents or Senior Vice Presidents), Assistant Vice Presidents, Assistant
Treasurers and Assistant Secretaries, as the Board of Directors may determine.
SECTION 2. Election. At the regular annual meeting of the Board
following the annual meeting of stockholders, the Board of Directors shall elect
the President, the Treasurer and the Secretary. Other officers may be elected by
the Board of Directors at such regular annual meeting of the Board of Directors
or at any other regular or special meeting.
SECTION 3. Qualification. No officer need be a stockholder or a
Director. Any person may occupy more than one office of the Corporation at any
time. Any officer may be required by the Board of Directors to give bond for the
faithful performance of his duties in such amount and with such sureties as the
Board of Directors may determine.
SECTION 4. Tenure. Except as otherwise provided by the Certificate of
Incorporation or by these By-Laws, each of the officers of the Corporation shall
hold office until the regular annual meeting of the Board of Directors following
the next annual meeting of stockholders and until his successor is elected and
qualified or until his earlier resignation or removal.
SECTION 5. Resignation. Any officer may resign by delivering his
written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
SECTION 6. Removal. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the Directors then in office; provided, however, that if an
officer is to be removed for cause, he may only be removed after reasonable
notice and an opportunity to be heard by the Board of Directors.
SECTION 7. Absence or Disability. In the event of the absence or
disability of any officer, the Board of Directors may designate another officer
to act temporarily in place of such absent or disabled officer.
SECTION 8. Vacancies. Any vacancy in any office may be filled for
the unexpired portion of the term by the Board of Directors.
<PAGE>
SECTION 9. President. Unless otherwise provided by the Board of
Directors or the Certificate of Incorporation, the President shall be the Chief
Executive Officer of the Corporation and shall, subject to the direction of the
Board of Directors, have general supervision and control of the Corporation's
business. The President shall have such other powers and perform such other
duties as the Board of Directors may from time to time designate.
SECTION 10. Chairman of the Board. The Chairman of the Board, if one is
elected, shall preside, when present, at all meetings of the stockholders and of
the Board of Directors. The Chairman of the Board shall have such other powers
and shall perform such other duties as the Board of Directors may from time to
time designate.
SECTION 11. Vice Chairman of the Board. The Vice Chairman of the Board,
if one is elected, shall preside, when present, at all meetings of the
stockholders of the Board of Directors in the event of the death, absence,
incapacity or refusal of the Chairman of the Board. The Vice Chairman of the
Board of Directors shall have such other powers and shall perform such other
duties as the Board of Directors may from time to time designate.
SECTION 12. Vice Presidents and Assistant Vice Presidents. Any Vice
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the Chief Executive Officer may from time to
time designate.
SECTION 13. Treasurer and Assistant Treasurers. The Treasurer shall,
subject to the direction of the Board of Directors and except as the Board of
Directors or the Chief Executive Officer may otherwise provide, have general
charge of the financial affairs of the Corporation and shall cause to be kept
accurate books of account. The Treasurer shall have custody of all funds,
securities, and valuable documents of the Corporation. He or she shall have such
other duties and powers as may be designated from time to time by the Board of
Directors or the Chief Executive Officer.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 14. Secretary and Assistant Secretaries. The Secretary shall
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose. In
his absence from any such meeting, a temporary secretary chosen at the meeting
shall record the proceedings thereof. The Secretary shall have charge of the
stock ledger (which may, however, be kept by any transfer or other agent of the
Corporation). The Secretary shall have custody of the seal of the Corporation,
and the Secretary, or an Assistant Secretary, shall have authority to affix it
to any instrument requiring it, and, when so affixed, the seal may be attested
by his or her signature or that of an Assistant Secretary. The Secretary shall
have such other duties and powers as may be designated from time to time by the
Board of
<PAGE>
Directors or the Chief Executive Officer. In the absence of the Secretary,
any Assistant Secretary may perform his or her duties and responsibilities.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 15. Other Powers and Duties. Subject to these By-Laws and to
such limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the Board of Directors or the Chief Executive
Officer.
ARTICLE IV
Capital Stock
SECTION 1. Certificates of Stock. Each stockholder shall be entitled to
a certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall
bear the Corporation seal and shall be signed by the Chairman of the Board of
Directors, Vice Chairman of the Board of Directors, the President or a Vice
President and by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary. The Corporation seal and the signatures by Corporation
officers, the transfer agent or the registrar may be facsimiles. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed on such certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if he were such officer, transfer
agent or registrar at the time of its issue. Every certificate for shares of
stock which are subject to any restriction on transfer and every certificate
issued when the Corporation is authorized to issue more than one class or series
of stock shall contain such legend with respect thereto as is required by law.
SECTION 2. Transfers. Subject to any restrictions on transfer and
unless otherwise provided by the Board of Directors, shares of stock may be
transferred only on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate theretofore properly
endorsed or accompanied by a written assignment or power of attorney properly
executed, with transfer stamps (if necessary) affixed, and with such proof of
the authenticity of signature as the Corporation or its transfer agent may
reasonably require.
SECTION 3. Record Holders. Except as may otherwise be required by law,
by the Certificate of Incorporation or by these By-Laws, the Corporation shall
be entitled to treat the record holder of stock as shown on its books as the
owner of such stock for all purposes, including the payment of dividends and the
right to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have
<PAGE>
been transferred on the books of the Corporation in accordance with the
requirements of these By-Laws.
It shall be the duty of each stockholder to notify the Corporation of
his post office address and any changes thereto.
SECTION 4. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date: (1) in the case of
determination of stockholders entitled to vote at any meeting of stockholders or
adjournment thereof, shall, unless otherwise required by law, not be more than
sixty nor less than ten days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action in
writing without a meeting, shall not be more than ten days from the date upon
which the resolution fixing the record date is adopted by the Board of
Directors; and (3) in the case of any other action, shall not be more than sixty
days prior to such other action. If no record date is fixed: (1) the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; (2) the record date
for determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action of the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation in accordance with applicable law, or, if prior action by the Board
of Directors is required by law, shall be at the close of business on the day on
which the Board of Directors adopts the resolution taking such prior action; and
(3) the record date for determining stockholders for any other purpose shall be
at the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
SECTION 5. Replacement of Certificates. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
<PAGE>
ARTICLE V
Indemnification
SECTION 1. Definitions. For purposes of this Article: (a) "Officer"
means any person who serves or has served as a Director of the Corporation or in
any other office filled by election or appointment by the stockholders or the
Board of Directors and any heirs or personal representatives of such person; (b)
"Non-Officer Employee" means any person who serves or has served as an employee
of the Corporation, but who is not or was not an Officer, and any heirs or
personal representatives of such person; (c) "Proceeding" means any action, suit
or proceeding (or part thereof), civil or criminal, administrative or
investigative, brought or threatened in or before any court, tribunal,
administrative or legislative body or agency and any claim which could be the
subject of a Proceeding; and (d) "Expenses" means any liability fixed by a
judgment, order, decree or award in a Proceeding, any amount reasonably paid in
settlement of a Proceeding and any professional fees or other disbursements
reasonably incurred in a Proceeding or in settlement of a Proceeding, including
fines, ERISA excise taxes or penalties.
SECTION 2. Officers. Except as provided in Section 4 of this Article V,
each Officer of the Corporation shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the General Corporation Law of
the State of Delaware, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment) against any and
all Expenses incurred by such Officer in connection with any Proceeding in which
such Officer is involved as a result of serving or having served (a) as an
Officer or employee of the Corporation, (b) as a director, officer or employee
of any wholly-owned subsidiary of the Corporation, or (c) in any capacity with
any other corporation, organization, partnership, joint venture, trust or other
entity at the written request or direction of the Corporation, including service
with respect to employee or other benefit plans, and shall continue as to an
Officer who has ceased to be an Officer and shall inure to the benefit of his or
her heirs, executors and administrators; provided, however, that the Corporation
shall indemnify any such Officer seeking indemnification in connection with a
Proceeding initiated by such Officer only if such Proceeding was authorized by
the Board of Directors of the Corporation.
SECTION 3. Non-Officer Employees. Except as provided in Section 4 of
this Article V, each Non-Officer Employee of the Corporation may, in the
discretion of the Board of Directors, be indemnified by the Corporation to the
fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment) against any or all Expenses
incurred by such Non-Officer Employee in connection with any Proceeding in which
such Non-Officer Employee is involved as a result of serving or having served
(a) as a Non-Officer Employee of the Corporation, (b) as a director, officer or
employee
<PAGE>
of any wholly-owned subsidiary of the Corporation, or (c) in any capacity
with any other corporation, organization, partnership, joint venture, trust
or other entity at the request or direction of the Corporation, including
service with respect to employee or other benefit plans, and shall continue
as to a Non-Officer Employee who has ceased to be a Non-Officer Employee and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that the Corporation may indemnify any such Non-Officer
Employee seeking indemnification in connection with a Proceeding initiated by
such Non-Officer Employee only if such Proceeding was authorized by the Board
of Directors of the Corporation.
SECTION 4. Good Faith. No indemnification shall be provided to an
Officer or to a Non-Officer Employee with respect to a matter as to which such
person shall have been adjudicated in any Proceeding not to have acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the best interests of the Corporation, and, with respect to any criminal
Proceeding, had no reasonable cause to believe his or her conduct was unlawful.
In the event that a Proceeding is compromised or settled so as to impose any
liability or obligation upon an Officer or Non-Officer Employee, no
indemnification shall be provided to said Officer or Non-Officer Employee with
respect to a matter if there be a determination that with respect to such matter
such person did not act in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the Corporation,
and, with respect to any criminal Proceeding, had no reasonable cause to believe
his or her conduct was unlawful. The determination shall be made by a majority
vote of those Directors who are not involved in such Proceeding. However, if
more than half of the Directors are involved in such Proceeding, the
determination shall be made by a majority vote of a committee of one or more
disinterested Director(s) chosen by the disinterested Director(s) at a regular
or special meeting.
SECTION 5. Prior to Final Disposition. Unless otherwise provided by the
Board of Directors or by the committee pursuant to the procedure specified in
Section 4 of this Article V, any indemnification extended to a Director pursuant
to this Article V shall include payment by the Corporation of Expenses incurred
in defending a Proceeding in advance of the final disposition of such Proceeding
upon receipt of an undertaking by the Director seeking indemnification to repay
such payment if such Director shall be adjudicated or determined not to be
entitled to indemnification under this Article V.
SECTION 6. Contractual Nature of Rights. The foregoing provisions of
this Article V shall be deemed to be a contract between the Corporation and each
Officer and Non-Officer Employee who serves in such capacity at any time while
this Article V is in effect, and any repeal or modification thereof shall not
affect any rights or obligations then existing with respect to any state of
facts then or theretofore existing or any action, suit or proceeding theretofore
or thereafter brought based in whole or in part upon any such state of facts.
SECTION 7. Non-Exclusivity of Rights. The provisions in respect of
indemnification and the payment of expenses incurred in defending a Proceeding
in
<PAGE>
advance of its final disposition set forth in this Article V shall not be
exclusive of any right which any person may have or hereafter acquire under
any statute, provision of the Certificate of Incorporation or these By-Laws,
agreement, vote of stockholders or disinterested directors or otherwise.
SECTION 8. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any Officer or Non-Officer Employee against any
liability of any character asserted against or incurred by the Corporation or
any such Officer or Non-Officer Employee, or arising out of any such status,
whether or not the Corporation would have the power to indemnify such person
against such liability under the General Corporation Law of the State of
Delaware or the provisions of this Article V.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Fiscal Year. The fiscal year of the Corporation shall
end on the last day of January of each year.
SECTION 2. Seal. The Board of Directors shall have power to adopt
and alter the seal of the Corporation.
SECTION 3. Execution of Instruments. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without Director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one is
elected, the President or the Treasurer or any other officer, employee or agent
of the Corporation as the Board of Directors or Executive Committee may
authorize.
SECTION 4. Voting of Securities. Unless the Board of Directors
otherwise provides, the Chairman of the Board, if one is elected, the President
or the Treasurer may waive notice of and act on behalf of this Corporation, or
appoint another person or persons to act as proxy or attorney in fact for this
Corporation with or without discretionary power and/or power of substitution, at
any meeting of stockholders or shareholders of any other corporation or
organization, any of whose securities are held by this Corporation.
SECTION 5. Resident Agent. The Board of Directors may appoint a
resident agent upon whom legal process may be served in any action or
proceeding against the Corporation.
SECTION 6. Corporate Records. The original or attested copies of the
Certificate of Incorporation, By-Laws and records of all meetings of the
incorporators, stockholders and the Board of Directors and the stock transfer
books, which shall contain the names of all stockholders, their record addresses
and the amount of stock held by
<PAGE>
each, may be kept outside the State of Delaware and shall be kept at the
principal office of the Corporation, at the office of its counsel or at an
office of its transfer agent or at such other place or places as may be
designated from time to time by the Board of Directors.
SECTION 7. Definitions. As used in these By-Laws, the terms "Voting
Stock," "Interested Stockholder" and "Continuing Director" shall have the same
respective meanings assigned to them in the Certificate of Incorporation. Any
determination of beneficial ownership of securities under these By-Laws shall be
made in the manner specified in the Certificate of Incorporation.
SECTION 8. Certificate of Incorporation. All references in these
By-Laws to the Certificate of Incorporation shall be deemed to refer to the
Third Amended and Restated Certificate of Incorporation of the Corporation, as
amended and in effect from time to time.
SECTION 9. Amendments. The Board of Directors shall have the power to
adopt, alter, amend and repeal these By-Laws. Any By-Laws adopted, altered,
amended or repealed by the Board of Directors under the powers conferred hereby
may be altered, amended or repealed by the Board of Directors or by the
stockholders. Notwithstanding the foregoing or any other provisions of the
Certificate of Incorporation or these By-Laws to the contrary, such action by
the Board of Directors shall require the affirmative vote of at least two-thirds
of the Directors then in office. Notwithstanding the foregoing or any other
provisions of the Certificate of Incorporation or these By-Laws to the contrary,
any action by the stockholders to alter, amend or repeal these By-Laws of the
Corporation shall require the affirmative vote of at least two-thirds of the
total votes eligible to be cast by stockholders with respect to such alteration,
amendment or repeal, voting together as a single class, at a duly constituted
meeting of stockholders called expressly for such purpose.
<PAGE>
EXHIBIT 10.1
INFOSOFT INTERNATIONAL, INC.
1993 Stock Purchase Plan
The purpose of this Plan is to provide eligible employees of
InfoSoft International, Inc. (the "Company") with opportunities to purchase
shares of the Company's common stock, $0.01 par value (the "Common Stock"). One
hundred thousand (100,000) shares of Common Stock in the aggregate have been
approved for this purpose.
1. Administration. The Plan shall be administered by the
Company's Board of Directors or by a Committee appointed by the Board of
Directors (the "Committee"). The Board of Directors or the Committee has
authority to make rules and regulations for the administration of the Plan, and
its interpretations and decisions with regard thereto shall be final and
conclusive.
2. Eligibility. All employees of the Company, including
Directors who are employees, are eligible to participate in any one or more of
the offerings of Options (as defined in Section 9) to purchase Common Stock
under the Plan provided that:
(a) they are regularly employed by the Company or a subsidiary of
the Company designated by the Committee (a "Designated
Subsidiary") more than 20 hours a week for at least five
months per calendar year; and
(b) they are employees of the Company or a Designated Subsidiary
on the first day of the applicable Plan Period (as defined
below).
Participation in the Plan will be neither permitted nor denied
contrary to the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"). No employee may purchase shares pursuant to the Plan if such
employee, immediately after such purchase, owns 5% or more of the total combined
voting power or value of the stock of the Company.
3. Offerings. The Company will make one or more offerings
("Offerings") to employees to purchase Common Stock under this Plan. The initial
Offering will begin on the effective date of the Company's initial public
offering and end on the following June 30 (the "Initial Offering"). All
subsequent Offerings shall begin on each January 1 or July 1, or the first
business day thereafter. The first day of each Offering shall be known as the
"Offering Date". Except for the Initial Offering, each Offering Date will begin
a six-month period (a "Plan Period").
<PAGE>
4. Participation. An employee eligible on the Offering Date of
any Offering may participate in such Offering by completing and forwarding an
enrollment form to the employee's appropriate payroll location. The form will
(a) state the amount to be deducted from his Compensation per pay period, (b)
authorize the purchase of Common Stock for him in each Offering in accordance
with the terms of the Plan and (c) specify the exact name or names in which
shares of Common Stock purchased for him are to be issued pursuant to Section 10
hereof. Unless an employee files a new form or withdraws from the Plan, his
deductions and purchases will continue at the same dollar amount for future
Offerings under the Plan as long as the Plan remains in effect.
5. Employee Contributions. Each eligible employee may
authorize payroll deductions at a minimum of $6.00 for each weekly pay period or
$25.00 for each monthly pay period up to a maximum of 15% of such employee's
Compensation for each such pay period. The Company shall maintain book accounts
showing the amount of payroll deductions made by each eligible employee for each
Plan Period.
6. Deduction Changes. An employee may not increase or decrease
his or her payroll deduction during any Plan Period, but may increase or
decrease his or her payroll deduction with respect to the next Plan Period by
filing a new payroll deduction authorization form in advance of the next
Offering Date.
7. Interest. No interest will be paid on employee accounts;
however, the Board of Directors or its Committee may, in its sole discretion,
elect to credit employee accounts with interest at such per annum rate as the
Board of Directors or the Committee may from time to time determine.
8. Withdrawal of Funds. An employee may at any time prior to
the close of business on the last business day in a Plan Period, and for any
reason, permanently withdraw the entire balance accumulated in the employee's
account and thereby withdraw from participation in an Offering. Partial
withdrawals are not permitted. The employee may not begin participation again
during the remainder of the Plan Period. The employee may participate in any
subsequent Offering in accordance with terms and conditions established by the
Board of Directors or the Committee.
9. Purchase of Shares. On each Offering Date of a Plan Period,
the Company will grant to each eligible employee who is then a participant in
the Plan an option ("Option") to purchase on the last business day of such Plan
Period (the "Exercise Date"), at the Option Price hereinafter provided for, such
number of whole shares of Common Stock of the Company reserved for the purposes
of the Plan as does not exceed the number of shares equal in value to 15% of
such employee's projected Compensation for the Plan Period divided by, with
respect to the Initial Offering, 85% of the offering price to the public of the
Common Stock on the date of the initial public offering of the Common Stock, or,
with respect to each Offering other than the Initial Offering, 85% of the last
reported sale price of the Common Stock on the Nasdaq National Market (the
"National Market") on the Offering Date.
<PAGE>
With respect to the Initial Offering, the purchase price for
each share purchased under the Plan will be 85% of the offering price to the
public of the Common Stock on the date of the initial public offering of the
Common Stock, or 85% of the last reported sale price of the Common Stock on the
National Market on the Exercise Date, whichever price shall be less, rounded up
to avoid fractions other than 1/4, 1/2 and 3/4. With respect to each Offering
other than the Initial Offering, the purchase price for each share purchased
under the Plan will be 85% of the last reported sale price of the Common Stock
on the National Market on the Offering Date or the Exercise Date, whichever last
reported sale price shall be less, rounded up to avoid fractions other than 1/4,
1/2 and 3/4. The purchase price determined by reference to either of the two
preceding sentences shall be referred to herein as the "Option Price".
No employee may be granted an Option permitting rights to
purchase Common Stock under this Plan and rights under any other stock purchase
plan of the Company to accrue at a rate which in the aggregate exceeds $25,000
of the fair market value of such Common Stock (determined at the Offering Date
of the Plan Period) for each calendar year in which the Option is outstanding at
any time. The purpose of the limitation in the preceding sentence is to comply
with Section 423(b)(8) of the Code.
Each employee who continues to be a participant in the Plan on
the Exercise Date shall be deemed to have exercised such employee's Option at
the Option Price on such date and shall be deemed to have purchased from the
Company such number of full shares of Common Stock reserved for purposes of the
Plan as such employee's accumulated payroll deductions on such date will pay for
pursuant to the formula set forth above. Any balance remaining in an employee's
account at the end of a Plan Period will be refunded to the employee promptly.
10. Issuance of Certificates. Certificates representing shares
of Common Stock purchased under the Plan may be issued only in the name of the
employee, or in the name of the employee and another person of legal age as
joint tenants with rights of survivorship.
11. Definitions. The phrase "last reported sale price" means
the last reported sale price of the Common Stock on the Exchange on a given day
or, if no sales of Common Stock were made on that day, the last reported sale
price of the Common Stock on the next preceding day on which sales were made.
The term "Compensation" means the amount of base pay
reportable on the employee's Federal Income Tax Withholding Statement, excluding
overtime, incentive or bonus awards, allowances and reimbursements for expenses
such as relocation expenses or travel expenses, income or gains on the exercise
of Company stock options, and similar items, whether or not shown on the
employee's Federal Income Tax Withholding Statement.
12. Rights on Retirement Death, or Termination of Employment.
In the event of a participating employee's termination of employment prior to
the last business
<PAGE>
day of a Plan Period, no payroll deduction shall be taken from any pay due
and owing to the employee and the balance in the employee's account shall be
paid to the employee or, in the event of the employee's death, to the
employ1ee's designated beneficiary. If, prior to the last business day of the
Plan Period, the Subsidiary by which an employee is employed shall cease to
be a Designated Subsidiary of the Company, or if the employee is transferred
to a Subsidiary of the Company that is not a Designated Subsidiary, it shall
be deemed that the employee has terminated employment for the purposes of
this Plan.
13. Optionees not Stockholders. Neither the granting of an
Option to an employee nor the deductions from an employee's pay shall constitute
such employee a stockholder of the shares of Common Stock covered by an Option
under this Plan until such shares have been purchased by and issued to such
employee.
14. Rights Not Transferable. Rights under this Plan are not
transferable by a participating employee other than by will or the laws of
descent and distribution, and are exercisable during the employee's lifetime
only by the employee.
15. Application of Funds. All funds received or held by the
Company under this Plan may be combined with other corporate funds and may be
used for any corporate purpose.
16. Adjustment in Case of Changes Affecting Common Stock. In
the event of a subdivision of outstanding shares of Common Stock, or the payment
of a dividend in Common Stock, the number of shares approved for this Plan, and
the share limitation set forth in Section 9, shall be increased proportionately,
and such other adjustment shall be made as may be deemed equitable by the Board
of Directors or the Committee. In the event of any other change affecting the
Common Stock, such adjustment shall be made as may be deemed equitable by the
Board of Directors or the Committee to give proper effect to such event.
17. Amendment of the Plan. The Board of Directors may at any
time and from time to time, amend this Plan in any respect, except that without
approval by a majority of the votes cast at a duly held stockholders' meeting at
which a quorum representing a majority of all outstanding Common Stock is,
either in person or by proxy, present, no amendment shall be made (a) increasing
or decreasing the number of shares approved for this Plan or (b) changing the
class of employees eligible to receive Options under the Plan.
18. Merger, Reorganization, etc. In the event of a merger,
reorganization, consolidation, or liquidation involving the Company, the
Committee has discretion to provide that all outstanding obligations of the
Company under the Plan will be assumed or equivalent rights substituted by the
successor corporation, or the Committee may shorten the offering period and
provide for all sums collected to be applied to purchase stock immediately prior
to such merger or other transaction.
19. Insufficient Shares. In the event that the total number of
shares of
<PAGE>
Common Stock specified in elections to be purchased under any Offering plus
the number of shares purchased under previous Offerings under this Plan
exceeds the maximum number of shares issuable under this Plan, the Board of
Directors or the Committee shall allot, in such manner as it may determine,
the shares then available.
20. Termination of the Plan. This Plan may be terminated at
any time by the Company's Board of Directors, subject to the limitation that no
such action may adversely affect any outstanding rights to purchase Common
Stock.
21. Governmental Regulations. The Company's obligation to sell
and deliver Common Stock under this Plan is subject to listing on the National
Market and obtaining all governmental approvals required in connection with the
authorization, issuance, or sale of such stock.
The Plan shall be governed by Delaware law except to the
extent that such law is preempted by federal law.
The Plan is intended to comply with the provisions of Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended. Any
provision inconsistent with such Rule shall be inoperative and shall not affect
the validity of the Plan.
22. Issuance of Shares. Shares may be issued upon exercise of
an Option from authorized but unissued Common Stock, from shares held in the
treasury of the Company, or from any other proper source.
23. Notification upon Sale of Shares. Each employee agrees, by
entering the Plan, to give the Company prompt notice of any disposition of
shares purchased under the Plan where such disposition occurs within two years
after the date of grant of the Option pursuant to which such shares were
purchased.
24. Effective Date and Approval of Shareholders. The Plan
shall take effect on the first day of the Company's initial public offering (the
"Effective Date") subject to closing of the offering and approval by a majority
of the votes cast at a duly held shareholders' meeting at which a quorum
representing a majority of all outstanding Common Stock is, either in person or
by proxy, present, which approval must occur within twelve months of the
adoption of the Plan by the Board of Directors.
AMENDMENT NO. 1
TO
1993 STOCK PURCHASE PLAN
OF
INSO CORPORATION
<PAGE>
The 1993 Stock Purchase Plan (the "Plan") of Inso Corporation, formerly
known as InfoSoft International, Inc. is hereby amended as follows (capitalized
terms used herein and not defined herein shall have the respective meaning
ascribed to such terms in the Plan):
The first paragraph of the Plan shall be deleted in its entirety and
replaced with the following:
"The purpose of this Plan is to provide eligible employees of Inso
Corporation (the "Company") with opportunities to purchase shares of the
Company's common stock, $0.01 par value (the "Common Stock"). Four hundred and
fifty thousand (450,000) shares of Common Stock in the aggregate have been
approved for this purpose."
The third sentence of Section 3 of the Plan shall be deleted in its entirety and
replaced with the following:
"Offerings on or before January 1, 1999 shall begin on each January 1
or July 1, or the first business day thereafter, subsequent offerings shall
begin on each June 1 or December 1, or the first business day thereafter."
Except as aforesaid, the Plan shall remain in full force and effect.
Adopted by the
Board of Directors
March 9, 1998
<PAGE>
EXHIBIT 10.3
INSO CORPORATION
1996 STOCK INCENTIVE PLAN
1. Purpose
The purpose of this 1996 Stock Incentive Plan (the "Plan") of INSO
Corporation, a Delaware corporation (the "Company"), is to advance the
interests of the Company by enhancing its ability to attract and retain key
employees, consultants and others who are in a position to contribute to the
Company's future growth and success.
2. Definitions
"Award" means any Option, Stock Appreciation Right, Performance
Shares, Restricted Stock or Unrestricted Stock awarded under the Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means a committee of not less than two members of the
Board appointed by the Board to administer the Plan, each of whom shall be a
"disinterested person" within the meaning of Rule 16b-3 under the Exchange
Act ("Rule 16b-3").
"Common Stock" means the Common Stock, .01 par value per share, of
the Company.
"Company" means INSO Corporation and, except where the context
otherwise requires, all present and future subsidiaries of INSO Corporation as
defined in Section 424(f) of the Code.
"Designated Beneficiary" means the beneficiary designated by a
Participant, in a manner determined by the Board, to receive amounts due or
exercise rights of the
<PAGE>
Participant in the event of the Participant's death. In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"Fair Market Value" means, with respect to Common Stock or any other
property, the fair market value of such property as determined by the Board in
good faith or in the manner established by the Board from time to time.
"Incentive Stock Option" means an option to purchase shares of Common
Stock awarded to a Participant under Section 6 which is intended to meet the
requirements of Section 422 of the Code or any successor provision.
"Nonstatutory Stock Option" means an option to purchase shares of
Common Stock awarded to a Participant under Section 6 which is not intended to
be an Incentive Stock Option.
"Option" means an Incentive Stock Option or a Nonstatutory Stock
Option.
"Participant" means a person selected by the Board to receive an
Award under the Plan.
"Performance Shares" mean shares of Common Stock which may be earned
by the achievement of performance goals established for a Participant under
Section 8.
"Reporting Person" means a person subject to Section 16 of the
Exchange Act or any successor provision.
"Restricted Period" means the period of time selected by the Board
during which shares subject to a Restricted Stock Award may be repurchased by
or forfeited to the Company.
"Restricted Stock" means shares of Common Stock awarded to a
Participant under Section 9.
"Stock Appreciation Right" or "SAR" means a right to receive any
excess in Fair Market Value of shares of Common Stock over the exercise price
of the Award granted to a Participant under Section 7.
"Unrestricted Stock" means shares of Common Stock awarded to a
Participant under Section 9(c).
3. Administration
<PAGE>
The Plan will be administered by the Board. The Board shall have
authority to make Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable
from time to time, and to interpret the provisions of the Plan. The Board's
decisions shall be final and binding. No member of the Board shall be liable for
any action or determination relating to the Plan made in good faith. To the
extent permitted by applicable law, the Board may delegate to one or more
executive officers of the Company the power to make Awards to Participants who
are not Reporting Persons and all determinations under the Plan with respect
thereto, provided that the Board shall fix the maximum amount of such Awards to
be made by such executive officers and a maximum amount for any one Participant.
To the extent permitted by applicable law, the Board may appoint a Committee to
administer the Plan and, in such event, all references to the Board in the Plan
shall mean such Committee or the Board. All decisions by the Board or the
Committee pursuant to the Plan shall be final and binding on all persons having
or claiming any interest in the Plan or in any Award.
4. Eligibility
All of the Company's employees, officers, consultants and advisors who
are expected to contribute to the Company's future growth and success, other
than persons who have irrevocably elected not to be eligible, are eligible to be
Participants in the Plan. Incentive Stock Options may be awarded only to persons
eligible to receive Incentive Stock Options under the Code.
5. Stock Available for Awards
(a) Subject to adjustment under subsection (b) below, Awards may be
made under the Plan for up to 2,000,000 shares of Common Stock. If any Award in
respect of shares of Common Stock expires or is terminated unexercised or is
forfeited for any reason or settled in a manner that results in fewer shares
outstanding than were initially awarded, the shares subject to such Award or so
surrendered, as the case may be, to the extent of such expiration, termination,
forfeiture or decrease, shall again be available for award under the Plan,
subject, however, in the case of Incentive Stock Options, to any limitation
required under the Code and provided that shares made available pursuant to this
sentence shall be available for Awards to Reporting Persons only to the extent
consistent with Rule 16b-3. Shares issued under the Plan may consist in whole or
in part of authorized but unissued shares or treasury shares.
(b) In the event that the Board, in its sole discretion, determines
that any stock dividend, extraordinary cash dividend, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination or other
similar transaction affects the Common Stock such that an adjustment is required
in order to preserve the benefits or potential benefits intended to be made
available under the Plan, then the Board, subject, in the case of Incentive
Stock Options, to any limitation required under the Code, shall equitably adjust
any or all of (i) the number and kind of shares in respect of which Awards may
be made under the Plan, (ii) the number and kind of shares subject to
<PAGE>
outstanding Awards, and (iii) the award, exercise or conversion price with
respect to any of the foregoing, and if considered appropriate, the Board may
make provision for a cash payment with respect to an outstanding Award.
(c) The Board may grant Awards under the Plan in substitution for stock
and stock based awards held by employees of another corporation who concurrently
become employees of the Company as a result of a merger or consolidation of the
employing corporation with the Company (or a subsidiary of the Company) or the
acquisition by the Company (or a subsidiary of the Company) of property or stock
of the employing corporation. The substitute Awards shall be granted on such
terms and conditions as the Board considers appropriate in the circumstances.
(d) Subject to adjustment under Section 5(b), the maximum number of
shares with respect to which an Award may be granted to any employee under the
Plan shall not exceed 300,000 per calendar year (subject to adjustment pursuant
to Section 5(b)). For purposes of calculating such maximum number, (i) an Award
shall continue to be treated as outstanding notwithstanding its repricing,
cancellation or expiration and (ii) the repricing of an outstanding Award or
issuance of a new Award in substitution for a canceled Award shall be deemed to
constitute the grant of a new additional Award separate from the original grant
of the Award that is repriced or canceled.
6. Stock Options
(a) General
(i) Subject to the provisions of the Plan, the Board may award
Incentive Stock Options and Nonstatutory Stock Options and determine the number
of shares of Common Stock to be covered by each Option, the option price of such
Option and the conditions and limitations applicable to the exercise of such
Option. The terms and conditions of Incentive Stock Options shall be subject to
and comply with Section 422 of the Code, or any successor provision, and any
regulations thereunder.
(ii) The Board shall establish the exercise price at the time
each Option is awarded. In the case of Incentive Stock Options, such price shall
not be less than 100% of the Fair Market Value of the Common Stock on the date
of grant; and in the case of Nonstatutory Stock Options, such price shall not be
less than 85% of the Fair Market Value of the Common Stock on the date of grant.
(iii) Each Option shall be exercisable at such times and
subject to such terms and conditions as the Board may specify in the applicable
Award or thereafter. The Board may impose such conditions with respect to the
exercise of Options, including conditions relating to applicable federal or
state securities laws, as it considers necessary or advisable.
(iv) Options granted under the Plan may provide for the
payment of the exercise price by delivery of cash or check in an amount equal to
the exercise price of
<PAGE>
such Options or, to the extent permitted by the Board at or after the award
of the Option, by (A) delivery of shares of Common Stock owned by the
optionee for at least six months (or such shorter period as is approved by
the Board), valued at their Fair Market Value, (B) delivery of a promissory
note of the optionee to the Company on terms determined by the Board, (C)
delivery of an irrevocable undertaking by a broker to deliver promptly to the
Company sufficient funds to pay the exercise price or delivery of irrevocable
instructions to a broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price, (D) payment of such other lawful
consideration as the Board may determine, or (E) any combination of the
foregoing.
(v) The Board may at any time accelerate the time at which all
or any part of an Option may be exercised.
(b) Incentive Stock Options
Options granted under the Plan which are intended to be
Incentive Stock Options shall be subject to the following additional terms and
conditions:
(i) All Incentive Stock Options granted under the Plan
shall, at the time of grant, be specifically designated as such in the option
agreement covering such Incentive Stock Options. The Option exercise period
shall not exceed ten years from the date of grant.
(ii) If any employee to whom an Incentive Stock Option is to
be granted under the Plan is, at the time of the grant of such option, the owner
of stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company (after taking into account the attribution of
stock ownership rule of Section 424(b) and of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
(x) The purchase price per share of the Common Stock subject
to such Incentive Stock Option shall not be less than 110% of the Fair Market
Value of one share of Common Stock at the time of grant; and
(y) The option exercise period shall not exceed five years
from the date of grant.
(iii) For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate Fair Market Value (determined as of
the respective date or dates of grant) of more than $100,000.
<PAGE>
(iv) No Incentive Stock Option may be exercised unless, at the
time of such exercise, the Participant is, and has been continuously since the
date of grant of his or her Option, employed by the Company, except that:
(x) an Incentive Stock Option may be exercised within the
period of three months after the date the Participant ceases to be an employee
of the Company (or within such lesser period as may be specified in the
applicable option agreement), provided, that the agreement with respect to such
Option may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a Nonstatutory Stock
Option under the Plan;
(y) if the Participant dies while in the employ of the
Company, or within three months after the Participant ceases to be such an
employee, the Incentive Stock Option may be exercised by the Participant's
Designated Beneficiary within the period of one year after the date of death (or
within such lesser period as may be specified in the applicable Option
agreement); and
(z) if the Participant becomes disabled (within the meaning of
Section 22(e)(3) of the Code or any successor provision thereto) while in the
employ of the Company, the Incentive Stock Option may be exercised within the
period of one year after the date of death (or within such lesser period as may
be specified in the applicable Option agreement).
For all purposes of the Plan and any Option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
(v) Incentive Stock Options shall not be assignable or
transferable by the person to whom they are granted, either voluntarily or by
operation of law, except by will or the laws of descent and distribution, and,
during the life of the optionee, shall be exercisable only by the optionee.
7. Stock Appreciation Rights
(a) The Board may grant SARs entitling recipients on exercise of the
SAR to receive an amount, in cash or Common Stock or a combination thereof (such
form to be determined by the Board), determined in whole or in part by reference
to appreciation in the Fair Market Value of the Common Stock between the date of
the Award and the exercise of the Award. A SAR shall entitle the Participant to
receive, with respect to each share of Common Stock as to which the SAR is
exercised, the excess of the share's Fair Market Value on the date of exercise
over its Fair Market Value on the date the SAR was granted. The Board may also
grant SARs that provide that, following a change in control of the Company (as
defined by the Board at the time of the Award), the holder of such SAR will be
entitled to receive, with respect to each share of Common Stock subject to the
SAR, an amount equal to the excess of a specified value (which may include an
<PAGE>
average of values) for a share of Common Stock during a period preceding such
change in control over the Fair Market Value of a share of Common Stock on the
date the SAR was granted.
(b) SARs may be granted in tandem with, or independently of, Options
granted under the Plan. A SAR granted in tandem with an Option which is not an
Incentive Stock Option may be granted either at or after the time the Option is
granted. A SAR granted in tandem with an Incentive Stock Option may be granted
only at the time the Option is granted.
(c) When SARs are granted in tandem with Options, the following
provisions will apply:
(i) The SAR will be exercisable only at such time or times,
and to the extent, that the related Option is exercisable and will be
exercisable in accordance with the procedure required for exercise of the
related Option.
(ii) The SAR will terminate and no longer be exercisable upon
the termination or exercise of the related Option, except that a SAR granted
with respect to less than the full number of shares covered by an Option will
not be reduced until the number of shares as to which the related Option has
been exercised or has terminated exceeds the number of shares not covered by the
SAR.
(iii) The Option will terminate and no longer be exercisable
upon the exercise of the related SAR.
(iv) The SAR will be transferable only with the related
Option.
(v) A SAR granted in tandem with an Incentive Stock Option may
be exercised only when the market price of the Common Stock subject to the
Option exceeds the exercise price of such Option.
(d) A SAR not granted in tandem with an Option will become exercisable
at such time or times, and on such conditions, as the Board may specify.
(e) The Board may at any time accelerate the time at which all or any
part of the SAR may be exercised.
8. Performance Shares
(a) The Board may make Performance Share Awards entitling recipients to
acquire shares of Common Stock upon the attainment of specified performance
goals. The Board may make Performance Share Awards independent of or in
connection with the granting of any other Award under the Plan. The Board in its
sole discretion shall determine the performance goals applicable under each such
Award, the periods during which performance is to be measured, and all other
limitations and conditions applicable
<PAGE>
to the awarded Performance Shares; provided, however, that the Board may rely
on the performance goals and other standards applicable to other performance
plans of the Company in setting the standards for Performance Share Awards
under the Plan.
(b) Performance Share Awards and all rights with respect to such Awards
may not be sold, assigned, transferred, pledged or otherwise encumbered.
(c) A Participant receiving a Performance Share Award shall have the
rights of a stockholder only as to shares actually received by the Participant
under the Plan and not with respect to shares subject to an Award but not
actually received by the Participant. A Participant shall be entitled to receive
a stock certificate evidencing the acquisition of shares of Common Stock under a
Performance Share Award only upon satisfaction of all conditions specified in
the agreement evidencing the Performance Share Award.
(d) The Board may at any time accelerate or waive any or all of the
goals, restrictions or conditions imposed under any Performance Share Award.
9. Restricted and Unrestricted Stock
(a) The Board may grant Restricted Stock Awards entitling recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares at their purchase price (or to require
forfeiture of such shares if purchased at no cost) from the recipient in the
event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable Restricted Period or Restricted
Periods established by the Board for such Award. Conditions for repurchase (or
forfeiture) may be based on continuing employment or service or achievement of
pre-established performance or other goals and objectives.
(b) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered, except as permitted by the Board, during the
applicable Restricted Period. Shares of Restricted Stock shall be evidenced in
such manner as the Board may determine. Any certificates issued in respect of
shares of Restricted Stock shall be registered in the name of the Participant
and, unless otherwise determined by the Board, deposited by the Participant,
together with a stock power endorsed in blank, with the Company (or its
designee). At the expiration of the Restricted Period, the Company (or such
designee) shall deliver such certificates to the Participant or if the
Participant has died, to the Participant's Designated Beneficiary.
(c) The Board may, in its sole discretion, grant (or sell at a purchase
price determined by the Board, which shall not be lower than 85% of Fair Market
Value on the date of sale) to Participants shares of Common Stock free of any
restrictions under the Plan ("Unrestricted Stock").
(d) The purchase price for each share of Restricted Stock and
Unrestricted Stock shall be determined by the Board of Directors. Such purchase
price may be paid in
<PAGE>
the form of past services or such other lawful consideration as is determined
by the Board.
(e) The Board may at any time accelerate the expiration of the
Restricted Period applicable to all, or any particular, outstanding shares of
Restricted Stock.
10. General Provisions Applicable to Awards
(a) Applicability of Rule 16b-3. Those provisions of the Plan which
make an express reference to Rule 16b-3 shall apply to the Company only at such
time as the Company's Common Stock is registered under the Exchange Act, or any
successor provision, and then only to Reporting Persons.
(b) Reporting Person Limitations. Notwithstanding any other provision
of the Plan, to the extent required to qualify for the exemption provided by
Rule 16b-3, (i) any Option, SAR, Performance Share Award or other similar right
related to an equity security issued under the Plan to a Reporting Person shall
not be transferable other than by will or the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by the Code or
Title I or the Employee Retirement Income Security Act ("ERISA"), or the rules
thereunder, and shall be exercisable during the Participant's lifetime only by
the Participant or the Participant's guardian or legal representative, and (ii)
the selection of a Reporting Person as a Participant and the terms of his or her
Award shall be determined only in accordance with the applicable provisions of
Rule 16b-3.
(c) Documentation. Each Award under the Plan shall be evidenced by an
instrument delivered to the Participant specifying the terms and conditions
thereof and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Board considers necessary or advisable. Such
instruments may be in the form of agreements to be executed by both the Company
and the Participant, or certificates, letters or similar documents, acceptance
of which will evidence agreement to the terms thereof and of this Plan.
(d) Board Discretion. Except as otherwise provided by the Plan, each
type of Award may be made alone, in addition to or in relation to any other type
of Award. The terms of each type of Award need not be identical, and the Board
need not treat Participants uniformly. Except as otherwise provided by the Plan
or a particular Award, any determination with respect to an Award may be made by
the Board at the time of award or at any time thereafter.
(e) Termination of Status. Subject to the provisions of Section
6(b)(iv), the Committee shall determine the effect on an Award of the
disability, death, retirement, authorized leave of absence or other termination
of employment or other status of a Participant and the extent to which, and the
period during which, the Participant's legal representative, guardian or
Designated Beneficiary may exercise rights under such Award.
<PAGE>
(f) Change in Control.
(i) Upon the occurrence of a Change in Control, (A) each
option outstanding under the Plan immediately prior to the effective date of
such Change in Control shall become automatically exercisable in full, and (B)
each outstanding share of Restricted Stock will immediately become free of all
restrictions and conditions.
(ii) A "Change in Control" shall be deemed to have occurred
only upon the occurrence of any of the following events:
(A) any "person," as such term is used in Sections 13(d) and 14(d) of
the Exchange Act, (other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, any
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of stock of the Company or
an Exempt Person) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing 33 1/3% or more of the combined voting power of the Company's then
outstanding securities (other than as a result of the acquisition of such
securities directly from the Company);
(B) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director designated by a person who has entered into an agreement with the
Company to effect a transaction described in paragraph (A), (C) or (D) of this
Subsection) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved cease for any reason to constitute at least a majority thereof; or
(C) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than (1) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (2) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
person (as hereinabove defined), other than a person holding more than 50% of
the combined voting power of the Company's then outstanding securities
immediately prior to such recapitalization, acquires more than 50% of the
combined voting power of the Company's then outstanding securities; or
<PAGE>
(D) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(iii) "Exempt Person" means Houghton Mifflin Company ("HMC"),
provided HMC shall cease to be an Exempt Person if and when, following a Change
in Control (as defined above but substituting "Houghton Mifflin Company" for the
"Company" as used therein) of HMC, HMC, directly or indirectly, acquires
beneficial ownership of any additional shares of the Company's capital stock.
(g) Withholding. The Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in respect of Awards under the Plan no later than the date of the
event creating the tax liability. In the Board's discretion, and subject to such
conditions as the Board may establish, such tax obligations may be paid in whole
or in part in shares of Common Stock, including shares retained from the Award
creating the tax obligation, valued at their Fair Market Value. The Company may,
to the extent permitted by law, deduct any such tax obligations from any payment
of any kind otherwise due to the Participant.
(h) Foreign Nationals. Awards may be made to Participants who are
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Board considers
necessary or advisable to achieve the purposes of the Plan or comply with
applicable laws.
(i) Amendment of Award. The Board may amend, modify or terminate any
outstanding Award, including substituting therefor another Award of the same or
a different type, changing the date of exercise or realization and converting an
Incentive Stock Option to a Nonstatutory Stock Option, provided that the
Participant's consent to such action shall be required unless the Board
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
(j) Cancellation and New Grant of Options. The Board of Directors shall
have the authority to effect, at any time and from time to time, with the
consent of the affected optionees, (i) the cancellation of any or all
outstanding Options under the Plan and the grant in substitution therefor of new
Options under the Plan covering the same or different numbers of shares of
Common Stock and having an option exercise price per share which may be lower or
higher than the exercise price per share of the canceled Options or (ii) the
amendment of the terms of any and all outstanding Options under the Plan to
provide an option exercise price per share which is higher or lower than the
then current exercise price per share of such outstanding Options.
(k) Conditions on Delivery of Stock. The Company will not be obligated
to deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan (i) until all
conditions of the Award have been satisfied or removed, (ii) until, in the
opinion of the Company's counsel, all applicable federal and state laws and
regulations have been complied with, (iii) if the outstanding
<PAGE>
Common Stock is at the time listed on any stock exchange, until the shares to
be delivered have been listed or authorized to be listed on such exchange
upon official notice of issuance, and (iv) until all other legal matters in
connection with the issuance and delivery of such shares have been approved
by the Company's counsel. If the sale of Common Stock has not been registered
under the Securities Act of 1933, as amended, the Company may require, as a
condition to exercise of the Award, such representations or agreements as the
Company may consider appropriate to avoid violation of such Act and may
require that the certificates evidencing such Common Stock bear an
appropriate legend restricting transfer.
11. Miscellaneous
(a) No Right To Employment or Other Status. No person shall have any
claim or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or service
for the Company. The Company expressly reserves the right at any time to dismiss
a Participant free from any liability or claim under the Plan, except as
expressly provided in the applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
under the Plan until he or she becomes the record holder thereof.
(c) Exclusion from Benefit Computations. No amounts payable upon
exercise of Awards granted under the Plan shall be considered salary, wages or
compensation to Participants for purposes of determining the amount or nature of
benefits that Participants are entitled to under any insurance, retirement or
other benefit plans or programs of the Company.
(d) Effective Date and Term. No Award granted under the Plan shall
become effective until the Plan shall have been approved by the Company's
stockholders. If such stockholder approval is not obtained within twelve months
after the date of the Board's adoption of the Plan, no Options previously
granted under the Plan shall be deemed to be Incentive Stock Options and no
Incentive Stock Options shall be granted thereafter. No Award may be made under
the Plan after March 7, 2006, but Awards previously granted may extend beyond
that date.
(e) Amendment of Plan. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time, provided that no amendment shall be
made without stockholder approval if such approval is necessary to comply with
any applicable tax or regulatory requirement, including any requirements for
compliance with Rule 16b-3. Amendments requiring stockholder approval shall
become effective when adopted by the Board of Directors, but no Incentive Stock
Option granted after the date of such amendment shall become exercisable (to the
extent that such amendment to the Plan was required to enable the Company to
grant such Incentive Stock Option to a particular
<PAGE>
Participant) unless and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular Participant.
<PAGE>
(f) Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of the State of Delaware.
Adopted by the Board of Directors
on March 7, 1996.
Approved by the stockholders
on May 2, 1996.
AMENDMENT NO. 1
TO
1996 STOCK INCENTIVE PLAN
OF
INSO CORPORATION
The 1996 Stock Incentive Plan (the "Plan") of Inso Corporation is
hereby amended as follows (capitalized terms used herein and not defined herein
shall have the respective meaning ascribed to such terms in the Plan):
1. The first sentence of Section 5(a) of the Plan shall be deleted in its
entirety and replaced with the following:
"Subject to adjustment under subsection (b) below, Awards may be
made under the Plan for up to 5,000,000 shares of Common Stock."
Except as aforesaid, the Plan shall remain in full force and effect.
Adopted by the
Board of Directors
March 9, 1998
<PAGE>
EXHIBIT 10.4
INSO CORPORATION
1996 NON-EMPLOYEE DIRECTOR PLAN
1. Purpose
The purpose of this 1996 Non-Employee Director Plan (the
"Plan") of INSO Corporation, a Delaware corporation (the "Company"), is to
encourage ownership in the Company by outside directors of the Company whose
continued services are considered essential to the Company's future progress and
to provide them with a further incentive to remain as directors of the Company.
2. Administration
The Board of Directors shall supervise and administer the
Plan. Grants of stock options and awards under the Plan and the amount and
nature of the options and awards to be granted shall be automatic in accordance
with Section 5. However, all questions of interpretation of the Plan or of any
options issued under it shall be determined by the Board of Directors and such
determination shall be final and binding upon all persons having an interest in
the Plan.
3. Participation in the Plan
Directors of the Company who are not employees of the Company
or any subsidiary of the Company shall be eligible to participate in the Plan.
4. Stock Subject to the Plan
(a) The maximum number of shares which may be issued under the
Plan shall be 250,000 shares of the Company's Common Stock, $.01 par value per
share (the "Common Stock").
(b) If any outstanding option under the Plan for any reason
expires or is terminated without having been exercised in full, the shares
allocable to the unexercised portion of such option shall again become available
for grant pursuant to the Plan.
(c) All options granted under the Plan shall be nonstatutory
options not entitled to special tax treatment under Section 422 of the Internal
Revenue Code of 1986, as amended to date and as it may be amended from time to
time (the "Code").
<PAGE>
5. Terms, Conditions and Form of Options
(a) Option Grants. Options will be granted in
accordance with the following:
(i) Initial Grants. An option for 20,000 shares
of Common Stock shall automatically be granted to each non-employee director
of the Company elected to the Board of Directors after the adoption of the
Plan, such option to be granted upon his or her initial election to the Board
of Directors. Each such option shall vest 25% upon grant and 25% upon each of
the first three anniversaries of the grant.
(ii) Annual Grants. An option for 5,000 shares
shall automatically be granted on the date of each annual meeting of
stockholders of the Company to each non-employee director of the Company,
provided that he or she was elected to serve as a director of the Company at
least three months prior to the date of such meeting. Each such option shall
vest 25% upon grant and 25% upon each of the first three anniversaries of the
grant.
(b) Option Exercise Price. The option exercise price per
share for each option granted under the Plan shall be equal to the Fair
Market Value per share of Common Stock on the date of grant. "Fair Market
Value" shall be (i) the last reported sales price per share of the Company's
Common Stock on the Nasdaq National Market (or, if the Common Stock is traded
on a national securities exchange, the reported closing sales price per share
of the Common Stock on such exchange) or if no such price is reported, such
price as reported on the nearest preceding day or (ii) if the Common Stock is
not traded on the Nasdaq National Market or a national securities exchange,
the fair market value per share as determined by the Board of Directors.
(c) Options Non-Transferable. Each option granted under the
Plan by its terms shall not be transferable by the optionee otherwise than by
will, or by the laws of descent and distribution, and shall be exercised
during the lifetime of the optionee only by him or her. No option or interest
therein may be transferred, assigned, pledged or hypothecated by the optionee
during his lifetime, whether by operation of law or otherwise, or be made
subject to execution, attachment or similar process.
(d) Termination. Upon termination of an optionee's service
as a director of the Company, each option held by him or her may be exercised
during the three month period following such termination of service, as to
the vested portion of such option as of the date of termination, provided
that (i) no option may be exercised more than ten (10) years after the date
of grant, and (ii) in the event an optionee ceases to serve as a director due
to his death or disability (within the meaning of Section 22(e)(3) of the
Code or any successor provision), each option may be exercised, within the
period of 180 days following the date the optionee ceases to serve as a
director, by the optionee or by the person to whom the option is transferred
by will, by the laws of descent and distribution, or by written notice, as to
the total number of shares subject to such option, whether or not then vested.
<PAGE>
(e) Exercise Procedure. Options may be exercised only by
written notice to the Company at its principal office accompanied by (i) payment
in cash of the full consideration for the shares as to which they are exercised
or (ii) an irrevocable undertaking, in form and substance satisfactory to the
Company, by a broker to deliver promptly to the Company sufficient funds to pay
the exercise price or delivery of irrevocable instructions, in form and
substance satisfactory to the Company, to a broker to deliver promptly to the
Company cash or a check sufficient to pay the exercise price.
(f) Exercise by Representative Following Death of Director. An
optionee, by written notice to the Company, may designate one or more persons
(and from time to time change such designation), including his or her legal
representative, who, by reason of the director's death, shall acquire the right
to exercise all or a portion of the option. If the person or persons so
designated wish to exercise any portion of the option, they must do so within
the term of the option as provided herein. Any exercise by a representative
shall be subject to the provisions of the Plan.
(g) Form of Agreement. Each option granted under the Plan
shall be evidenced by a written agreement in such form as the Board of Directors
shall from time to time approve, which agreements shall comply with and be
subject to the terms and conditions of this Plan.
6. Unrestricted Stock
(a) Annual Award. On January 27 of each year (or if such day
is not a business day, then on the next succeeding business day), the Company
shall grant and issue to each non-employee director of the Company an award of
1,000 shares of Common Stock of the Company.
(b) Election to Receive Unrestricted Stock in Lieu of
Directors' Fees. Each non-employee director may elect, pursuant to an
irrevocable written election delivered to the Company no later than the date on
which the directors' fees would otherwise be paid, to receive all or a portion
of such fees in shares of Common Stock (valued at Fair Market Value on the date
on which such directors' fees would otherwise be paid or on the effective date
of the election, if later). Such stock shall be paid to the non-employee
director at the same time the directors' fees would otherwise have been paid, or
at a later time, as specified by the non-employee director in the election. Such
election shall be effective no earlier than six months and one day following the
date of such election. Any revocation of such election shall be effective six
months and one day following the date of the revocation.
7. Assignments
The rights and benefits of participants under the Plan may not
be assigned, whether voluntarily or by operation of law, except as provided in
Section 5(f).
<PAGE>
8. Effective Date
The Plan shall become effective immediately upon its adoption
by the Board of Directors, but all grants of options shall be conditional upon
the approval of the Plan by the stockholders of the Company within 12 months
after adoption of the Plan by the Board of Directors.
9. Limitation of Rights
(a) No Right to Continue as a Director. Neither the Plan, nor
the granting of an option nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Company will retain the optionee as a director for any period of time.
(b) No Stockholders' Rights for Options. An optionee shall
have no rights as a stockholder with respect to the shares covered by his or her
options until the date of the issuance to him or her of a stock certificate
therefor, and no adjustment will be made for dividends or other rights (except
as provided in Section 10) for which the record date is prior to the date such
certificate is issued.
10. Changes in Common Stock. If the outstanding shares of Common Stock
are increased, decreased or exchanged for a different number or kind of shares
or other securities, or if additional shares or new or different shares or other
securities are distributed with respect to such shares of Common Stock or other
securities, through merger, consolidation, sale of all or substantially all of
the assets of the Company, reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split or other distribution with
respect to such shares of Common Stock, or other securities, an appropriate and
proportionate adjustment will be made in (i) the maximum number and kind of
shares reserved for issuance under the Plan, (ii) the number and kind of shares
or other securities subject to then outstanding options under the Plan and (iii)
the price for each share subject to any then outstanding options under the Plan,
without changing the aggregate purchase price as to which such options remain
exercisable. No fractional shares will be issued under the Plan on account of
any such adjustments.
11. Change in Control.
(a) Upon the occurrence of a Change in Control, all options
outstanding under the Plan immediately prior to the effective date of such
Change in Control shall become automatically exercisable in full.
(b) A "Change in Control" shall be deemed to have occurred
only upon the occurrence of any of the following events:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other
than the
<PAGE>
Company, any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, any corporation owned directly or indirectly by
the stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company or an Exempt Person) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 33 1/3% or
more of the combined voting power of the Company's then outstanding
securities (other than as a result of the acquisition of such securities
directly from the Company);
(ii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors of the Company (the
"Board"), and any new director (other than a director designated by a person who
has entered into an agreement with the Company to effect a transaction described
in paragraph (i), (iii) or (iv) of this Subsection) whose election by the Board
or nomination for election by the Company's stockholders was approved by a vote
of at least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or nomination
for election was previously so approved cease for any reason to constitute at
least a majority thereof; or
(iii) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
person (as hereinabove defined), other than a person holding more than 50% of
the combined voting power of the Company's then outstanding securities
immediately prior to such recapitalization, acquires more than 50% of the
combined voting power of the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(c) "Exempt Person" means Houghton Mifflin Company ("HMC"),
provided that HMC shall cease to be an Exempt Person if and when, following a
Change in Control (as defined above but substituting "Houghton Mifflin Company"
for the "Company" as used therein) of HMC, HMC, directly or indirectly, acquires
beneficial ownership of any additional shares of the Company's capital stock.
12. Amendment of the Plan
<PAGE>
The Board of Directors may suspend or discontinue the Plan or
revise or amend it in any respect whatsoever; provided, however, that without
approval of the stockholders of the Company no revision or amendment shall
change the number of shares subject to the Plan (except as provided in Section
10), or materially increase the benefits accruing to participants under the
Plan. The provisions of Sections 5(a) and 5(b) and Section 6 of the Plan may not
be amended more than once in any six-month period.
13. Notice
Any written notice to the Company required by any of the
provisions of the Plan shall be addressed to the Treasurer of the Company and
shall become effective when it is received.
<PAGE>
14. Governing Law
The Plan and all determinations made and actions taken
pursuant hereto shall be governed by the laws of the State of Delaware.
Adopted by the Board of Directors
on March 7, 1996.
Approved by the stockholders
on May 2, 1996.
AMENDMENT NO. 1
TO
1996 NON-EMPLOYEE DIRECTOR PLAN
OF
INSO CORPORATION
The 1996 Non-Employee Director Plan (the "Plan") of Inso Corporation is
hereby amended as follows (capitalized terms used herein and not defined herein
shall have the respective meaning ascribed to such terms in the Plan):
1. Section 4(a) of the Plan shall be deleted in its entirety and replaced with
the following:
(a) The maximum number of shares which may be issued under the Plan
shall be 415,000 shares of the Company's Common Stock, $.01 par value per share
(the "Common Stock").
Except as aforesaid, the Plan shall remain in full force and effect.
Adopted by the
Board of Directors
March 9, 1998
<PAGE>
EXHIBIT 10.5
INSO CORPORATION 401(k) PLAN
<PAGE>
INSO CORPORATION 401(k) PLAN
WHEREAS, Inso Corporation (hereinafter referred to as the "Employer") heretofore
adopted the Inso Corporation 401(k) Plan (hereinafter referred to as the "Plan")
for the benefit of its eligible Employees, effective as of April 1, 1994; and
WHEREAS, the Employer reserved the right to amend the Plan; and
WHEREAS, the Employer wishes to amend the Plan; and
WHEREAS, it is intended that the Plan is to continue to be a qualified plan
under Section 401(a) of the Internal Revenue Code for the exclusive benefit of
the Participants and their Beneficiaries;
NOW, THEREFORE, the Plan is hereby amended by restating the Plan in its entirety
as follows:
<PAGE>
Table of Contents
-----------------
ARTICLE ONE--DEFINITIONS
- ------------------------
1.1 Account
1.2 Administrator
1.3 Beneficiary
1.4 Break in Service
1.5 Code
1.6 Compensation
1.7 Disability
1.8 Effective Date
1.9 Employee
1.10 Employer
1.11 Employment Date
1.12 Highly-Compensated Employee
1.13 Hour of Service
1.14 Leased Employee
1.15 Net Income and Retained Earnings
1.16 Non highly-Compensated Employee
1.17 Normal Retirement Date
1.18 Participant
1.19 Plan
1.20 Plan Year
1.21 Trust
1.22 Trustee
1.23 Valuation Date
1.24 Year of Service or Service
ARTICLE TWO--SERVICE DEFINITIONS AND RULES
- ------------------------------------------
2.1 Year of Service
2.2 Break in Service
2.3 Leave of Absence
2.4 Service in Excluded Job Classifications or with
Related Companies
ARTICLE THREE--PLAN PARTICIPATION
- ---------------------------------
3.1 Participation
3.2 Re-employment of Former Participant
3.3 Termination of Eligibility
ARTICLE FOUR--ELECTIVE DEFERRALS, EMPLOYER CONTRIBUTIONS, ROLLOVERS AND
TRANSFERS FROM OTHER PLANS
- -----------------------------------------------------------------------
<PAGE>
4.1 Elective Deferrals
4.2 Employer Contributions
4.3 Rollovers and Transfers of Funds from Other Plans
4.4 Timing of Contributions
ARTICLE FIVE--ACCOUNTING RULES
- ------------------------------
5.1 Investment of Accounts and Accounting Rules
5.2 Participants Omitted in Error
ARTICLE SIX--VESTING, RETIREMENT AND DISABILITY BENEFITS
- --------------------------------------------------------
6.1 Vesting
6.2 Normal Retirement
6.3 Disability
ARTICLE SEVEN--MANNER AND TIME OF DISTRIBUTING BENEFITS
- -------------------------------------------------------
7.1 Manner of Payment
7.2 Time of Commencement of Benefit Payments
7.3 Furnishing Information
7.4 Minimum Distribution Rules for Installment Payments
7.5 Amount of Death Benefit
7.6 Designation of Beneficiary
7.7 Distribution of Death Benefits
7.8 Eligible Rollover Distributions
ARTICLE EIGHT--LOANS AND IN-SERVICE WITHDRAWALS
- -----------------------------------------------
8.1 Loans
8.2 Hardship Distributions
8.3 Withdrawals After Age 59-1/2
8.4 Withdrawals of Rollover Contributions
8.5 Withdrawals of Employer Contributions
ARTICLE NINE--ADMINISTRATION OF THE PLAN
- ----------------------------------------
9.1 Plan Administration
9.2 Claims Procedure
9.3 Trust Agreement
<PAGE>
ARTICLE TEN--SPECIAL COMPLIANCE PROVISIONS
- ------------------------------------------
10.1 Distribution of Excess Elective Deferrals
10.2 Limitations on 401(k) Contributions
10.3 Nondiscrimination Test for Employer Matching Contributions
10.4 Limitation on the Multiple Use Alternative
ARTICLE ELEVEN--LIMITATION ON ANNUAL ADDITIONS
- ----------------------------------------------
11.1 Rules and Definitions
ARTICLE TWELVE--AMENDMENT AND TERMINATION
- -----------------------------------------
12.1 Amendment
12.2 Termination of the Plan
ARTICLE THIRTEEN--TOP-HEAVY PROVISIONS
- --------------------------------------
13.1 Applicability
13.2 Definitions
13.3 Allocation of Employer Contributions for a Top-Heavy Plan Year
ARTICLE FOURTEEN--MISCELLANEOUS PROVISIONS
- ------------------------------------------
14.1 Plan Does Not Affect Employment
14.2 Successor to the Employer
14.3 Repayments to the Employer
14.4 Benefits not Assignable
14.5 Merger of Plans
14.6 Investment Experience not a Forfeiture
14.7 Distribution to Legally Incapacitated
14.8 Construction
14.9 Governing Documents
14.10 Governing Law
14.11 Headings
14.12 Counterparts
14.13 Location of Participant or Beneficiary Unknown
<PAGE>
ARTICLE ONE--DEFINITIONS
For purposes of the Plan, unless the context or an alternative definition
specified within another Article provides otherwise, the following words and
phrases shall have the definitions provided:
1.1 "ACCOUNT" shall mean the individual bookkeeping accounts maintained for a
Participant under the Plan which shall record (a) the Participant's allocations
of Employer contributions, (b) amounts of Compensation deferred to the Plan
pursuant to the Participant's election, (c) any amounts transferred to this Plan
under Section 4.3 from another qualified retirement plan, and (d) the allocation
of Trust investment experience.
1.2 "ADMINISTRATOR" shall mean the Plan Administrator appointed from time to
time in accordance with the provisions of Article Nine hereof.
1.3 "BENEFICIARY" shall mean any person, trust, organization, or estate entitled
to receive payment under the terms of the Plan upon the death of a Participant.
1.4 "BREAK IN SERVICE" shall mean the twelve (12)-month computation period
specified in Article Two.
1.5 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to
time.
1.6 "COMPENSATION" subject to the provisions of Section 4.1, shall mean the
compensation paid to a Participant by the Employer for the Plan Year, but
exclusive of any stock options, any program of deferred compensation or
additional benefits payable other than in cash. Compensation shall include any
amounts deferred under a salary reduction agreement in accordance with Section
4.1 or under a Code Section 125 plan maintained by the Employer.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, the annual
Compensation of each Participant taken into account under the Plan shall not
exceed the OBRA `93 annual compensation limit. The OBRA `93 annual compensation
limit is $150,000, as adjusted by the Secretary of the Treasury or his delegate
for increases in the cost of living in accordance with Section 401(a)(17)(B) of
the Code. The cost-of-living adjustment in effect for a calendar year applies to
any period, not exceeding twelve (12) months, over which Compensation is
determined (determination period) beginning in such calendar year. If a
determination period consists of fewer than twelve (12) months, the OBRA `93
annual compensation limit shall be multiplied by a fraction, the
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numerator of which is the number of months in the determination period, and
the denominator of which is twelve (12).
Any reference in the Plan to the limitation under Section 401(a)(17) of the Code
shall mean the OBRA `93 annual compensation limit set forth in this provision.
If Compensation for any prior determination period is taken into account in
determining a Participant's benefits accruing in the current Plan Year, the
Compensation for that prior determination period is subject to the OBRA `93
annual compensation limit in effect for that prior determination period.
For purposes of determining who is a Highly-Compensated Employee, Compensation
shall mean compensation as defined in Code Section 414(q)(7).
1.7 "DISABILITY" Disability shall mean a "permanent and total" disability
incurred by a Participant while in the employ of the Employer. For this purpose,
a permanent and total disability shall mean suffering from a physical or mental
condition that, in the opinion of the Administrator and based upon appropriate
medical advice and examination, can be expected to result in death or can be
expected to last for a continuous period of no less than twelve (12) months. The
condition must have existed for a period of at least three (3) months and, in
accordance with uniform and consistent rules, must be determined by the
Administrator to prevent a Participant from engaging in substantial gainful
activity. Receipt of a Social Security disability award shall be deemed proof of
disability.
1.8 "EFFECTIVE DATE" The Plan's initial Effective Date is April 1, 1994. The
Effective Date of this restated Plan, on and after which it supersedes the terms
of the existing Plan document, is October 1, 1997, except where the provisions
of the Plan shall otherwise specifically provide. The rights of any Participant
who separated from the Employer's Service prior to this date shall be
established under the terms of the Plan and Trust as in effect at the time of
the Participant's separation from Service, unless the Participant subsequently
returns to Service with the Employer. Rights of spouses and Beneficiaries of
such Participants shall also be governed by those documents.
1.9 "EMPLOYEE" shall mean a common law employee of the Employer, who for the
entire period of his employment, was also treated as a common law employee on
the payroll records of the Employer.
1.10 "EMPLOYER" shall mean Inso Corporation and any subsidiary or affiliate
which is a member of its "related group" (as defined in Section 2.4) which has
adopted the Plan (a "Participating Affiliate"), and shall include any
successor(s) thereto which adopt this Plan. Any such subsidiary or affiliate of
Inso Corporation may adopt the Plan with the approval of its board of directors
(or noncorporate counterpart) subject to the approval of Inso Corporation. The
provisions of this Plan shall apply equally to each Participating Affiliate and
its Employees
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except as specifically set forth in the Plan; provided, however,
notwithstanding any other provision of this Plan, the amount and timing of
contributions under Article 4 to be made by any Employer which is a
Participating Affiliate shall be made subject to the approval of Inso
Corporation. For purposes hereof, each Participating Affiliate shall be
deemed to have appointed Inso Corporation as its agent to act on its behalf
in all matters relating to the administration, amendment, termination of the
Plan and the investment of the assets of the Plan. For purposes of the Code
and ERISA, the Plan as maintained by Inso Corporation and the Participating
Affiliates shall constitute a single plan rather than a separate plan of each
Participating Affiliate. All assets in the Trust shall be available to pay
benefits to all Participants and their Beneficiaries.
1.11 "EMPLOYMENT DATE" shall mean the first date as of which an Employee is
credited with an Hour of Service, provided that, in the case of a Break in
Service, the Employment Date shall be the first date thereafter as of which an
Employee is credited with an Hour of Service.
1.12 "HIGHLY-COMPENSATED EMPLOYEE" shall mean any Employee of the Employer who:
(a) was a five percent (5%) owner of the Employer (as defined in Code
Section 416(i)(1)) during the "determination year" or "look-back
year"; or
(b) earned more than $80,000 (as increased by cost-of-living
adjustments) of Compensation from the Employer during the "look-
back year" and, if the Employer elects, was in the top twenty
percent (20%) of Employees by Compensation for such year.
An Employee who separated from Service prior to the "determination year" shall
be treated as a Highly-Compensated Employee for the "determination year" if such
Employee was a Highly-Compensated Employee when such Employee separated from
Service, or was a Highly-Compensated Employee at any time after attaining age
fifty-five (55).
For purposes of this Section, the "determination year" shall be the Plan Year
for which a determination is being made as to whether an Employee is a
Highly-Compensated Employee. The "look-back year" shall be the twelve (12) month
period immediately preceding the "determination year". However, if permitted by
applicable law and if the Employer shall elect, the "look-back year" shall be
the calendar year ending with or within the Plan Year for which testing for the
determination of which Employees are Highly-Compensated Employees is being
performed, and the "determination year" (if applicable) shall be the period of
time, if any, which extends beyond the "look-back year" and ends on the last day
of the Plan Year for which such testing is being performed (the "lag period").
If the "lag period" is less than twelve (12) months, the dollar threshold
amounts specified in (b) above shall be pro-rated based upon the number of
months in the "lag period".
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1.13 "HOUR OF SERVICE" shall mean:
(a) each hour for which an Employee is paid or entitled to payment for
the performance of duties for the Employer. These hours shall be
credited to the Employee for the computation period in which the
duties are performed; and
(b) each hour for which an Employee is paid, or entitled to payment, by
the Employer on account of a period of time during which no duties
are performed (irrespective of whether the employment relationship
has terminated) due to vacation, holiday, illness, incapacity
(including disability), layoff, jury duty, involuntary military
duty, or leave of absence. No more than five hundred and one (501)
Hours of Service shall be credited under this subsection for any
single continuous period during which no duties are performed
(whether or not such period occurs in a single computation period).
Hours under this subsection shall be calculated and credited
pursuant to Section 2530.200b-2(b) and (c) of the Department of
Labor Regulations which are incorporated herein by this reference;
and
(c) each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Employer. The same
Hours of Service shall not be credited both under subsection (a) or
subsection (b), as the case may be, and under this subsection (c).
These hours shall be credited to the Employee for the computation
period or periods to which the award or agreement pertains rather
than the computation period in which the award, agreement, or
payment is made.
In crediting Hours of Service for Employees who are paid on an hourly basis, the
"actual" method shall be utilized. For this purpose, the "actual" method shall
mean the determination of Hours of Service from records of hours worked and
hours for which the Employer makes payment or for which payment is due from the
Employer, subject to the limitations enumerated above. In crediting Hours of
Service for Employees who are not paid on an hourly basis, the "weeks of
employment" method shall be utilized. Under this method, an Employee shall be
credited with forty-five (45) Hours of Service for each week for which the
Employee would be required to be credited with at least one (1) Hour of Service
pursuant to the provisions enumerated above.
1.14 "LEASED EMPLOYEE" shall mean any person who, pursuant to an agreement
between the Employer and any other person or organization, has performed
services for the Employer (determined in accordance with Code Section 414(n)(6))
on a substantially full-time basis for a period of at least one (1) year and
where such services are performed under the primary direction and control of the
Employer. A person shall not be considered a Leased Employee if the total number
of Leased Employees does not exceed twenty percent (20%) of the
Nonhighly-Compensated Employees employed by the Employer, and if any such person
is covered by a money purchase pension plan providing (a) a nonintegrated
employer contribution rate of at least ten percent (10%) of compensation, as
defined in Section 11.1(b)(2) of the Plan but including amounts contributed
pursuant to a salary reduction agreement which are excludable from the
employee's gross income under Code Sections 125,
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402(g) or 403(b), (b) immediate participation, and (c) full and immediate
vesting.
1.15 "NET INCOME AND RETAINED EARNINGS" of the Employer shall mean the net
income and the retained earnings as shown by the Employer's books.
1.16 "NONHIGHLY-COMPENSATED EMPLOYEE" shall mean an Employee of the Employer who
is not a Highly-Compensated Employee.
1.17 "NORMAL RETIREMENT DATE" shall mean a Participant's sixty-fifth (65th)
birthday.
1.18 "PARTICIPANT" shall mean any Employee who has satisfied the eligibility
requirements of Article Three and who is participating in the Plan.
1.19 "PLAN" shall mean the Inso Corporation 401(k) Plan, as set forth herein
and as may be amended from time to time.
1.20 "PLAN YEAR" shall mean the twelve (12)-consecutive month period beginning
January 1 and ending December 31.
1.21 "TRUST" shall mean the Trust Agreement entered into between the Employer
and the Trustee forming part of this Plan, together with any amendments thereto.
"Trust Fund" shall mean any and all property held by the Trustee pursuant to the
Trust Agreement, together with income therefrom.
1.22 "TRUSTEE" shall mean the Trustee or Trustees appointed by the Employer, and
any successors thereto.
1.23 "VALUATION DATE" shall mean the date or dates established by the
Administrator for the valuation of the assets of the Plan. In no event shall the
assets of the Plan be valued less frequently than once each Plan Year.
1.24 "YEAR OF SERVICE" or "SERVICE" and the special rules with respect to
crediting Service are in Article Two of the Plan.
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ARTICLE TWO--SERVICE DEFINITIONS AND RULES
Service is the period of employment credited under the Plan. Definitions and
special rules related to Service are as follows:
2.1 YEAR OF SERVICE. For purposes of determining an Employee's eligibility to
receive an Employer contribution under Section 4.2(a) and 4.2(c) of the Plan, an
Employee shall be credited with a Year of Service if he completes at least one
thousand (1,000) Hours of Service during the twelve (12)-consecutive month
period commencing on his Employment Date. If an Employee fails to be credited
with at least one thousand (1,000) Hours of Service during that computation
period, he shall be credited with a Year of Service if he is credited with at
least one thousand (1,000) Hours of Service in any Plan Year commencing on or
after his Employment Date. An Employee shall be credited with a Year of Service
as of the last day of each such twelve (12) month period.
If an individual becomes an Employee of Inso Corporation, or any Participating
Affiliate (within the meaning of Section 1.10), as a result of Inso
Corporation's (or such Participating Affiliate's) acquisition of such Employee's
former employer, such Employee shall be credited with any prior service with
such former employer in determining such Employee's Year(s) of Service, provided
such acquisition occurred prior to October 31, 1997.
2.2 BREAK IN SERVICE. A Break in Service shall be a twelve (12)-month
computation period (as used for measuring Years of Service) in which an Employee
or Participant is not credited with at least five hundred and one (501) Hours of
Service.
2.3 LEAVE OF ABSENCE. A Participant on an unpaid leave of absence pursuant to
the Employer's normal personnel policies shall be credited with Hours of Service
at his regularly-scheduled weekly rate while on such leave, provided the
Employer acknowledges in writing that the leave is with its approval. These
Hours of Service shall be credited only for purposes of determining if a Break
in Service has occurred and, unless specified otherwise by the Employer in
writing, shall not be credited for eligibility to participate in the Plan or
qualification to receive an allocation of Employer contributions. Hours of
Service during a paid leave of absence shall be credited as provided in Section
1.13.
For any individual who is absent from work for any period by reason of the
individual's pregnancy, birth of the individual's child, placement of a child
with the individual in connection with the individual's adoption of the child,
or by reason of the individual's caring for the child for a period beginning
immediately following such birth or adoption, the Plan shall treat as Hours of
Service, solely for determining if a Break in Service has occurred, the
following Hours of Service:
(a) the Hours of Service which otherwise normally would have been
credited to such individual but for such absence; or
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<PAGE>
(b) in any case where the Administrator is unable to determine the
Hours of Service, on the basis of an assumed eight (8) hours
per day.
In no event shall more than five hundred and one (501) of such hours be credited
by reason of such period of absence. The Hours of Service shall be credited in
the computation period which starts after the leave of absence begins. However,
the Hours of Service shall instead be credited in the computation period in
which the absence begins if it is necessary to credit the Hours of Service in
that computation period to avoid the occurrence of a Break in Service.
2.4 SERVICE IN EXCLUDED JOB CLASSIFICATIONS OR WITH RELATED COMPANIES.
(a) SERVICE WHILE A MEMBER OF AN INELIGIBLE CLASSIFICATION OF
EMPLOYEES. An Employee who is a member of an ineligible
classification of Employees shall not be eligible to
participate in the Plan while a member of such ineligible
classification. However, if any such Employee is transferred to
an eligible classification, such Employee shall be credited with
any prior periods of Service completed while a member of such an
ineligible classification. For this purpose, an Employee shall be
considered a member of an ineligible classification of Employees
for any period during which: (i) he is a Leased Employee; or
(ii) he is employed in a job classification which is excluded from
participating in the Plan under Section 3.1 below.
(b) SERVICE WITH RELATED GROUP MEMBERS. For each Plan Year in which the
Employer is a member of a "related group", as hereinafter defined,
all Service of an Employee with any one or more members of such
related group shall be treated as employment by the Employer for
purposes of determining the Employee's Years of Service under
Section 2.1 and his Months of Service under Section 3.1. The
transfer of employment by any such Employee to another member of
the related group shall not be deemed to constitute a retirement
or other termination of employment by the Employee for purposes of
the Plan, but the Employee shall be deemed to have continued in
employment with the Employer for purposes hereof. For purposes of
this subsection (b), "related group" shall mean the Employer and
all corporations, trades or businesses (whether or not
incorporated) which constitute a controlled group of corporations
with the Employer, a group of trades or businesses under common
control with the Employer, or an affiliated service group which
includes the Employer, within the meaning of Section 414(b),
Section 414(c), or Section 414(m), respectively, of the Code
or any other entity required to be aggregated under Code
Section 414(o).
(c) CONSTRUCTION. This Section is included in the Plan to comply with
the Code prov isions regarding the crediting of Service, and not to
extend any additional rights to Employees in ineligible
classifications other than as required by the Code and regulations
thereunder.
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ARTICLE THREE--PLAN PARTICIPATION
3.1 PARTICIPATION. All Employees participating in the Plan prior to the Plan's
restatement shall continue to participate, subject to the terms hereof.
Each other Employee shall become a Participant under the Plan effective as of
the first bi-weekly payroll period following the Employee's completion of one
(1) Month of Service. For purposes of this Section 3.1, an Employee shall be
credited with one (1) Month of Service for each one (1)-month period commencing
on his Employment Date and the one (1) month anniversaries of that date and
ending on the date he separates from Service. Fractional periods of a month
shall be expressed in terms of days, with thirty (30) days being equal to one
(1) month.
Notwithstanding the foregoing, a Participant shall not be eligible to receive an
Employer contribution under Section 4.2(a) or 4.2(c) until the Participant
completes one (1) Year of Service; provided, however, that an Employee who has
completed one (1) Year of Service, who terminates employment with the Employer
prior to the first Entry Date (as defined hereunder) on which such Employee
would have been eligible to receive Employer contributions and who is reemployed
by the Employer after such Entry Date shall become eligible to receive Employer
contributions on the Entry Date coincident with or next following the date such
former Employee again becomes an Employee of the Employer. For purposes of this
paragraph, the term "Entry Date" shall mean the first day of the month
coincident with or next following the Employee's completion of one (1) Year of
Service.
In no event, however, shall any Employee participate under the Plan while he is
included in a unit of Employees covered by a collective bargaining agreement
between the Employer and the Employee representatives under which retirement
benefits were the subject of good faith bargaining unless such collective
bargaining agreement specifically provides for participation in the Plan. In
addition, in no event shall any Employee who is hired on a temporary basis or
who is an independent contractor, non-resident alien, co-op student, or intern
be eligible to participate in the Plan.
3.2 RE-EMPLOYMENT OF FORMER PARTICIPANT. A Participant whose participation
ceased because of termination of employment with the Employer shall participate
as soon as administratively possible following his re-employment; provided,
however, that such Employee shall not be eligible to receive any Employer
contributions under Section 4.2(a) or 4.2(c) unless he has satisfied the
eligibility requirements for such Employer contributions as set forth under
Section 3.1. In addition, in no event shall any Employee who is hired on a
temporary basis or who is an independent contractor, non-resident alien, co-op
student, or intern be eligible to participate in the Plan.
3.3 TERMINATION OF ELIGIBILITY. In the event a Participant is no longer a member
of an eligible class of Employees and he becomes ineligible to participate, such
Employee shall
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<PAGE>
participate as soon as administratively possible following his return to an
eligible class of Employees.
In the event an Employee who is not a member of an eligible class of Employees
becomes a member of an eligible class, such Employee shall participate as soon
as administratively possible thereafter, if such Employee has satisfied the
appropriate eligibility requirements of Section 3.1 and would have otherwise
previously become a Participant.
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ARTICLE FOUR--ELECTIVE DEFERRALS, EMPLOYER CONTRIBUTIONS,
AND ROLLOVERS AND TRANSFERS FROM OTHER PLANS
4.1 ELECTIVE DEFERRALS.
(a) ELECTIONS. A Participant may elect to defer a portion of his
Compensation for a Plan Year. In this regard, a Participant may
also elect to apply his deferral election to "Total Cash
Compensation" or to "Base Compensation". For such purposes,
"Total Cash Compensation" shall have the meaning set forth in
Section 1.6, and "Base Compensation" shall mean Compensation
less bonuses and commissions. The amount of a Participant's
Compensation that is deferred in accordance with the
Participant's election shall be withheld by the Employer from
the Participant's Compensation on a ratable basis throughout
the Plan Year. The amount deferred on behalf of each
Participant shall be contributed by the Employer to the Plan
and allocated to the Participant's Account.
(b) CHANGES IN ELECTION. A Participant may prospectively elect to
change or revoke the amount (or percentage) of his elective
deferrals during the Plan Year by filing a written election with
the Employer, or via a telephone "voice response" and/or on-line
access system designated by the Administrator, provided that a
written confirmation is forwarded in response to such request.
(c) LIMITATIONS ON DEFERRALS. No Participant shall defer an amount
which exceeds $9,500 (or such amount as adjusted for
cost-of-living increases under Section 402(g) of the Code) for
any calendar year ending with or within the Plan Year.
(d) ADMINISTRATIVE RULES. All elections made under this Section 4.1,
including the amount and frequency of deferrals, shall be made
on a prospective basis only and shall be subject to the rules of
the Administrator which shall be consistently applied and which
may be changed from time to time.
4.2 EMPLOYER CONTRIBUTIONS.
(a) EMPLOYER MATCHING CONTRIBUTIONS. For each Plan Year, the
Employer may contribute to the Plan, on behalf of each
Participant eligible under Section 4.2(b), a discretionary
matching contribution equal to a percentage of the elective
deferrals made by each such Participant, subject to a maximum
matching contribution, as established by the Employer, which
maximum shall be based on a percentage of the Participant's
"Total Cash Compensation" (as defined under Section 4.1). The
amount, if any, of the Employer matching contribution for any
Plan Year shall be made from the Employer's Net Income or
Retained Earnings at the discretion of the board of directors of
the Employer. The Employer's board of directors may also
determine to suspend, reduce or increase its contributions under
this Section for any Plan Year or any portion thereof.
Allocations under this Section shall be subject to
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the special rules of Section 13.3 in any Plan Year in which the
Plan is a Top-Heavy Plan (as defined in Section 13.2(c)).
(b) ELIGIBILITY FOR EMPLOYER MATCHING CONTRIBUTIONS. To be eligible
for a share of Employer matching contributions under Section
4.2(a) for a Plan Year, a Participant must have satisfied the
one (1) Year of Service requirement as set forth under Section
3.1.
(c) ADDITIONAL EMPLOYER CONTRIBUTIONS. Additional Employer
contributions may be made from the Employer's Net Income or
Retained Earnings at the discretion of the Employer's board of
directors for any Plan Year, subject to limits for tax
deductions under the Code and provided that the special
allocation in Section 13.3 has been satisfied if the Plan is a
Top-Heavy Plan (as defined in Section 13.2(c)).
(d) ELIGIBILITY FOR ADDITIONAL EMPLOYER CONTRIBUTIONS. To be
eligible for an allocation of additional Employer contributions
under Section 4.2(c) for a Plan Year, a Participant must (1)
have satisfied the one (1) Year of Service requirement as set
forth under Section 3.1 and (2) be employed by the Employer on
the last day of the Plan Year; provided, however, that if the
Participant's failure to be employed on the last day of the Plan
Year is due to the Participant's Disability, death or retirement
on or after his Normal Retirement Date during the Plan Year,
such Participant shall nevertheless be entitled to share in the
allocation of any additional Employer contributions for such
Plan Year.
(e) ALLOCATION OF ADDITIONAL EMPLOYER CONTRIBUTIONS. Any
contribution made under Section 4.2(c) shall be allocated among
the Accounts of eligible Participants in accordance with the
ratio that each such eligible Participant's Compensation bears
to the total Compensation of all such eligible Participants for
the Plan Year.
(f) Notwithstanding anything herein to the contrary, in any
situation where the exclusion of certain Participants from
receiving an allocation of any Employer contributions hereunder
would result in the Plan failing to satisfy minimum coverage
requirements under applicable provisions of the Code or income
tax regulations, then the following shall apply:
(1) Such affected Participants shall receive an allocation of
Employer contributions in order of priority beginning with
the individual whose employment terminated latest in the
Plan Year, and continuing back in order of time until such
allocations have been made to all such individuals or until
the Plan satisfies the minimum coverage requirement for the
Plan Year, whichever occurs first.
(2) In the event that after allocations of Employer contributions
made in accordance with paragraph (1) above, the Plan
still does not satisfy the minimum coverage requirements,
allocations of additional Employer contributions shall be made
to the remaining affected Participants beginning
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with the individual credited with the greatest number of Hours
of Service and continuing in descending order until allocations
have been made to the smallest number of affected Participants
that will permit the Plan to satisfy the minimum coverage
requirements for the Plan.
If two individuals referred to in the preceding paragraph
have the same number of Hours of Service, then they shall be
deemed eligible Participants in order of a priority based
upon the earliest Employment Date with the Employer.
4.3 ROLLOVERS AND TRANSFERS OF FUNDS FROM OTHER PLANS. With the approval of the
Administrator, there may be paid to the Trustee amounts which have been held
under other plans qualified under Code Section 401 either (a) maintained by the
Employer which have been discontinued or terminated with respect to any
Employee, or (b) maintained by another employer with respect to which any
Employee has ceased to participate. Any such transfer or rollover may also be
made by means of an Individual Retirement Account qualified under Section 408 of
the Code, where the Individual Retirement Account was used as a conduit from the
former plan. Any amounts so transferred on behalf of any Employee shall be
nonforfeitable and shall be maintained under a separate Plan account, to be paid
in addition to amounts otherwise payable under this Plan. The amount of any such
account shall be equal to the fair market value of such account as adjusted for
income, expenses, gains, losses, and withdrawals attributable thereto.
Notwithstanding anything contained herein to the contrary, in no event shall the
Administrator accept on behalf of any Employee a transfer of funds from a
qualified plan which would subject the Plan to the provisions of Section
401(a)(11) of the Code.
An Employee who would otherwise be eligible to participate in the Plan but for
the failure to satisfy the (1) one month of Service requirement for
participation as set forth under Section 3.1, shall be eligible to complete a
rollover to the Plan. Such an Employee shall also be eligible to obtain a loan
or withdrawal in accordance with the provisions of Article Eight prior to
satisfying such service requirement.
4.4 TIMING OF CONTRIBUTIONS. Employer contributions shall be made to the Plan no
later than the time prescribed by law for filing the Employer's Federal income
tax return (including extensions) for its taxable year ending with or within the
Plan Year. Elective deferrals under Section 4.1 shall be paid to the Plan as
soon as administratively possible, but no later than the time prescribed by
applicable law, following receipt of such deferrals by the Administrator.
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ARTICLE FIVE--ACCOUNTING RULES
5.1 INVESTMENT OF ACCOUNTS AND ACCOUNTING RULES.
(a) INVESTMENT FUNDS. The investment of Participants' Accounts shall
be made in a manner consistent with the provisions of the Trust.
The Administrator, in its discretion, may allow the Trust to
provide for separate funds for the directed investment of each
Participant's Account.
(b) PARTICIPANT DIRECTION OF INVESTMENTS. In the event Participants'
Accounts are subject to their investment direction, each
Participant may direct how his Account is to be invested among
the available investment funds in the percentage multiples
established by the Administrator. In the event a Participant
fails to make an investment election, with respect to all or any
portion of his Account, the Trustee shall invest all or such
portion of his Account in the investment fund to be designated
by the Administrator. A Participant may change his investment
election, with respect to future contributions and/or amounts
previously accumulated in the Participant's Account, in writing,
on such form as the Administrator shall specify, or via a
telephone "voice response" and/or on-line access system
designated by the Administrator, provided that a written
confirmation is forwarded in response to such request. Any such
change in a Participant's investment election shall be effective
at such time as may be prescribed by the Administrator. If the
Plan's recordkeeper or investments are changed, the
Administrator may suspend the Participants' investment direction
of their Accounts.
(c) ALLOCATION OF INVESTMENT EXPERIENCE. As of each Valuation Date,
the investment fund(s) of the Trust shall be valued at fair
market value, and the income, loss, appreciation and
depreciation (realized and unrealized), and any paid expenses of
the Trust attributable to such fund shall be apportioned among
Participants' Accounts within the fund based upon the value of
each Account within the fund as of the preceding Valuation Date.
(d) ALLOCATION OF CONTRIBUTIONS. Employer contributions shall be
allocated to the Account of each eligible Participant as of the
last day of the period for which the contributions are made.
Elective deferrals shall be allocated to the Account of each
Participant as soon as administratively practical following
receipt of such contributions by the Administrator.
(e) MANNER AND TIME OF DEBITING DISTRIBUTIONS. For any Participant
who is entitled to receive a distribution from his Account, such
distribution shall be made in accordance with the provisions of
Section 7.2. The amount distributed shall be based upon the fair
market value of the Participant's vested Account as of the
Valuation Date preceding the distribution.
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5.2 PARTICIPANTS OMITTED IN ERROR. In the event a Participant is not allocated a
share of the Employer contribution as a result of an administrative error in any
Plan Year, the Employer may elect to either (a) make an additional contribution
on behalf of such omitted Participant in an appropriate amount, or (b) deduct
the appropriate amount from the next succeeding Employer contribution and
allocate such amount to the Participant's Account prior to making the
allocations set forth under Section 5.1(d).
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ARTICLE SIX--VESTING, RETIREMENT AND DISABILITY BENEFITS
6.1 VESTING. A Participant shall at all times have a nonforfeitable (vested)
right to his Account derived from elective deferrals, Employer matching
contributions under Section 4.2(a), additional Employer contributions under
Section 4.2(c), Employer "fail-safe" contributions under Section 10.2, and any
rollovers or transfers from other plans, adjusted for investment experience. The
provisions of this Section shall, however, be subject to the provisions of
Section 12.1 below.
6.2 NORMAL RETIREMENT. A Participant who is in the employment of the Employer at
his Normal Retirement Date shall be entitled to receive the full amount credited
to his Account. A Participant who continues employment with the Employer after
his Normal Retirement Date shall continue to participate under the Plan but may
elect in writing to have his Account payable at the time and in the manner
specified in Article Seven.
6.3 DISABILITY. If a Participant incurs a Disability, the Participant shall be
entitled to receive the full amount credited to his Account. Payment of such
Participant's Account balance shall be made at the time and in the manner
specified in Article Seven, following receipt by the Administrator of the
Participant's written distribution request.
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ARTICLE SEVEN--MANNER AND TIME OF DISTRIBUTING BENEFITS
7.1 MANNER OF PAYMENT. The Participant's vested Account shall be distributed to
the Participant (or to the Participant's Beneficiary in the event of the
Participant's death) by any of the following methods, as elected by the
Participant or, when applicable, the Participant's Beneficiary:
(a) in a single lump-sum payment in cash;
(b) in a single lump-sum payment in the number of whole shares of
Employer stock credited to the Account of the Participant (or
the Participant's Beneficiary in the event of the Participant's
death) with any fractional shares and the remainder of the
Participant's or Beneficiary's Account being paid in cash; or
(c) provided the Participant's vested Account exceeds $3,500 ($5,000
for Plan Years beginning after December 31, 1997) , in monthly,
quarterly, or annual installments over a period not exceeding
twenty (20) years, subject to the minimum distribution rules of
Section 7.4.
7.2 TIME OF COMMENCEMENT OF BENEFIT PAYMENTS. Distribution of the Participant's
Account balance for a Participant who terminates employment on or after his
Normal Retirement Date, or as a result of his Disability, shall be made or
commence no later than sixty (60) days following the close of the Plan Year in
which such event occurred, unless the Participant elects to defer receipt of his
Account subject to the provisions of this Section; provided, however, that if
the amount required to be distributed cannot be ascertained by such date,
distribution shall be made no later than sixty (60) days after the earliest date
on which such amount can be ascertained; and provided, further, that if the
Participant's Account balance exceeds $3,500 ($5,000 for Plan Years beginning
after December 31, 1997), distribution shall not be made or commence prior to
such Participant's Normal Retirement Date, unless the Participant otherwise
requests in writing. In such event, distribution shall commence as soon as
administratively practical following receipt by the Administrator of the
Participant's written request.
If a Participant terminates employment for any reason other than Normal
Retirement, Disability or death, distribution of his vested Account balance
shall be made or commence no later than sixty (60) days following the close of
the Plan Year in which he terminates employment with the Employer. However, if
the vested balance of the Participant's Account exceeds $3,500 ($5,000 for Plan
Years beginning after December 31, 1997), distribution shall not be made or
commence prior to such Participant's Normal Retirement Date unless the
Participant otherwise requests in writing.
A Participant who terminates employment after his Normal Retirement Date may
elect to defer receipt of his Account; provided, however, that in no event shall
the distribution be made or commence later than the April 1st following the end
of the calendar year in which the
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Participant attains age seventy and one-half (70-1/2), or except for a
Participant who is a five percent (5%) owner of the Employer (within the
meaning of Section 401(a)(9) of the Code), if later, the April 1st following
the calendar year in which the Participant retires or otherwise separates
from service.
In the event distribution is required to be made while the Participant is
employed by the Employer, such distribution may, at the election of the
Participant, be made in installments subject to the provisions of Section
401(a)(9) of the Code and the regulations thereunder.
7.3 FURNISHING INFORMATION. Prior to the payment of any benefit under the Plan,
each Participant or Beneficiary may be required to complete such administrative
forms and furnish such proof as may be deemed necessary or appropriate by the
Employer, Administrator, and/or Trustee.
7.4 MINIMUM DISTRIBUTION RULES FOR INSTALLMENT PAYMENTS. If a distribution is
made in installments the following rules shall apply:
(a) PAYMENTS TO PARTICIPANT OR TO PARTICIPANT AND SURVIVING SPOUSE.
Payment shall commence no later than a date provided for in
Section 7.2. The amount to be distributed each year shall be at
least equal to the vested balance in the Participant's Account
as of the preceding Valuation Date multiplied by the following
fraction: the numerator shall be one (1) and the denominator
shall be the life expectancy of the Participant (or the joint
life expectancies of the Participant and the Participant's
spouse) determined as of the Valuation Date preceding the first
payment and reduced by one for each succeeding year.
(b) PAYMENTS TO PARTICIPANT AND NON-SPOUSE BENEFICIARY. Payment
shall commence no later than a date provided for in Section 7.2.
The amount to be distributed each year shall be at least equal
to the vested balance in the Participant's Account as of the
preceding Valuation Date multiplied by the following fraction:
the numerator shall be one (1) and the denominator shall be the
joint life expectancies of the Participant and the Participant's
Beneficiary computed as of the Valuation Date preceding the
first payment and reduced by one (1) for each succeeding year.
Payments shall be restricted under this option to insure
compliance with the minimum distribution incidental death
benefit requirement of Section 401(a)(9) of the Code and the
regulations promulgated thereunder.
(c) PAYMENTS TO BENEFICIARY. Payment shall commence no later than a
date provided for in Section 7.7. The amount to be distributed
each year shall be at least equal to the vested balance in the
Participant's Account as of the preceding Valuation Date
multiplied by the following fraction: the numerator shall be one
(1) and the denominator shall be the life expectancy of the
Participant's Beneficiary computed as of the Valuation Date
preceding the first payment and reduced by one (1) for each
succeeding year.
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(d) RECALCULATION OF LIFE EXPECTANCY. If distribution is to be made
over the life expectancy of the Participant or, where the
Participant's spouse is his Beneficiary, the life expectancy of
the Participant's surviving spouse, or the joint life
expectancies of the Participant and his spouse, such life
expectancy or joint life expectancies, at the election of the
Participant or his surviving spouse, as the case may be, may be
recalculated annually. Any such election shall be irrevocable as
to the Participant (and spouse, if applicable) and shall apply
to all subsequent years. In no event, however, shall the life
expectancy of a non-spouse Beneficiary be recalculated.
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7.5 AMOUNT OF DEATH BENEFIT.
(a) DEATH BEFORE TERMINATION OF EMPLOYMENT. In the event of the
death of a Participant while in the employ of the Employer, the
Participant's Account balance shall be paid to the Participant's
Beneficiary.
(b) DEATH AFTER TERMINATION OF EMPLOYMENT. In the event of the death
of a former Participant after termination of employment, but
prior to the complete distribution of his Account balance under
the Plan, the undistributed balance of the Participant's Account
shall be paid to the Participant's Beneficiary.
7.6 DESIGNATION OF BENEFICIARY. Each Participant shall file with the
Administrator a designation of Beneficiary to receive payment of any death
benefit payable hereunder if such Beneficiary should survive the Participant.
However, no Participant who is married shall be permitted to designate a
Beneficiary other than his spouse unless the Participant's spouse has signed a
written consent witnessed by a Plan representative or a notary public, which
provides for the designation of an alternate Beneficiary.
Subject to the above, Beneficiary designations may include primary and
contingent Beneficiaries, and may be revoked or amended at any time in similar
manner or form, and the most recent designation shall govern. In the absence of
an effective designation of Beneficiary, or if the Beneficiary dies before
complete distribution of the Participant's vested Account, all amounts shall be
paid to the first surviving class of the following classes of successive
preference Beneficiaries: the Participant's (a) widow or widower; (b) surviving
issue, per stirpes; (c) surviving parents; (d) brothers and sisters or their
issue by right of representation; and (e) executors and administrators.
Notification to Participants of the death benefits under the Plan and the method
of designating a Beneficiary shall be given at the time and in the manner
provided by regulations and rulings under the Code.
7.7 DISTRIBUTION OF DEATH BENEFITS. The Beneficiary shall be allowed to
designate the mode of receiving benefits in accordance with Section 7.1, unless
the Participant had designated a method in writing and indicated that the method
was not revocable by the Beneficiary.
Distribution of any death benefit hereunder shall be made or commence within one
(1) year of the Participant's death or, in the case of a surviving spouse,
within a reasonable time after the Participant's death or, if the surviving
spouse so elects and if the Participant's vested Account exceeds $3,500, no
later than the date on which the Participant would have reached age seventy and
one-half (70-1/2). If a surviving spouse dies before distributions to the spouse
begin, this paragraph shall be applied as if the surviving spouse were the
Participant.
To the extent payments are not designated to or for the benefit of a natural
person, or if payments commence after the required time, the following
distribution modes shall be
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available:
(a) a lump sum payable at any time within five (5) years of the
Participant's death; and
(b) payments of installments at such time and in such amount as
determined by the Beneficiary, provided that all amounts must be
paid from the Trust within five (5) years of the Participant's
death.
If a Participant dies after payments have commenced, any survivor's benefit must
be paid no less rapidly than the method of payment in effect at the time of the
Participant's death.
7.8 ELIGIBLE ROLLOVER DISTRIBUTIONS. Notwithstanding the foregoing provisions of
this Article Seven, the provisions of this Section 7.8 shall apply to
distributions made under the Plan.
(a) A distributee may elect, at the time and in the manner
prescribed by the Administrator, to have any portion of an
eligible rollover distribution paid directly to an eligible
retirement plan specified by the distributee in a direct
rollover.
(b) Definitions:
(i) ELIGIBLE ROLLOVER DISTRIBUTION. An eligible rollover
distribution is any distribution of all or any portion
of the balance to the credit of the distributee, except
that an eligible rollover distribution does not
include: any distribution that is one of a series of
substantially equal periodic payments (not less
frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or
joint life expectancies) of the distributee and the
distributee's designated Beneficiary, or for a
specified period of ten (10) years or more; any
distribution to the extent such distribution is
required under Section 401(a)(9) of the Code; and the
portion of any distribution that is not includable in
gross income (determined without regard to the
exclusion for net unrealized appreciation with respect
to employer securities).
(ii) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan
is an individual retirement account described in
Section 408(a) of the Code, an individual retirement
annuity described in Section 408(b) of the Code, an
annuity plan described in Section 403(a) of the Code or
a qualified trust described in Section 401(a) of the
Code, that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible
rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement
account or individual retirement annuity.
(iii) DISTRIBUTEE. A distributee includes an Employee or
former Employee. In addition, the Employee's or former
Employee's surviving spouse and the Employee's or
former Employee's spouse or former spouse who is the
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alternate payee under a qualified domestic relations
order, as defined in Section 414(p) of the Code, are
distributees with regard to the interest of the spouse
or former spouse.
(iv) DIRECT ROLLOVER. A direct rollover is a payment by the
Plan to the eligible retirement plan specified by the
distributee.
(c) If a distribution is one to which Sections 401(a)(11) and 417 of
the Code do not apply, such distribution may commence less than
30 days after the notice required under Section 1.411(a)-11(c)
of the Income Tax Regulations is given, provided that:
(i) the Administrator clearly informs the Participant that
the Participant has a right to a period of at least 30
days after receiving the notice to consider the
decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option),
and
(ii) the Participant, after receiving the notice, affirmatively
elects a distribution.
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ARTICLE EIGHT--LOANS AND IN-SERVICE WITHDRAWALS
8.1 LOANS.
(a) PERMISSIBLE AMOUNT AND PROCEDURES. Upon the application of a
Participant, the Administrator may, in accordance with a uniform
and nondiscriminatory policy, direct the Trustee to grant a loan
to the Participant, which loan shall be secured by the
Participant's vested Account balance. The Participant's
signature shall be required on a promissory note. In determining
a rate of interest on such loan, the Administrator may refer to
the rate of interest used for obligations of a comparable nature
by commercial lending institutions within a radius of fifty (50)
miles of the Employer's principal place of business. Participant
loans shall be treated as segregated investments, and interest
repayments shall be credited only to the Participant's Account.
(b) LIMITATION ON AMOUNT OF LOANS. A Participant's loan shall not
exceed the lesser of:
(1) $50,000, which amount shall be reduced by the highest
outstanding loan balance during the preceding twelve
(12)-month period; or
(2) one-half (1/2) of the vested value of the Participant's
Account, determined as of the Valuation Date preceding
the date of the Participant's loan.
Any loan must be repaid within five (5) years, unless made for the purpose of
acquiring the primary residence of the Participant, in which case such loan may
be repaid over a longer period of time not to exceed twenty (20) years. The
repayment of any loan must be made in at least quarterly installments of
principal and interest.
Loan repayments may be suspended for a Participant who is on a leave of absence
("Leave"), either without pay from the Employer or at a rate of pay (after
income and employment tax withholding) that is less than the amount of the
installment payments required under the term of the loan. However, the loan must
be repaid by the latest date permitted under Section 72(p)(2)(B) of the Code and
the installments due after the Leave ends (or, if earlier, upon the expiration
of the first year of the Leave) must not be less than those required under the
terms of the original loan.
If a Participant defaults on any outstanding loan, the unpaid balance, and any
interest due thereon, shall become due and payable in accordance with the terms
of the underlying promissory note; provided, however, that such foreclosure on
the promissory note and attachment of security shall not occur until a
distributable event occurs in accordance with the provisions of Article Seven.
If a Participant terminates employment while any loan balance is outstanding,
the unpaid balance, and any interest due thereon, shall become due and payable
in accordance with the terms of the underlying promissory note. If such amount
is not paid to the Plan, it shall be
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charged against the amounts that are otherwise payable to the Participant or
the Participant's Beneficiary under the provisions of the Plan.
In the case of a Participant who has loans outstanding from other plans of the
Employer (or a member of the Employer's related group (within the meaning of
Section 2.4(b)), the Administrator shall be responsible for reporting to the
Trustee the existence of said loans in order to aggregate all such loans within
the limits of Section 72(p) of the Code.
8.2 HARDSHIP DISTRIBUTIONS. In the case of a financial hardship resulting from a
proven immediate and heavy financial need, a Participant may receive a
distribution not to exceed the lesser of (i) the value of the Participant's
vested Account, excluding, however, any investment earnings received after
December 31, 1988 on the portion of the Participant's Account attributable to
his elective deferrals, determined as of the Valuation Date immediately
preceding such withdrawal request, or (ii) the amount necessary to satisfy the
financial hardship. The amount of any such immediate and heavy financial need
may include any amounts necessary to pay Federal, state or local income taxes or
penalties reasonably anticipated to result from the distribution. Such
distribution shall be made in accordance with nondiscriminatory and objective
standards consistently applied by the Administrator.
Hardship distributions under this Section shall be deemed to be the result of an
immediate and heavy financial need if such distribution is to (a) pay expenses
for medical care (as described in Section 213(d) of the Code) previously
incurred by the Participant, the Participant's spouse, or any dependents of the
Participant (as defined in Section 152 of the Code), or to permit the
Participant, the Participant's spouse, or any dependents of the Participant to
obtain such medical care, (b) purchase the principal residence of the
Participant (excluding mortgage payments), (c) pay tuition and related
educational fees for the next twelve (12) months of post-secondary education for
the Participant, Participant's spouse, or any of the Participant's dependents or
(d) prevent the eviction of the Participant from his principal residence or
foreclosure on the Participant's principal residence. In addition, any hardship
distribution hereunder shall only be made provided that the funds for such
hardship are not available from other financial resources of the Participant,
the Participant's spouse or the Participant's children. Distributions paid
pursuant to this Section shall be deemed to be made as of the Valuation Date
immediately preceding the hardship distribution, and the Participant's Account
shall be reduced accordingly.
The provisions of this Section (relating to hardship distributions) are intended
to comply with Treasury Regulations issued under Section 401(k) of the Code, and
shall be so interpreted.
No hardship distribution shall be made pursuant to this Section unless the
Administrator, based upon the Participant's representation and such other facts
as are known to the Administrator, determines that the following conditions are
satisfied:
(a) The distribution is not in excess of the amount of the immediate
and heavy financial need of the Participant; and
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(b) The Participant has obtained all distributions, other than
hardship distributions, and all non-taxable loans currently
available under all plans maintained by the Employer.
8.3 WITHDRAWALS AFTER AGE 59-1/2. After attaining age fifty-nine and one-half
(59-1/2), a Participant, by giving written notice to the Administrator, may
withdraw from the Plan a sum (a) not in excess of the credit balance of his
vested Account as of the Valuation Date preceding such notice and (b) not less
than such minimum amount as the Administrator may establish from time to time to
facilitate administration of the Plan. Any such withdrawals shall be made in
accordance with nondiscriminatory and objective standards consistently applied
by the Administrator.
8.4 WITHDRAWALS OF ROLLOVER CONTRIBUTIONS. A Participant, by giving written
notice to the Administrator, may withdraw from the Plan a sum (a) not in excess
of the credit balance of his vested Account attributable to rollover
contributions as of the Valuation Date preceding such notice and (b) not less
than such minimum amount as the Administrator may establish from time to time to
facilitate administration of the Plan. Any such withdrawals shall be made in
accordance with nondiscriminatory and objective standards consistently applied
by the Administrator.
8.5 WITHDRAWALS OF EMPLOYER CONTRIBUTIONS. A Participant who has been a
Participant in the Plan for a period of at least sixty (60) months (whether or
not continuous) and who has withdrawn the full amount available pursuant to
Sections 8.4 and 8.5, by giving written notice to the Administrator, may
withdraw from the Plan a sum (a) not in excess of the credit balance of his
vested Account attributable to Employer contributions as of the Valuation Date
preceding such notice and (b) not less than such minimum amount as the
Administrator may establish from time to time to facilitate administration of
the Plan. Any such withdrawals shall be made in accordance with
nondiscriminatory and objective standards consistently applied by the
Administrator.
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ARTICLE NINE--ADMINISTRATION OF THE PLAN
9.1 PLAN ADMINISTRATION. The Employer shall be the Plan Administrator,
hereinbefore and hereinafter called the Administrator, and "named fiduciary"
(for purposes of Section 402(a)(1) of the Employee Retirement Income Security
Act of 1974, as amended from time to time) of the Plan, unless the Employer, by
action of its board of directors, shall designate a person or committee of
persons to be the Administrator and named fiduciary. The administration of the
Plan, as provided herein, including a determination of the payment of benefits
to Participants and their Beneficiaries, shall be the responsibility of the
Administrator; provided, however, that the Administrator may delegate any of its
powers, authority, duties or responsibilities to any person or committee of
persons. In the event more than one party shall act as Administrator, all
actions shall be made by majority decisions. In the administration of the Plan,
the Administrator may (a) employ agents to carry out nonfiduciary
responsibilities (other than Trustee responsibilities), (b) consult with
counsel, who may be counsel to the Employer, and (c) provide for the allocation
of fiduciary responsibilities (other than Trustee responsibilities) among its
members. Actions dealing with fiduciary responsibilities shall be taken in
writing and the performance of agents, counsel and fiduciaries to whom fiduciary
responsibilities have been delegated shall be reviewed periodically.
The expenses of administering the Plan and the compensation of all employees,
agents, or counsel of the Administrator, including accounting fees,
recordkeeper's fees, and the fees of any benefit consulting firm, shall be paid
by the Plan, or shall be paid by the Employer if the Employer so elects. To the
extent required by applicable law, compensation may not be paid by the Plan to
full-time Employees of the Employer.
In the event the Employer pays the expenses of administering the Plan, the
Employer may seek reimbursement from the Plan for the payment of such expenses.
Reimbursement shall be permitted only for Plan expenses paid by the Employer
within the last twelve (12)-month period.
The Administrator shall obtain from the Trustee, not less often than annually, a
report with respect to the value of the assets held in the Trust Fund, in such
form as may be required by the Administrator.
The Administrator shall administer the Plan and adopt such rules and regulations
as, in the opinion of the Administr ator, are necessary or advisable to
implement and administer the Plan and to transact its business.
9.2 CLAIMS PROCEDURE. Pursuant to procedures established by the Administrator,
adequate notice in writing shall be provided to any Participant or Beneficiary
whose claim for benefits under the Plan has been denied within ninety (90) days
of receipt of such claim. Such notice shall be written in a manner calculated to
be understood by the claimant, shall advise the claimant the right to
administrative review, and shall set forth the specific reason for such denial,
the specific references to the pertinent Plan provisions on which the denial is
based,
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and a description of any additional material or information necessary to
perfect the claim, and an explanation of why such material or information is
necessary. If such review is requested by the claimant or his authorized
representative within ninety (90) days after receipt by the claimant of
written notification of denial of his claim, the Administrator shall afford a
reasonable opportunity for a full and fair review by the Administrator of the
decision denying the claim. The review shall focus on the additional facts,
legal interpretations or material, if any, presented by the claimant. The
Administrator shall, within sixty (60) days (or if special circumstances
apply, one hundred twenty (120) days) of a request for review, render a
written decision on its review setting forth the specific reasons for such
decision, written in a manner calculated to be understood by the claimant.
9.3 TRUST AGREEMENT. The Trust Agreement entered into by and between the
Employer and the Trustee, including any supplements or amendments thereto, or
any successor Trust Agreement, is incorporated by reference herein.
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ARTICLE TEN--SPECIAL COMPLIANCE PROVISIONS
10.1 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS. If the amount of any elective
deferrals made by a Participant exceeds the dollar limitation of Section 4.1(c),
then the excess amount, and any income allocable thereto, shall be distributed
to such Participant subject to the requirements of applicable law.
10.2 LIMITATIONS ON 401(k) CONTRIBUTIONS.
(a) AVERAGE ACTUAL DEFERRAL PERCENTAGE TEST. Amounts contributed as
elective deferrals under Section 4.1(a) and any "fail-safe"
contributions made under this Section, are considered to be
amounts deferred pursuant to Section 401(k) of the Code. For
purposes of this Article, these amounts are referred to as the
"deferred amounts." For purposes of the "average actual deferral
percentage test" described below, such deferred amounts must be
made before the last day of the twelve (12)-month period
immediately following the Plan Year to which the contributions
relate. The Employer shall maintain records sufficient to
demonstrate satisfaction of the average actual deferral
percentage test and the deferred amounts used in such test.
As of the last day of each Plan Year, the deferred amounts for
the Plan Year for the Participants who are Highly-Compensated
Employees shall satisfy either of the following tests:
(1) The average actual deferral percentage for the eligible
Participants who are Highly-Compensated Employees shall not
exceed the average actual deferral percentage for eligible
Participants who are Nonhighly-Compensated Employees
multiplied by 1.25; or
(2) The average actual deferral percentage for eligible
Participants who are Highly-Compensated Employees shall not
exceed the average actual deferral percentage of eligible
Participants who are Nonhighly-Compensated Employees
multiplied by two (2), provided that the average actual
deferral percentage for eligible Participants who are
Highly-Compensated Employees does not exceed the average
actual deferral percentage for eligible Participants who are
Nonhighly-Compensated Employees by more than two (2)
percentage points, or such lesser amount as the Secretary of
the Treasury shall prescribe to prevent the multiple use of
this alternative limitation with respect to any
Highly-Compensated Employee.
For purposes of the above tests, the "actual deferral percentage" shall mean
the ratio (expressed as a percentage) that the deferred amounts, which are
allocated to the Participant's Account as of any day in the Plan Year, on
behalf of each eligible Participant for the Plan Year bears to the eligible
Participant's compensation, as defined in Code Section 414(s) and the
regulations promulgated thereunder. The "average actual deferral
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percentage" shall mean the average (expressed as a percentage) of the actual
deferral percentages of the eligible Participants in each group. "Eligible
Participant" shall mean each Employee who is eligible to participate in the
Plan under Section 3.1.
For purposes of this Section 10.2, the actual deferral percentage for any
eligible Participant who is a Highly-Compensated Employee for the Plan Year and
who is eligible to have elective deferrals allocated to his account under two
(2) or more plans or arrangements described in Code Section 401(k) that are
maintained by the Employer or any employer who is a related group member (within
the meaning of Section 2.4(b)) shall be determined as if all such deferrals were
made under a single arrangement. In the event that this Plan satisfies the
requirements of Code Section 410(b) only if aggregated with one (1) or more
other plans, or if one (1) or more other plans satisfy the requirements of Code
Section 410(b) only if aggregated with this Plan, then the provisions of this
Section 10.2 shall be applied by determining the actual deferral percentage of
eligible Participants as if all such plans were a single plan.
The determination and treatment of deferred amounts and the actual deferral
percentage of any Participant shall be subject to the prescribed requirements of
the Secretary of the Treasury.
In the event the average actual deferral percentage test is not satisfied for a
Plan Year, the Employer, in its discretion, may make a special "fail-safe"
contribution for eligible Participants who are Nonhighly Compensated Employees,
to be allocated among their Accounts in proportion to their Compensation for the
Plan Year.
(b) DISTRIBUTIONS OF EXCESS CONTRIBUTIONS.
(1) IN GENERAL. If the average actual deferral percentage test
of of Section 10.2(a) is not satisfied for a Plan Year, then
the "excess contributions", and income allocable thereto,
shall be distributed, to the extent required under Treasury
regulations, no later than the last day of the Plan Year
following the Plan Year for which the excess contributions
were made. However, if such excess contributions are
distributed later than two and one-half (2-1/2) months
following the last day of the Plan Year in which such excess
contributions were made, a ten percent (10%) excise tax
shall be imposed upon the Employer with respect to such
excess contributions.
Notwithstanding the foregoing, to the extent otherwise
required to comply with the requirements of Section
401(a)(4) of the Code and the regulations thereunder, vested
matching contributions may be forfeited.
(2) EXCESS CONTRIBUTIONS. For purposes of this Section, "excess
contributions" shall consist of the excess of the aggregate
amount of deferred amounts made by or on behalf of the
affected Highly-Compensated Employee over the maximum amount
of all such contributions permitted under the test under
Section 10.2(a). In reducing the excess contribution
hereunder, the reduction shall be first applied to the
Highly-Compensated Employee with the highest
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percentage under Section 10.2(a). If reductions are further
required to comply with Section 10.2(a), such reductions shall
be applied to the Highly-Compensated Employee with the next
highest percentage, and so forth until the nondiscrimination
test of Section 10.2(a) is satisfied.
(3) DETERMINATION OF INCOME. The income allocable to excess
contributions shall be determined by multiplying the income
allocable to the Participant's deferred amounts for the Plan
Year by a fraction, the numerator of which is the excess
contributions made on behalf of the Participant for the Plan
Year, and the denominator of which is the sum of the
Participant's Account balances attributable to the
Participant's deferred amounts on the last day of the Plan
Year.
(4) MAXIMUM DISTRIBUTABLE AMOUNT. The excess contributions
to be distributed to a Participant shall be adjusted for
income and, if there is a loss allocable to the excess
contribution, shall in no event be less than the lesser of
the Participant's Account under the Plan or the
Participant's deferred amounts for the Plan Year. Excess
contributions shall be distributed from that portion of the
Participant's Account attributable to such deferred amounts
to the extent allowable under Treasury regulations.
10.3 NONDISCRIMINATION TEST FOR EMPLOYER MATCHING CONTRIBUTIONS.
(a) AVERAGE CONTRIBUTION PERCENTAGE TEST. The provisions of this
Section shall apply if Employer matching contributions are made
in any Plan Year under Section 4.2(a) and such matching
contributions are not used to satisfy the average actual
deferral percentage test of Section 10.2.
As of the last day of each Plan Year, the average contribution
percentage for Highly-Compensated Employees for the Plan Year
shall satisfy either of the following tests:
(1) The average contribution percentage for eligible
Participants who are Highly-Compensated Employees shall not
exceed the average contribution percentage for eligible
Participants who are Nonhighly-Compensated Employees for the
Plan Year multiplied by 1.25; or
(2) The average contribution percentage for eligible
Participants who are Highly-Compensated Employees shall not
exceed the average contribution percentage for eligible
Participants who are Nonhighly-Compensated Employees for the
Plan Year multiplied by two (2), provided that the average
contribution percentage for eligible Participants who are
Highly-Compensated Employees does not exceed the average
contribution percentage for eligible Participants who are
Nonhighly-Compensated Employees by more than two (2)
percentage points or such lesser amount as the Secretary of
the Treasury
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shall prescribe to prevent the multiple use of this alternative
limitation with respect to any Highly-Compensated Employee.
For purposes of the above tests, the "average contribution percentage" shall
mean the average (expressed as a percentage) of the contribution percentages
of the "eligible Participants" in each group. The contribution percentage"
shall mean the ratio (expressed as a percentage) that the sum of Employer
matching contributions and elective deferrals (to the extent such elective
deferrals are not used to satisfy the average actual deferral percentage test
of Section 10.2) under the Plan on behalf of the eligible Participant for the
Plan Year bears to the eligible Participant's compensation (as defined in
Code Section 414(s) and the regulations promulgated thereunder) for the Plan
Year. "Eligible Participant" shall mean each Employee who is eligible to
participate in the Plan under Section 3.1.
For purposes of this Section 10.3, the contribution percentage for any
eligible Participant who is a Highly-Compensated Employee for the Plan Year
and who is eligible to have Employer matching contributions or elective
deferrals allocated to his account under two (2) or more plans described in
Section 401(a) of the Code or under arrangements described in Section 401(k)
of the Code that are maintained by the Employer or any member of the
Employer's related group (within the meaning of Section 2.4(b)), shall be
determined as if all such contributions and elective deferrals were made
under a single plan.
In the event that this Plan satisfies the requirements of Section 410(b) of
the Code only if aggregated with one (1) or more other plans, or if one (1)
or more other plans satisfy the requirements of Section 410(b) of the Code
only if aggregated with this Plan, then the provisions of this Section 10.3
shall be applied by determining the contribution percentages of eligible
Participants as if all such plans were a single plan.
The determination and treatment of the contribution percentage of any
Participant shall satisfy such other requirements as may be prescribed by the
Secretary of the Treasury.
(b) DISTRIBUTION OF EXCESS EMPLOYER MATCHING CONTRIBUTIONS.
(1) IN GENERAL. If the nondiscrimination tests of Section
10.3(a) are not satisfied for a Plan Year, then the "excess
contributions", and any income allocable thereto, shall be
forfeited, if otherwise forfeitable, no later than the last
day of the Plan Year following the Plan Year for which the
nondiscrimination tests are not satisfied, and shall be used
to reduce Employer contributions under Section 4.2(a). To
the extent that such "excess contributions" are
nonforfeitable, such excess contributions shall be
distributed to the Participant on whose behalf the excess
contributions were made no later than the last day of the
Plan Year following the Plan Year for which such "excess
contributions" were made. However, if such excess
contributions are distributed later than two and one-half
(2-1/2) months following the last day of the Plan Year in
which such excess contributions were made, a ten percent
(10%) excise tax shall be imposed upon the Employer with
respect to such excess contributions. For purposes of the
limitations of Section 11.1(b)(1) of the Plan, excess
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contributions shall be considered annual additions.
(2) EXCESS CONTRIBUTIONS. For purposes of this Section, "excess
contributions" shall consist of the excess of the aggregate
amount of Employer matching contributions and elective
deferrals (to the extent not used to satisfy the average
actual deferral percentage test of Section 10.2) made on
behalf of the affected Highly-Compensated Employee over the
maximum amount of all such contributions permitted under the
nondiscrimination tests under Section 10.3(a). In reducing
the excess contribution hereunder, the reduction shall be
first applied to the Highly-Compensated Employee with the
highest percentage under Section 10.3(a). If reductions are
further required to comply with Section 10.3(a), such
reductions shall be applied to the Highly-Compensated
Employee with the next highest percentage, and so forth
until the nondiscrimination tests of Section 10.3(a) are
satisfied.
(3) DETERMINATION OF INCOME. The income allocable to excess
contributions shall be determined by multiplying the income
allocable to the Employer matching contributions and, if
applicable, such elective deferrals by a fraction, the
numerator of which is the excess contributions on behalf of
the Participant for the Plan Year, and the denominator of
which is the sum of the Participant's Account balances
attributable to Employer matching contributions and, if
applicable, such elective deferrals, on the last day of the
Plan Year.
Notwithstanding the foregoing, to the extent otherwise
required to comply with the requirements of Section
401(a)(4) of the Code and the regulations thereunder, vested
matching contributions may be forfeited.
10.4 LIMITATION ON THE MULTIPLE USE ALTERNATIVE. The sum of the average actual
deferral percentage of Highly-Compensated Employees under Section 10.2(a) and
the average contribution percentage of Highly-Compensated Employees under
Section 10.3(a) shall not exceed the "aggregate limit", as defined in Section
401(m)(9) of the Code and the regulations promulgated thereunder.
If the aggregate limit is exceeded, the average contribution percentage of the
Highly-Compensated Employees shall be reduced in accordance with the provisions
of Section 10.3(b). In lieu of reducing the average contribution percentage, the
Administrator may reduce the average actual deferral percentage of the
Highly-Compensated Employees in accordance with the provisions of Section
10.2(b). The reductions under this Section shall be made only to the extent
necessary to comply with the restrictions on the multiple use of the
"alternative limitation" within the meaning of Code Section 401(m)(9).
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ARTICLE ELEVEN--LIMITATION ON ANNUAL ADDITIONS
11.1 RULES AND DEFINITIONS.
(a) RULES. The following rules shall limit additions to Participants'
Accounts:
(1) If the Participant does not participate, and has never
participated, in another qualified plan maintained by the
Employer, the amount of annual additions which may be
credited to the Participant's Account for any limitation
year shall not exceed the lesser of the "maximum
permissible" amount (as hereafter defined) or any other
limitation contained in this Plan. If the Employer
contribution that would otherwise be allocated to the
Participant's Account would cause the annual additions for
the limitation year to exceed the maximum permissible
amount, the amount allocated shall be reduced so that the
annual additions for the limitation year shall equal the
maximum permissible amount.
(2) Prior to determining the Participant's actual compensation
for the limitation year, the Employer may determine the maximum
permissible amount for a Participant on the basis of a
reasonable estimation of the Participant's compensation for
the limitation year, uniformly determined for all Participants
similarly situated.
(3) As soon as is administratively feasible after the end
of the limitation year, the maximum permissible amount for
the limitation year shall be determined on the basis of the
Participant's actual compensation for the limitation year.
(4) If there is an excess amount, the excess shall be disposed
of as follows:
(A) Any nondeductible voluntary Employee after-tax
contributions and, to the extent elected by the
Administrator pursuant to a nondiscriminatory procedure,
elective deferrals under Section 4.1(a), and any earnings
thereon, to the extent they would reduce the excess amount,
shall be returned to the Participant.
(B) If an excess amount still exists after the application of
subparagraph (A), and the Participant is covered by the
Plan at the end of the limitation year, the excess amount
in the Participant's Account shall be used to reduce
Employer contributions for such Participant in the next
limitation year, and each succeeding limitation year if
necessary;
(C) If an excess amount still exists after the application of
subparagraphs (A) and (B), and the Participant is not
covered by the Plan at the end of the limitation year, the
excess amount shall be held unallocated in a suspense
account and applied to reduce future Employer contributions
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for all remaining Participants in the next limitation year,
and each succeeding limitation year if necessary.
(D) If a suspense account is in existence at any time during
the limitation year pursuant to this Section 11.1(a)(4),
it shall not participate in the allocation of the
Trust's investment gains and losses. In addition, all
amounts held in the suspense account shall be allocated
and reallocated to Participants' Accounts before any
Employer or Employee contributions may be made for the
limitation year.
(5) If, in addition to this Plan, the Participant is covered
under another defined contribution plan maintained by the
Employer, or a welfare benefit fund, as defined in Code
Section 419(e), maintained by the Employer, or an individual
medical account, as defined in Code Section 415(1)(2),
maintained by the Employer which provides an annual
addition, the annual additions which may be credited to a
Participant's account under all such plans for any such
limitation year shall not exceed the maximum permissible
amount. Benefits shall be reduced under any discretionary
defined contribution plan before they are reduced under any
defined contribution pension plan. If both plans are
discretionary contribution plans, they shall first be
reduced under this Plan. Any excess amount attributable to
this Plan shall be disposed of in the manner described in
Section 11.1(a)(4).
(6) If the Employer maintains, or at any time maintained, a
qualified defined benefit plan covering any Participant in
this Plan, the sum of the Participant's defined benefit plan
fraction and defined contribution plan fraction shall not
exceed 1.0 in any limitation year. The annual additions
which may be credited to the Participant's Account under
this Plan for any limitation year shall be limited so that
if the limitations of Code Section 415(e) become applicable,
benefits under a defined contribution plan shall have first
been provided before benefits under a defined benefit plan
are provided.
(7) In any Plan Year in which the Plan becomes a Super Top-Heavy
Plan (as defined in Section 13.2(b)), the denominators of
the defined benefit fraction and defined contribution
fraction shall be computed using one hundred percent (100%)
of the maximum dollar limitation instead of one hundred and
twenty-five percent (125%).
(8) In any year in which the Plan is a Top-Heavy Plan (as
defined in Section 13.2(c)) (but not a Super Top-Heavy
Plan), the limitations shall be similarly reduced, subject
to the special provisions of Section 13.3, which provide for
the use of the one hundred and twenty-five percent (125%)
limitation subject to the added minimum allocations.
(b) DEFINITIONS.
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(1) ANNUAL ADDITIONS: The following amounts credited to a
Participant's Account for the limitation year shall be
treated as annual additions:
(A) Employer contributions;
(B) Elective deferrals;
(C) Employee after-tax contributions, if any;
(D) Forfeitures, if any; and
(E) Amounts allocated after March 31, 1984 to an individual
medical account, as defined in Section 415(l)(2) of the
Code, which is part of a defined benefit plan maintained
by the Employer. Also, amounts derived from
contributions paid or accrued after December 31, 1985 in
taxable years ending after such date which are
attributable to post-retirement medical benefits
allocated to the separate account of a Key Employee, as
defined in Section 419A(d)(3), and amounts under a
welfare benefit fund, as defined in Section 419(e),
maintained by the Employer, shall be treated as annual
additions to a defined contribution plan.
For this purpose, any excess amount applied under Section
11.1(a)(4) in the limitation year to reduce Employer
contributions shall be considered annual additions for
such limitation year.
(2) COMPENSATION: For purposes of determining maximum permitted
benefits under this Section, compensation shall include all
of a Participant's earned income, wages, salaries, and fees
for professional services, and other amounts received for
personal services actually rendered in the course of
employment with the Employer, including, but not limited to,
commissions paid to salesmen, compensation for services on
the basis of a percentage of profits, commissions on
insurance premiums, tips and bonuses, and excluding the
following:
(A) Employer contributions to a plan of deferred compensation
which are not included in the Employee's gross income for
the taxable year in whichcontributed, or Employer
contributions under a simplified employee pension plan
(funded with individual retirement accounts or annuities)
to the extent such contributions are deductible by the
Employee, or any distributions from a plan of deferred
compensation;
(B) Amounts realized from the exercise of a nonqualified
stock option, or when restricted stock (or property)
held by the Employee either becomes freely transferable
or is no longer subject to a substantial risk of
forfeiture;
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(C) Amounts realized from the sale, exchange, or other
disposition of stock acquired under a qualified stock
option; and
(D) Other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under
a salary reduction agreement) toward the purchase of an
annuity described in Section 403(b) of the Code (whether
or not the amounts are actually excludable from the
gross income of the Employee).
Compensation shall be measured on the basis of compensation
paid in the limitation year.
(3) DEFINED BENEFIT FRACTION: This shall mean a fraction, the
numerator of which is the sum of the Participant's projected
annual benefits under all the defined benefit plans
maintained or previously maintained by the Employer, and the
denominator of which is the lesser of one hundred and
twenty-five percent (125%) of the dollar limitation in
effect for the limitation year under Section 415(b)(1)(A) of
the Code or one hundred and forty percent (140%) of the
highest average compensation including any adjustment under
Code Section 415(b).
(4) DEFINED CONTRIBUTION FRACTION: This shall mean a
fraction, the numerator of which is the sum of the annual
additions to the Participant's account under all the defined
contribution plans (whether or not terminated), welfare
benefit funds, and individual medical accounts maintained by
the Employer for the current and all prior limitation years,
and the denominator of which is the sum of the maximum
aggregate amounts for the current and all prior limitation
years of Service with the Employer, regardless of whether a
defined contribution plan was maintained by the Employer.
The maximum aggregate amount in any limitation year is
the lesser of one hundred and twenty-five percent (125%) of
the dollar limitation then in effect under Section
415(c)(1)(A) of the Code or thirty-five (35%) of the
Participant's compensation for such year.
If the Employee, as of the end of the first day of the
first limitation year beginning after December 31, 1986,
was a participant in one (1) or more defined contribution
plans maintained by the Employer which were in existence on
May 5, 1986, the numerator of this fraction shall be
adjusted if the sum of this fraction and the defined benefit
fraction would otherwise exceed 1.0 under the terms of this
Plan. Under the adjustment, an amount equal to the product
of (i) the excess of the sum of the fractions over 1.0 and
(ii) the denominator of this fraction, will be permanently
subtracted from the numerator of this fraction. The
adjustment is calculated using the fractions as they would
be computed as of the end of the last limitation year
beginning before January 1, 1987, and disregarding any
changes in the terms and
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<PAGE>
conditions of the Plan made after May 5, 1986, but using the
Code Section 415 limitation applicable to the first limitation
year beginning on or after January 1, 1987.
The annual addition for any limitation year beginning before
January 1, 1987, shall not be recomputed to treat all
Employee contributions as annual additions.
(5) DEFINED CONTRIBUTION DOLLAR LIMITATION: This shall mean the
greater of $30,000 or one-fourth (1/4) of the defined
benefit dollar limitation of Section 415(b)(1) of the Code
in effect for the limitation year.
(6) EMPLOYER: This term refers to the Employer that adopts this
Plan, and all members of a controlled group of corporations
(as defined in Section 414(b) of the Code, as modified by
Section 415(h)), commonly-controlled trades or businesses
(as defined in Section 414(c), as modified by Section
415(h)), or affiliated service groups (as defined in Section
414(m)) of which the Employer is a part, or any other entity
required to be aggregated with the Employer under Code
Section 414(o).
(7) HIGHEST AVERAGE COMPENSATION: This means the average
compensation for the three (3) consecutive limitation years
with the Employer that produces the highest average.
(8) LIMITATION YEAR: This shall mean the Plan Year.
(9) MAXIMUM PERMISSIBLE AMOUNT: This shall mean an amount equal
to the lesser of the defined contribution dollar limitation
or twenty-five percent (25%) of the Participant's
compensation for the limitation year. If a short limitation
year is created because of an amendment changing the
limitation year to a different twelve (12)-consecutive month
period, the maximum permissible amount shall not exceed the
defined contribution dollar limitation multiplied by the
following fraction:
Number of months in the short limitation year
---------------------------------------------
12
(10) PROJECTED ANNUAL BENEFIT: This is the annual retirement
benefit (adjusted to an actuarially equivalent straight life
annuity if such benefit is expressed in a form other than a
straight life annuity or qualified joint and survivor
annuity) to which the Participant would be entitled under
the terms of the plan, assuming:
(A) the Participant will continue employment until normal
retirement age under the plan (or current age, if
later), and
(B) the Participant's compensation for the current limitation
year and all other
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relevant factors used to determine benefits under the plan
will remain constant for all future limitation years.
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ARTICLE TWELVE--AMENDMENT AND TERMINATION
12.1 AMENDMENT. The Employer, by resolution of its board of directors, (or, to
the extent permitted by resolution of such board of directors, by action of a
duly authorized officer of the Employer) shall have the right to amend, alter or
modify the Plan at any time, or from time to time, in whole or in part. Any such
amendment shall become effective under its terms upon adoption by the Employer.
However, no amendment affecting the duties, powers or responsibilities of the
Trustee may be made without the written consent of the Trustee. No amendment
shall be made to the Plan which shall:
(a) make it possible (other than as provided in Section 14.3) for
any part of the corpus or income of the Trust Fund (other than
such part as may be required to pay taxes and administrative
expenses) to be used for or diverted to purposes other than the
exclusive benefit of the Participants or their Beneficiaries;
(b) decrease a Participant's account balance or eliminate an
optional form of payment with respect to benefits accrued as of
the later of (i) the date such amendment is adopted, or (ii) the
date the amendment becomes effective; or
(c) alter the schedule for vesting in a Participant's Account with
respect to any Participant with three (3) or more Years of
Service without his consent or deprive any Participant of any
nonforfeitable portion of his Account.
Notwithstanding the other provisions of this Section or any other provisions
of the Plan, any amendment or modification of the Plan may be made
retroactively if necessary or appropriate to conform to or to satisfy the
conditions of any law, governmental regulation, or ruling, and to meet the
requirements of the Employee Retirement Income Security Act of 1974, as it
may be amended.
12.2 TERMINATION OF THE PLAN. The Employer, by resolution of its board of
directors, reserves the right at any time and in its sole discretion to
discontinue payments under the Plan and to terminate the Plan. In the event the
Plan is terminated, or upon complete discontinuance of contributions under the
Plan by the Employer, the rights of each Participant to his Account on the date
of such termination or discontinuance of contributions, to the extent of the
fair market value under the Trust Fund, shall remain fully vested and
nonforfeitable. The Employer shall direct the Trustee to distribute the Trust
Fund in accordance with the Plan's distribution provisions to the Participants
and their Beneficiaries, each Participant or Beneficiary receiving a portion of
the Trust Fund equal to the value of his Account as of the date of distribution.
These distributions may be implemented by the continuance of the Trust and the
distribution of the Participants' Account shall be made at such time and in such
manner as though the Plan had not terminated, or by any other appropriate
method, including rollover into Individual Retirement Accounts. Upon
distribution of the Trust Fund, the Trustee shall be discharged from all
obligations under the Trust and no Participant or Beneficiary shall have any
further right or claim therein. If a partial termination of the Plan is deemed
to have
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occurred, this Section shall apply only to those Participant's affected by
such partial termination.
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ARTICLE THIRTEEN--TOP-HEAVY PROVISIONS
13.1 APPLICABILITY. The provisions of this Article shall become applicable only
for any Plan Year in which the Plan is a Top-Heavy Plan (as defined in Section
13.2(c)). The determination of whether the Plan is a Top-Heavy Plan shall be
made each Plan Year by the Administrator.
13.2 DEFINITIONS. For purposes of this Article, the following definitions shall
apply:
(a) "KEY EMPLOYEE": "Key Employee" shall mean any Employee or former
Employee (and the Beneficiaries of such Employee) who, at any
time during the determination period, was (1) an officer of the
Employer earning compensation (as defined in Section 416(i) of
the Code) in excess of fifty percent (50%) of the dollar
limitation under Section 415(b)(1)(A) of the Code, (2) an owner
(or considered an owner under Section 318 of the Code) of both
more than a one-half percent (1/2%) interest in the Employer and
one of the ten (10) largest interests in the Employer if such
individual's compensation exceeds the dollar limitation under
Section 415(c)(1)(A) of the Code, (3) a five percent (5%) owner
of the Employer, or (4) a one percent (1%) owner of the Employer
who has an annual compensation of more than $150,000. For
purposes of this Section, annual compensation shall mean
compensation as defined in Code Section 415(c)(3), but including
amounts contributed by the Employer pursuant to a salary
reduction agreement which are excludable from the Employee's
income under Code Sections 125, 402(g), 402(h) or 403(b). The
determination period of the Plan is the Plan Year containing the
"determination date" as defined in Section 13.2(c)(4) and the
four (4) preceding Plan Years.
The determination of who is a Key Employee (including the terms
"5% owner" and "1% owner") shall be made in accordance with
Section 416(i)(1) of the Code and the regulations thereunder.
(b) "SUPER TOP-HEAVY PLAN": The Plan shall constitute a "Super
Top-Heavy Plan" if it meets the test for status as a Top-Heavy
Plan, where "90%" is substituted for "60%" at each place in
Section 13.2(c).
(c) "TOP-HEAVY PLAN":
(1) The Plan shall constitute a "Top-Heavy Plan" if any of the
following conditions exist:
(A) The top-heavy ratio for the Plan exceeds sixty percent
(60%) and the Plan is not part of any required aggregation
group or permissive aggregation group of plans; or
(B) The Plan is part of a required aggregation group of
plans (but is not part
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of a permissive aggregation group) and the top-heavy ratio
for the group of plans exceeds sixty percent (60%); or
(C) The Plan is a part of a required aggregation group of
plans and part of a permissive aggregation group and the
top-heavy ratio for the permissive aggregation group
exceeds sixty percent (60%).
(2) If the Employer maintains one (1) or more defined
contribution plans (including any simplified employee
pension plan funded with individual retirement accounts or
annuities) and the Employer maintains or has maintained one
(1) or more defined benefit plans which have covered or
could cover a Participant in this Plan, the top-heavy ratio
is a fraction, the numerator of which is the sum of account
balances under the defined contribution plans for all Key
Employees and the actuarial equivalents of accrued benefits
under the defined benefit plans for all Key Employees, and
the denominator of which is the sum of the account balances
under the defined contribution plans for all Participants
and the actuarial equivalents of accrued benefits under the
defined benefit plans for all Participants. Both the
numerator and denominator of the top-heavy ratio shall
include any distribution of an account balance or an accrued
benefit made in the five (5)-year period ending on the
determination date and any contribution due to a defined
contribution pension plan but unpaid as of the determination
date. In determining the accrued benefit of a non-Key
Employee who is participating in a plan that is part of a
required aggregation group, the method of determining such
benefit shall be either (i) in accordance with the method,
if any, that uniformly applies for accrual purposes under
all plans maintained by the Employer or any member of the
Employer's related group (within the meaning of Section
2.4(b)), or (ii) if there is no such method, as if such
benefit accrued not more rapidly than the slowest accrual
rate permitted under the fractional accrual rate of Code
Section 411(b)(1)(C).
(3) For purposes of (1) and (2) above, the value of account
balances and the actuarial equivalents of accrued benefits
shall be determined as of the most recent Valuation Date
that falls within or ends with the twelve (12)-month period
ending on the determination date. The account balances and
accrued benefits of a Participant who is not a Key Employee
but who was a Key Employee in a prior year shall be
disregarded. The accrued benefits and account balances of
Participants who have performed no Hours of Service with any
Employer maintaining the plan for the five (5)-year period
ending on the determination date shall be disregarded. The
calculations of the top-heavy ratio, and the extent to which
distributions, rollovers, and transfers are taken into
account shall be made under Section 416 of the Code and
regulations issued thereunder. Deductible Employee
contributions shall not be taken into account for purposes
of computing the top-heavy ratio. When aggregating plans,
the value of account balances and accrued benefits shall be
calculated with reference to the determination dates that
fall within the same calendar year.
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(4) Definition of terms for Top-Heavy status:
(A) "TOP-HEAVY RATIO" shall mean the following:
(1) If the Employer maintains one or more defined
contribution plans (including any simplified employee
pension plan funded with individual retirement accounts
or annuities) and the Employer has never maintained any
defined benefit plans which have covered or could cover
a Participant in this Plan, the top-heavy ratio is a
fraction, the numerator of which is the sum of the
account balances of all Key Employees as of the
determination date (including any part of any
account balance distributed in the five (5)-year
period ending on the determination date), and the
denominator of which is the sum of the account
balances (including any part of any account balance
distributed in the five (5)-year period ending on
the determination date) of all Participants as of
the determination date. Both the numerator and the
denominator shall be increased by any contributions
due but unpaid to a defined contribution pension
plan as of the determination date.
(B) "PERMISSIVE AGGREGATION GROUP" shall mean the required
aggregation group of plans plus any other plan or plans
of the Employer which, when considered as a group with
the required aggregation group, would continue to
satisfy the requirements of Section 401(a)(4) and/or 410
of the Code.
(C) "REQUIRED AGGREGATION GROUP" shall mean (i) each
qualified plan of the Employer (including any terminated
plan) in which at least one Key Employee participates,
and (ii) any other qualified plan of the Employer which
enables a plan described in (i) to meet the requirements
of Section 401(a)(4) and/or 410 of the Code.
(D) "DETERMINATION DATE" shall mean, for any Plan Year
subsequent to the first Plan Year, the last day of the
preceding Plan Year. For the first Plan Year of the
Plan, "determination date" shall mean the last day of
that Plan Year.
(E) "VALUATION DATE" shall mean the last day of the Plan
Year.
(F) Actuarial equivalence shall be based on the interest and
mortality rates utilized to determine actuarial
equivalence when benefits are paid from any defined
benefit plan. If no rates are specified in said plan,
the following shall be utilized: pre- and post-
retirement interest -- five percent (5%); post-retirement
mortality based on the Unisex Pension (1984) Table as used
by the Pension Benefit Guaranty Corporation on
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the date of execution hereof.
13.3 ALLOCATION OF EMPLOYER CONTRIBUTIONS FOR A TOP-HEAVY PLAN YEAR.
(a) Except as otherwise provided below, in any Plan Year in which
the Plan is a Top-Heavy Plan, the Employer contributions
allocated on behalf of any Participant who is a non-Key Employee
shall not be less than the lesser of three percent (3%) of such
Participant's compensation (as defined in Section 11.1(b)(2)) or
the largest percentage of Employer contributions as a percentage
of the Key Employee's Compensation, allocated on behalf of any
Key Employee for that Plan Year. This minimum allocation shall
be made even though, under other Plan provisions, the
Participant would not otherwise be entitled to receive an
allocation or would have received a lesser allocation for the
Plan Year because of insufficient Employer contributions under
Section 4.2 or the Participant's failure to make elective
deferrals under Section 4.1.
(b) The minimum allocation under this Section shall not apply to any
Participant who was not employed by the Employer on the last day
of the Plan Year.
(c) The minimum allocation under this Section shall be offset and
reduced by any allocation of contributions under Section 4.2,
and under any other defined contribution plan (if such
contributions are not matching contributions under Code Section
401(m)) with a Plan Year ending in the same calendar year as the
Valuation Date.
(d) For purposes of the Plan, a non-Key Employee shall be any
Employee or Beneficiary of such Employee, any former Employee,
or Beneficiary of such former Employee, who is not or was not a
Key Employee during the Plan Year ending on the determination
date, nor during the four (4) preceding Plan Years.
(e) If no defined benefit plan has ever been part of a permissive or
required aggregation group of plans of the Employer, the
contributions under this step shall be offset by any allocation
of contributions under any other defined contribution plan of
the Employer with a Plan Year ending in the same calendar year
as this Plan's Valuation Date.
(f) There shall be no duplication of the minimum benefits required
under Code Section 416. Benefits shall be provided under defined
contribution plans before under defined benefit plans. If a
defined benefit plan (active or terminated) is part of the
permissive or required aggregation group of plans, the
allocation method of subparagraph (a) above shall apply, except
that "3%" shall be increased to "5%."
(g) There shall be no duplication of the minimum benefits required
under Code Section 416. Benefits shall be provided under defined
contribution plans before defined benefit plans. If a defined
benefit plan (active or terminated) is part of the
48
<PAGE>
permissive or required aggregation group of plans, and if any
Participant in the Plan would have his benefits limited due to the
application of the Code limitation rule in Section 11.1 in a Plan
Year in which the Plan is a Top-Heavy Plan but not a Super Top-
Heavy Plan, the allocation method of subparagraph (f) above shall
apply, except that "5%" shall be increased to "7.5%."
(h) A Participant shall at all times have a nonforfeitable (vested)
right to any minimum allocations made to his Account in any Plan
Year in which the Plan is a Top-Heavy Plan pursuant to this
Section.
49
<PAGE>
ARTICLE FOURTEEN--MISCELLANEOUS PROVISIONS
14.1 PLAN DOES NOT AFFECT EMPLOYMENT. Neither the creation of this Plan, any
amendment thereto, the creation of any fund nor the payment of benefits
hereunder shall be construed as giving any legal or equitable right to any
Employee or Participant against the Employer, its officers or Employees, or
against the Trustee. All liabilities under this Plan shall be satisfied, if at
all, only out of the Trust Fund held by the Trustee. Participation in the Plan
shall not give any Participant any right to be retained in the employ of the
Employer, and the Employer hereby expressly retains the right to hire and
discharge any Employee at any time with or without cause, as if the Plan had not
been adopted, and any such discharged Participant shall have only such rights or
interests in the Trust Fund as may be specified herein.
14.2 SUCCESSOR TO THE EMPLOYER. In the event of the merger, consolidation,
reorganization or sale of assets of the Employer, under circumstances in which a
successor person, firm, or corporation shall carry on all or a substantial part
of the business of the Employer, and such successor shall employ a substantial
number of Employees of the Employer and shall elect to carry on the provisions
of the Plan, such successor shall be substituted for the Employer under the
terms and provisions of the Plan upon the filing in writing with the Trustee of
its election to do so.
14.3 REPAYMENTS TO THE EMPLOYER. Notwithstanding any provisions of this Plan
to the contrary:
(a) Any monies or other Plan assets attributable to any contribution
made to this Plan by the Employer because of a mistake of fact
shall be returned to the Employer within one (1) year after the
date of contribution.
(b) Any monies or other Plan assets attributable to any contribution
made to this Plan by the Employer shall be refunded to the
Employer, to the extent such contribution is predicated on the
deductibility thereof under the Code and the income tax
deduction for such contribution is disallowed. Such amount shall
be refunded within one (1) taxable year after the date of such
disallowance or within one (1) year of the resolution of any
judicial or administrative process with respect to the
disallowance. All Employer contributions hereunder are expressly
contributed based upon such contributions' deductibility under
the Code.
However, the provisions of this Section shall not apply to elective deferrals
made by a Participant under Section 4.1.
14.4 BENEFITS NOT ASSIGNABLE. Except as provided in Section 414(p) of the Code
with respect to "qualified domestic relations orders," the rights of any
Participant or his Beneficiary
50
<PAGE>
to any benefit or payment hereunder shall not be subject to voluntary or
involuntary alienation or assignment.
With respect to any "qualified domestic relations order" relating to the Plan,
the Plan shall permit distribution to an alternate payee under such order at any
time, irrespective of whether the Participant has attained his "earliest
retirement age" (within the meaning of Section 414(p)(4)(B) of the Code) under
the Plan. A distribution to an alternate payee prior to the Participant's
attainment of his earliest retirement age shall, however, be available only if
the order specifies distribution at that time or permits an agreement between
the Plan and the alternate payee to authorize an earlier distribution. Nothing
in this paragraph shall, however, give a Participant a right to receive
distribution at a time otherwise not permitted under the Plan nor does it permit
the alternate payee to receive a form of payment not otherwise permitted under
the Plan or under said Section 414(p) of the Code.
14.5 MERGER OF PLANS. In the case of any merger or consolidation of this Plan
with, or transfer of the assets or liabilities of the Plan to, any other plan,
the terms of such merger, consolidation or transfer shall be such that each
Participant would receive (in the event of termination of this Plan or its
successor immediately thereafter) a benefit which is no less than what the
Participant would have received in the event of termination of this Plan
immediately before such merger, consolidation or transfer.
14.6 INVESTMENT EXPERIENCE NOT A FORFEITURE. The decrease in value of any
Account due to adverse investment experience shall not be considered an
impermissible "forfeiture" of any vested balance.
14.7 DISTRIBUTION TO LEGALLY INCAPACITATED. In the event any benefit is payable
to a minor or to a person deemed to be incompetent or to a person otherwise
under legal disability, or who is by sole reason of advanced age, illness, or
other physical or mental incapacity incapable of handling the disposition of his
property, the Administrator, may direct the Trustee to apply all or any portion
of such benefit directly to the care, comfort, maintenance, support, education
or use of such person or to pay or distribute the whole or any part of such
benefit to (a) the spouse of such person, (b) the parent of such person, (c) the
guardian, committee, or other legal representative, wherever appointed, of such
person, (d) the person with whom such person shall reside, (e) any other person
having the care and control of such person, or (f) such person. The receipt of
any such payment or distribution shall be a complete discharge of liability for
Plan obligations.
14.8 CONSTRUCTION. Wherever appropriate, the use of the masculine gender shall
be extended to include the feminine and/or neuter or vice versa; and the
singular form of words shall be extended to include the plural; and the plural
shall be restricted to mean the singular.
51
<PAGE>
14.9 GOVERNING DOCUMENTS. A Participant's rights shall be determined under the
terms of the Plan as in effect at the Participant's date of separation from
Service.
14.10 GOVERNING LAW. The provisions of this Plan shall be construed under the
laws of the state of the situs of the Trust, except to the extent such laws are
preempted by Federal law.
14.11 HEADINGS. The Article headings and Section numbers are included solely for
ease of reference. If there is any conflict between such headings or numbers and
the text of the Plan, the text shall control.
14.12 COUNTERPARTS. This Plan may be executed in any number of counterparts,
each of which shall be deemed an original; said counterparts shall constitute
but one and the same instrument, which may be sufficiently evidenced by any one
counterpart.
14.13 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN. In the event that all or
any portion of the distribution payable to a Participant or to a Participant's
Beneficiary hereunder shall, at the expiration of five (5) years after it shall
become payable, remain unpaid solely by reason of the inability of the
Administrator to ascertain the whereabouts of such Participant or Beneficiary,
after sending a registered letter, return receipt requested, to the last known
address, and after further diligent effort, the amount so distributable shall be
used to reduce Employer contributions under Article Four. In the event a
Participant or Beneficiary is located subsequent to the reallocation of his
Account balance, such Account balance shall be restored.
-------------------------
IN WITNESS WHEREOF, the Employer, by its duly authorized officer, has caused
this Plan to be effective as of the first day of October, 1997.
INSO CORPORATION
By /s/ Bruce G. Hill
----------------------------
Authorized Officer
52
<PAGE>
EXHIBIT 10.8
LEASE
THIS LEASE (the "Lease") is entered into as of the 6th day of March, 1997 by
and between THE FOUNDRY ASSOCIATES, L.P., a Rhode Island limited partnership
of which Antonio Guerra is the managing general partner (hereinafter the
"Landlord") and INSO PROVIDENCE CORPORATION, a Delaware corporation
(hereinafter the "Tenant").
IT IS MUTUALLY covenanted and agreed by and between the parties as follows:
Definitions and construction.
1.01 Leasing Details. For the purposes of this Lease, the following words and
phrases are defined as set forth below:
BUILDING: The building commonly known as the "Manchester Building" located on
the Land and within which the Leased Premises are situated, as shown on
Exhibit A-1.
LAND: That lot or parcel of land described in Exhibit A-2 forming a portion
of the Foundry Complex, so-called, shown on Exhibit A-1.
LANDLORD: The Foundry Associates, L.P.
LANDLORD'S ADDRESS:
3 Holden Street
Providence, Rhode Island 02908
Attn: Mr. Thomas F. Guerra
TENANT: Inso Providence Corporation
TENANT'S ADDRESS: 31 St. James Avenue
Boston, Massachusetts 02116
Attention: Bruce G. Hill, Esquire
and as of the Commencement Date
<PAGE>
299 Promenade Street
Providence, Rhode Island 02908
Attention: Graham Marshall, Vice President and General Manager
RENT: Years 1 through 10 - $535,780.00 per annum; $44,648.33 per month
SECURITY DEPOSIT: $44,648.33
LEASED PREMISES: Approximately thirty-eight thousand two hundred and seventy
(38,270) rentable square feet of space in the Building and more particularly
described on Exhibit A.
TERM: Ten (10) years from the Commencement
Date. See Section 34 for extension
1.02 Effect of Reference to Data. Each reference in this Lease to any of the
titles contained in Section 1. 01 shall be construed to incorporate the data
stated under that title. Any title contained in Section 1. 01 which is used
herein but not otherwise defined herein shall have the meaning set forth in
Section 1.01.
1.03 Miscellaneous. The words "hereby," "hereof," "hereto," "herein,"
"hereunder," and any similar words, refer to this Lease; the word "hereafter"
means after, and the word "heretofore" means before, the date of this Lease. The
word "person" refers to partnerships (including limited partnerships), limited
liability companies, corporations, trusts and other legal entities, as well as
natural persons. The title of this Lease, as well as the paragraph and
subparagraph titles, are for convenience of reference only and will not be
considered in the interpretation or construction of any of the provisions
hereof. Words in the singular may be construed to include the plural, and vice
versa, as the context may require. Any notice required or permitted to be given
by a party to this Lease will be in writing and will be given as provided for
herein.
1.04 Exhibits. The exhibits listed below in this Section are incorporated in
this Lease by reference and are to be construed as a part of this Lease:
EXHIBIT A. Floor Plan showing the Leased Premises.
EXHIBIT A-1. Site Plan showing the Building and the Foundry Complex.
<PAGE>
EXHIBIT A-2. Description of Land.
EXHIBIT B. Description of Landlord's Work.
EXHIBIT B-1. Landlord's Allowance.
EXHIBIT C. Rules and Regulations.
EXHIBIT D. Landlord's Services.
EXHIBIT E. Additional Rent - Three Percent Solution.
2. Leased Premises and Parking. The Landlord demises and leases to the Tenant
and the Tenant leases and takes from the Landlord the Leased Premises.
Tenant shall have, as appurtenant to the Leased Premises, the right to use in
common with other occupants of the Building, if any:
(i) the fire escapes, loading bays, entrances and exits to the Building;
(ii) all installations designed and intended for common use and serving the
Leased Premises such as but not limited to telephone, electricity, gas, hot
and cold water, sewer, heat, ventilation and air conditioning (including,
without limitation, all pipes, ducts, vents, wires, cables and conduits
designed and intended for common use in connection therewith);
(iii) all apparatus and equipment designed and intended for common use and
serving the Leased Premises such as but not limited to tanks, pumps, motors
and electrical switch gear, fans, compressors, control apparatus and
equipment; and
(iv) if the Leased Premises include less than the entire rentable floor area
of any floor, the common toilets, corridors and lobby of such floor.
For each one thousand (1,000) rentable square feet of space in the Leased
Premises, Tenant shall be entitled to use three (3) parking spaces in the
parking area which will initially be located as shown on the plan attached
hereto as Exhibit A-1 (the "Site Plan") as the "Parking Area". Initially,
based upon 38,270 rentable square feet in the Leased Premises, Tenant shall
be entitled to use 116 parking spaces in the Parking Area, in common with
other tenants of the Building, if any. All said parking spaces are provided
to Tenant on a "first come-first served" basis. With the exception of the
parking areas in the area shown on the Site Plan as "Permanent Parking
Spaces," the Landlord may relocate said parking spaces
<PAGE>
to other parking areas in any portion of the "Permitted Parking Area" shown
on the Site Plan. The Landlord also reserves the right to construct one or
more parking garages in the Permitted Parking Area and to relocate all or a
portion of the Tenant's spaces (excluding the Permanent Parking Spaces) to
said parking garages. The parking area available for the Tenant's use from
time to time pursuant to the foregoing provision is hereinafter referred to
as the "Parking Area". In the event any portion of the Building not included
within the Leased Premises is used for retail uses, the Permanent Parking
Spaces shall be for Tenant's exclusive use, and Landlord and Tenant shall
cooperate reasonably and in good faith, at Landlord's sole cost and expense,
to identify the Permanent Parking Spaces as being reserved for the Tenant.
3. Term . To have and to hold the Leased Premises unto the Tenant for and during
the Term set forth in Section 1.01, beginning on the date (the "Commencement
Date") that is the earlier to occur of (i) the Completion Date (as defined in
Section 4) or (ii) the date the Tenant opens for business in the Leased
Premises, and ending on the Termination Date. Landlord and Tenant agree to
promptly execute and deliver after the Commencement Date a written statement in
recordable form setting forth the Commencement Date and the Termination Date of
this Lease.
4. Landlord's Construction.
4.01 Landlord's Work. Landlord shall cause to be performed at
Landlord's sole cost and expense the work described in Exhibit B (hereinafter
referred to as the "Landlord's Work"). The Exhibit B which is attached hereto
as of the date hereof is a preliminary general description of the Landlord's
Work. The obligations of the parties hereunder are expressly conditioned upon
Landlord producing at Landlord's sole cost and expense, more detailed
specifications for the Landlord's Work which have been approved by the
parties on or before March 14, 1997 (after approval, the "Plans"), such Plans
to be memorialized in an amendment to this Lease pursuant to which the Plans
will replace or supplement the current Exhibit B. If the Plans have not been
approved on or before March 14, 1997, this Lease shall, at the option of
either party exercised pursuant to written notice to the other, terminate,
the Security Deposit shall be returned to Tenant and neither party shall have
any further rights or obligations hereunder. All the Landlord's Work shall be
done in a good and workmanlike manner employing first quality new materials
and so as to conform to all applicable governmental laws, ordinances and
regulations and the Plans. Landlord shall not make any changes to the Plans
without obtaining Tenant's prior written approval, which approval shall not
be unreasonably withheld, conditions or delayed. In the event the Tenant
fails to respond within five (5) days of the Landlord's written request for
Tenant's approval to the initial draft of the
<PAGE>
Plans and any revisions or changes to the Plans, the Tenant's approval will
be deemed given. All material changes to the Plans must be in writing and
signed by both Landlord and Tenant. Landlord shall pay for all fees incurred
by the Landlord in connection with Landlord's Work, including, without
limitation, all architectural, engineering, consultant, utility, loan,
development, transaction and building permit fees.
Notwithstanding anything contained in this Lease or in this Section to the
contrary, the Landlord has provided the Tenant with a construction allowance
(the "Tenant Allowance") of up to but not exceeding the amount to be set forth
on Exhibit B-1 with respect to the items (the "Allowance Items") described or
listed on Exhibit B1. Exhibit B-1 will be incorporated into this Lease in
conjunction with the amendment to incorporate the revised Plans. Any costs for
the Allowance Items in excess of the Tenant Allowance will be the sole
responsibility of the Tenant. In the event the cost of any Allowance Item will
exceed the Tenant Allowance for the applicable Allowance Item, the Landlord will
not be obligated to cause any work under this section to be performed unless and
until the Tenant deposits with Fleet National Bank the amount in excess of the
Tenant Allowance or other arrangements satisfactory to the Landlord in its
reasonable discretion are made with respect to payment by the Tenant of such
additional costs. Tenant may, at any time, without prejudice, deposit requested
amounts hereunder with McGovern, Noel & Benik, to be held in escrow pending
resolution of the dispute.
In the event that the Tenant desires to request a change in the Landlord's Work
and/or Plans, the Tenant shall make such a request in writing. The Landlord
shall review and either approve in writing (with or without modification by
Landlord) or reject such changes within 10 days of its receipt of Tenant's
written request. The Tenant shall bear the cost of the preparation of any plans
and specifications, and any modifications thereof, which are required. The
Tenant shall also be responsible to pay for the increase in cost of any such
changes, including the contractor's and Landlord's markup for overhead and
profit in connection therewith. The Landlord shall not be obligated to perform
such change orders requested by the Tenant until both the Landlord and the
Tenant have executed same and Tenant has agreed to pay for the costs of such
change and/or modification of the scope of Landlord's Work and Plans. The
parties agree that their consent to any change orders will not be unreasonably
withheld, conditioned or delayed except that all deadlines for the completion of
Landlord's Work shall be extended as a result of any delay resulting from
Tenant's change orders.
4.02 Delivery of Leased Premises and Tenant's Rights. Landlord acknowledges that
completion of Landlord's Work and delivery of the Leased Premises to Tenant on
or before October 1, 1997 (the "Scheduled Completion
<PAGE>
Date") is of paramount importance to Tenant, and the Landlord agrees to use
diligent efforts to complete Landlord's Work and deliver the Leased Premises
to Tenant on or before the Scheduled Completion Date. As a material
inducement for entering into this Lease, Landlord hereby grants to Tenant the
following termination and rent abatement rights:
(a) In the event performance of Landlord's Work has not commenced on or
before April 1, 1997, Tenant shall have the right, exercisable by notice to
Landlord at any time prior to commencement of such performance (and as the
Tenant's sole and exclusive remedy at law or in equity) to terminate this
Lease, in which event this Lease shall be deemed void and of no force or
effect as of the date of delivery of such notice, the Security Deposit shall
be returned to Tenant and the parties shall have no further rights or
obligations hereunder. Construction shall be deemed commenced as of the date
the Landlord commences demolition of any portion of the Building requiring
demolition or the date the Landlord commences the installation of any
equipment, material or item comprising the Landlord Work or otherwise
commences in any material way construction of the Landlord's Work;
(b) Except in the event of Tenant Delay (as that term is hereinafter defined)
or any delay caused by any event described in Section 37, in the event
performance of Landlord's Work, once commenced, ceases for a period in excess
of fourteen (14) consecutive days, Tenant shall have the right, exercisable
by notice to Landlord at any time prior to recommencement of such performance
(and as the Tenant's sole and exclusive remedy at law or in equity), to
terminate this Lease, in which event this Lease shall be deemed void and of
no force or effect as of the date of delivery of such notice, the Security
Deposit shall be returned to Tenant and the parties shall have no further
rights or obligations hereunder;
(c) In the event the Completion Date has not been achieved on or before the
Scheduled Completion Date, and such failure was not caused by a Tenant Delay,
then for each day after the Scheduled Completion Date that delivery of the
Leased Premises is delayed, Tenant shall receive an abatement against its
rent obligation in the amount of $1,000.00; and
(d) In the event the Completion Date has not been achieved on or before
November 1, 1997, and such failure was not caused by a Tenant Delay, Tenant
shall have the right, exercisable by notice to Landlord delivered at any time
prior to the Completion Date (and as the Tenant's sole and exclusive remedy
at law and in equity), to terminate this Lease, in which event this Lease
shall be deemed void and of no force or effect as of the date of delivery of
such notice, the Security Deposit shall be returned to Tenant and the parties
shall have no further rights or obligations hereunder.
As used herein, the term "Tenant Delay" shall mean any act or
<PAGE>
omission by Tenant, its agents, servants, employees or contractors, which
causes interference or delay in Landlord's performance of the Landlord Work.
All of the dates set forth in this Section 4.02 shall be extended for the
period of any Tenant Delay and also for any period of time in excess of five
(5) days incurred by the Landlord in obtaining Tenant's approval under
Section 4.01.
Notwithstanding anything contained in this Lease to the contrary, the
Landlord reserves the right to notify the Tenant on or before April 1, 1997
(as said date may be extended by the parties), that the Landlord has not
obtained the necessary financing or satisfied any of the items required in
order to enable the Landlord to perform hereunder, in which event this Lease
shall become null and void and without recourse by or against either party.
4.03 Completion Date. The "Completion Date" shall have been achieved when (a)
Landlord has completed Landlord's Work, even though so-called "punchlist"
items may remain to be finished or corrected, provided such punchlist items
do not materially adversely affect Tenant's ability to use and enjoy the
Leased Premises, and (b) a temporary or permanent certificate of occupancy
with no prohibitions against Tenant's occupancy has been issued for the
Leased Premises. Landlord and Tenant shall walk through the Leased Premises
together promptly after the Completion Date to develop a punchlist of items
to be completed or corrected, and Landlord shall complete or correct such
punchlist items within thirty (30) days after development of the punchlist.
The Tenant and not the Landlord shall be responsible for any damage to the
Leased Premises or the Building caused by the Tenant, its agents, servants,
movers or other contractors.
During the period of any occupancy of the Leased Premises by Tenant
prior to the Commencement Date, no Rent or additional rent shall accrue or by
payable but otherwise such occupancy shall be subject to all the terms,
covenants and provisions contained in this Lease.
4.04 Warranties. Landlord shall use reasonable efforts to enforce on Tenant's
behalf all warranties and guaranties received by it from contractors and
vendors in connection with Landlord's Work. Landlord shall I during the first
lease year, correct any latent defects in Landlord's Work promptly after
being notified of such defects by Tenant.
4.05 Representatives. Landlord hereby designates Thomas F. Guerra as its
representative for all matters relating to Landlord's Work, who shall have
full authority and responsibility to act on behalf of Landlord. Tenant hereby
designates John Young as its representative for all matters relating to
Landlord's Work, who shall have full authority and responsibility to act on
behalf of Tenant. Each party shall be entitled to
<PAGE>
rely upon statements, assurances and agreements made by the other party's
representative.
4.06 Tenant's Fixtures and Cabinets. Tenant and Landlord shall cooperate
reasonably during construction to enable Tenant to install, at Tenant's sole
cost and expense, its fixtures, cabling and telecommunications equipment in
the Leased Premises prior to the Completion Date; subject, however, to
Landlord's scheduling of Landlord's Work.
4.07 Acceptance of the Leased Premises. Tenant or its representatives may
enter upon the Leased Premises during the progress of the Landlord's Work to
inspect the progress thereof and to determine if the Landlord's Work is being
performed in accordance with the requirements of this Section. Tenant shall
promptly give to Landlord written notice of any alleged failure by Landlord
to comply with those requirements. Landlord's Work shall be deemed approved
by Tenant sixty (60) days after Tenant opens for business in the Leased
Premises except for latent defects in workmanship or material. If Tenant
shall not have opened for business within sixty (60) days after the
Commencement Date, a certificate of completion by a licensed architect or
registered engineer shall be conclusive evidence that Landlord's Work has
been completed except for any items stated in such certificate to be
incomplete or not in conformity with Exhibit B or to the Plans and except for
latent defects in the Landlord's Work.
5. Rent. Commencing on and as of the Commencement Date, the Tenant will pay
to the Landlord, at the address specified in section 1.01, Rent, without
set-off or deduction and without prior notice or demand, except as expressly
provided in this Lease, at the annual and monthly rates f or the Term of this
Lease as set forth in Section 1.01.
All Rent is payable in advance in the aforesaid monthly installments of Rent
on the first business day of each month, with interest at the prime rate of
interest, so called, announced by Fleet National Bank from time to time plus
four (4%) percent on any unpaid installments of Rent or additional rent from
the date due until paid in full. Such prime rate shall change as of each
published change thereof by Fleet National Bank. If Fleet National Bank
ceases to publish such a prime rate for any reason, the prime rate of The
Wall Street Journal or any successor journal shall be utilized. Rent payable
for any partial month will be prorated on a daily basis.
6. Additional Rent.
<PAGE>
6.01 Electricity and Other Costs. As part of the Landlord's Work, the
Landlord will cause the Leased Premises to be separately metered for
electricity. As additional rent , the Tenant will pay all costs of heat, gas,
air conditioning, electricity and any other utilities, excluding water for
lavatory purposes, consumed in the Leased Premises, including, but not
limited to, relating to the use of the HVAC system during the Term hereof as
shown by the applicable meters or, as in the case of a sub-meter, as
reasonably calculated by the Landlord.
6.02 Taxes. Included in the Rent is the amount of fifty cents ($.50) per
rentable square foot of space contained within the Leased Premises as a base
amount with respect to real estate taxes applicable to the Land and Building
(the "Real Estate Tax Base"). Based upon 38,270 rentable square feet, the
initial Real Estate Tax Base would be $19,135.00. The Real Estate Tax Base
shall increase by the amount of fifty cents ($.50) per square foot for each
additional rentable square foot included in the Leased Premises subsequent to
the date hereof. In the event the rentable square footage of the Leased
Premises is reduced as a result of a taking, the Real Estate Tax Base shall
similarly be reduced based upon the aforesaid formula. Each such increase or
decrease shall be effective as of the date of the increase or decrease in
rentable square footage. The Tenant shall pay, as additional rent with
respect to real estate taxes for the Expense Year of calendar year 1998,
commencing on and as of January 1, 1998, an amount equal to three (3%)
percent of the Real Estate Tax Base, which amount shall be payable in twelve
(12) equal installments with the monthly installments of Rent. The aforesaid
three (3%) percent increase shall be payable without regard to the actual
increase or decrease in real estate taxes. For each Expense Year thereafter,
Tenant shall pay to the Landlord, as additional rent, on account of real
estate taxes, three (3%) percent of the sum of (i) the Real Estate Tax Base
and (ii) the additional rent on account of real estate taxes payable for the
prior Expense Year pursuant to the terms hereof. The Tenant shall also be
solely responsible for and pay within the time period provided by law all
taxes imposed on its inventory, furniture, trade fixtures, apparatus,
leasehold improvements, equipment and any other of Tenant's personal or other
property.
6.03 Tenant's Percentage; operating Expenses. Subject to the provisions of
Section 42, f or the purposes of this Lease, the following terms shall have
the meanings hereinafter set forth:
(a) "Tenant's Percentage" shall mean the percentage computed from time to
time by dividing the rentable area of the Leased Premises by the rentable
area of the Building. In the event that either the rentable area of the
Leased Premises or the rentable area of the Building is changed, Tenant's
Percentage will be appropriately adjusted and, as to the Expense
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Year in which such change occurs, Tenant's Percentage shall be determined on
the basis of the number of days during such Expense Year at each such
percentage. Notwithstanding anything contained in this Lease to the contrary,
unless the remainder of the Building is developed and leased for office use,
the rentable square footage of the remainder of the Building will not be
included in calculating the Tenant's Percentage and the operating expenses
for such portion of the Building shall not be included in calculating the
Operating Expenses to be paid by the Tenant under this Lease. In the event
the Parking Area is part of a larger area made available for the use of
tenants in one or more buildings comprising the Foundry Complex on adjacent
land owned by the Landlord or an affiliated entity, its successors or
assigns, and in the event the Landlord desires to allocate and bill Operating
Expenses based upon such larger parking parcel(s), for purposes of
calculating the payment by the Tenant with respect to Operating Expenses, the
aforesaid rentable area formula shall be utilized to determine the Tenant's
Percentage of the Operating Expenses applicable to the Building and the Land,
with the formula to be utilized for the Parking Area as well as the other
parking areas relating thereto (including the larger parking area of which
the Parking Area is a portion) to be as follows:
In order to calculate the Tenant's Percentage with respect to the
Parking Area, the Landlord shall multiply the number of parking spaces which
the Tenant is entitled to utilize in the applicable parking lots by five
hundred (500) square feet per parking space and then divide the resulting
number by the total square footage of the land in the applicable parking lots
which comprise the parcel(s) involved. It is the intention and agreement of
the parties that the Tenant shall pay, as the Tenant's Percentage of
Operating Expenses relating to the Parking Area, the percentage that the
square footage of the parking spaces available to the Tenant (calculated as
aforesaid) bears to the total square footage of the parcel(s) comprising the
applicable total parking area from time to time.
Notwithstanding anything contained in this Lease to the contrary, until the
Landlord develops and leases the remainder of the Building for office
purposes and the commencement date for such lease occurs, the Tenant's
Percentage shall be 100%. At such time as the commencement date for any such
office lease in the remainder of the Building occurs, the rentable square
footage in such office space shall be included in the rentable area of the
Building in order to calculate the Tenant's Percentage.
(b) "Operating Expenses" shall mean the total costs and expenses
paid or incurred by Landlord in connection with the operation, maintenance
and repair of the Building and all improvements, located on or forming a part
of the Land and used or available for the benefit of the Building, (including
but not limited to the Parking Area), including, without limitation, (i)
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maintenance, repair and energy costs associated with maintaining air
conditioning, electricity, steam, heating, mechanical, ventilating, escalator
and elevator systems, sprinkler systems and all other common area utilities
and the cost of supplies and equipment as well as maintenance and service
contracts in connection therewith, (ii) the cost of maintenance, repair,
cleaning, lighting, signing, painting, brick cleaning, resealing (but not
repaving), striping, policing and security of the Land, Building and Parking
Area, (iii) the cost of fire, extended coverage, boiler, sprinkler,
apparatus, public liability, property damage, loss of rent, earthquake and
all other insurance with respect to the Land, Building and the Parking Area,
(iv) reasonable wages, salaries and other labor costs, including taxes,
insurance, and equipment used in connection with the foregoing, removal of
ice and snow and debris, and landscaping, (vi) a management fee no greater
than market rate, and (vii) any other expenses of any other kind whatsoever
reasonably incurred in operating, maintaining and repairing the Land,
Building and Parking Area. It is understood and agreed that the term
"Operating Expenses" does not include the following: any item that would be
deemed a capital expenditure under generally accepted accounting principles;
amounts received by Landlord through proceeds of insurance, tenants, other
source; brokerage condemnation awards, warranties or any commissions; taxes;
costs in the nature of fees, fines or penalties arising out of the breach of
any obligation, contractual or at law, by Landlord or its contractors,
employees or agents, including attorneys' fees; tenant buildout expenses,
including permit, license and inspection costs relating thereto; costs or
expenses relating to renovation of the Building or correction of latent
defects in the Building; costs relating to non-compliance of the Building or
Land with laws in effect as of the date hereof; costs relating to
environmental compliance or remediation; reserves maintained or future
expenditures not yet incurred; attorneys' fees and other costs and expenses
incurred in connection with negotiations or disputes with present or
prospective tenants of the Building; expenses in connection with services not
offered to the Tenant; overhead and profit increments paid to Landlord or any
of its affiliates to the extent the same exceed market rates; interest,
principal, points and fees on any debt or loans; advertising and promotional
expenditures; and depreciation.
(c) "Expense Year" shall mean each twelve (12) consecutive calendar month
period, with the first full Expense Year beginning January 1, 1997 provided that
Landlord, upon notice to Tenant, may change the Expense Year from time to time
to any other twelve (12) consecutive month period subsequent to the Commencement
Date. In the event of a partial Expense Year or any such change, Tenant's
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proportionate share of Operating Expenses based on Tenant's Percentage shall
be equitably adjusted for any partial Expense Year or for the Expense Years
involved in any such change.
(d) "Operating Expense Base Amount" shall be the amount derived by
multiplying the amount of Two and 00/100 ($2.00) Dollars by the amount of the
rentable square feet of space in the Leased Premises from time to time. Based
upon 38,270 rentable square feet of space, the Operating Expense Base Amount
would be $76,540. In the event the Landlord elects at any time to bill
separately for the Operating Expenses allocable to the Parking Area (or the
larger parking lot parcel(s) as aforesaid) pursuant to Section 6.03 (a), the
Operating Expense Base Amount shall be reasonably allocated by the Landlord
between the Land and Building on the one hand, and the Parking Area and other
applicable parking parcel(s) on the other.
6.04 Payment of Operating Expenses. Because of the manner in which the
Building and other components of the Foundry Complex are operated, Operating
Expenses for the Building are difficult to calculate with precision. Landlord
and Tenant have therefore elected initially to assume that operating Expenses
for calendar year 1997 are equal, on a per square foot basis, to the
operating Expense Base Amount, and that Operating Expenses will increase by
three percent (3%) per year after calendar year 1997. Landlord and Tenant
have agreed that Tenant will be responsible for Tenant's Percentage of such
three percent increases. Accordingly, for the Expense Year of calendar year
1998, Tenant shall pay to Landlord, as additional rent, an amount equal to
three percent (3%) of the Operating Expense Base Amount, in twelve (12) equal
monthly installments, commencing of January 1, 1998. For each Expense Year
thereafter, Tenant shall pay to Landlord, as additional rent, an amount equal
to the amount by which the Operating Expense Base Amount is exceeded by the
product of 1. 03 times the sum of (a) the Operating Expense Base Amount and
(b) the additional rent payable on account of Operating Expenses f or the
prior Expense Year in twelve (12) monthly installments commencing on the
first day of the year. The above-described arrangement is referred to
hereinafter as the "Three Percent Solution." Set forth on Exhibit E attached
hereto is a table listing Tenant's additional rent obligation under the Three
Percent Solution for each Expense Year.
Notwithstanding the foregoing, Landlord may for any Expense Year elect, in lieu
of the Three Percent Solution, to have Tenant pay as its share of Operating
Expenses the amount by which Tenant's Percentage of actual Operating Expenses
for such Expense
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Year exceeds the Operating Expense Base Amount, and in such event (i) Tenant
shall pay such excess, in twelve (12) equal monthly installments, (ii) to the
extent Tenant's cumulative payments under the Three Percent Solution for past
increases in Tenant's Percentage Tenant shall receive a credit obligations
under this Section 6.04 and (iii) if Landlord elects to revert to the Three
Percent Solution for any subsequent Expense Year, the calculation shall be
made as if Operating Expenses increased three percent (3%) per year from the
Operating Expense Base Amount, regardless of whether in any particular
Expense Year the Three Percent Solution was applied (i.e. Tenant's additional
rent obligations shall be the amount set forth for the applicable Expense
Year on Exhibit E).
Landlord' s election of whether or not to apply the Three Percent Solution to
a particular Expense Year shall be made within one hundred twenty (120) days
after the expiration of such Expense Year. In the absence of an election
within such 120-day period, Landlord shall be deemed to have elected to apply
the Three Percent Solution.
Regardless of whether the Three Percent Solution has been applied, Landlord
shall, within one hundred twenty (120) days after expiration of each Expense
Year deliver to Tenant a statement ("Landlord's Expense Statement") of an
officer of Landlord setting forth the actual Operating Expenses for such
Expense Year, including a description of any applicable allocation of costs
shared by the Building and other components of the Foundry Complex. The
failure of the Landlord to provide the annual statement called for hereunder
shall not relieve the Tenant from its obligations hereunder. If the actual
Operating Expenses for such Expense Year exceed the estimated operating
Expenses paid by Tenant for such Expense Year which the Landlord elects to
bill (and the Landlord elects not to apply the Three Percent Solution),
Tenant shall pay to Landlord the difference between the amount paid by Tenant
and the Tenant's Percentage of the actual Operating Expenses within thirty
(30) days after the receipt of Landlord's Expense Statement, and if the total
amount paid by Tenant for any such Expense Year shall exceed the Tenant's
Percentage of the actual Operating Expenses for such Expense Year, such
excess shall be credited against the next installments of the estimated
Operating Expenses due from Tenant to Landlord hereunder until exhausted or
refunded to the Tenant if the Term has expired.
Tenant's aforesaid proportionate share of Operating Expenses for the Expense
Year in which this Lease commences or terminates shall be in the
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proportion that the number of days from and including the first day of the
Expense Year in which the commencement or termination occurs to and including
the last day of such Expense Year or Termination Date, as applicable, bears
to 365; provided, however, in the event the Landlord elects to bill for
actual increases in operating Expenses, Landlord may, pending the
determination of the amount of Operating Expenses for such partial Expense
Year, furnish Tenant with statements of estimated operating Expenses, and
Tenant's proportionate share thereof for such partial Expense Year. Within
fifteen (15) days after receipt of such estimated statement, Tenant shall
remit to Landlord, as additional rent, the monthly amount of Tenant's
proportionate share of such Operating Expenses. After such Operating Expenses
have been finally determined and Landlord's Expense Statement has been
furnished to Tenant, and if there shall have been an underpayment of Tenant's
proportionate share of Operating Expenses, Tenant shall remit the amount of
such underpayment to Landlord within fifteen (15) days of receipt of such
statement, and if there shall have been an overpayment, Landlord shall remit
the amount of any such overpayment to Tenant within fifteen (15) days of the
issuance of such statement.
6.06 Tenant's Audit Rights. Tenant shall have the right to audit the
applicable records of the Landlord to confirm that the Operating Expenses
billed to Tenant under this Section 6 are proper and conform to the
provisions of this Section 6. Such right shall be exercisable by Tenant
within one (1) year after Tenant's receipt of each such annual statement, the
statement shall be deemed final and accepted by the Tenant. Landlord shall
cooperate with Tenant in providing Tenant reasonable access to Landlord's
books and records as they relate to any costs or expenses passed through to
Tenant pursuant to any provisions of this Lease. If the audit discloses any
overpayment on the part of Tenant, then Tenant shall be entitled to a credit
on the next succeeding installment of additional rent for an amount equal to
the overcharge plus interest on the amount of such overcharge from the date
on which same was paid by Tenant until the date refunded by Landlord at the
prime rate of Fleet National Bank, and such credit shall be extended to
succeeding installments of additional rent in the event such overcharge
exceeds the amount of the next succeeding such installment and, in the event
the Term of this Lease has expired or been earlier terminated, then Tenant
shall be entitled to a refund of such excess from Landlord within thirty (30)
days after such date or expiration or earlier termination. In addition, in
the event such audit by Tenant discloses such an overcharge in excess of
twelve (12%) percent of the amount of the actual Operating Expenses, the
Landlord shall pay to Tenant the reasonable costs and expenses documented by
the Tenant of the cost of such audit up to the maximum amount of One Thousand
and 00/100 ($1,000.00) Dollars.
7. Permitted Use: Compliance with Laws. etc. The Tenant will use
<PAGE>
the Leased Premises solely for office purposes together with the operation of
a shrink wrap conveyor and processor for the preparation of existing software
product mailings by Fed Ex or other like mailing services; provided, however,
that the shrink wrap conveyor and processor equipment shall not occupy more
than 7,000 square feet of the Leased Premises. No portion of the Leased
Premises shall be used for manufacturing or industrial purposes. The Tenant
will promptly observe and comply with all present and future laws,
ordinances, requirements, orders, directives, rules and regulations of
Federal, State, city and town governments and all other governmental
authorities or any national or local Board of Fire Insurance Underwriters
affecting the Leased Premises or the Tenant's use thereof. Notwithstanding
the foregoing or any other provision of this Lease to the contrary, however,
Tenant shall not be responsible for compliance with any such laws,
regulations or the like requiring (i) structural repairs or modifications to
the Building, or (ii) repairs or modifications to the utility or building
service equipment, or (iii) installation of new building service equipment,
such as fire detection or suppression equipment, unless such repairs,
modifications, or installations shall (a) be due to Tenant's particular
manner of use of the Leased Premises (as opposed to office use in general),
or (b) be due to the negligence or willful misconduct of the Tenant or any
agent, employee or contractor of Tenant. The Tenant will indemnify and hold
harmless the Landlord from and against any and all penalties or damages
charged to or imposed upon it or for any violation of any such laws,
ordinances, rules or regulations by Tenant. The Tenant will not use, or
permit the and/or the Land for any use of, the Leased Premises, the Building
purpose which would cause the premiums on the Landlord's fire and casualty
insurance to be increased or create a forfeiture or prevent renewal of such
insurance. The Tenant shall not bring any oil, petroleum, hazardous substance
or hazardous material regulated under any federal or state law on the Land or
in the Building, except for ordinary office supplies, used in accordance with
applicable law, or otherwise release or discharge any such hazardous
substance or material (or allow any subtenant, invitee or visitor to do so).
The Tenant will not use, or permit the use of, the Leased Premises, the
Building and/or the Land for any improper, offensive or unlawful purpose.
8. Repairs and Maintenance. Alterations.
8.01 Landlord's Repairs. The Landlord will maintain in good condition, and will
make all replacements and repairs to, the roof, exterior and structural
components of the Building and the Landlord will maintain in good condition and
keep clean the Parking Area, halls, stairways and other areas in the Building
used in common by all tenants; provided, however, that the Landlord will not be
responsible for any repairs and
<PAGE>
maintenance made necessary by the negligence or misconduct of the Tenant or
the Tenant's agents, servants, employees or contractors.
8.02 Tenant's Repairs. The Tenant will: (i) be responsible for repairs and
maintenance made necessary by the negligence or misconduct of the Tenant or
the Tenant's agents, servants, employees or contractors; (ii) maintain in
good order, condition and repair and keep clean the Leased Premises
(including the replacement of glass in windows and doors); and (iii) replace
any light bulbs in the Leased Premises necessary during the Term hereof.
8.03 Alterations. The Tenant may not make any (i) structural alterations or
improvements or (ii) non-structural alterations or improvements costing in
excess of One Hundred Thousand and 00/100 ($100,000.00) Dollars in the
aggregate in any 12 month period to the Leased Premises without the prior
written consent of Landlord, which consent may be given or withheld in the
Landlord's sole discretion. The Tenant may not make any non-structural
alterations or improvements to the Leased Premises costing in the aggregate
in any lease year One Hundred Thousand and 00/100 ($100,000.00) Dollars or
less without the prior written consent of the Landlord, which consent shall
not be unreasonably withheld, conditioned or delayed.
9. Tenant's Trade Fixtures.
9.01 Trade Fixtures Defined. For the purposes of this Lease, Tenant's "Trade
Fixtures" means items of personal property owned by the Tenant and especially
designed or fitted for use in its business which: (i) will not be affixed or
incorporated into the Leased Premises in such manner that their removal will
cause damage to the Building, and (ii) will, after removal, have a value
significantly exceeding the cost of removal.
9.02 Installation and Removal. The Tenant may install Tenant's Trade Fixtures
in the Leased Premises. Tenant's Trade Fixtures will, notwithstanding the
manner of their installation, remain the property of the Tenant and will be
removed by the Tenant upon the termination of this Lease. The Tenant will
repair any damage to the Leased Premises occasioned by the removal of the
Tenant's Trade Fixtures. Any of Tenant's Trade Fixtures left on the Leased
Premises upon the termination of this Lease, at the election of the Landlord,
may be (i) removed at the Tenant's expense and sold, stored or discarded, or
(ii) deemed to have been abandoned and to be the property of the Landlord.
10. Public Liability Insurance; Indemnity.
10.01 Insurance. The Tenant will obtain and pay for comprehensive
<PAGE>
general public liability insurance insuring the Landlord and its mortgagees
(as Additional Insureds) and the Tenant against loss from and liability for
damages on account of loss or injury suffered by any person or property
within or upon the Leased Premises, the coverage and protection of such
insurance to be in the amount of at least $3,000,000 per incident.
10.02 Tenant's Indemnity. Tenant will indemnify and hold Landlord harmless
from and against all loss, cost or damage (including reasonable attorneys'
fees) sustained by Landlord on account of: (i) damage to property or injury
to persons resulting from any accident or other occurrence on or about the
Leased Premises, (ii) damage to property or injury to persons resulting from
the Tenant's activities outside the Leased Premises but on the Land, if due
to Tenant's negligence or misconduct, or (iii) the Tenant's failure to
perform or fulfill any term, condition or agreement contained or referred to
hearing to be performed or fulfilled by the Tenant (provided this clause
shall not be construed so as to expand Landlord's remedies under Section 16).
This indemnity shall survive the expiration or the earlier termination of
this Lease.
10.03 Landlord's Indemnity. The Landlord will indemnify and hold Tenant
harmless from and against all loss, cost or damage (including reasonable
attorneys' fees) sustained by Tenant on account of: (i) damage to property or
injury to persons resulting from any accident or other occurrence on or about
the Leased Premises caused by the negligent act or omission of the Landlord,
(ii) damage to property or injury to persons resulting from activities of the
Landlord in the Building or (iii) the Landlord's failure to perform or
fulfill any condition or agreement contained or referred to herein to be
performed or fulfilled by Landlord. This indemnity shall survive the
expiration or the earlier termination of this Lease.
11. Fire or other Casualty: Cross Releases and Waiver of Subrogation;
Tenant's Property.
11.01 Fire or Other Casualty. If the Building or the Leased Premises or any
part thereof are damaged by fire or other casualty, the Landlord will, using
all available insurance proceeds, forthwith commence and continue with all
reasonable diligence the repair of the same; provided, however, that if the
repair of the Building or Leased Premises shall require a period greater than
two hundred seventy (270) days to restore, then upon notice given to the
Tenant not later than sixty (60) days after the casualty, the Landlord may
terminate this Lease as of the date of the casualty and a proportionate part
of the Rent paid in advance will be repaid to the Tenant. Notwithstanding any
of the foregoing provisions to the contrary, if (a) the Leased Premises are
materially damaged by fire or other casualty during the last twelve (12)
months of the Term and Tenant
<PAGE>
has not exercised its Term extension rights under this Lease, or (b) the
Leased Premises are materially damaged by fire or other casualty and not
restored (including restoration of the leasehold improvements in the Leased
Premises to the extent initially installed by the Landlord as part of the
Landlord's Work), within two hundred seventy (270) days after the date of
such f ire or casualty, or (c) in the event the damage to the Leased Premises
is such that the repair of such will require a period greater than two
hundred seventy (270) days, then Tenant shall have the right, exercisable by
notice to Landlord delivered within thirty (30) days after the date of such f
ire or casualty (with respect to clause (a) or (c) above) or within thirty
(30) days after the expiration of such two hundred seventy (270) day period
while f failure to restore the Leased Premises and the leasehold improvements
in the Leased Premises persists (with respect to clause (b) above) , to
terminate this Lease, effective as of the date of delivery of such notice.
With respect to any provision set forth above, if Tenant fails to terminate
this Lease within the aforesaid thirty (30) day periods, the Tenant shall be
deemed to have waived its rights of termination under this Section 11.01. Any
termination by the Tenant under this Article shall be null and void and of no
force or effect in the event the Landlord completes the restoration work
within forty-five (45) days of the Tenant's termination notice. Until the
Leased Premises are restored by the Landlord, there will be an equitable
adjustment of the base Rent and all additional rent.
The Tenant does hereby expressly waive any right or privilege of termination
now granted or created under the provisions of any of the real property laws
of the State of Rhode Island or any similar law, rule or regulation now or
hereafter in effect relating to the damage or destruction of the Building or
Leased Premises from any cause including, without limitation, Rhode Island
General Laws, Section 34-18.1-8.
11.02 Release. The parties release each other from any claims, to the extent
of the insurance coverage, for damage to any person or to the Leased Premises
and the Building and to the personal property, fixtures, improvements and
alteration of either the Landlord or the Tenant in or on the Leased Premises
and the Building that are caused by or result from risks insured against
under any insurance policies carried by the parties and in force at the time
of any such damage.
11.03 Waiver of Subrogation. Upon the request of either party, each party will
cause each fire or other casualty insurance policy obtained by it to provide
that the insurance company waives all right of recovery by way of subrogation
against either party in connection with any damage covered by any policy. If any
such insurance policy cannot be obtained with a waiver of subrogation, or is
obtainable only by the payment of an additional premium charge above that
charged by insurance companies issuing policies without waiver of subrogation,
the party undertaking to
<PAGE>
obtain the insurance will notify the other party of this fact. The other
party will have a period of ten (10) days after receiving the notice either
to place the insurance with a company that is reasonably satisfactory to the
other party and that will carry the insurance with a waiver of subrogation,
or to agree to pay the additional premium if such a policy is obtainable at
additional cost. If the insurance cannot be obtained or the party in whose
favor a waiver of subrogation is desired refuses to pay the additional
premium charged, the other party is relieved of the obligation to obtain a
waiver of subrogation rights with respect to the particular insurance
involved.
11.04 Risk of Loss. The risk of loss of or damage to property of the Tenant
on or about the Leased Premises will be borne solely by the Tenant and
neither the Landlord nor any other tenant will have any liability for loss
thereof or damage thereto.
12. Insurance.
12.01 Tenant's Insurance Policies. All insurance required under this Lease
will be issued by companies reasonably satisfactory to the Landlord. Each
such policy will contain a provision that no act or omission of the Tenant
will affect or limit the obligation of the insurer to pay on behalf of the
Landlord the amount of the loss sustained by, or claim made against, the
Landlord, and will contain an agreement by the insurer that such policy will
not be canceled without at least twenty (20) days' prior written notice to
the Landlord.
12.02 Landlord's Insurance Policies. Landlord shall maintain in full force
throughout the Term, a policy of insurance upon the Building insuring against
all risks of physical loss or damage under an All Risk coverage endorsement
in an amount at least equal to the full replacement value of the property
insured, with an Agreed Amount endorsement to satisfy the co-insurance
requirements, as well as insurance against breakdown of boilers and other
machinery as customarily insured against. Landlord shall supply to Tenant
from time to time upon request of Tenant certificates of all such insurance
issued by or on behalf of the insurers named therein by a duly authorized
agent. All policies of insurance maintained by Landlord shall contain the
same waiver of subrogation provisions for the benefit of Tenant as Tenant is
required to obtain in its insurance policies for the benefit of Landlord.
13. Subordination. It is agreed that the rights and interest of Tenant
under this Lease shall be (i) subject or subordinate to any present or future
mortgage or mortgages and to any and all advances to be made thereunder, and
to all amendments or modifications of same, provided the mortgages involved
enter into a nondisturbance agreement with Tenant under which the mortgagees
<PAGE>
agree to recognize all of Tenant's rights under this Lease, including
Tenant's expansion, extension and first offer rights, if such mortgagee shall
elect by notice to Tenant to subject or subordinate the rights and interest
of Tenant under this Lease to such mortgage or (ii) prior to any present or
future mortgage or mortgages, if such mortgage shall elect, by notice to
Tenant, to give the rights and interest of Tenant under this Lease priority
to such mortgage. In the event of either of such elections, and upon
notification by mortgagee to that effect, the rights and interest of Tenant
under this Lease shall be deemed to be subordinate to, or have priority over,
as the case may be, said mortgage or mortgages, irrespective of the time of
execution or time of recording of any such mortgage or mortgages. Tenant
agrees it will, upon request of Landlord, or any such mortgagee, execute,
acknowledge and deliver any and all instruments deemed by Landlord, or by the
requesting mortgagee, necessary or desirable to give effect to or notice of
such subordination or priority. Any mortgage to which this Lease shall be
subordinated may contain such terms, provisions and conditions as the holder,
it is sole discretion, deems necessary or appropriate.
An election by a mortgagee under clause (i) of this Section to subordinate
the rights and interest of Tenant to a mortgage shall not be valid unless
consented to in writing by all the holders of record of all prior mortgages
then outstanding secured by the Leased Premises or the Building, which
consent such mortgagees may give or withhold in their sole discretion. The
Landlord shall have the right from time to time (including, without
limitation, pursuant to any provision contained in the mortgage having
priority of record), to limit the foregoing right of subordination in favor
of its mortgagees to only its first mortgagee.
14. Condemnation. In case, during the Term hereof, the whole of the Building,
the Leased Premises and the Land shall be taken by condemnation or right of
eminent domain, this Lease shall terminate on the date on which Tenant is
deprived of possession. If so terminated, Landlord shall return any advance
Rent payments. In case, during the Term hereof, at least one-third (1/3) of
the Land and/or Leased Premises shall be taken by condemnation or right of
eminent domain, both Landlord and Tenant shall have the option to terminate
this Lease by written notice to the other given not later than sixty (60)
days after the effective date of the taking. Should neither party elect to
terminate this Lease pursuant to the foregoing provision, Landlord shall
proceed with all reasonable dispatch after such taking or condemnation, and
the determination of Landlord's award therein, to restore the Leased Premises
to their condition prior to such taking to the extent such restoration may be
practicable, provided that Landlord shall have no obligation to expend, in
connection with such restoration, any amount in excess of the net proceeds to
Landlord of such condemnation award.
In the event Landlord proceeds to restore such portion of the Leased
<PAGE>
Premises, such restoration shall be completed within two hundred seventy
(270) days of the date Tenant was deprived of possession of such portion of
the Leased Premises, and a just abatement of the base Rent and additional
rent shall be made until such restoration has been completed in the same
manner as provided in Article 11 with respect to insurance proceeds. In the
event Landlord does not complete said restoration during said two hundred
seventy (270) day period, except as a result of Act of God, weather, fire,
casualty, labor difficulties or other force majeure causes outside of the
Landlord's control, Tenant shall have the right, within thirty (30) days
after the expiration of said two hundred seventy (270) day period, to
terminate this Lease effective thirty (30) days from the date of Landlord's
receipt of written notice of Tenant's election to so terminate. If Tenant
fails to exercise its rights to terminate this Lease within the afroesaid
thirty (30) day period, the Tenant shall be deemed to have waived its right
of termination under this Section 14. Any termination by the Tenant under
this Article shall be null and void and of no force or effect in the event
the Landlord completes the restoration work within forty-five (45) days of
the Tenant's termination notice. Except for awards for relocation expenses,
all compensation awarded or paid upon any taking or condemnation of the Land,
Building and/or the Leased Premises shall belong to and be the property of
Landlord without any participation by Tenant. Tenant specifically waives and
assigns to Landlord all claims for any value of its leasehold interest or
lease. If so terminated, Landlord shall return any advance Rent payments.
15. Assignments and Subleases. The Tenant will not directly or indirectly
assign or encumber its interest in this Lease or in the Leased Premises, or
sublease all or any part of the Leased Premises, or allow any other person,
firm or corporation to occupy or use all or any part of the Leased Premises,
without first obtaining the Landlord's written consent, which consent shall
not be unreasonably withheld, conditioned or delayed. Any assignment,
encumbrance or sublease without the Landlord's consent will be voidable and,
at the Landlord's election, will constitute a default under this Lease. Each
assignee or sublessee shall execute an agreement in favor of the Landlord by
which such party agrees to comply with all the terms of this Lease except, in
the case of a subtenant only, the payment of rent to the Landlord. No
permitted assignment or subleasing will in any way affect or reduce any of
the liabilities or obligations of the Tenant under this Lease, which
liability shall be joint and several with any assignee or sublessee, as
applicable. The parties agree that with respect to any approved assignment or
sublease, the Landlord and Tenant pay to the Landlord fifty (50%) percent of
the net profit paid or payable to the Tenant as a result of same, which net
profit shall equal the assignment consideration or sublease rent minus the
Tenant's brokerage commission, reasonable legal costs, leasehold improvements
and other applicable costs associated with the assignment or sublease.
<PAGE>
If, at any time during the Term of this Lease, Tenant is:
(a) a corporation or a trust (whether or not having shares of beneficial
interest) and there shall occur, as a result of any single transaction or as
a result of any series of related or unrelated transactions over time, any
change in the identity of any person then having a ten percent (10%) or
greater voting interest with respect to the election or appointment of the
directors, trustees or other persons exercising like functions and managing
the affairs of Tenant (the foregoing shall not be applicable if Tenant is a
publicly traded corporation); or
(b) a partnership, limited liability company, or association or otherwise not
a natural person (and is not a corporation or a trust) and there shall occur
any change in the identity of any of the persons who then are members of such
partnership or association and who holds at least a ten percent (10%)
interest in the profits and/or losses of such partnership; then, and in
either event, Tenant shall be deemed to have assigned this Lease in violation
of the terms herein contained, and shall be in default hereof, and Landlord
shall be entitled to the remedies set forth in this Lease. Notwithstanding
anything contained herein to the contrary, the Tenant may assign this Lease
or sublease the Leased Premises without the Landlord's consent to any parent,
subsidiary or affiliate of the Tenant or in connection with the
consolidation, merger or reorganization of Tenant or the sale by Tenant of
all or substantially all of its stock or assets.
16. Default and Remedies.
16.01 Events of Default. The Tenant will be in default under this Lease upon
the occurrence of any of the following events or conditions as to the Tenant
or any guarantor of the Tenant's obligations hereunder: (I) the Tenant's
failure to pay Rent, additional rent or make the other payments at the times
and in the manner provided herein, such failure having continued for a period
of ten (10) days (no notice of such nonpayment being required to be given by
the Landlord): (ii) the Tenant's failure to perform or fulfill any other
term, condition or agreement contained or referred to herein, on the part of
the Tenant to be performed or fulfilled, such failure having continued for a
period of thirty (30) days after notice thereof shall have been given by the
Landlord to the Tenant, unless such non-monetary default, although curable,
shall require a longer period as is reasonable to effect a cure, in which
case the Tenant shall have up to an additional one hundred twenty (120) days
to cure; (iii) if the Tenant or any guarantor of the Tenant's obligations
hereunder shall generally not pay its debts as they become due or shall admit
in writing its inability to pay its debts, or shall make a general assignment
for the benefit of creditors; (iv) if the Tenant or any such guarantor shall
commence any case, proceeding or other action seeking reorganization,
arrangement, adjustment, liquidation, dissolution or
<PAGE>
composition of it or its debts under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, or seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or
any substantial part of its property; (v) if any case, proceeding or other
action against the Tenant or any guarantor of the Tenant's obligations
hereunder shall be commenced seeking to have an order for relief entered
against it as debtor, or seeking reorganization, arrangement, adjustment,
liquidation, dissolution or composition of it or its debts under any law
relating to bankruptcy, insolvency, reorganization or relief of debtors, or
seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its property, and such
case, proceeding or other action (x) results in the entry of an order for
relief against it which is not fully stayed within seven business days after
the entry thereof or (y) remains undismissed for a period of 45 days; (vi) if
the leasehold interest hereby created is levied upon by execution or taken by
process of law; or (vii) the dissolution of the Tenant or any guarantor of
the Tenant's obligations hereunder.
16.02 Remedies. In the event of default existing beyond all applicable grace
and cure periods, it will be lawful for the Landlord thereupon, or at any
time thereafter, at the Landlord's option, to exercise all rights and
remedies available at law or in equity and to terminate this Lease and to
enter upon the Leased Premises and to expel the Tenant and those claiming
under the Tenant, without being guilty of any manner of trespass, and
thenceforth peacefully and quietly hold and enjoy the Leased Premises as if
this Lease had not been made; without prejudice, however, to any right to sue
f or and recover any base rent and additional rent and other sums then and
thereafter due under this Lease, or to any claim f or damages or right of
action or remedy for preceding breach of any covenant, agreement or condition
herein contained which the Landlord might otherwise have or use.
16.03 Additional Remedies. Upon the termination of this Lease under any
provision contained in Section 16.01, or if this Lease is otherwise
terminated by operation of law or as a result of any uncured default or
breach of any obligation of Tenant, Tenant shall nevertheless remain liable
for all Rent (including, without limitation, additional rent payable on
account of Operating Expenses, and all other payments or amounts deemed to be
additional rent hereunder) then due and payable hereunder as of the date of
the termination of this Lease, together with all damages due or sustained by
Landlord prior to such termination or arising as a result of events or
conditions occurring or in existence during the Term hereof and prior to or
after such termination, and all reasonable costs, fees and expenses incurred
by Landlord in pursuit of, or in the collection of its remedies hereunder or
under any law, or in leasing or attempting to lease
<PAGE>
all or any porting the Leased Premises to others from time to time
(including, without limitation, all repossession costs, brokerage
commissions, reasonably attorney's fees in connection with the foregoing
matters, and all reasonable costs of such alterations, repairs, and
decoration as Landlord, in its reasonable judgment, considers necessary or
advisable in connection with such reletting) (all such rent, damages, costs,
fees and expenses being referred to herein as the "Termination Damages") and,
in addition thereto, additional damages (the "Additional Damages") , which,
at the election of Landlord, shall be either of the following:
(a) an amount or amounts equal to all Rent (including, without limitation,
base Rent and all additional rent) which, but for termination, would have
been payable to Landlord over the remainder of the Term, reduced by the
amount of rent, if any, which the Landlord shall actually receive from time
to time during such period from others to whom the Leased Premises may be
rented from time to time. The Landlord shall not be obligated to attempt to
collect any rental or other payment obligation from any other person renting
all or any portion of the Leased Premises by litigation or otherwise. Such
Additional Damages shall be computed and payable in monthly installments,
with interest on any amount in arrears at the maximum rate of interest per
year permitted by law, in arrears, on the f rst day of each calendar month
following termination of the Lease and shall continue to become due and
payable in monthly installments until the date on which the Term would have
expired but for such termination and any and all amounts due and payable
hereunder, including any amount in arrears, shall be a continuing liability
of Tenant thereafter, and interest thereon shall accrue at the maximum rate
of per year permitted by law, until Tenant shall discharge same by payment to
Landlord of the amount due, and any suit or action brought from time to time
to collect any such Additional Damages for any month or months shall not in
any manner prejudice the right of Landlord to collect any Additional Damages
for any subsequent month or months by a similar proceeding. There shall be
added to any payment required to be made hereunder, as Additional Damages,
any additional Termination Damages incurred by Landlord during the month
preceding the due date of such payment, in pursuit of, or in the collection
of any of its remedies hereunder, or under any law, or in leasing or
attempting to lease the Leased Premises to others (including, without
limitation, all repossession costs, brokerage commissions, fees for legal
services in connection with such reletting, and all costs of such
alterations, repairs, and decorations as Landlord considers necessary or
advisable in connection with such reletting); or
(b) an amount equal to the present value (as of the date of such termination)
of all Rent (including, without limitation, base Rent and additional rent)
which, but for termination of this Lease, would have become due during the
remainder of the Term, reduced by an amount equal to the fair rental value of
the Leased Premises over the remainder of the
<PAGE>
Term, as determined by an independent real estate appraiser named by
Landlord, in which case such Additional Damages shall be payable to Landlord
in one lump sum on demand made by Landlord at any time and shall bear
interest at the rate of 1 1/2% per month from the date of termination until
paid. For purposes of this clause (b) , present value shall be computed by
the application of a discount rate equal to the discount rate in effect at
the Federal Reserve Bank nearest to the location of the Foundry Complex as of
the date of determination.
In addition, if this Lease is terminated under any provision contained in
Section 16.01, or as a result of any default or breach of any obligation of
Tenant, Landlord may, but shall have no obligation to, relet the Leased
Premises or any part thereof, alone or together with other premises, for such
term or terms (which may be greater or less than the period which otherwise
would have constituted the balance of the Term) ad non such terms and
conditions (which may include concessions or free rent and alterations of the
Leased Premises) as Landlord, in its reasonable discretion, may determine,
but Landlord shall not be liable for, nor shall Tenant's obligations
hereunder be diminished by reason of, failure by Landlord to relet the Leased
Premises or any failure by Landlord to collect any rent due upon such
reletting. The Landlord agrees to use reasonable efforts to mitigate its
damages if and to the extent required by applicable law.
Nothing contained in this Lease shall, however, limit or prejudice the right
of Landlord to prove for and obtain in proceedings under any federal or state
laws relating to bankruptcy or insolvency or reorganization or arrangement by
reason of the termination of this Lease, an amount equal to the maximum
allowed by any statute or rule of law in effect at the time when, and
governing the proceedings in which, the damages are to be proved, whether or
not the amount be greater than the amount of the loss or damages referred to
above.
16.04 Remedies Cumulative. Any and all rights and remedies which Landlord may
have under this Lease, and at law and equity, shall be cumulative and shall
not be deemed inconsistent with each other, and any two or more of all such
rights and remedies may be exercised at the same time insofar as permitted by
law.
16.05 Creditors. In the event of default, this Lease will not, except at the
option of the Landlord, continue for the benefit of any attaching creditor,
assignee for the benefit of creditors, permanent receiver, or trustee in
bankruptcy.
16.06 Attorneys 0' Fees. In the event of any litigation between Landlord and
Tenant, the unsuccessful party as determined by a court of competent
jurisdiction shall reimburse the successful party for all reasonable legal
fees and expenses incurred by the successful party in
<PAGE>
prosecuting or defending any such action.
17. Other Rights and Responsibilities of Landlord; Services and Utilities.
17.01 Landlord's Rights. The Landlord and its authorized representatives will
have the right to enter the Leased Premises at all reasonable times upon
reasonable notice (except in the case of emergency when no notice shall be
required) for any of the following purposes: (i) to determine whether the
Leased Premises are in good condition and whether the Tenant is complying
with its obligations under this Lease; (ii) to give any notice required or
permitted to be given to the Tenant hereunder; (iii) to show the Leased
Premises to prospective brokers, agents, buyers, or tenants during the last
six (6) months of the Term; or (iv) to do any necessary maintenance and to
make any restoration or repairs to the Leased Premises or the Building. In
exercising such rights, Landlord shall use diligent efforts to prevent or
minimize inconvenience with Tenant's use of the Leased Premises and Parking
Area.
17.02 Common Facilities. The Landlord will have the right to relocate or
change any common facility in the Building provided that comparable
facilities are provided and Tenant's use and enjoyment of and access to the
Leased Premises and the Parking Area are not materially affected.
17.03 Building Hours. The Landlord will have the right to close the Building
after regular business hours (from 8:00 a.m. to 6:00 p.m. on weekdays and
from 8:00 a.m. to 1:00 p.m. on Saturdays) and on Sundays and legal holidays
but Tenant will have access to the Leased Premises and the Parking Area
twenty-four (24) hours per day, seven (7) days per week, throughout the Term.
17.04 Repairs. The Landlord will have the right to close doors, entryways and
common areas for the purpose of repairing, maintaining or altering the same.
In exercising such rights, Landlord shall use diligent efforts to prevent or
minimize inconvenience and interference with Tenant's use of the Leased
Premises.
17.05 Services. The Landlord will provide the following to the Tenant: (i) water
for reasonable domestic purposes and reasonable heat at the Tenant's expense for
the comfortable use and occupancy of the Leased Premises; (ii) electrical energy
at Tenant's expense f or ordinary room illumination, operation of office and
business machines and equipment operating on standard 110 volt current drawing
not in excess of 15 amps; (iii) maintenance and cleaning of the areas of the
Building used in common by all tenants; (iv) the services, utilities, facilities
and supplies set forth in Exhibit D attached hereto; and (v) at Tenant's
reasonable request and expense, such additional services as are usual and
customary in similar buildings in Providence.
<PAGE>
The Tenant will pay for the cost of electricity and any other service or
utility used by it. The Tenant will also pay all electrical costs for
heating, ventilation and air conditioning. Except when occasioned by the
Landlord's gross negligence or willful misconduct, the Landlord will have no
responsibility or liability (other than as set forth in Section 17.06 hereof)
for defects, delays, lapses or cessation in or of these services and, in any
event, the Landlord will have no liability for consequential damages
resulting from any defect, delay, lapse or cessation in or of these services.
17.06 Interruptions. Notwithstanding any provisions of this Lease to the
contrary, in the event Tenant is not reasonably able to use the Leased
Premises or the Parking Area on account of work, repairs or alterations made
by Landlord or a cessation or reduction in any access, utilities or services
necessary for use of the Leased Premises or the Parking Area, the base Rent
shall be abated equitably hereunder from and after the date that is two (2)
business days after the date upon which Tenant became unable to use the
Leased Premises or the Parking Area, as applicable, until the date Tenant is
again reasonably able to use the Leased Premises and the Parking Area. In
addition, in the event the Tenant is not reasonably able to use the Leased
Premises f or a period of 270 consecutive days as a result of the
interruption in utilities or the performance of any environmental remediation
work with respect to the Leased Premises, the Tenant shall be entitled to
terminate this Lease pursuant to thirty (30) days written notice to the
Landlord. Such termination notice shall be null and void and have no force or
effect in the event the Landlord restores the utilities which have been
interrupted or otherwise permits the Tenant to reasonably use the Leased
Premises within thirty (30) days after delivery of Tenant's termination
notice.
17.07 Signs. Tenant may, at its sole cost and expense and subject to and in
compliance with all applicable laws, install Tenant's sign on the exterior
facade of the Building. Said sign shall be of a size and design and with
materials selected by Tenant provided it is consistent with the Landlord's
standard building signage in the Foundry Complex.
18. Surrender; Holdover.
18.01 Surrender. At the termination of this Lease, the Tenant will peaceably
surrender the Leased Premises in good order, condition and repair, excepting
reasonable wear and tear and excepting damage by fire or other casualty which
has been insured against.
18.02 Holdover. If the Tenant remains in possession of the Leased Premises after
the expiration of the Term of this Lease and continues to pay rent without any
express agreement as to holding over, the Landlord's
<PAGE>
acceptance of rent will be deemed an acknowledgement of the Tenant's holding
over upon a month-to-month tenancy, subject, however, to all of the terms and
conditions of this Lease except as to the Term hereof and any option to renew
the Term.
18.03 Holdover Rent. If the Tenant remains in possession of the Leased
Premises after the expiration of the Term of this Lease, whether as a
month-to-month tenant pursuant to Paragraph 18.02 or otherwise, and the
Landlord at any time declines to accept the rent at the rate specified
herein, the Tenant's holding over thereater will be deemed to be as a tenant
at sufferance. The Tenant will nevertheless be subject to all of the terms
and conditions of this Lease except as to the Term hereof and any option to
renew the term and except that the tenant will pay a monthly rent in an
amount equal to one hundred fifty (150%) percent of the amount otherwise due
hereunder. Nothing herein in paragraphs 18.02 and 18.03 shall be understood
to imply any right of holdover on the part of the Tenant.
19. Quiet Enjoyment. Upon paying the rent and all other payments required to
be made by the Tenant hereunder, and upon the Tenant's performing and
fulfilling all terms, conditions or agreements on its part to be performed
and fulfilled, the Tenant will quietly have and enjoy the Leased Premises
during the Term of this Lease without lawful hindrance by any person claiming
by, through or under the Landlord.
20. Waivers. The failure of the Landlord to insist in any one or more
instances upon the strict and literal performance of any of the agreements,
terms, or conditions of this Lease or to exercise any option of the Landlord
herein contained, will not be construed as a waiver for the future of such
term, condition, agreement or option. The receipt by the Landlord of rent
with knowledge of the breach of any term, condition, or agreement will not be
deemed to be a waiver of such breach. The receipt by the Landlord of rent
after the giving of any notice required to be given to the Tenant by law or
by the terms of this Lease will not in any way affect the operation of such
notice.
21. Notices. No notice, approval, consent or other communication permitted or
required to be given by this Lease will be effective unless the same is sent
postage prepaid, by United States registered or certified mail, return
receipt requested, to the other party at the following addresses: if to the
Landlord, at the address set forth in Section 1.01, with a copy to: David J.
Tracy, Esquire, McGovern, Noel & Benik, 1800 Hospital Trust Tower,
Providence, Rhode Island 02903; and with a copy to mortgagees pursuant to
Section 26; and if to the Tenant, to Inso Providence Corporation, with a copy
to the address set forth in Section 1.01, with a copy to: Hale and Dorr, 60
State Street, Boston, Massachusetts 02109, Attn: Mark G. Borden, Esq. or to
such other address as either party may designate by notice to the other party.
<PAGE>
22. Governing La . This Lease and the performance thereof will be governed,
interpreted, construed and regulated by the laws of the State of Rhode Island
without resort to the conflict of laws rules of the State of Rhode Island.
23. Successors and Assigns. This Lease will bind and enure to the benefit of
the parties hereto and their respective successors and permitted assigns.
References herein to the parties will be deemed to include their respective
successors and permitted assigns.
24. Entire Agreement. This Lease contains all of the agreements of the
parties and may not be modified or amended except by written agreement.
25. Tenant's Rules and Regulations. The Tenant will comply with rules and
regulations, enforced in a non-discriminatory manner, attached to this Lease
as Exhibit C. The Landlord will have the right from time to time to alter or
amend the same. Upon delivery of a copy of reasonable altered or amended
rules and regulations to the Tenant, the Tenant will become bound by them and
will comply with the same. If there is a conflict between the rules and
regulations and any of the provisions of this Lease, the provisions of this
Lease will prevail. The Landlord will not be liable to the Tenant for
violation of any rules and regulations by other tenants, but Landlord will
use reasonable efforts (excluding litigation or defaulting a tenant) to
enforce the rules and regulations uniformly against all tenants in a
non-discriminatory manner.
26. Notice to Mortgagee. After receiving written notice from any person, firm
or other entity that it holds a mortgage which includes as part of the
mortgaged premises the Building, Tenant shall, so long as such mortgage is
outstanding, be required to give to such holder the same notice as it
required to be given to Landlord under the terms of this Lease; but such
notice may be given by Tenant to Landlord and such holder concurrently.
27. Assignment of Rents. With reference to any assignment by Landlord of
Landlord's interest in this Lease, or the rents payable hereunder,
conditional in nature or otherwise, which assignment is made to the holder of
a mortgage on the Building, Tenant agrees that the execution thereof by
Landlord, and the acceptance thereof by the holder of such mortgage, shall
not be deemed an assumption by such holder of any of the obligations of
Landlord hereunder, unless such holder shall, by written notice sent to
Tenant, specifically otherwise elect.
28. Mechanics' Liens. Tenant agrees immediately to discharge (either by
payment or by filing of the necessary bond, or otherwise) any mechanics,
materialmen's or other lien(s) against the Building, the
<PAGE>
Leased Premises, the Land and/or the Landlord's interest therein, which liens
may arise out of any payment due, or purported to be due, for any labor,
services, materials, supplies or equipment alleged to have been furnished to
or for Tenant in, upon or about the Building and/or the Leased Premises.
Landlord shall not be deemed to have consented to the placing of a lien on
the Building or Leased Premises by any person dealing with the Tenant.
29. No Brokerage. Tenant and Landlord warrant and represent, each to the
other, that they have dealt with no broker in connection with the
consummation of this Lease other than Landlord's broker, Commercial
Properties, Ltd. Landlord shall pay all commissions due to Commercial
Properties, Ltd. as a result of this Lease pursuant to the separate agreement
between Landlord and Broker. In the event of any brokerage claims against any
party predicated upon prior dealings with the other by any other broker, the
defaulting party agrees to defend the same and indemnify the other against
any such claim.
30. Provisions Binding, Limitation on Landlord's Liability, Etc. Except as
herein otherwise expressly provided, the terms hereof shall be binding upon
and shall inure to the benefit of the successors and assigns, respectively,
of Landlord and Tenant. The obligations of the Landlord shall be binding only
upon the assets of the Landlord which comprise the Land and the Building. No
individual partner, trustee, shareholder, officer, director or employee of
the Landlord shall be personally liable and the Tenant shall look solely to
Landlord's interest in the Land and Building in pursuit of its remedies. The
reference contained to successors and assigns of Tenant is not intended to
constitute a consent to assignment by Tenant, but has reference only to those
instances in which Landlord may later give written consent to a particular
assignment as required by the provisions hereof.
31. Estoppel Letter. Upon not less than ten (10) days' prior notice by
Landlord from time to time, Tenant agrees to execute, acknowledge and deliver
to Landlord, and to any assignee, mortgagee, lender or any other third party
which Landlord may designate, a statement in writing certifying that this
Lease is unmodified and in full force and effect and that Tenant has no known
defenses, offsets or counterclaims against its obligations to pay the rent,
additional rent and any other charges and to perform its other covenants
under this Lease (or, if there have been any modifications that the same is
in full force and effect as modified and stating the modifications and, if
there are any known defenses, off sets or counterclaims, setting them forth
in reasonable detail) , and a statement that, to the best of Tenant's
knowledge, Landlord is not in default hereunder (or if in default, the
general nature of such default). Any such statement delivered pursuant to
this Section may be relied upon by any prospective purchaser or mortgagee of
the Leased Premises, or any prospective assignee of any such mortgage.
<PAGE>
32. Security Deposit.
32.01 Security Deposit - Amount. Tenant, contemporaneously with the execution
of this Lease, has deposited with Landlord the sum set forth in Section 1.01
as the Security Deposit, if any, receipt of which is hereby acknowledged by
Landlord. The Security Deposit set forth in Section 1.01 shall be held by
Landlord, without liability for interest, as security for the faithful
performance by Tenant of all of the terms, covenants, and conditions of this
Lease by the Tenant to be kept and performed during the lease Term. If at any
time during the lease Term, any of the rent herein reserved shall be overdue
and unpaid, or any other sum payable by Tenant to Landlord hereunder shall be
overdue and unpaid, Landlord may, but shall not be required, at its sole
discretion, appropriate and apply any portion of said Security Deposit to the
payment of any such sum.
32.02 Application of Security Deposit. In the event of the failure of Tenant
to keep and perform any of the terms, covenants and conditions of this Lease
to be kept and performed by Tenant, then the Landlord at its sole option may
appropriate and apply the entire Security Deposit, or so much thereof as may
be necessary, to compensate the Landlord for loss or damage sustained or
suffered by the Landlord due to such breach on the part of the Tenant. Should
the entire Security Deposit, or any portion thereof, be appropriated and
applied by the Landlord, the Tenant shall, upon the written demand of
Landlord, forthwith remit to Landlord a sufficient amount in cash to restore
the Security Deposit to the original sum, and Tenant's failure to do so
within five (5) days after receipt of such demand shall constitute an event
of default hereunder. Should Tenant comply with all of such terms, covenants
and conditions and promptly pay all sums payable by Tenant to Landlord
hereunder, the Security Deposit shall be returned in full to Tenant within
thirty (30) days following the end of the Term of this Lease, or upon the
earlier termination of this Lease, minus any portion thereof which may have
been utilized by Landlord to cure any default or applied to any damage
suffered by Landlord. Neither said deposit, nor application thereof by
Landlord, as provided herein, shall be a bar or defense to any action
whatsoever which Landlord may at any time commence for a breach of any of the
covenants or conditions of this Lease.
32.03 Transfer of Deposit. The Landlord may deliver the funds deposited
hereunder by the Tenant to the purchaser of Landlord's interest in the Leased
Premises, in the event that such interest be conveyed, and thereupon Landlord
shall be discharged by Tenant Lessee from any further liability with respect to
such Security Deposit provided said purchaser assumes in writing Landlord's
obligations under this Lease (subject to and with the benefit of Section 30),
including obligations relating to the
<PAGE>
Security Deposit.
33. Special Mortgagee Provisions.
33.01 Rights of Mortgage Holders. In the event the holder of a mortgage shall
succeed to the interests of the Landlord such holder shall be liable to
perform all of the obligations of Landlord accruing from and after such
entry, subject to and with the benefit of all of the provisions of this
Lease. No Rent, additional rent or any other charge shall be paid more than
10 days prior to the due dates thereof and payments made in violation of this
provision shall (except to the extent that such payment are actually received
by a mortgagee in possession or in the process of foreclosing its mortgage)
be a nullity as against such mortgagee and Tenant shall be liable for the
amount of such payments to such mortgagee.
33.02 Mortgagee's Right to Cure Defaults. Notwithstanding anything contained
in this Lease to the contrary, no act or failure to act on the part of
Landlord which would entitle Tenant under the terms of this Lease, or by law,
to be relieved of Tenants obligations hereunder or to terminate this Lease,
shall result in a release or termination of such obligations or a termination
of this Lease unless (i) Tenant shall have first given written notice of
Landlord's act or failure to act to Landlord's mortgagees of which Tenant has
been given notice, specifying the act or failure to act on the part of
Landlord which could or would give basis to Tenant's rights; and (ii) such
mortgagees, after receipt of such notice, have failed or refused to correct
or cure the condition complained of within sixty (60) days thereafter; but
nothing contained in this Section shall be deemed to impose any obligation on
any such mortgagees to correct or cure any such condition.
34. option to Extend.
34.01 Extended Term. The Tenant is hereby given the option to extend the Term
of this Lease for a single term of five (5) years at the expiration of the
initial Term (the "Extended Term") . This Lease shall be deemed to be
extended at the end of the Term hereof for the Extended Term upon and subject
to the following terms and conditions:
(a) There shall not exist at the time of the exercise of the option to extend
the Term or at the commencement date of the Extended Term any default or
event of default under this Lease; and
(b) Tenant shall have given Landlord written notice of Tenant's exercise of
its option to extend this Lease on or before the date occurring not later
than twelve (12) months prior to the Termination Date.
34.02 Terms of Extension. All terms and provisions of this Lease
<PAGE>
shall apply to the Extended Term, except for the amount of annual base Rent
and additional rent for Operating Expenses and real estate taxes payable
therefor, which shall be equal to the current fair market rental rate for all
such items of rent and additional rent. In no event, however, shall the base
Rent and additional rent be less than the base Rent and additional rent
payable f or the last year of the prior Term. In the event that the Tenant
fails to provide the notice described in subparagraph (ii) above, within the
time set forth therein, the Tenant shall be deemed to have waived its option
to extend the Term for the Extended Term. Tenant shall have no further right
to extend this Lease beyond the Extended Term. Each reference in the Lease to
the "Term" shall be deemed to include any option term f or which the Tenant
has exercised its option to extend unless the context clearly requires a
different meaning.
Upon the Tenants exercising its option to extend, the parties shall attempt
to agree upon the f air market rental value of the Leased Premises. In the
event that the parties hereto cannot agree to such fair market rental value
on or before the date which is nine (9) months prior to the original
Termination Date of this Lease (the "Adjustment Date"), the fair market
rental value for such Extended Term shall be determined by binding appraisal
as follows:
(a) Either of Landlord or Tenant may give the other written notice after the
Adjustment Date designating an independent appraiser ("First Appraiser"). The
other party shall within fifteen (15) days thereafter designate a second
independent appraiser ("Second Appraiser") and the First Appraiser and Second
Appraiser so designated or appointed shall meet within ten (10) days after
the Second Appraiser is appointed. If, within fifteen (15) days after the
second Appraiser is appointed, the First Appraiser and Second Appraiser do
not agree upon the then fair market rental value of the Leased Premises, they
shall themselves appoint a Third Appraiser who shall be a competent and
impartial person; and in the event of their being unable to agree upon such
appointment within fifteen (15) days after the time aforesaid, the Third
Appraiser shall be selected by the parties themselves if they can agree
thereon within a further period of fifteen (15) days. If the parties do not
so agree then either party, on behalf of both, may request such appointment
by the then President of the Rhode Island Board of Realtors or any similar
association.
(b) In the event of the failure, refusal or inability of any appraiser to act, a
new appraiser shall be appointed in his stead, which appointment shall be made
in the same manner as hereinbefore provided for the appointment of such
appraiser so failing, refusing or being unable to act. Each party shall pay the
fees and expenses of the one of the two original appraisers appointed by such
party, or in whose stead, as above provided, such appraiser was appointed, and
one-half of the fees and expenses of the Third Appraiser, and all other
expenses, if any, shall be
<PAGE>
borne equally by both parties. Any appraiser designated to serve in
accordance with the provisions of this option to extend shall be
disinterested, shall be qualified to appraise real estate in Rhode Island of
the type covered by this option to extend, shall be a member of the American
Institute of Real Estate Appraisers (or any successor association or body of
comparable standing if such Institute is not then in existence), and shall
have been actively engaged in the appraisal of commercial real estate in
Rhode Island for a period of not less than five (5) years immediately
preceding his appointment. Each party will also pay their own attorneys' fees.
(c) The appraisers shall determine the fair market rental value of the Leased
Premises as of the date of appraisal. A decision joined in by two of the
three appraisers shall be the decision of the Appraisers and shall be binding
on the parties. After reaching a decision, the appraisers shall give written
notice thereof to Landlord and Tenant.
(d) If the appraisers fail to reach a decision within thirty (30) days after
the appointment of the Third Appraiser, the Appraisers shall average the
three appraisals if no appraisal is more than ten (10%) percent in variation
from the other two (2) appraisals and such average shall be the fair market
rental value of the Leased Premises. If there is any such variation of more
than ten (10%) percent, the appraisal process shall start over with the
appointment of new appraisers.
Notwithstanding the foregoing to the contrary, the Landlord and the Tenant
may at any time terminate the aforesaid appraisal process should they agree
on a fair market rental value for the Leased Premises for the extended term
in question.
In the event for any reason whatsoever the parties have not executed a
written instrument setting forth the annual base Rent and additional rent for
the Extended Term by the originally scheduled Termination Date for the
initial Term (including, without limitation, as a result of any dispute or
disagreement as to the annual base Rent for the Option Term), the Tenant
shall continue pay the annual base Rent specified in Section 1.01 increased
by ten (10%) percent (together with all additional rent) and when the new
rent has been determined, the Tenant shall pay to the Landlord any
underpayment and the Landlord shall refund any overpayment within a period of
thirty (30) days.
35. Right of First offer - Additional Space.
If at any time during the Term Landlord intends to lease the whole or any
portion of the remaining space in the Building, the Tenant shall have the right
of first refusal to lease the additional space (the "Additional Space")
comprising the remainder of the Building shown on the Site Plan
<PAGE>
attached hereto as Exhibit A-1. The term of the Tenant's lease of the
applicable Additional Space shall be the term offered to the prospective
tenant for the applicable Additional Space. Tenant's exercise of this right
of first refusal to lease the Additional Space is subject to the condition
that there shall not exist at the time of Tenant's attempted exercise of such
right of first refusal any event of default under this Lease.
Should the Landlord desire to lease such Additional Space, the Landlord shall
notify the Tenant in writing of its intention to lease the same. Such notice
shall set forth the rentable square footage involved, the location of the space,
the applicable rent including the applicable additional rent for taxes,
Operating Expenses and the like, the amount of any allowance for leasehold
improvements as well as the other applicable economic lease terms. The Landlord
agrees to provide the Tenant with the letter of intent or other document, if
any, setting forth the terms of the proposed lease transaction. Upon receipt of
such written notice, the Tenant shall have thirty (30) days to notify the
Landlord in writing that the Tenant is exercising its right of first refusal
pursuant to the terms of this Section. Upon Tenant's sending such notice to the
Landlord, the Tenant will be deemed to have agreed to lease the Additional Space
upon the terms set forth in the Landlord's aforesaid notice. If Tenant declines
to accept Landlord's offer, Landlord shall be free for a period of one hundred
fifty (150) days to lease the subject space to a third party on terms no more
favorable to such party than those proposed to Tenant. If Landlord fails to
execute a lease on such terms upon the expiration of said one hundred fifty
(150) day period (the "Revival Date"), Tenant's first refusal rights shall again
apply. The annual base rent and additional rent including, without limitation,
additional rent for taxes and operating expenses as defined and described in the
Landlord's notice to the Tenant shall be the amounts to be paid by the Tenant
for the Additional, Space even if the additional rent is to be paid without a
base year and: covers a broader' category of items. The Tenant and the Landlord
shall, within ten (10) business days after the date of the Tenant's notice to
the Landlord that it has exercised its right of first refusal hereunder with
respect to the Additional Space, execute an amendment to this Lease, which of
the Tenant and add the Additional Space to this Lease for all purposes including
the calculation of the Tenant's Percentage and the payment of additional rent
for Operating Expenses. If the proposed term for the Additional Space to be
leased by the Tenant pursuant to the exercise of the foregoing right of first
refusal extends beyond the end of the Term of this Lease, Tenant's exercise of
the within right of first refusal shall be conditioned upon Tenant's extending
the Term so as to make it coterminous with the proposed term of the first
refusal space. In such event the base Rent during such extension of the Term
beyond the original ten (10) year Term for the Leased Premises
<PAGE>
(excluding the Additional Space) shall be the fair rental value determined
under Section 34.02. The fair rental value shall be determined pursuant to
the dates set forth in Section 34.02 with the Tenant being deemed to have
exercised its option to extend on the first day of the last year of the Term.
Upon the expiration of such new Term for the Leased Premises including
Additional Premises, the Tenant shall have the option to extend set forth in
Section 34.01; provided, however, if the Term of the Lease has been extended
for five (5) or more years as provided above in order to cause this Lease to
be coterminous with the term of the first refusal space, the Tenant will no
longer have an option to extend under Section 34.01.
In the event the Tenant should desire to lease any available space
in the Building prior to receiving any notice from the Landlord in connection
with Tenant's right of first refusal, the Tenant may notify the Landlord of
such desire and, in such notice, the Tenant shall specify the base rent and
additional rent the Tenant is willing to pay for such space. The Tenant
acknowledges and agrees that the Landlord is not obligated to lease any space
in the Building to the Tenant except in connection with Tenant's exercise of
its right of first refusal. The Landlord is not obligated to accept the
proposed rental offered by the Tenant and the Landlord may elect to attempt
to lease any such space to another tenant subject only to the right of first
refusal set forth herein.
Notwithstanding anything contained herein to the contrary this right of first
refusal and the right to lease the Additional Space as aforesaid may not be
assigned apart from this Lease and shall automatically expire on the date of
the expiration of such right or the earlier termination of this Lease.
36. Financial Information. The Tenant agrees to provide its most recent
financial statements and other relevant financial information covering Tenant
and the Guarantor promptly upon Landlord's request for same from time to
time. If Tenant or Guarantor is a publicly traded company and Landlord is
able to obtain the applicable financial statements and financial information
for such entity from another source, the Tenant shall not be obligated to
provide said financial statements and information to Landlord.
37. Force Majeure. Except as otherwise set forth herein with respect to
Landlord's construction and delivery obligations under Section 4 and excluding
the exercise of the right to cure by a mortgagee pursuant to Section 33.02 in
connection with Landlord failures under Section 4, in any case where either
party hereto is required to do any act, delays caused by or resulting from Act
of God, war, civil commotion, fire or other casualty, labor difficulties,
general shortages of labor, materials or equipment, government regulations or
any other unavoidable delays shall
<PAGE>
not be counted in determining the time when the performance of such act must
be completed, whether such time be designated by a fixed time, a fixed period
of time or "a reasonable time." Notwithstanding the foregoing, the concept of
unavoidable delay or force majeure shall not apply to the payment of base
Rent, additional rent or any other payments under this Lease.
38. Landlord's Representations, Warranties and Covenants. Landlord represents
and warrants to Tenant that (i) Landlord holds fee simple title to the Leased
Premises, Building and Land, free and clear of any encumbrance that may
interfere with the use of the same by the Tenant for the uses contemplated
under this Lease; and (ii) Landlord has full authority and capacity to enter
into this Lease and all necessary corporate and partnership actions and
consents necessary for Landlord to enter into this Lease have been taken or
obtained. Landlord covenants to Tenant that upon completion of the Landlord's
Work, the Leased Premises, Building and Land will be in material compliance
with all applicable zoning and land use laws.
39. Landlord's Hazardous Waste Indemnity. To the best of Landlord's
knowledge, Landlord represents and warrants to Tenant that the Leased
Premises, Building and Land do not contain any "hazardous substances" or
"hazardous waste", as defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, and regulations thereunder, the
Resource Conservation and Recovery Act, as amended, and regulations
thereunder, and the Federal Clean Water Act, and regulations thereunder, or
oil, petroleum products, asbestos, radioactive materials or similar regulated
substances (collectively, "Hazardous Materials") other than the Hazardous
Materials, if any, identified in the "Level 1 Environmental Site Assessment
Report" dated April 27, 1995 (the "Environmental Report"), a copy of which
has been provided to Tenant. Landlord hereby agrees to defend, indemnify and
hold Tenant harmless from and against any and all clean-up costs, remediation
costs and reasonable legal fees incurred in connection with or arising out of
or relating in any way to the presence of Hazardous Materials as identified
by the Environmental Report as of the date hereof or the presence of
Hazardous Materials in or on the Land, the Building or the Leased Premises
caused solely by Landlord's activities on the Leased Premises, Building or
Land, but excluding any damages of the Tenant such as, without limitation,
any consequential or incidental damages incurred in connection with or
arising out of the presence of Hazardous Materials in or on the Building, the
Land and the Leased Premises. Tenant agrees to defend, indemnify and hold
Landlord harmless from and against any and all cleanup costs, remediation
costs and reasonable legal fees incurred in connection with the presence of
Hazardous Materials in or on the Building, the Land or the Leased Premises
caused by Tenant's or its agents', employees' or contractors' activities.
40. Notice of Lease. Upon request of either party, after the Tenant
<PAGE>
takes occupancy of the Leased Premises pursuant to Section 4.02 hereof, both
parties shall execute and deliver a notice of this Lease in form appropriate
for recording or registration, stating the Commencement Date and Termination
Date of the Lease and making reference to Tenant's extension, expansion and
first offer rights, and if this Lease is terminated before the Term expires,
an instrument in such form acknowledging the date of termination.
41. Landlord's Right to Cure Defaults. Landlord may, but shall not be
obligated to, cure, at any time, following sixty (60) days' prior notice to
Tenant, except in cases of emergency when no notice shall be required, any
default by Tenant under this Lease; and whenever Landlord so elects, all
costs and expenses incurred by Landlord, including reasonable attorneys' fees
and expenses, in curing such a default shall be paid by Tenant to Landlord as
additional rent on demand, together with interest thereon at the maximum rate
permitted by law from the date of payment by Landlord to date of payment by
Tenant.
42. Balance of Building.
42.01. In the event any portion of the Building not included within the
Leased Premises is used for a purpose other than office use and uses
ancillary thereto (the "Other Use") , the following provisions shall apply:
(a) In the event, at the Landlord's option, the Operating Expenses
for such additional portion of the Building are included in the Operating
Expenses payable by the Tenant under Section 6.04, Landlord shall identify
those Operating Expenses that are attributable primarily to the Other Use, or
same higher as a result of the Other Use than the would be if the space
subject to the Other Use were being used for office purposes, and Landlord
shall remove such costs and increased costs from the Operating Expenses for
which Tenant would otherwise be liable hereunder;
(b) If the Other Use generates more parking demand than office
use would, the Permanent Parking Spaces shall become Tenant's exclusive
parking spaces. In the event any portion of the Building not included within
the Leased Premises is used for retail uses, the Permanent Parking Spaces
shall be the Tenant's exclusive use, and Landlord and Tenant shall cooperate
reasonable and in good faith, at Landlord's sole cost and expense, to
identify the Permanent Parking Spaces as being reserved for the Tenant; and
(c) If the Other Use places a greater demand on Building operating
systems, such increased demand shall be accommodated at Landlord's expense in
a manner that will not diminish the availability or capacity of such systems
to service the Leased Premises.
<PAGE>
42.02. The portion of the Building not included within the Leased Premises
shall, whether occupied of not, be kept in safe, secure and clean condition, at
Landlord's sole cost and expense.
IN WITNESS WHEREOF, the Landlord and Tenant have executed this instrument under
seal as of the day and year first above written.
LANDLORD
THE FOUNDRY ASSOCIATES, L.P.
By: /s/ Antonio Guerra
Antonio Guerra
General Partner
TENANT
INSO PROVIDENCE CORPORATION
By: /s/ Graham Marshall
Name: Graham Marshall
Title: General Manager
<PAGE>
EXHIBIT 10.9
STANDARD FORM LEASE
PARTIES. This Lease, executed in duplicate at Cupertino, California, on
April 11, 1996, by and between Berg & Berg Developers, a California General
Partnership, and Sherpa Corporation, a California Corporation, hereinafter
called respectively Lessor and Lessee, without regard to number or gender.
Use: WITNESSETH: That Lessor hereby leases to Lessee, and Lessee hires
from Lessor, for the purpose of conducting therein office, research and
development, light manufacturing, and warehouse activities, and any other
legal activity, and for no other purpose without obtaining the prior
written consent of Lessor.
PREMISES: The real property with appurtenances as shown on Exhibit A. 1 (the
"Premises") situated in the City of Milpitas, County of Santa Clara, State
of California, and more particularly described as follows:
Lessees portion of the Premises is 49,954 square feet of building,
including all improvements thereto, as shown on Exhibit A.2 including
the right to use up to 184 unreserved parking spaces. The address for
the leased portion of the Premises is 1315 McCandless Drive, Milpitas,
California. The pro-rata share of the building is 63.4%. Lessee's
portion of the Premises and pro-rata share shall be adjusted per the
Commencement Date Memorandum Section below.
TERM: The term shall be for eighty-four (84) months and 15 days unless
extended pursuant to Section 35 of this Lease (the "Lease Term"), commencing
on the 15th day of November, 1996, and ending on the 30th day of November,
2003.
Rent: Base rent shall be payable in monthly installments as follows:
<TABLE>
<CAPTION>
Base rent Estimated CAC Total
--------- ------------- ------
<S> <C> <C> <C>
Months 1 through 12 $46,957 $10,560* $57,517
</TABLE>
Monthly base rent to increase by 3% on the annual anniversary of the
Commencement Date each year during the Lease Term over the prior year's rent.
CAC charges to be adjusted per Common Area Charges Section below.
Base rent as scheduled above shall be payable in advance on or before the
first day of each calendar month during the Lease Term. The term "Rent," as
used herein, shall be deemed to be and to mean the base monthly rent and all
other sums required to be paid by Lessee pursuant to the terms of this Lease.
Rent shall be paid in lawful money of the United States of America, without
offset or deduction, and shall be paid to Lessor at such place or places as
may be designated from time to time by Lessor. Rent for any period less than
a calendar month shall be a pro rata portion of the monthly installment. Upon
execution of this Lease, Lessee shall deposit with Lessor the first month's
rent.
COMMON AREA CHARGES: Lessee shall pay to Lessor, as additional Rent, an
amount equal to Lessee's prorata share of the total common area charges of
the Project and sixty-three and one-half percent (63.4%) of the total common
area charges for the Premises as defined below (the common area charges for
the Project and the common area charges for the Premises collectively
referred to herein as ("CAC")). Lessee shall pay to Lessor as Rent, on or
before the first day of each calendar month during the Lease Term, subject to
adjustment and reconciliation as provided hereinbelow, the sum of Ten
Thousand Five Hundred Sixty Dollars ($10,560), said sum representing Lessee's
estimated monthly payment of Lessee's percentage share of CAC. It is
<PAGE>
understood and agreed that Lessee's obligation under this paragraph shall be
prorated to reflect the Commencement Date and the end of the Lease Term. Upon
execution of this Lease, Lessee shall deposit with Lessor the first monthly
estimated CAC.
Lessee's estimated monthly payment of CAC payable by Lessee during the
calendar year in which the Lease commences is set forth above. At or prior to
the commencement of each succeeding calendar year term (or as soon as
practical thereafter), Lessor shall provide Lessee with Lessee's estimated
monthly payment for CAC which Lessee shall pay as Rent. Within 120 days of
the end of the calendar year and of the end of the Lease Term or earlier
termination of this Lease, Lessor shall provide Lessee a statement of actual
CAC incurred for the preceding year including capital reserves or other
applicable period in the case of a termination year. If such statement shows
that Lessee has paid less than its actual percentage, then Lessee shall on
demand pay to Lessor the amount of such deficiency limited to 10% over the
estimated CAC on an annual basis. Provided however, the limitation set forth
above in this paragraph shall not apply to changes in the amount of property
taxes versus Lessor's estimate for property taxes included in the CAC. If
such statement shows that Lessee has paid more than its actual percentage,
then Lessor shall, at its option, promptly refund such excess to Lessee or
credit die amount thereof to the Rent next becoming due from Lessee. Lessor
reserves the right to revise any estimate of CAC if the actual or projected
CAC show an increase or decrease in excess of 10% from an earlier estimate
for the same period. In such event, Lessor shall provide a revised estimate
to Lessee, together with an explanation of the reasons therefor, and Lessee
shall revise its monthly payments accordingly. Lessor's and Lessee's
obligation with respect to adjustments at the end of the Lease Term or
earlier expiration of this Lease shall survive the Lease Term or earlier
termination.
As used in this Lease, CAC shall include but are not limited to, (i) all
items-identified in Paragraphs 5(b), 6, 9, 16 and 3 1; (ii) utility costs
related to the common areas of die McCandless Technology Park (the "Project"
as shown on Exhibit A.2) (iii) all costs and expenses including but not
limited to supplies, materials, equipment and tools used or required in
connection with the operation and maintenance of the Project-, (iv) licenses,
permits and inspection fees; (v) all other costs incurred by Lessor in
maintaining and operating the Project; (vi) all reserves for capital
replacements; and (vii) an amount equal to five percent (5%) of the actual
expenditures for the aggregate of all CAC, as compensation for Lessor's
accounting and processing services. Lessee shall have the right to review the
CAC applicable to this Lease annually upon reasonable notice.
SECURITY DEPOSIT: Lessee shall deposit with Lessor the sum of Fifty-Seven
Thousand Five Hundred Seventeen Dollars (S57,517) (the "Security Deposit").
The Security Deposit shall be held by Lessor as security for the faithful
performance by Lessee of all of the terms, covenants, and conditions of this
Lease applicable to Lessee. If Lessee commits a default as provided for
herein, including but not limited to a default with respect to the provisions
contained herein relating to the condition of the Premises, Lessor may (but
shall not be required to) use, apply or retain all or any part of the
Security Deposit for the payment of any amount which Lessor may spend by
reason of default by Lessee. If any portion of the Security Deposit is so
used or applied, Lessee shall, within ten days after written demand therefor,
deposit cash with Lessor in an amount sufficient to restore the Security
Deposit to its original amount. Lessees failure to do so shall be a default
by Lessee. Any attempt by Lessee to transfer or encumber its interest in- the
Security Deposit shall be mill and void. Upon execution of this Lease, Lessee
shall deposit with Lessor the Security Deposit. Subject to the conditions
herein, the Security Deposit shall be returned to Lessee at the end of the
Lease Term or earlier expiration of this Lease.
Page 2
<PAGE>
LATE CHARGES: Lessee hereby acknowledges that a late payment made by Lessee
to Lessor of Rent and other sums due hereunder will cause Lesser to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges, which may be imposed on
Lessor according to the terms or any mortgage or trust deed covering the
Premises. Accordingly, if any installment of Rent or any other sum due from
Lessee is not received by Lessor or Lessee's designee within ten (10) days
after such amount is due, Lessee shall pay to Lessor a late charge equal to
five (5%) percent of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payments made by Lessee. Acceptance of such late
charges by Lessor shall in no event constitute a waiver of Lessee's default
with respect to such overdue amount, nor shall it prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
Notwithstanding the above, Lessor agrees to waive one late charge per any
twelve month period during the Lease Term.
QUIET ENJOYMENT: Lessor covenants and agrees with Lessee that upon Lessee
paying Rent and performing its covenants and conditions under this Lease,
Lessee shall and may peaceably and quietly have, hold and enjoy the Premises
for the Lease Term, subject, however, to the rights reserved by Lessor
hereunder.
ACKNOWLEDGEMENT AND APPROVAL: Lessee hereby acknowledges that Lessee has
approved the site plan (attached as Exhibit A) and the Building floor plan
and elevations (attached as Exhibit C).
COMMENCEMENT DATE MEMORANDUM: When the actual Commencement Date is
determined, the parties shall execute a Commencement Date Memorandum setting
forth the Commencement Date, the actual gross exterior square footage of the
Premises, the Base rent, the CAC, Lessee's prorata share, and the TI
Allowance, but failure to do so shall not affect the continuing validity and
enforceability of this Lease, which shall remain in full force and effect.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
1. POSSESSION: Possession shall be deemed tendered and the Lease Term shall
commence upon the first to occur of the following (the "Commencement Date"):
(i) the Premises are Substantially Complete or (ii) Lessee occupies the
Premises and commences to conduct business operations or (iii) if Lessor is
prevented from or delayed in completing its work under Section 2 of this
Lease due to the acts or omissions of Lessee or Lessee's failure to meet the
Lessee approval deadlines set forth in Exhibit E, such work will be deemed
Substantially Complete as of the date on which it would have been
Substantially Complete had it not been for such Lessee-caused delay. It is
the intention of Lessee and Lessor that November 15, 1996 shall be the
Commencement Date except as provided in Section 2 of this Lease
"Substantially Complete" shall mean that: (i) Lessor has tendered possession
of the Premises to Lessee, (ii) Lessor has met all legal requirements for
occupancy, (iii) the Building Shell and Lessee Interior Improvements are
materially complete per the approved plans, exclusive of telephone or other
communication systems, punchlist items and there remains no incomplete or
Page 3
<PAGE>
defective items of work which would materially adversely affect Lessee's
intended use of the Premises and (iv) said interior of the building is in a
"broom clean" condition.
2. BUILDING SHELL AND LESSEE'S IMPROVEMENTS: The "Building Shell", as defined
in the attached Exhibit B shall be constructed at Lessor's sole cost.
The "Lessee Interior Improvements" shall be defined as all items not part of
the Building Shell and shall include all items on attached Exhibit D and
shall be constructed by independent contractors to be employed by and under
the supervision of Lessor, in accordance with complete plans and
specifications prepared by Lessor for submission to the City of Milpitas
("Lessee Improvement Plans"), complete with all mechanical and electrical
design, approved by Lessee, and then to be attached hereto as Exhibit D.
Lessee and its designated representatives, shall at all times during the
construction of the Lessee Interior Improvements have access to the Premises
to monitor the progress of construction and Lessor's compliance with its
obligation hereunder, provided however, that such access shall not
unreasonably interfere with the activities of Lessor or its contractors. If
Lessor notifies Lessee that any fittings, finishes or other materials
included in the specifications for the Lessee Interior Improvements cannot be
obtained within forty-five (45) days after placing an order therefor, Lessor,
subject to Lessee approval, shall be responsible for selecting alternative
fittings, finishes or other materials which can be obtained within said
forty-five (45) day period, or, if Lessee does not approve any alternative,
Lessee shall be responsible for any delay beyond said forty-five (45) day
period including Rent for each day of delay.
Lessor shall be responsible for ensuring that the Building Shell and Lessee
Interior Improvements conform to all applicable statutes, rules, regulations,
ordinances, and City of Milpitas Building Department interpretations
necessary for occupancy and the approved Lessee Improvement Plans.
For any contract to be entered into between Lessor and any contractor
furnishing labor or materials in connection with the construction of the
Lessee Interior Improvements where the payment due under such contract is
estimated by Lessor to be in excess of one hundred thousand dollars S
100,000, Lessor shall request bids from at least three (3) qualified
contractors selected by Lessor for bidding. Lessor will accept the lowest
bid. Lessee shall have the opportunity to review the qualified bidders list
and may select a bidder of their choice for any bid provided the bidder meets
Lessors reasonable requirements.
Lessor shall be responsible for and shall pay the cost of the Lessee Interior
Improvements up to the amount of One Million Two Hundred Forty-Eight Thousand
Eight Hundred Fifty Dollars ($1,248,850) (the "TI Allowance") as shown on
attached Exhibit D, being Twenty-Five Dollars S25.00 per square foot times
49,954 square feet. In the event the cost of the Lessee Interior Improvements
is less than the TI Allowance, the monthly base rent under this Lease shall
be decreased by $11.37 per month for every $1,000 dollar reduction in the
TI Allowance. Costs in excess of the TI Allowance, if any, will not be
incurred without the advance approval of Lessee. Any approved cost over the
TI Allowance shall be paid for by Lessee in cash within fifteen (15) days
after Lessor has provided Lessee with evidence that the work approved is
complete per plans. Lessor shall be entitled to a construction management fee
covering its overhead and profit on the costs incurred for the Lessee
Interior Improvements not to exceed six percent (6%). All costs for the
Lessee Interior Improvements shall be documented and subject to verification
by Lessee.
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Lessor shall use its best efforts to cause the Commencement Date of the initial
term to occur not later than November 15, 1996. Lessor shall advise Lessee on or
before May 15, 1996 if Lessor will be able to complete the Premises by November
15, 1996. If no notice is provided by this date, Lessor agrees to complete the
Premises by December 15, 1996 or pay any excess rent incurred by Lessee on its
existing lease, up to a maximum of 150%, from the earlier of December 15, 1996
or the date Lessor notifies Lessee in writing that the Premises shall be
completed, until such time as the Premises are completed. Lessor and Lessee
agree that having a Commencement Date after the earlier of December 15, 1996 or
the date Lessor notifies Lessee in writing that the Premises shall be completed
will cause Lessee and Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Accordingly, the
parties hereby agree that Lessors payment to Lessee of excess rent specified
herein represents a fair and reasonable settlement for both parties and neither
party shall have further liability to the other for any damages. If the
Commencement Date has not occurred by February 15, 1997, Lessee may at its sole
option, by written notice to Lessor, have the right to terminate this Lease at
any time after February 15, 1997 until the Commencement Date. Notwithstanding
anything to the contrary herein, all dates stated herein shall be extended one
day for each day Lessor is unable to Substantially Complete the Premises due to
acts of God, one day for each day Lessor is unable to Substantially Complete the
Premises due to Lessee delays, one day for each day Lessor is unable to
Substantially Complete the Premises due to governmental actions (other than
governmental action of refusing to approve work which fails to comply a with the
law or the building permit) which occurs after receipt of normal building
permits, one day for each day over thirty (30) days that the City of Milpitas
requires to issue a building permit, and one day for each day Lessee fails to
meet Lessee deadlines for approvals as shown on attached Exhibit E. Lessee shall
have a minimum of 3 business days to approve or disapprove any preliminary plans
or change orders and a minimum of 10 business days to approve or disapprove any
final plans. If Lessee does not disapprove any plans or change orders within the
time period set forth herein in writing, Lessor may proceed on the basis that
the plans or change orders are approved by Lessee. If plans or change orders are
disapproved, Lessee shall state the reason for disapproval and Lessor and Lessee
shall act in good faith to resolve any issues.
2.1 ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: Lessor represents that
the Premises will be in good order and repair, and comply with all requirements
for occupancy and all plans, specifications, designs and blue prints attached
hereto as of the Commencement Date. Lessee agrees on the last day of the Lease
Term, or on the sooner termination of this Lease. to surrender the Premises to
Lessor in Good Condition and Repair. Good Condition and Repair ("Good Condition
and Repair") shall not mean original condition, but shall mean that the Premises
are in a commercially acceptable condition suitable for occupancy by a
reasonable lessee. The interior walls of all office and warehouse areas, the
floors of all office and warehouse areas, all suspended ceilings and any
carpeting are to be cleaned and in Good Condition and Repair. Lessee also agrees
to surrender unto Lessor all alterations, additions, and improvements (not
personal property and trade fixtures) which may have been made in, to, or on the
Premises by Lessee, except that Lessee shall ascertain from Lessor, within (30)
days before the end of the Lease Term or earlier termination of this Lease,
whether Lessor desires to have the Premises or any part or parts thereof
restored to their condition as of the Commencement Date of this Lease; if Lessor
shall so desire, then Lessee shall restore said Premises or such part or parts
thereof before the end of tile Lease Term or earlier termination of this Lease
at Lessee's sole cost and expense. Lessee, on or before the end of the Lease
Term or sooner termination of this Lease, shall remove all its personal property
and trade fixtures from the Premises, and all such property not so removed shall
be deemed to be abandoned by Lessee. Lessee shall reimburse Lessor for all
disposition costs incurred by Lessor relative to Lessee's abandoned property. If
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the Premises are not surrendered at the end of the Lease Term or earlier
termination of this Lease, Lessee shall indemnify Lessor against loss or
liability resulting from any delay caused by Lessee in surrendering the Premises
including, without limitation, any claims made by any succeeding Lessee founded
on such delay.
3. USES PROHIBITED: Lessee shall not commit or suffer to be committed, any
waste upon the Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant in or around the buildings in
which the subject Premises are located or allow any sale by auction upon the
Premises, or allow the Premises to be used for any improper, immoral,
unlawful or objectionable purpose, or place any loads upon the floor, walls,
or ceiling which may endanger the structure, or use any machinery or
apparatus which will in any mariner vibrate or shake the Premises or the
building of which it is a part, or place any harmful liquids in the drainage
system of the building. No waste materials or refuse shall be dumped upon or
permitted to remain upon any part of the Premises outside of the building
proper. No materials, supplies, equipment, finished products or semi-finished
products, raw materials or articles of any nature shall be stored upon or
permitted to remain on any portion of the Premises outside of the building
structure, unless approved by the local, state federal or other applicable
governing authority. Lessor consents to Lessee's use of materials which are
incidental to the normal, day-to-day operations of any office user, such as
copier fluids, cleaning materials, etc., but this does not relieve Lessee of
any of its obligations not to contaminate the Premises or related real
property or violated any Hazardous Materials Laws.
4. ALTERATIONS AND ADDITIONS: Lessee shall not make, or suffer to be made, any
alteration or addition to said Premises, or any part thereof, without the
express, advance written consent of Lessor, any addition or alteration to said
Premises, except movable furniture, movable partitions, and trade fixtures,
shall become at once a part of the realty and belong to Lessor at the end of the
Lease Term or earlier termination of this Lease. Alterations and additions which
arc not deemed as trade fixtures shall include HVAC systems, lighting systems,
electrical systems, non-movable partitioning, carpeting, or any other
installation which has become an integral part of the Premises. Lessee agrees
that it will not proceed to make such alterations or additions until all
required government permits have been obtained and after having obtained consent
from Lessor to do so, until five (5) days from the receipt of such consent, so
that Lessor may post appropriate notices to avoid any liability to contractors
or material suppliers for payment for Lessee's improvements. Lessee shall at all
times permit such notices to be posted and to remain posted until the completion
of work. At the end of the Lease Term or earlier termination of this Lease,
Lessee shall remove and shall be required to remove its special tenant
improvements and all related equipment installed by Lessee, unless approved by
Lessor not to remove, at or during the Lease Term and Lessee shall return the
Premises to the condition that existed before the installation of the special
tenant improvements. Notwithstanding the above, Lessor agrees to allow any
reasonable alterations and improvements and will use its best efforts to notify
Lessee at the time of approval if such improvements or alterations are to be
removed at Lease Expiration or earlier termination of this Lease.
Notwithstanding the above, Lessee shall have the right, during the term of this
Lease, to make improvements to the Premises at their sole cost and expense of
S25,000 per year with no approval from Lessor, provided they are not structural
and subject to the requirement to remove the subject improvements at the end of
the Lease Term or earlier termination of the Lease.
5. MAINTENANCE OF PREMISES:
(a) Lessee shall at its sole cost and expense keep and maintain the
interior of the Premises, including, but not limited to, all lighting
systems, temperature control systems and plumbing systems, in Good
Condition and Repair, including any
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required replacements. Lessee shall maintain all wall surfaces and floor
coverings in Good Condition and Repair, free of holes, gouges or defacements.
(b) Lessor shall keep and maintain in Good Condition and Repair including
replacements, at Lessee's expense, based on a pro-rata share of cost based on
square footage or costs directly related to Lessee's use of the Premises the
following, which shall be included in the monthly CAC:
1. The exterior of the building, any appurtenances and every part thereof,
including but not limited to, glazing, sidewalks, parking areas, electrical
systems, HVAC systems, roof membrane, and painting of exterior walls.
2. The HVAC by a service contract with a licensed air conditioning and
heating contractor which contract shall provide for a minimum of bi-monthly
maintenance of all air conditioning and heating equipment at the Premises
including HVAC repairs or replacements which are either excluded from such
service contract or any existing equipment warranties.
3. The landscaping by a landscape contractor to water, maintain, trim and
replace, when necessary, any shrubbery and landscaping at the Premises.
4. The roof membrane by a service contract with a licensed reputable
roofing contractor which contract shall provide for a minimum of
semi-annual maintenance, cleaning of storm gutters, drains, removing of
debris and trimming overhanging trees, repair of the roof and application
of a finish coat every five years at the Premises.
5. Extermination services.
6. Fire monitoring services.
Notwithstanding the provisions of Section 5(b) above, Lessor agrees that for the
first twelve months of the initial lease term, Lessor shall pay the repair and
replacement costs for die roof and HVAC system, provided however, that the
failure or repair is not caused by the negligence or misconduct of Lessee or
Lessee's Agents. Lessee has the obligation throughout the Lease Term, including
the first twelve months of the initial lease term, to pay for all normal
maintenance and related service contracts.
(c) Lessee hereby waives any and all tights to make repairs at the expense of
Lessor as provided in Section 1942 of the Civil Code of the State of California,
and all rights provided for by Section 1941 of said Civil Code.
(d) Lessor shall be responsible for the repair of any structural defects in the
Premises including the roof structure (not membrane), exterior walls and
foundation during the Lease Tenn.
(e) Immediately prior to the end of the Lease Term, Lessee shall provide Lessor
with a Tenant Report indicating that the Premises occupied by Lessee is free of
any active termite infestation and any related damages, if any, have been
repaired by Lessee at Lessee's sole cost and expense.
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6. HAZARD INSURANCE: Lessee shall not use, or permit said Premises, or any part
thereof, to be used, for any purpose other than that for which said Premises are
hereby leased; and no use shall be made or permitted to be made of the Premises,
nor acts done, which may cause a cancellation of any insurance policy covering
said building, or any part thereof, nor shall Lessee-sell or permit to be kept',
used or sold, in or about said Premises, any article which may be prohibited by
a standard form fire insurance policy. Lessee shall, at its sole cost and
expense, comply with any and all requirements, pertaining to said Premises, of
any insurance organization or company, necessary for the maintenance of
reasonable fire and general liability insurance, including flood, covering said
building and appurtenances. Lessor agrees to purchase and keep in force fire and
extended coverage insurance covering loss or damage to the Premises in amounts
not to exceed the full replacement cost of said Premises as reasonably
determined by Lessor, with proceeds payable to Lessor. Lessor may, but shall not
be obligated to obtain flood insurance and Lessor shall have no liability to
Lessee if Lessor elects not to obtain flood insurance. Lessee acknowledges that
the insurance referenced above does not include coverage for Lessee's personal
property. In the event of a loss per the insurance provisions of this paragraph,
Lessee shall be responsible for deductibles up to a maximum of $5,000 per
occurrence. Lessee agrees to pay to the Lessor as additional Rent, on demand,
the full cost of said insurance as evidenced by insurance billings to Lessor,
plus an accounting fee equal to five percent of such insurance costs. If said
insurance billings cover the Premises, and Lessee does not occupy the entire
Premises, the insurance premiums and deductibles shall be allocated to the
portion of the Premises occupied by Lessee on a pro-rata square footage or other
equitable basis, as determined by Lessor. It is understood and agreed that
Lessee's obligation under this paragraph will be prorated to reflect the
Commencement Date and the end of the Lease Term. Lessee agrees to pay to the
Lessor as additional Rent, on demand, the full cost of said insurance as
evidenced by insurance billings to the Lessor which shall be included in
Lessee's monthly CAC.
Lessor and Lessee hereby waive any rights each may have against die other
related to any loss or damage caused to Lessor or Lessee as the case may be, or
to the Premises or its contents, and which may arise from any risk generally
covered by fire and extended coverage insurance, including flood. The parties
shall provide that their respective insurance policies insuring the property or
die personal property include a waiver of any right of subrogation which said
insurance company may have against Lessor or Lessee, as the case may be. Lessor
shall maintain in full force and effect, a policy of rental loss insurance, in
an amount equal to the amount of Rent payable by Lessee commencing on the date
of loss during the next ensuing one (1) year, as reasonably determined by Lessor
with proceeds payable to Lessor ("Loss of Rents Insurance"). Lessee shall
reimburse Lessor for the full cost of said rental loss insurance coverage.
7. ABANDONMENT: Lessee shall not vacate or abandon the Premises at any time
during the Lease Term; and if Lessee shall abandon, vacate or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee and left on the Premises shall be deemed to be
abandoned, at the option of Lessor. Notwithstanding the above, the Premises
shall not be considered vacated or abandoned if Lessee maintains the Premises in
Good Condition and Repair, provides security and is not in default.
8. FREE FROM LIENS: Lessee shall keep the subject Premises and the property in
which the subject Premises are situated, free from any and all liens including
but not limited to liens arising out of any work performed, materials furnished,
or obligations incurred by Lessee. However, the Lessor shall allow Lessee to
contest a lien claim, so long as the claim is discharged prior to
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any foreclosure proceeding being initiated against the property and provided
Lessee provides Lessor a bond if the lien exceeds $5,000.
9. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Lessee shall, at its sole cost and
expense, comply with all of the requirements of all local, municipal, state and
federal authorities now in force, or which may hereafter be in force, pertaining
to Lessee's use and occupancy of the said Premises, and shall faithfully observe
in the use of the Premises all local and municipal ordinances and state and
federal statutes now in force or which may hereafter be in force.
10. LESSEE'S INSURANCE: Lessee, as a material part of the consideration to be
rendered to Lessor, hereby waives all claims against Lessor and Lessor's Agents
for damages to goods, wares and merchandise, and all other personal property in,
upon or about said Premises, and for injuries to persons in, upon or about said
Premises, from any cause arising at any time, and Lessee will hold Lessor and
Lessor's Agents exempt and harmless from any damage or injury to any person, or
to the goods, wares and merchandise and all other personal property of any
person, arising from the use or occupancy of the Premises by Lessee, or from the
failure of Lessee to keep the Premises in good condition and repair, as herein
provided. Lessee shall secure and keep in force a standard policy of commercial
general liability insurance and property damage policy covering the Premises,
including parking areas, insuring the Lessee. A certificate of said policy
naming Lessor as an additional insured shall be delivered to Lessor and will
have a combined single limit for both bodily injury, death and property damage
in an amount not less than five million dollars ($5,000,000.00). The limits of
said insurance shall not, however, limit the liability of Lessee hereunder.
Lessee shall obtain a written obligation on the part of the insurer to notify
Lessor 30 days in advance in writing before any cancellation thereof. Lessee
shall obtain, at Lessee's sole cost and expense, a policy of fire and extended
coverage insurance including coverage for direct physical loss special form, and
a sprinkler leakage endorsement insuring the personal property of Lessee. 'Me
proceeds from any personal property damage policy shall be payable to Lessee.
Lessee shall, at its sole cost and expense, comply with all of the insurance
requirements of all local, municipal, state and federal authorities now in
force, or which may hereafter be in force, pertaining to Lessee's use and
occupancy of the said Premises.
11. ADVERTISEMENTS AND SIGNS: Lessee shall not place or permit to be placed, in,
upon or about the Premises any unusual or extraordinary signs, or any signs not
approved by the city, local, state, federal or other applicable governing
authority. Lessee shall not place, or permit to be placed upon the Premises, any
signs, advertisements or notices without the written consent of the Lessor, and
such consent shall not be unreasonably withheld. A sign so placed on the
Premises shall be so placed upon the understanding and agreement that Lessee
will remove same at the end of the Lease Term or earlier termination of this
Lease and repair any damage or injury to the Premises caused thereby, and if not
so removed by Lessee, then Lessor may have the same removed at Lessee's expense.
Lessee shall be entitled to place its sign on the building monument similar to
existing signs.
12. UTILITIES: Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities supplied to the Premises. Any charges for sewer
usage or related fees shall be the obligation of Lessee and paid for by
Lessee. If any such services are not a separately metered to Lessee, Lessee
shall pay a reasonable proportion of all charges which are jointly metered,
the determination to be made by Lessor acting reasonably and on any equitable
basis.
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13. ATTORNEY'S FEES: In case suit should be brought for the possession of the
Premises, for the recovery of any sum. due hereunder, or because of the breach
of any other covenant herein, the losing party shall pay to the prevailing party
reasonable attorneys fee which shall be deemed to have accrued on the
commencement of such action and shall be enforceable whether or not such action
is prosecuted to judgment.
14.1 DEFAULT: The occurrence of any of the following shall constitute a default
and breach of' this Lease by Lessee: a) Any failure by Lessee to pay Rent or to
make any other payment required to be made by Lessee hereunder when due if not
cured within ten (10) days after written notice thereof by Lessor to Lessee; b)
The abandonment or vacation of the Premises by Use except as provided in Section
7; c) A failure by Lessee to observe and perform any other provision of this
Lease to be observed or performed by Lessee, where such failure continues for
thirty days after written notice thereof by Lessor to Lessee, provided,
however, that if the nature of such default is such that the same cannot be
reasonably cured within such thirty (30) day period, Lessee shall not be deemed
to be in default if Lessee shall, within such period, commence such cure and
thereafter diligently prosecute the same to completion; d) The making by Lessee
of any general assignment for the benefit of creditors; the filing by or against
Lessee of a petition to have Lessee adjudged a bankrupt or of a petition for
reorganization or arrangement under any law relating to bankruptcy, c) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets or Lessee's interest in this Lease, or the attachment, execution
or other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease.
14.2 SURRENDER OF LEASE: In the event of any such default by Lessee, then in
addition to any other remedies available to Lessor at law or in equity, Lessor
shall have the immediate option to terminate this Lease before the end of the
Lease Term and all rights of Lessee hereunder, by giving written notice of such
intention to terminate. In the event that Lessor terminates this Lease due to a
default of Lessee, then Lessor may recover from Lessee: a) the worth at the time
of award of any unpaid Rent which had been earned at the time of such
termination; plus b) the worth at die time of award of unpaid Rent which would
have been earned after termination until the time of award exceeding the amount
of such rental loss that the Lessee proves could have been reasonably avoided-,
plus c) the worth at the time of award of the amount by which the unpaid Rent
for the balance of the Lease Term after. the time of award exceeds the amount of
such rental loss that the Lessee proves could have been reasonably avoided-,
plus d) any other amount necessary to compensate Lessor for all the detriment
proximately caused by Lessees failure to perform his obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom; and e) at Lessors election, such other amounts in addition to or in
lieu of die foregoing as may be permitted from time to time by applicable
California law. As used in (a) and (b) above, the "worth at the time of award"
is computed by allowing interest at the rate of Wells Fargo's prime rate plus
two percent (2%) per annum. As used in (c) above, the "worth at the time of
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
14.3 RIGHT OF ENTRY AND REMOVAL: In the event of any such default by Lessee,
Lessor shall also have the right, with or without terminating this Lease, to
reenter the Premises and remove all persons and property from the Premises; such
property may be removed and stored in a public warehouse or elsewhere at the
cost of and for the account of Lessee.
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14.4 ABANDONMENT: In the event of the vacation or abandonment, except as
provided in Section 7, of the Premises by Lessee or in the event that Lessor
shall elect to re-enter as provided in paragraph 14.3 above or shall take
possession of the Premises pursuant to legal proceeding or pursuant to any
notice provided by law, and Lessor does not elect to terminate this Lease as
provided in paragraph 14.2 above, then Lessor may from time to time, without
terminating this Lease, either recover all Rent as it becomes due or relet the
Premises or any part thereof for such term or terms and at such rental rates and
upon such other terms and conditions as Lessor, in its sole discretion, may deem
advisable with the right to make alterations and repairs to the Premises. In the
event that Lessor elects to relet the Premises, then Rent received by Lessor
from such reletting shall be applied; first, to the payment of any indebtedness
other than Rent due hereunder from Lessee to Lessor, second, to the payment of
any cost of such reletting; third, to the payment of the cost of any alterations
and repairs to the Premises; fourth, to the payment of Rent due and unpaid
hereunder, and the residue, if any, shall be held by Lessor and applied to the
payment of future Rent as the same may become due and payable hereunder. Should
that portion of such Rent received from such reletting during any month, which
is applied by the payment of Rent hereunder according to die application
procedure outlined above, be less than the Rent payable during that month by
Lessee hereunder, then Lessee shall pay such deficiency to Lessor immediately
upon demand therefor by Lessor. Such deficiency shall be calculated and paid
monthly. Lessee shall also pay to Lessor, as soon as ascertained, any costs and
expenses incurred by Lessor in such reletting or in- making such alterations and
repairs not covered by the rentals received from such reletting.
14.5 NO IMPLIED TERMINATION: No re-entry or taking possession of the Premises by
Lessor pursuant to 14.3 or 14.4 of this Article 14 shall be construed as an
election to terminate this Lease unless a written notice of such intention is
given to Lessee or unless the termination thereof is decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by
Lessor because of any default by Lessee, Lessor may at any time after such
reletting elect to terminate this Lease for any such default.
15. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at
the option of Lessor, terminate all or any existing subleases or sub tenancies,
or may, at the option of Lessor, operate as an assignment to him of any or all
such subleases or sub tenancies.
16. TAXES: Lessee shall pay and discharge punctually before a penalty is due,
all real estate taxes, personal property taxes, taxes based on vehicles
utilizing parking areas in the Premises, taxes computed or based on rental
income (other than federal, state and municipal net income taxes), environmental
surcharges, privilege taxes, excise taxes, business and occupation taxes, school
fees or surcharges, gross receipts taxes, sales and/or use taxes, employee
taxes, occupational license taxes, water and sewer taxes, assessments
(including, but not limited to, assessments for public improvements or benefit),
assessments for local improvement and maintenance districts,. and all other
governmental impositions and charges of every kind and nature whatsoever,
regardless of whether now customary or within the contemplation of the parties
hereto and regardless of whether resolution from increased rate and/or
valuation, or whether extraordinary or ordinary, general or special, unforeseen
or foreseen, or similar or dissimilar to any of the foregoing (all of the
foregoing being hereinafter collectively called "Tax" or "Taxes") which, at any
time during the Lease Term, shall be applicable or against the Premises, or
shall become due and payable and a lien or charge upon the Premises under or by
virtue of any present or future laws, statutes, ordinances, regulations, or
other requirements of any governmental authority whatsoever. The term
"Environmental Surcharge" shall include any and all
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expenses, taxes, charges or penalties imposed by the Federal Department of
Energy, Federal Environmental Protection Agency, the Federal Clean Air Act,
or any regulations promulgated thereunder, or any other local, state or
federal governmental agency or entity now or hereafter vested with the power
to impose taxes, assessments or other types of surcharges as a means of
controlling or abating environmental pollution or die use of energy in regard
to the use, operation or occupancy of the Premises. The term "Tax" shall
include, without limitation, all taxes, assessments, levies, fees,
impositions or charges levied, imposed, assessed, measured, or based in any
manner whatsoever (i) in whole or in part on die Rent payable by Lessee under
this Lease, (ii) upon or with respect to the use, possession, occupancy,
leasing, operation or management of the Premises, (iii) upon this transaction
or any document to which Lessee is a party creating or transferring an
interest or an estate in the Premises, (iv) upon Lessee's business operations
conducted at the Premises, (v) upon, measured by or reasonably attributable
to the cost or value of Lessee's equipment, furniture, fixtures and other
personal property located on the Premises or the cost or value of any
leasehold improvements made in or to the Premises by or for Lessee,
regardless of whether title to such improvements shall be in Lessor or
Lessee, or (vi) in lieu of or equivalent to any Tax set forth in this Section
16. In the event any such Taxes are payable by Lessor and it shall not be
lawful for Lessee to reimburse Lessor for such Taxes, the n the Rent payable
thereunder shall be increased to net Lessor the same net rent after
imposition of any such Tax upon Lessor as would have been payable to Lessor
prior to the imposition of any such Tax. It is the intention of the parties
that Lessor shall be free from all such Taxes and all other governmental
impositions and charges of every kind and nature whatsoever. However, nothing
contained in this Section 16 shall require Lessee to pay any Federal or State
income, franchise, estate, inheritance, succession, transfer or excess
profits tax imposed upon Lessor. If any general or special assessment is
levied and assessed against the Premises, Lessor agrees to use its best
reasonable efforts to cause the assessment to become a lien on the Premises
securing repayment of a bond sold to finance the improvements to which the
assessment relates which is payable in installments of principal and interest
over the maximum term allowed by law. It is understood and accepted that
Lessee's obligation under this paragraph will be prorated to reflect the
Commencement Date and the end of the Lease Tenn. It is further understood
that if Taxes cover the Premises and Lessee does not occupy the entire
Premises, the Taxes will be allocated to the portion of the Premises occupied
by Lessee based on a pro-rata square footage or other equitable basis. Taxes
billed to Lessor shall be included in the monthly CAC.
Subject to any limitations or restrictions imposed by any deeds of trust or
mortgages now or hereafter covering or affecting the Premises, Lessee shall have
the right to contest or review the amount or validity of any Tax by appropriate
legal proceedings but which is not to be deemed or construed in any way as
relieving, modifying or extending Lessee's covenant to pay such Tax at the time
and in the manner as provided in this Section 16. However, as a condition of
Lessees right to contest, if such contested Tax is not paid before such contest
and if the legal proceedings shall not operate to prevent or stay the collection
of the Tax so contested, Lessee shall, before institution any such proceeding,
protect the Premises and the interest of Lessor and of the beneficiary of a deed
of trust or the mortgagee of a mortgage affecting the Premises against any lien
upon the Premises by a surety bond, issued by an insurance company acceptable to
Lessor and in an amount equal to one and one-half (1 1/2) times the amount
contested or, at Lessors option, the amount of the contested Tax and the
interest and penalties in connection therewith. Any contest as to the validity
or amount of any Tax, whether before or after payment, shall be made by Lessee
in Lessee's own name, or if required by law, in the name of Lessor or both
Lessor and Lessee. Lessee shall defend, indemnify and hold harmless Lessor from
and against any and all costs or expenses, including attorney' fees, in
connection with any such proceedings brought by Lessee, whether in its own name
or not. Lessee shall be entitled to retain any refund of any such
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contested Tax and penalties or interest thereon which have been paid by Lessee.
Nothing contained herein shall be construed as affecting or limiting Lessees
right to contest any Tax at Lessor's expense.
17. NOTICES: Unless otherwise provided for in this Lease, any and all written
notices or other communication (the "Communication") to be given in connection
with this Lease shall be given in writing and shall be given by personal
delivery, facsimile transmission or by mailing by registered or certified mail
with postage thereon or recognized overnight courier, fully prepaid; in a sealed
envelope addressed to the intended recipient as follows:
(a) to the Lessor at: 10050 Bandley Drive
Cupertino, California 95014
Attention: Carl E. Berg
Fax No: (408) 725-1626
(b) to the Lessee at: 1315 McCandless Drive
Milpitas, California
Attention:
Fax No:
or such other addresses, facsimile number or individual as may be designated by
a Communications given by a party to the other parties as aforesaid. Any
Communication given by personal delivery shall be conclusively deemed to have
been given and received on a date it is so delivered at such address provided
that such date is a business day, otherwise on the first business day following
its receipt, and if given by registered or certified mail, on the day on which
delivery is made or refused or if given by recognized overnight courier, on the
first business day following deposit such overnight courier and if given by
facsimile transmission, oil the day oil which it was transmitted provided such
day is a business day, failing which, on the next business day thereafter.
18. ENTRY BY LESSOR: Lessee shall permit Lessor and its agents to enter into and
upon said Premises at all reasonable times and upon reasonable notice using the
minimum amount of interference and inconvenience to Lessee and Lessees business,
subject to any security regulations of Lessee, for the purpose of inspecting the
same or for the purpose of maintaining the building in which said Premises are
situated, or for the purpose of making repairs, alterations or additions to any
other portion of said building, including the erection and maintenance of such
scaffolding, canopies, fences and props as may be required, without any rebate
of Rent and without any liability to Lessee for any loss of occupation or quiet
enjoyment of the Premises; and shall pen-nit Lessor and his agents, at any time
within ninety (90) days prior to the end of the Lease Term, to place upon said
Premises any usual or ordinary "For Sale" or "For Lease" signs and exhibit the
Premises to prospective tenants at reasonable hours.
19. DESTRUCTION OF PREMISES: In the event of a partial destruction of the said
Premises during the Lease Term from any cause which is covered by Lessors
property insurance, Lessor shall forthwith repair the same, provided such
repairs can be made within ninety (90) days under the laws and regulations of
State, Federal, County, or Municipal authorities, but such partial
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destruction shall in no way annul or void this Lease, except that Lessee
shall be entitled to a proportionate reduction of Rent while such repairs are
being made to the extent of payments received by Lessor under its Loss of
Rents Insurance coverage. With respect to any partial destruction which
Lessor is obligated to repair or may elect to repair under the terms of This
paragraph, the provision of Section 1932, Subdivision 2, and of Section 1933,
Subdivision 4, of the Civil Code of the State of California are waived by
Lessee. In the event that the building in which the subject Premises may be
situated is destroyed to an extent greater than thirty-three and one-third
(33 1/3%) of the replacement cost thereof, either party may, at its sole
option, elect to terminate this Lease, whether the subject Premises is
insured or not. A total destruction of the building in which the subject
Premises are situated shall terminate this Lease. Notwithstanding the above,
Lessor is only obligated to repair or rebuild to the extent of available
insurance proceeds including any deductible amount. Should Lessor determine
that insufficient or no insurance proceeds are available for repair or
reconstruction of Premises, Lessor, at its sole option, may terminate the
Lease. Lessee shall have the option of continuing this Lease by agreeing to
pay all repair costs to the subject Premises.
20. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this Lease, or any
interest therein, and shall not sublet the said Premises or any part thereof, or
any right or privilege appurtenant thereto, or cause any other person or entity
(a bona fide subsidiary or affiliate of Lessee excepted) to occupy or use the
Premises, or any portion thereof, without the advance written consent of Lessor
which consent shall not be unreasonably withheld except as provided in this
paragraph. Any such assignment or subletting without such consent shall be void,
and shall, at the option of the Lessor, terminate this 1,ease. This Lease shall
not, or shall any interest therein, be assignable, as to the interest of Lessee,
by operation of law, without the written consent of Lessor. Notwithstanding
Lessor's obligation to provide reasonable approval, Lessor reserves the right to
withhold its consent for any proposed sublessee or assignee of Lessee if the
proposed sublessee or assignee is a user or generator of Hazardous Materials.
Notwithstanding the foregoing, Lessee may assign this Lease to a successor in
interest, whether by merger or acquisition, provided there is no substantial
reduction in the net worth of die resulting entity and the resulting entity is
not a user or generator of Hazardous Materials. Whether or not Lessors consent
to a sublease or assignment is required, in the event of any sublease or
assignment, Lessee shall be and shall remain primarily liable for the
performance of all conditions, covenants, and obligations of Lessee hereunder
and, in the event of a default by an assignee or sublicense, Lessor may proceed
directly against the original Lessee hereunder and/or any other predecessor of
such assignee or sublessee without the necessity of exhausting remedies against
said assignee or sublease.
21. CONDEMNATION: If any part of the Premises shall be taken for any public or
quasi-public use, under any statute or by right of eminent domain or private
purchase in lieu thereof, and a part thereof remains which is susceptible of
occupation hereunder, this Lease shall as to the part so taken, terminate as of
the date title vests in the condemnor or purchaser, and the Rent payable
hereunder shall be adjusted so that the Lessee shall be required to pay for the
remainder of the Lease Term only that portion of Rent as the value of the part
remaining rental adjustment resulting will be computed at the same Rental rate
for the remaining part not taken; however, Lessor shall have the option to
terminate this Lease as of the date when title to the part so taken vests in the
condemnor or purchaser. If all of the Premises, or such part thereof be taken so
that there does not remain a portion sufficient for the reasonable needs of
Lessee's business, this Lease shall thereupon terminate, provided Lessee
notifies Lessor in writing within fifteen (15) days after Lessee's notice of the
taking. If a part or all of the Premises be taken, all
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compensation awarded upon such taking shall be payable to the Lessor.
Lessee may file a separate claim and be entitled to any award granted to
Lessee
22. EFFECTS OF CONVEYANCE: The term "Lessor" as used in this Lease, means only
the owner for the time being of the land and building constituting the Premises,
so that, in the event of any sale of said land or building, or in the event of a
Lease of said building, Lessor shall be and hereby is entirely freed and
relieved of all covenants and obligations of Lessor hereunder, and it shall be
deemed and construed, without further agreement between the parties and the
purchaser of any such sale, or the Lessor of the building, that the purchaser or
lessor of the building has assumed and agreed to carry out any and all covenants
and obligations of the Lessor hereunder. If any security is given by Lessee to
secure the faithful performance of all or any of the covenants of this Lease on
the part of Lessee, Lessor shall transfer and deliver the security, as such, to
the purchaser at any such sale of the building, and thereupon the Lessor shall
be discharged from any further liability.
23. SUBORDINATION: This Lease, in the event Lessor notifies Lessee in writing,
shall be subordinate to any ground lease, deed of trust, or other hypothecation
for security now or hereafter placed upon the real property at which the
Premises arc a part and to any and all advances made on the security thereof and
to renewals, modifications, replacements and extensions thereof Lessee agrees to
promptly execute any documents which may be required to effectuate such
subordination. Notwithstanding such subordination, if Lessee is not in default
and so long as Lessee shall pay the Rent and observe and perform all of the
provisions and covenants required under this Lease, Lessees right to quiet
possession of the Premises shall not be disturbed or effected by any
subordination.
24. Waiver: The waiver by Lessor of any breach of any term, covenant or
condition, herein contained shall not be construed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition therein contained. Thc subsequent acceptance of Rent
hereunder by Lessor shall not be deemed to be a waiver of Lessees breach of any
term, covenant, or condition of the Lease.
25. HOLDING OVER: Any holding over after the end of the Lease Term requires
Lessor's written approval prior to the end of the Lease Term, which Lessor
may unreasonably withhold and shall be construed to be a tenancy at
sufferance from month to month. Lessee shall pay to Lessor monthly base rent
equal to one and one-half (1.5) times the monthly base rent installment due
in the last month of the Lease Term and all other additional rent, including
CAC, and all other terms and conditions of the Lease shall apply, so far as
applicable. Holding over by Lessee without written approval of Lessor shall
subject Lessee to the liabilities and obligations provided for in this Lease
and by law, including, but not limited to those in Section 2.1 of this Lease.
Lessee shall indemnify and hold Lessor harmless against any loss or liability
resulting from any delay caused by Lessee in a surrendering the Premises,
including without limitation, any claims made or penalties incurred by any
succeeding lessee or by Lessor. No holding over shall be deemed or construed
to exercise any option to extend or renew this Lease in lieu of full and
timely exercise of any such option as required hereunder.
26. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained shall,
subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all of the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.
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27. ESTOPPEL CERTIFICATES: Lessee shall at any time during the Lease Term,
upon not less than ten (10) business days prior written notice from Lessor,
execute and deliver to Lessor a statement in writing certifying that, this
Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification) and the dates to which the Rent and other
charges have been paid in advance, if any, and acknowledging that there are
not, to Lessee's knowledge, any uncured defaults on the part of Lessor
hereunder or specifying such defaults if they are claimed. Any such statement
may be conclusively relied upon by any prospective purchaser or encumbrance
of the Premises. Lessees failure to deliver such a statement within such time
shall be conclusive upon the Lessee that (a) this Lease is in full force and
effect, without modification except as may be represented by Lessor, (b)
there are no uncured defaults in Lessors performance.
28. TIME: Time is of the essence of the Lease.
29. CAPTIONS: The headings on titles to the paragraphs of this Lease arc not
a part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof. This instrument contains all of the
agreements and conditions made between the parties hereto and may not be
modified orally or in any other manner than by an agreement in writing signed
by all of the parties hereto or their respective successors in interest.
30. PARTY NAMES: Landlord and Tenant may be used in various places in this
Lease as a substitute for Lessor and Lessee respectively.
31. EARTHQUAKE INSURANCE: As a condition of Lessor agreeing to waive the
requirement for earthquake insurance, Lessee agrees that it will pay, as
additional Rent, which shall be included in the monthly CAC, an amount not to
exceed twenty thousand dollars ($20,000) per year for earthquake insurance if
Lessor desires to obtain some form of earthquake insurance in the future, if and
when available, on terms acceptable to Lessor.
32. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in
Section 14 herein, Lessor and Lessee agree that if Lessee shall have
defaulted in die payment of Rent for three or more times during any twelve
month period during the Lease Term, then such conduct shall, at the option of
the Lessor, represent a separate event of default which cannot be cured by
Lessee. Lessee acknowledges that die purpose of this provision is to prevent
repetitive defaults by die Lessee under the Lease, which constitute a
hardship to the Lessor and deprive the Lessor of the timely performance by
the Lessee hereunder.
33. HAZARDOUS MATERIALS
33.1 DEFINITIONS: As used herein, the following terms shall have the
following meaning:
a. the term "Hazardous Materials" shall mean (i) polychlorinated biphenyls;
(ii) radioactive materials and (iii) any chemical, material or substance now
or hereafter defined as or included in the definitions of "hazardous
substance' "hazardous water", "hazardous material", "extremely hazardous
waste", "restricted hazardous waste" under Section 25115, 25117 or 15122.7,
or listed pursuant to Section 25140 of the California Health and Safety
Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined
as "hazardous substance" under Section 25316 of the California Health and
Safety Code, Division 20, Chapter 6.8 (Carpenter-Presale-Tanner Hazardous
Substances
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Account Act), (iii) defined as "hazardous material", "hazardous substance",
or "hazardous waste, under Section 25501 of the California Health and Safety
Code, Division 20, Chapter 6.95 (Hazardous Materials Release, Response,
Plans and Inventory), (iv) defined as a "hazardous substance" under Section
25181 of the California Health and Safety Code, Division 201, Chapter 6.7
(Underground Storage of Hazardous Substances), (v) petroleum, (vi) asbestos,
(vii) listed under Article 9 or defined as "hazardous" or "extremely
hazardous" pursuant to Article 11 of Title 22 of the California
Administrative Code, Division 4, Chapter 20, (viii) defined as "hazardous
substance" pursuant to Section 311 of the Federal Water Pollution Control
Act, 33 U.S.C. 1251 et seq. or listed pursuant to Section 1004 of the
Federal Water Pollution Control Act (33 U.S.C.1317), (ix) defined as a
"hazardous waste, pursuant to Section 1004 of the Federal Resource
Conservation and Recovery Act, 42 U.S.C. 6901 et scq., (x) defined as
"hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Responsibility Compensations, and Liability Act,
42 U.S.C. 9601 et seq., or (xi) regulated under the Toxic Substances Control
Act, 156 U.S.C. 2601 et seq.
b. The term "Hazardous Materials Laws" shall mean any local, state and
federal laws, rules, regulations, or ordinances relating to the use,
generation, transportation, analysis, manufacture, installation, release,
discharge, storage or disposal of Hazardous Material.
c. The term "Lessor's Agents" as used herein shall mean Lessor's agents,
representatives, employees, contractors, subcontractors, directors, officers
and partners.
d. The term "Lessees Agents" as used herein shall mean Lessee's agents,
representatives, employees, contractors, subcontractors, directors, officers,
partners, invitees or any other person in or about the Premises.
33.2 LESSEE'S RIGHT TO INVESTIGATE: Lessee shall be entitled to cause such
inspection, soils and ground water tests, and other evaluations to be made of
the Premises as Lessee deems necessary regarding (i) the presence and use of
Hazardous Materials in or about the Premises, and (ii) the potential for
exposure to Lessees employees and other persons to any Hazardous Materials used
and stored by previous occupants in or about the Premises. Lessee shall provide
Lessor with copies of all inspections, tests and evaluations. Lessee shall
indemnify, defend and hold Lessor harmless from any cost, claim or expense
arising from such entry by Lessee or from the performance of any such
investigation by such Lessee.
33.3 LESSOR'S REPRESENTATIONS: Lessor hereby represents and warrants to the best
of Lessor's knowledge that the Premises are, as of the date of this Lease, in
compliance with all Hazardous Material Laws.
33.4 LESSEE'S OBLIGATION TO INDEMNIFY: Lessee, at its sole cost and expense,
shall indemnify, defend, protect and hold Lessor and Lessor's Agents harmless
from and against any and all cost or expenses, including those described
under subparagraphs i, ii and iii herein below set forth, arising from or
caused in whole or in part, directly or indirectly by:
a. Lessees or Lessee's Agents' use, analysis, storage, transportation,
disposal, release, threatened release, discharge or generation of
Hazardous Material to, in, on, under, about or from the Premises, or
b. Lessees or Lessee's Agents failure to comply with Hazardous Material
laws; or
c. Any release of Hazardous Material to, in, on, under, about, from or
onto the Premises caused by Lessee or Lessees Agents or occurring
during the Lease Term, except ground water contamination from other
parcels where the source is from off the Premises not arising from or
caused by Lessee or Lessee's Agents.
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The cost and expenses indemnified against include, but arc not limited to the
following:
i. Any and all claims, actions, suits, proceedings, losses, damages,
liabilities, deficiencies, forfeitures, penalties, fines, punitive
damages, cost or expenses;
ii. Any claim, action, suit or proceeding for personal injury
(including sickness, disease, or death), tangible or intangible
property damage, compensation for lost wages, business income, profits
or other economic loss, damage to the natural resources of the
environment, nuisance, pollution, contamination, leaks, spills, release
or other adverse effects on the environment-,
iii. The cost of any repair, clean-up, treatment or detoxification of
the Premises necessary to bring the Premises into compliance with all
Hazardous Material Laws, including the preparation and implementation
of any closure, disposal, remedial action, or other actions with regard
to the Premises, and expenses (including, without limitation,
reasonable attorney's fees and consultants fees, investigation and
laboratory fees, court cost and litigation expenses).
33.5 LESSEE'S OBLIGATION TO REMEDIATE CONTAMINATION: Lessee shall, at its sole
cost and expense, promptly take any and all action necessary to remediate
contamination of the Premises by Hazardous Materials during the Lease Term.
33.6 OBLIGATION TO NOTIFY: Lessor and Lessee shall each give written notice to
the other as soon as reasonably practical of (i) any communication received from
any governmental authority concerning Hazardous Material which related to the
Premises and (ii) any contamination of the Premises by Hazardous Materials which
constitutes a violation of any Hazardous Material Laws.
33.7 SURVIVAL: The obligations of Lessee under this Section 33 shall survive the
Lease Term or earlier termination of this Lease.
33.8 CERTIFICATION AND CLOSURE: On or before the end of the Lease Term or
earlier termination of this Lease, Lessee shall deliver to Lessor a
certification executed by Lessee stating that, to the best of Lessee's
knowledge, there exists no violation of Hazardous Material Laws resulting from
Lessee's obligation in Paragraph 33. if pursuant to local ordinance, state or
Weral law, Lessee is required, at the expiration of the Lease Term, to submit a
closure plan for the Premises to a local, state or federal agency, then Lessee
shall furnish to Lessor a copy of such plan.
33.9 PRIOR HAZARDOUS MATERIALS: Lessee shall have no obligation to clean up or
to hold Lessor harmless; with respect to, any Hazardous Material or wastes
discovered on the Premises which were not introduced into, in, on, about, from
or under the Premises during the Lease Term or ground water contamination from
other parcels where the source is from off the Premises not arising from or
caused by Lessee or Lessees Agents.
34. BROKERS: Lessor and Lessee represent that they have not utilized or
contacted a real estate broker or finder with respect to this Lease other than
Cornish & Carey ("C&C") and Lessee agrees to indemnify and hold Lessor harmless
against any claim, cost, liability or cause of action asserted by any broker or
finder claiming through Lessee other than C&C.Lessor shall at its sole cost and
expense pay the brokerage Lessors standard commission schedule to C&C in
connection with this transaction. Lessor represents and warrants that it has not
utilized or contacted a real estate broker or finder with respect to
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this Lease other than C&C and Lessor agrees to indemnify and hold Lessee
harmless against any claim, cost, liability or cause of action asserted by any
broker or finder claiming through Lessor.
35. OPTION TO EXTEND
A. OPTION: Lessor hereby grants to Lessee one (1) option to extend the Lease
Term, with die extended term to be for a period of five (5) years, on the
following terms and conditions:
(i) Lessee shall give Lessor written notice of its exercise of its option
to extend no earlier than twenty-four (24) calendar months, nor later than
six (6) calendar months before the Lease Term would end but for said
exercise. Time is of the essence.
(ii) Lessee may not extend the Lease Term pursuant to any option granted
by this section 35 if Lessee is in default as of the date of the exercise
of its option. If Lessee has committed a default by Lessee as defined in
Section 14 or 32 that has not been cured or waived by Lessor in writing by
the date that any extended term is to commence, then Lessor may elect not
to allow the Lease Term to be extended, notwithstanding any notice given
by Lessee of an exercise of this option to extend.
(iii) All terms and conditions of this Lease shall apply during the
extended term, except that the base rent and rental increases for each
extended term shall be determined as provided in Section 3 5 (B) below
(iv) Once Lessee delivers a notice of exercise of its options to extend
the Lease Term, Lessee may not withdraw such exercise and subject to the
provisions of this Section 35, such notice shall operate to extend the
Lease Term. Upon any extension of the Lease Term pursuant to this
Section 35, the term "Lease Term" as used in this Lease shall thereafter
include the then extended term.
(v) The option rights of Sherpa Corporation granted under this Section 35
are granted for Sherpa Corporation's and its affiliate's personal benefit
and may not be assigned or transferred by Sherpa Corporation or its
affiliate or exercised if Sherpa Corporation or its affiliate is not
occupying the Premises at the time of exercise.
B. EXTENDED TERM RENT - OPTION PERIOD: The monthly Rent for the Premises during
the extended term shall equal ninety-five percent (95%) of the fair market
monthly Rent for the Premises as of the commencement date of the extended term,
but in no case, less than the Rent during the last month of the prior Lease
term. Promptly upon Lessee's exercise of the option to extend, Lessee and Lessor
shall meet and attempt to agree on the fair market monthly Rent for the Premises
as of the commencement date of the extended term. In the event the parties fail
to agree upon the amount of the monthly Rent for the extended term prior to
commencement thereof, the monthly Rent for the extended term shall be determined
by appraisal in the manner hereafter set forth; provided, however, that in no
event shall the monthly Rent for the extended term be less than in the immediate
preceding period. Annual base rent increases durin6 the extended term shall be
equal to those being imposed on similar properties at the time of option
exercise. In the event it becomes necessary under this paragraph to determine
the fair market monthly Rent of the Premises by appraisal, Lessor and Lessee
each shall appoint a real estate appraiser who shall be a
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member of the American Institute of Real Estate Appraiser ("AUZJEA") and such
appraisers shall each determine the fair market monthly Rent for the Premises
taking into account the value of the Premises and the amenities provided by
the outside areas, the common areas, and the Building, and prevailing
comparable Rentals in the area. Such appraisers shall, within twenty (20)
business. days after their appointment, complete their appraisals and submit
their appraisal reports to Lessor and Lessee. If the fair market monthly Rent
of the Premises established in the two (2) appraisals varies by five percent
(5%) or less of the higher Rent, the average of the two shall be controlling.
If said fair market monthly Rent varies by more than five percent (5%) of the
higher Rental, said appraisers, within ten (10) days after submission of the
last appraisal, shall appoint a third appraiser who shall be a member of the
AIREA and who shall also be experienced in die appraisal of Rent values and
adjustment practices for commercial properties in the vicinity of the
Premises. Such third appraiser shall, within twenty (20) business days after
his appointment, determine by appraisal the fair market monthly Rent of the
Premises taking into account the same factors referred to above, and submit
his appraisal report to Lessor and Lessee. The fair market monthly Rent
determined by the third appraiser for the Premises shall be controlling,
unless it is less than that set forth in the lower appraisal previously
obtained, in which case the value set forth in said lower appraisal shall be
controlling, or unless it is greater than that set forth in the higher
appraisal previously obtained in which case the Rent set for in said higher
appraisal shall be controlling. If either Lessor or Lessee fails to appoint
an appraiser, or if an appraiser appointed by either of them fails, after his
appointment to submit his appraisal within the required period in accordance
with the foregoing, the appraisal submitted by the appraiser properly
appointed and timely submitting his appraisal shall be controlling. If the
two appraisers appointed by Lessor and Lessee are unable to agree upon a
third appraiser within the required period in accordance with die foregoing,
application shall be made within twenty (20) days thereafter by either Lessor
or Lessee to AIREA, which shall appoint a member of said institute willing to
serve as appraiser. The cost of all appraisals under this subparagraph shall
be borne equally be Lessor and Lessee.
36. APPROVALS: Whenever in this Lease the Lessor's or Lessee's consent is
required, such consent shall not be unreasonably or arbitrarily withheld or
delayed. In the event that die Lessor or Lessee does not respond to a request
for any consents which may be required of it in this Lease within ten business
days of the request of such consent in writing by the Lessee or Lessor, such
consent shall be deemed to have been given by the Lessor or Lessee.
37. AUTHORITY: Each party executing this Lease represents and warrants that he
or she is duly authorized. to execute and deliver the Lease. If executed on
behalf of a corporation, that the Lease is executed in accordance with the
by-laws of said corporation (or a partnership that the Lease is executed in
accordance with the partnership agreement of such partnership), that no other
party's approval or consent to such execution and delivery is required, and that
the Lease is binding upon said individual, corporation (or partnership) as the
case may be in accordance with its terms.
38. INDEMNIFICATION OF LESSOR: Except to the extent caused by the sole
negligence or willful misconduct of Lessor or Lessor's a Agents, Lessee shall
defend, indemnify and hold Lessor harmless from and against any and all
obligations, losses, costs, expenses, claims, demands, reasonable attorney's
fees, investigation costs or liabilities on account of, or arising out of the
use, condition or occupancy of the Premises or any act or omission to act of
Lessee or Lessee's Agents or any occurrence in, upon, about or at the Premises,
including, without limitation, any of the foregoing provisions arising out of
the use, generation, manufacture, installation, release, discharge, storage, or
disposal or Hazardous Materials by Lessee or Lessee's Agents. It is understood
that Lessee is and shall be in control and possession of the Premises and that
Lessor shall in no event be
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responsible or liable for any injury or damage or injury to any person
whatsoever, happening on, in, about, or in connection with the Premises, or for
any injury or damage to the Premises or any part thereof. This Lease is entered
into on the express condition that Lessor shall not be liable for, or suffer
loss by reason of injury to person or property, from whatever cause, which in
any way may be connected with the use, condition or occupancy of the Premises or
personal property located herein. The provisions of this Lease permitting Lessor
to enter and inspect the Premises arc for the purpose of enabling Lessor to
become informed as to whether Lessee is complying with, the terms of this Lease
and Lessor shall be under no duty to enter, inspect or to perform any of
Lessee's covenants set forth in this Lease. Lessee shall further indemnify,
defend and hold harmless Lessor from and against any and all claims arising from
any breach or default in the performance of any obligation to Lessee's part to
b- performed under the terms of this Lease. The provisions of Section 38 shall
survive the Lease Term or earlier termination of this Lease with respect to any
damage, injury or death occurring during the Lease Tenn.
39. LESSOR'S LIABILITY: If Lessee should recover a money judgment against
Lessor arising in connection with this Lease, the judgment shall be satisfied
only out of the Lessors interest in the Premises and neither Lessor or any of
its partners shall be liable personally for any deficiency.
40. RIGHT OF FIRST OFFER: Prior to Lessor accepting any offer to lease the
balance of the space in the building in which the Premises are located,
Lessor shall give Lessee written notice of such offer ("Lessor's First
Notice") and Lessee shall have the opportunity to lease the space or the part
thereof offered for lease on the terms and conditions set forth in Lessor's
First Notice. Lessee shall have the option, which may be exercised by written
notice to Lessor at any time within five (5) days from the receipt of Lessors
First Notice to agree to lease die space specified in the Lessor's First
Notice on the terms and conditions set forth in Lessor's First Notice. If
Lessee fails to exercise its option within the 5-day period, Lessor shall
have 180 days thereafter to lease the space specified in Lessor's First
Notice, but in no case on terms more favorable than those offered to Lessee
in Lessor's First Notice. Notwithstanding the above, Lessee's right of first
offer shall be subordinate to any existing rights of first offer and shall be
subordinate to any existing options to extend. If Lessor elects, within 180
days of Lessors notice, to lease the space to a third party on terms more
favorable to the third party lessee than the terms set forth in Lessor's
First Notice, then Lessor must re-offer the space to Lessee on the same terms
and conditions offered to the third party lessee ("Lessors Second Notice").
Lessee shall have five (5) days from Lessees receipt of Lessors Second Notice
to elect to lease the space on the terms and conditions set forth in Lessor's
Second Notice. If Lessee does not respond in writing accepting all terms and
conditions, Lessor shall thereafter be entitled to lease the space to the
third party on the terms and conditions set forth in Lessors Second Notice or
on other terms and conditions at least as favorable to Lessor as said terms
and conditions in Lessors Second Notice for a period of 180 after which
Lessee's Right of First Offer to Lease shall again be in effect for the
remaining space in the building in which the Premises are located.
Notwithstanding the above, Lessor shall notify Lessee during the 12 months
after Lease signing of any serious prospective lessees for the balance of the
space in the building and shall provide Lessee with 3 business days to lease
the balance of the space in the building on terms provided by Lessor.
41. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are
cumulative and not alternative to the extent permitted by law and are in
addition to all other rights or remedies in law and in equity.
Page 21
<PAGE>
42. CHOICE OF LAW: This lease shall be construed and enforced in accordance with
the substantive laws of the State of California. The language of all parts of
this lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against either Lessor or Lessee.
43. ENTIRE AGREEMENT: This Lease is the entire agreement between the parties,
and there are no agreements or representations between the parties except as
expressed herein. Except as otherwise provided for herein, no subsequent change
or addition to this Lease shall be binding unless in writing and signed by the
parties hereto.
In Witness Whereof, Lessor and Lessee have executed these presents, the day and
year first above written.
Lessor Lessee
Berg & Berg Developers Sherpa Corporation
By: /s/ Carl E. Berg /s/ Richard B. Jones
- ------------------------------ -----------------------------
signature of authorized representative signature of authorized representative
Carl E. Berg Richard B. Jones
- ------------------------------ -----------------------------
printed name printed name
G.P. VP Finance & CFO
- ------------------------------ -----------------------------
title title
April 11, 1996 April 11, 1996
- ------------------------------ -----------------------------
date date
Page 22
<PAGE>
Exhibit B
Berg & Berg ("Building Shell") includes the following items in customary
quantities and quality. All items not listed are part of Lessee Interior
Improvements.
Exterior walls
Foundation
Floor slabs
Roof structure and membrane
Glazing
Exit doors
Truck doors
Landscaping
Parking and paving
Storm sewer line to building
Sanitary sewer line to building
Water line to building
Paint of exterior walls
Shell architecture and engineering
All permits for the above items
Page 24
<PAGE>
Exhibit C
Building floor plan and elevations to be attached.
Page 25
<PAGE>
Exhibit D.
Lessee Interior Improvement plans to be attached.
Page 26
<PAGE>
Exhibit E
Lessee Approval Deadlines
Lease signed 04/11/96
Approval of preliminary Lessee improvement floor plan,
single line 03/22/96
Approval of restroom and underground plumbing 04/16/96
Approval of interior plans and specifications 04/25/96
Final selection of all material and interior finishes
for construction such as carpet, ceramic tile,
paint and any other lessee selected materials & finishes 05/15/96
Lessee shall not unreasonably withhold approval of interior plans if they
conform in general to the preliminary lessee improvement floor plan.
If desired, Lessor shall provide Lessee with assistance in selection of
materials and interior finishes.
One day of Lessee delay will be charged for each day Lessee does not meet each
deadline set forth on this Exhibit E.
Page 27
<PAGE>
EXHIBIT 10.11
INSO CORPORATION
Management Retention Agreement
INSO Corporation
31 St. James Avenue
Boston, MA 02116-4101
Dear [name]:
INSO Corporation (the "Company") recognizes that, as is the case with
many publicly held corporations, the possibility of a change in control may
exist and that such possibility, and the uncertainty and questions which it may
raise among key personnel, may result in the departure or distraction of key
personnel to the detriment of the Company, its stockholders and its customers.
The Board of Directors of the Company (the "Board") has determined that
appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of the Company's key personnel, including yourself, to
their assigned duties without distraction in the face of potentially disturbing
circumstances arising from the possibility of a change in control of the
Company.
In order to induce you to remain in its employ, the Company agrees that
you shall receive the severance benefits set forth in this letter agreement (the
"Agreement") in the event your employment with the Company is terminated under
the circumstances described below subsequent to a "Change in Control" of the
Company (as defined below).
1. Certain Definitions.
As used herein, the following terms shall have the following respective
meanings:
(a) A "Change in Control" shall occur or be deemed to have
occurred only if any of the following events occur:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other
than the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, any corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportion as their ownership of stock of the Company or an Exempt Person) is or
becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange
Act), directly or indirectly, of securities of the Company representing 33 1/3%
or more of the combined voting power of the Company's then
<PAGE>
outstanding securities (other than as a result of the acquisition of such
securities directly from the Company);
(ii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director designated by a person who has entered into an agreement with the
Company to effect a transaction described in paragraph (i), (iii) or (iv) of
this Subsection) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved cease for any reason to constitute at least a majority thereof; or
(iii) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
person (as hereinabove defined), other than a person holding more than 50% of
the combined voting power of the Company's then outstanding securities
immediately prior to such recapitalization, acquires more than 50% of the
combined voting power of the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(b) "Cause" shall mean (i) an intentional act of fraud,
embezzlement or theft in connection with your duties to the Company or in the
course of your employment with the Company, (ii) your willful engaging in gross
misconduct which is demonstrably and materially injurious to the Company, (iii)
your willful and continued failure to perform substantially your duties with the
Company or one of its affiliates (other than any such failure resulting from
incapacity due to physical or mental illness), which such failure is not cured
within 30 days after a written demand for substantial performance is delivered
to you by the Board or the Chief Executive Officer of the Company which
specifically identifies the manner in which the Board or Chief Executive Officer
believes that you have not substantially performed your duties. For purposes of
this Subsection, no act or failure to act on your part shall be deemed "willful"
unless done or omitted to be done by you not in good faith and without
reasonable belief that your action or omission was in the best interest of the
Company.
(c) "Date of Termination" shall have the meaning set forth in
Section 3(c).
<PAGE>
(d) "Disability" shall be deemed to have occurred if, as a
result of incapacity due to physical or mental illness, you shall have been
absent from the full time performance of your duties with the Company for six
(6) consecutive months and, within thirty (30) days after written Notice of
Termination by reason of disability is given to you, you shall not have returned
to the full time performance of your duties.
(e) "Exempt Person" means Houghton Mifflin Company ("HMC"),
provided that HMC shall cease to be an Exempt Person if and when, following a
Change in Control (as defined in Section 1(a) but substituting "Houghton Mifflin
Company" for the "Company" as used therein) of HMC, HMC, directly or indirectly,
acquires beneficial ownership of any additional shares of the Company's capital
stock.
(f) "Good Reason" shall mean, without your express written
consent, the occurrence after a Change in Control of the Company of any of the
following circumstances unless, in the case of paragraphs (A), (C), (D), (F) or
(G), such circumstances are fully corrected prior to the Date of Termination
specified in the Notice of Termination given in respect thereof:
(A) any significant diminution in your
position, duties, responsibilities, power, title or office as in effect
immediately prior to a Change in Control;
(B) any reduction in your annual base salary as in
effect on the date hereof or as the same may be increased from time to time;
(C) the failure by the Company to (i) continue in
effect any material compensation or benefit plan in which you participate
immediately prior to the Change in Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan, (ii) continue your participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable,
both in terms of the amount of benefits provided and the level of your
participation relative to other participants, as existed at the time of the
Change in Control or (iii) award cash bonuses to you in amounts and in a
manner substantially consistent with past practice in light of the Company's
financial performance;
(D) the failure by the Company to continue to
provide you with benefits substantially similar to those enjoyed by you under
any of the Company's life insurance, medical, health and accident, or
disability plans in which you were participating at the time of the Change in
Control, the taking of any action by the Company which would directly or
indirectly materially reduce any of such benefits, or the failure by the
Company to provide you with the number of paid vacation days to which you are
entitled on the basis of years of service with the Company in accordance with
the Company's normal vacation policy in effect at the time of the Change in
Control;
<PAGE>
(E) any requirement by the Company or of any
person in control of the Company that (i) the location at which you perform
your principal duties for the Company be changed to a new location that is
both outside a radius of 35 miles from your principal residence at the time
of the Change in Control and more than 20 miles from the location at which
you perform your principal duties for the Company at the time of the Change
in Control or (ii) you travel on an overnight basis more than 90 days in any
consecutive 12-month period;
(F) the failure of the Company to obtain a
reasonably satisfactory agreement from any successor to assume and agree to
perform this Agreement, as contemplated in Section 5; or
(G) any purported termination of your employment
which is not effected pursuant to a Notice of
Termination satisfying the requirements of
Section 3(b), which purported termination shall
not be effective for purposes of this Agreement.
(g) "Notice of Termination" shall have the meaning set
forth in Section 3(b).
(h) "Severance Payments" shall have the meaning set forth
in Section 4(c)(ii).
(i) "Term" shall have the meaning set forth in Section 2.
2. Term of the Agreement.
The term of this Agreement (the "Term") shall commence as of the date
hereof and shall continue in effect through December 31, ______; provided,
however, that commencing on January l, _______ and each January l thereafter,
the Term shall be automatically extended for one additional year unless, not
later than November 30 of the preceding calendar year, the Company shall have
given you written notice that the Term will not be extended; and provided
further that, if a Change in Control of the Company shall have occurred during
the original or extended Term, this Agreement shall continue in effect for a
period of not less than [36 months] beyond the month in which such Change in
Control occurred.
3. Employment Status; Termination Following Change in Control.
(a) No benefits shall be payable under this Agreement unless
there has been a Change in Control of the Company during the Term. You
acknowledge that this Agreement does not constitute a contract of employment or
impose on the Company any obligation to retain you as an employee. You may
terminate your employment at any time, with or without Good Reason. If your
employment with the Company terminates
<PAGE>
for any reason and subsequently a Change in Control shall have occurred, you
shall not be entitled to any benefits hereunder.
(b) Any termination of your employment by the Company or by
you following a Change in Control of the Company during the Term shall be
communicated by written notice of termination that indicates the specific
provision in this Agreement relied upon and sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
your employment under the provision so indicated ("Notice of Termination"). A
Notice of Termination shall be delivered to the other party hereto in
accordance with Section 6.
(c) The "Date of Termination" shall mean (i) if your
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
full-time performance of your duties during such thirty (30) day period), and
(ii) if your employment is terminated by the Company for Cause, by you for
Good Reason or for any other reason (other than Disability), the date
specified in the Notice of Termination (which, in the case of a termination
for Cause, shall not be less than thirty (30) days from the date such Notice
of Termination is given and in the case of a termination for Good Reason
shall not be less than fifteen (15) nor more than sixty (60) days from the
date such Notice of Termination is given); provided, however, that if within
fifteen (15) days after any Notice of Termination is given, or, if later,
prior to the Date of Termination (as determined without regard to this
proviso), the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, then the Date of
Termination shall be the date on which the dispute is finally determined,
either by mutual written agreement of the parties, by a binding arbitration
award, or by a final judgment, order or decree of a court of competent
jurisdiction (which is not appealable or with respect to which the time for
appeal therefrom has expired and no appeal has been perfected); and provided,
further, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Company will continue
to pay you your full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, base salary) and
continue you as a participant in all compensation, benefit and insurance
plans in which you were participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved in accordance with
this Subsection.
(d) You shall be entitled to the benefits provided in
Section 4 if a Change in Control shall have occurred during the Term and your
employment with the Company is subsequently terminated or terminates within
36 months after such Change in Control, unless such termination is (A)
because of your death, (B) by the Company for Disability or Cause , or (C) by
you other than for Good Reason.
(e) Your right to terminate your employment for Good Reason
shall not be affected by your incapacity due to physical or mental illness. Your
continued
<PAGE>
employment shall not constitute consent to, or a waiver of rights with
respect to, any circumstance constituting Good Reason under this Agreement.
4. Compensation Upon Termination. Following a Change in Control of
the Company, you shall be entitled to the following benefits during a period
of disability, or upon termination of your employment, as the case may be,
provided that such period or termination occurs during the Term:
(a) Disability. During any period that you fail to perform your full
time duties with the Company as a result of incapacity due to physical or
mental illness, you shall continue to receive base salary and all other
earned compensation at the rate in effect at the commencement of any such
period (offset by all compensation payable to you under the Company's
disability plan or program or other similar plan during such period) until
your employment is terminated by reason of Disability. Thereafter, or in the
event your employment is terminated by reason of death, your benefits shall
be determined under the Company's long term disability, retirement, insurance
and other compensation programs then in effect in accordance with the terms
of such programs.
(b) Cause and Voluntary Termination other than for Good Reason. If
your employment shall be terminated by the Company for Cause or by you other
than for Good Reason following a Change in Control, the Company shall pay you
your full base salary and all other compensation through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, plus all other amounts to which you are entitled under any
compensation plan of the Company at the time such payments are due, and the
Company shall have no further obligations to you under this Agreement.
(c) Termination Without Cause; Voluntary Termination for Good
Reason. If your employment with the Company is terminated by the Company
(other than for Cause, Disability or your death) or by you for Good Reason
within 36 months after a Change in Control, then you shall be entitled to the
benefits below:
(i) the Company shall pay to you (A) your
full base salary and all other compensation through the Date of Termination
at the rate in effect at the time the Notice of Termination is given, no
later than the full fifth day following the Date of Termination, plus all
other amounts to which you are entitled under any compensation plan of the
Company at the time such payments are due and (B) if you so elect, in lieu of
your right to continue to receive deferred compensation under any deferred
compensation plan of the Company then in effect, no later than the fifth full
day following the Date of Termination, a lump sum amount, in cash, equal to
the deferred amounts together with any earnings credited on such amounts
under such plan;
(ii) the Company will pay as severance pay to you,
at the time specified in Subsection (e) below, a lump sum severance payment
(together with the payments provided in paragraph (iii) below, the "Severance
Payments") in an amount equal to the sum of (A) three (3) times the higher of
(x) your annual base salary in effect
<PAGE>
on the Date of Termination or (y) your annual base salary in effect
immediately prior to the Change in Control, plus (B) one and one-half (1-1/2)
times the higher of (x) your target incentive bonus for the year in which the
Date of Termination occurs, or (y) your target incentive bonus for the year
in which the Change in Control occurred;
(iii) the Company shall pay to you all legal fees
and expenses incurred by you in seeking to obtain or enforce any right or
benefit provided by this Agreement; and
(iv) for a [24-]month period after such
termination, the Company shall arrange to provide you with life, [disability,]
dental, accident and group health insurance benefits substantially similar
to those which you were receiving immediately prior to the Notice of
Termination. Notwithstanding the foregoing, the Company shall not provide any
benefit otherwise receivable by you pursuant to this paragraph (iv) if an
equivalent benefit is actually received by you from another employer during
the [24-]month period following your termination, and any such benefit
actually received by you shall be reported to the Company.
(v) all options and shares of restricted stock
granted or issued to you under the Company's 1993 Stock Incentive Plan or any
other stock incentive plan of the Company shall become exercisable or vested
in full on the Date of Termination.
(d) In the event that you become entitled to the Severance
Payments, if any of the Severance Payments will be subject to the tax imposed by
Section 4999 of the Code, (or any similar tax that may hereafter be imposed)(the
"Excise Tax") the Company shall pay to you at the time specified in Subsection
(e), below, an additional amount (the "Gross-Up Payment") such that the net
amount retained by you, after deduction of any Excise Tax on the Total Payments
(as hereinafter defined) and any federal, state and local income tax and Excise
Tax upon the payment provided for by this Subsection, shall be equal to the
Total Payments. For purposes of determining whether any of the Severance
Payments will be subject to the Excise Tax and the amount of such Excise Tax,
(a) any other payments or benefits received or to be received by you in
connection with a Change in Control of the Company or your termination of
employment (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, any person whose actions result in a
Change in Control of the Company or any person affiliated with the Company or
such person)(which together with the Severance Payments, constitute the "Total
Payments") shall be treated as "parachute payments" within the meaning of
Section 280G(b)(2) of the Code, and all "excess parachute payments" within the
meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax,
unless in the opinion of tax counsel selected by the Company's independent
auditors and acceptable to you such other payments or benefits (in whole or in
part) do not constitute parachute payments, or such excess parachute payments
(in whole or in part) represent reasonable compensation for services actually
rendered within the
<PAGE>
meaning of Section 280G(b)(4) of the Code in excess of the base amount within
the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject
to the Excise Tax, (b) the amount of the Total Payments which shall be
treated as subject to the Excise Tax shall be equal to the lesser of (1) the
total amount of the Total Payments or (2) the amount of excess parachute
payments within the meaning of Section 280G(b)(1) (after applying paragraph
(a), above), and (c) the value of any non-cash benefits or any deferred
payment or benefit shall be determined by the Company's independent auditors
in accordance with the principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-Up Payment, you shall be
deemed to pay federal income taxes at the highest marginal rate of federal
income taxation in the calendar year in which the Gross-Up Payment is to be
made and state and local income taxes at the highest marginal rate of
taxation in the state and locality of your residence on the Date of
Termination, net of the maximum reduction in federal income taxes which could
be obtained from deduction of such state and local taxes. In the event that
the Excise Tax is subsequently determined to be less than the amount taken
into account hereunder at the time of termination of your employment, you
shall repay to the Company at the time that the amount of such reduction in
Excise Tax is finally determined the portion of the Gross-Up Payment
attributable to such reduction (plus the portion of the Gross-Up Payment
attributable to the Excise Tax and federal, state and local income tax
imposed on the Gross-Up Payment being repaid by you if such repayment results
in a reduction in Excise Tax and/or a federal, state and local income tax
deduction) plus interest on the amount of such repayment at the rate provided
in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder at the time of
the termination of your employment (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), the Company shall make an additional gross-up payment in respect of
such excess (plus any interest payable with respect to such excess) at the
time that the amount of such excess is finally determined.
(e) The payments provided for in Subsections 4(b), (c) and
(d) shall be made not later than the fifth day following the Date of
Termination, unless otherwise specified; provided, however, that, if the
amounts of such payments cannot be finally determined on or before such day,
the Company shall pay to you on such day an estimate, as determined in good
faith by the Company, of the minimum amount of such payments and shall pay
the remainder of such payments (together with interest at the rate provided
in Section l274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined but in no event later than the thirtieth day after the Date of
Termination. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to you, payable on the fifth day after
demand by the Company (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code).
(f) Except as provided in the second sentence of Subsection
4(c)(v) hereof, you shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any
<PAGE>
payment or benefit provided for in this Section 4 be reduced by any
compensation earned by you as a result of employment by another employer, by
retirement benefits or by offset against any amount claimed to be owed by you
to the Company or otherwise.
5. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company expressly to
assume and agree to perform this Agreement to the same extent that the
Company would be required to perform it if no such succession had taken
place. Failure of the Company to obtain an assumption of this Agreement at or
prior to the effectiveness of any succession shall be a breach of this
Agreement and shall constitute Good Reason if you elect to terminate your
employment, except that for purposes of implementing the foregoing, the date
on which any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, Company shall mean the Company as
defined above and any successor to its business or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or
otherwise.
(b) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or if there is no such designee, to your
estate.
6. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
duly given when delivered or when mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed to the
Company, at 31 St. James Avenue, Boston, Massachusetts 02116-4101, Attention:
President and General Counsel, and to you at the address shown above or to such
other address as either the Company or you may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
7. Miscellaneous.
(a) The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
(b) The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Delaware.
<PAGE>
(c) No waiver by you at any time of any breach of, or
compliance with, any provision of this Agreement to be performed by the Company
shall be deemed a waiver of that or any other provision at any subsequent time.
(d) This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but both of which together will
constitute one and the same instrument.
(e) Any payments provided for hereunder shall be paid net
of any applicable withholding required under federal, state or local law.
(f) This Agreement sets forth the entire agreement of the
parties hereto in respect of the subject matter contained herein and supersedes
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer, employee
or representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and canceled.
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter, which
will then constitute our agreement on this subject.
Sincerely,
INSO CORPORATION
By__________________________________
Agreed to this ____ day of , 199_
____________________________________
(Signature)
_____________________________________
Print Name
Address:______________________
______________________
<PAGE>
EXHIBIT 21
List of Subsidiaries
Corporation Jurisdiction
Electronic Book Technologies
Canada, Ltd. Ontario, Canada
Electronic Book Technologies
International, Inc. Delaware, USA
Electronic Book Technologies, S.A. Switzerland
Henderson Software, Inc. Colorado, USA
Inso Australia Pty, Ltd. New South Wales, Australia
Inso Chicago Corporation Illinois, USA
Inso Corporation KK Tokyo, Japan
Inso Corporation, Ltd. England
Inso Foreign Sales Corporation Barbadoa, USA
Inso France SARL France
Inso France Development SA France
Inso Kansas City Corporation Missouri, USA
Inso (Overseas) Corporation Delaware, USA
Inso Providence Corporation Delaware, USA
Inso Securities Corporation Massachusetts, USA
Inso Technology Corporation Illinois, USA
Paradigm Development Corporation Nova Scotia, Canada
Sherpa Limited England
<PAGE>
Sherpa Systems Corporation California, USA
Sherpa Systems International, Inc. California, USA
Sherpa Systems GmbH Germany
Sherpa Systems GmbH & Co. KG Germany
Synex Information AB Sweden
Venture Lab, Inc. Nova Scotia, Canada
Viewport Development AB Sweden
Viewco ULC Canada
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-77302, 33-83606, 33-77304, 33-93324, 333-06847, 333-06845,
333-67771, 333-67773, and 333-67777) pertaining to the Inso Corporation 1993
Stock Purchase Plan, 1993 Stock Incentive Plan, 401(k) Plan, 1996
Non-employee Director Plan and 1996 Stock Incentive Plan and in the
Registration Statement (Form S-3 No. 333-69259) of Inso Corporation and in
the related Prospectus of our report dated March 29, 1999, with respect to
the consolidated financial statements and schedule of Inso Corporation
included in this Annual Report (Form 10-K) for the year ended December 31,
1998.
ERNST & YOUNG LLP
Boston, Massachusetts
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S ANNUAL REPORT ON FORM-10K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000917471
<NAME> INSO CORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 9,502
<SECURITIES> 44,555
<RECEIVABLES> 27,588
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 93,394
<PP&E> 9,865
<DEPRECIATION> 0
<TOTAL-ASSETS> 163,219
<CURRENT-LIABILITIES> 51,117
<BONDS> 0
0
0
<COMMON> 155
<OTHER-SE> 109,019
<TOTAL-LIABILITY-AND-EQUITY> 163,219
<SALES> 51,758
<TOTAL-REVENUES> 60,094
<CGS> 9,362
<TOTAL-COSTS> 12,650
<OTHER-EXPENSES> 86,019
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (20,604)
<INCOME-TAX> (1,035)
<INCOME-CONTINUING> (20,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,569)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
