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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27358
DOCUMENTUM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4261421
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5671 GIBRALTAR DRIVE, PLEASANTON, CALIFORNIA 94588-8547
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(Registrant's telephone number, including area code): (510) 463-6800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Nasdaq National Market
Common Stock, $0.001 par value
(TITLE OF CLASS)
Indicate by check mark whether the registrant has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on March 10,
1997 as reported on the Nasdaq National market, was approximately
$160,105,000. Shares of common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of outstanding shares of the registrant's Common Stock, par value
$.001 per share, was 14,169,816 on March 10, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Registrant's 1997 Annual
Meeting of Stockholders to be held May 8, 1997 are incorporated by reference
in Part III of this Form 10-K.
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FORM 10-K
INDEX
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<C> <S> <C>
PART I............................................................... Page 3
Item 1. Business.................................................. Page 3
Item 2. Properties................................................ Page 17
Item 3. Legal Proceedings......................................... Page 18
Item 4. Submission of Matters to a Vote of Security Holders....... Page 18
PART II.............................................................. Page 18
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters...................................... Page 18
Item 6. Selected Financial Data................................... Page 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... Page 20
Item 8. Consolidated Financial Statements and Supplementary Data.. Page 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... Page 25
PART III............................................................. Page 25
Item 10. Directors and Executive Officers of the Registrant........ Page 25
Item 11. Executive Compensation.................................... Page 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... Page 25
Item 13. Certain Relationships and Related Transactions............ Page 25
PART IV.............................................................. Page 26
Item 14. Exhibits, Consolidated Financial Statements, Financial
Statement Schedules, and Reports on Form 8-K............. Page 26
SIGNATURES........................................................... Page 27
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PART I
ITEM 1. BUSINESS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein as well as those
discussed under the caption "Risk Factors." Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this report. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that
may subsequently arise. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission that attempt
to advise interested parties of the risks and factors that may affect the
Company's business.
GENERAL
Documentum, Inc. ("Documentum" or the "Company") develops, markets and
supports a family of client/server and intranet software products that address
the specific challenges of managing business-critical documents effectively
across large enterprises. The Documentum Enterprise Document Management System
("EDMS") automates and accelerates the creation, modification and reuse of
business-critical documents and other unstructured data and the collaborative
efforts involved in these activities. The Documentum EDMS provides several key
business advantages. Companies can effectively manage all of the processes
involved in making business-critical documents available, keeping them
relevant and current, and tailoring them to make them useful for all
individuals. The Documentum EDMS extends the value of business-critical
documents through not only re-use, but re-purposing--the ability to assemble
and apply documents again and again for different purposes as the needs arise.
The Documentum EDMS is designed for enterprise-wide deployments, with a family
of client products that deliver appropriate information to different classes
of users in the appropriate format. Through Documentum's enterprise
scalability, companies can deploy solutions that not only meet the needs of
individual departments, but can scale to the entire enterprise--from hundreds
to thousands of users.
The Company was incorporated in Delaware in January 1990. The Company's
principal executive offices are located at 5671 Gibraltar Drive, Pleasanton,
California 94588. Its telephone number is (510) 463-6800. The Company's home
page can be located on the World Wide Web at http://www.documentum.com. As
used in this document, the "Company" and "Documentum" refer to Documentum,
Inc. and its subsidiaries.
INDUSTRY BACKGROUND
In today's highly competitive marketplace, a key component of corporate
success is the ability to leverage business-critical documents to help shorten
time to market, improve quality and enhance overall organizational
effectiveness. Business-critical documents contain corporate information,
employee knowledge and business processes. Global companies are increasingly
seeking innovative solutions to make optimal use of these documents.
According to some industry reports, up to 80 percent of corporate data is
unstructured--existing in the form of business-critical documents ranging from
text files, word processing documents and spreadsheets to CAD drawings,
graphics and images, Web pages, and even video or audio clips. In a typical
corporate environment, documents are created, modified, distributed and stored
using multiple software systems. These software applications run on a variety
of computing platforms that may be geographically dispersed, with little
compatibility or data sharing capability between systems.
Whatever their format and wherever their location, business-critical
documents such as product specifications, standard operating procedures,
technical manuals, regulatory submissions and project proposals
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represent the physical output of professionals and are essential to the key
processes of a company. However, today's information complexities have created
inefficiencies in document-related processes that hamper the productivity of
professionals both at the individual and team levels. Without an effective
means of searching for and reusing enterprise information, workers are often
forced to re-create documents from scratch, duplicating effort and increasing
the margin for error. The existence of multiple document versions creates
information integrity and accuracy problems. As a result, professionals are
spending a disproportionate amount of their time locating, processing, sharing
and assembling documents rather than engaging in higher-value activities.
Additional complexity is added by the document processes, which often require
group collaboration by teams of workers who are geographically dispersed and
use different client platforms.
Historically, companies have tried to address these document management
challenges either with costly and labor-intensive manual processes, or with
internally-developed systems based on proprietary technologies that are
difficult to implement, manage and maintain. The proliferation of productivity
tools such as word processors and spreadsheets has streamlined individual
document creation. However, these tools do not address productivity in
processes that require a number of individuals to collaborate and contribute
information across organizational and geographic barriers. A number of "point"
solutions have emerged that address certain aspects of document management,
such as imaging or text retrieval, but they do not provide a comprehensive
solution for the document management needs of the enterprise. Similarly, LAN-
based products that deliver simple library services are not engineered to
scale to the enterprise, and do not address the needs of business processes
because they overlook the issues of workflow and complex documents. Groupware
products enhance group productivity through ad hoc communications and project
discussions, but are not optimized to support collaboration on documents that
require formal version control and more robust enterprise security
capabilities. Likewise, many users are turning to new information delivery
vehicles such as World Wide Web browsers, but may require additional
capabilities such as collaboration on document creation and the ability to
control access to and ensure integrity and versioning of business-critical
documents.
Large organizations need enterprise-wide solutions to optimize the value of
their business-critical documents by automating all of the associated
procedures that take place between a document's creation and its use, re-use,
or re-purposing. These procedures range over the document's entire lifecycle--
from information capture to managing and controlling updates to the document,
automating its release and distribution, assembling document components, and
making the document easy for users to find and access. Business-critical
documents must easily integrate with the organization's existing business
processes and procedures, and the solution must scale effectively in a
heterogeneous computing environment. In addition, as companies make a stronger
commitment to the Web as a corporate computing infrastructure, they are
demanding technologies that improve the quality and usability of Web content
while at the same time reducing the costs of controlling and maintaining the
information.
DOCUMENTUM'S SOLUTION
Documentum was founded in 1990 to deliver document management software that
addresses the specific challenges of managing business-critical documents
effectively across the enterprise. The Company's solution is the Documentum
Enterprise Document Management System ("EDMS"), a family of object-oriented,
client/server and Web software products. The Documentum EDMS is based on the
idea that corporate customers need to manage ongoing changes in information to
stay effective. As a result, the EDMS provides an enterprise-scaleable
architecture that supports multiple networking configurations and user
environments. With the Documentum EDMS, companies can securely manage changes
to documents and document components at the object level, and they can
dynamically assemble documents based on their business procedures. In
addition, Documentum's family of client products enables all individuals in
the enterprise to access the documents they need, whether they're using Web
browsers, custom clients, or their own desktop applications.
Core Functionality
At the heart of the Documentum EDMS is the DocPage Server(TM), providing a
rich set of document and Web content management services for controlling and
managing business-critical information and processes
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throughout the enterprise. The DocPage Server supports capture, updating,
distribution, assembly, and access for all document types ranging from
traditional rich text and images to HTML, SGML, and multimedia objects. The
DocPage Server creates a dynamic document and Web page repository called a
Docbase(TM). Driven by business rules, the Docbase stores a document or Web
page as a Docobject(TM) that encapsulates the document's content together with
its attributes, including information about the document's relationships,
associated versions, renditions, formats, workflow, and security. Docobjects
can be infinitely combined and re-combined on demand to form Virtual
Documents--dynamic configurations of Docobjects that can come from any source
in the enterprise.
An extension of the DocPage Server, called Documentum RightSite(TM),
delivers powerful Web content management services for delivering high-quality,
business-critical information on an intranet. RightSite solves the complex
challenges of capturing, managing, and assembling frequently changing
information on corporate Web sites. RightSite makes Web applications cost-
effective by eliminating the laborious, manual tasks involved in tailoring
information and keeping it current. With RightSite, companies can ensure that
only the information relevant to a user's job function is delivered to the
desktop. Unlike first-generation, static Web solutions, RightSite dynamically
assembles Web pages "on the fly" according to business processes, enabling
companies to tailor Web content to users' unique needs.
The Documentum EDMS delivers the following key business benefits:
Heterogeneous Information Access. Users can access all the information they
need using their existing platforms, applications, and Web browsers, without
having to know where the information exists in the enterprise, how and when it
was created, or the information's type and format.
Support of Multiple Formats. Documentum enables users to work with multiple
formats or information types from text and data to complex formats such as
multi-file CAD drawings or multi-page fax images.
Workflow/Process Automation. Documentum's workflow effectively links
business-critical information with the processes involved in its capture,
creation and reuse. This enables companies to manage their information in the
context of best business practices, accelerating time to market and improving
professional productivity.
Reusability/Integrity. With Documentum, companies can re-use and re-purpose
documents and components of documents, eliminating duplication of effort and
reinforcing the accuracy and integrity of information. For instance, when a
business rule triggers a change in a component to reflect a new stage in a
business process, the change can instantly apply to all documents which
utilize that component. Users can then re-use that component and be assured
that it contains the correct information.
Tailorability. The Documentum EDMS is designed to be easily tailored by both
users and application developers, enabling customers to effectively develop
and deploy document management applications based on their unique business
processes. Developers can combine Documentum's embedded application
programming interfaces ("APIs") with a choice of languages to customize
applications and integrate them with the existing information infrastructure.
Enterprise Scalability. Companies can deploy solutions that not only meet
the needs of individual departments, but can scale to the entire enterprise--
from hundreds to thousands of users.
PRODUCTS
Within the enterprise, Documentum has identified three classes of document
management users: document coordinators, document contributors, and
information consumers. The Documentum EDMS is delivered via a range of client
products, each designed to deliver the appropriate DocPage Server and
RightSite functionality to a different class of user. Customers purchase
different combinations of seats of the products depending on the level of
functionality they choose to deliver to each user population.
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Documentum products include:
Documentum WorkSpace(TM)
Through its own robust client environment or integration with familiar
desktop applications, WorkSpace gives document coordinators access to the full
power and features of the DocPage Server.
Documentum SmartSpace(TM)
SmartSpace provides an easy-to-use client environment for document
contributors to perform basic document management tasks. SmartSpace also
supports integration with familiar desktop applications. The Company also
offers SmartSpace(TM) Intranet, an extension of the Smartspace product to the
Web platform which enables users to contribute content and perform a range of
document management tasks over the Web.
Documentum ViewSpace(TM) Intranet and Documentum SiteSpace(TM)
Designed for information consumers, ViewSpace Intranet and SiteSpace extend
the services of the Documentum EDMS to the Web. ViewSpace Intranet enables Web
browser users to access and view documents in a Docbase. SiteSpace is an
anonymous, unnamed user license of ViewSpace Intranet which enables companies
to deliver public content to any user without requiring a login or password.
Documentum UnaLink(TM)
UnaLink integrates the Documentum EDMS with the groupware capabilities of
Lotus Notes, enabling Notes users to participate in the full document
lifecycle.
Documentum LeafConnect(TM)
LeafConnect enables users of the Interleaf publishing system to take full
advantage of the flexibility and power of the Documentum EDMS from within the
familiar Interleaf environment.
Documentum DocPage Builder(TM).
The DocPage Builder is a set of tools for integrating desktop systems and
building tailored document management applications.
Documentum DocLink for SAP(TM)
DocLink for SAP is an interface that provides seamless integration between
the Documentum EDMS and SAP's R/3 product. DocLink for SAP enables
corporations to use intranet and client/server technology to link their
knowledge chain with the SAP supply chain in a paperless, electronic
environment.
PROFESSIONAL SERVICES
In addition to the EDMS product family, Documentum offers a range of
technical support, training, and consulting services through its Professional
Services organization. The Company operates two Technical Support Centers, one
located at its U.S. headquarters in Pleasanton and one located at its European
headquarters in the United Kingdom. Both centers offer hotline technical
support, remote dial-in services for problem identification and access to
maintenance and patch releases for supported and purchased products. The
Documentum Education Center offers a curriculum of training courses on the
Documentum EDMS for end users, developers and system administrators. Training
is available at the Company's training centers in Pleasanton, Philadelphia,
and abroad in London, and can also be given at the customer's site. Finally,
Documentum's consulting group offers a range of services designed to
accelerate deployment and user acceptance of Documentum applications across
the enterprise, and to reduce the time and cost of deploying applications.
Documentum consultants become an integral part of a customer's implementation
team, assisting with design, implementation, and deployment of the
application.
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STRATEGY
The Company's objective is to be the leading worldwide supplier of
enterprise document management software solutions. To achieve this objective,
the Company's strategy includes extending its technology leadership,
penetrating global industries vertically, leveraging its technology
partnerships, focusing on enterprise deployments and utilizing multiple
distribution channels.
Extend Technology Leadership. The Company's strategy is to continue to
enhance its existing server and client technologies, to add functionality to
its EDMS product family and to provide greater flexibility in terms of
information delivery, document repositories, and the number and variety of
supported client, server and relational database management system (RDBMS)
platforms. Documentum expects to enhance the features of its products by
making them compatible with new technologies as well as existing applications
and by responding to the unique needs of large organizations. The Company has
enhanced the architecture of its open, extensible server to support
distributed, heterogeneous document repositories across the enterprise.
Besides expanding the functionality of its own easy-to-use WorkSpace client
environment for document coordinators, Documentum has delivered new client
products for document contributors and consumers working in both Web and
client/server environments. Documentum has also provided support for other
information delivery vehicles such as SAP, Lotus Notes and the Interleaf
publishing product.
Penetrate Global Industries Vertically. Documentum has identified strategic
vertical markets with compelling business-critical needs for the Company's
EDMS, namely, industries where more efficient management of unstructured
information and intellectual capital results in an immediate and substantial
payback. Recently, the Company formed an internal Industry Solutions
organization to focus the Company's efforts on developing complete, whole-
product solutions for these targeted industries. Through its early focus on
research and development and regulatory processes within the pharmaceutical
industry, the Company has sold its EDMS products to many of the largest
pharmaceutical companies worldwide. The Company has leveraged this leadership
position by penetrating the manufacturing operations of pharmaceutical
companies and subsequently extending its customer base to include additional
process manufacturing companies in chemicals, petrochemicals and consumer
products. The Company has also replicated its vertical market strategy to
address key segments in discrete manufacturing, obtaining major customers in
the construction engineering, electronics and computer industries. In the
future, the Company intends to expand its customer base in additional markets,
such as financial services, telecommunications and government.
Leverage Technology Partnerships. The Company intends to accelerate the
development, introduction and acceptance of its EDMS solutions through
selected strategic technology partnerships. For example, the Company has
embedded in its software certain industry-standard features and functionality
licensed from Adobe, Microsoft and Verity. In addition, the Company integrates
its EDMS solutions with other business-critical applications from vendors
including Autodesk, Lotus and SAP. Finally, the Company conducts joint
marketing and sales activities with complementary strategic hardware and RDBMS
vendors, including Hewlett-Packard, IBM, Sun, Informix, Oracle and Sybase.
Focus on Enterprise Deployments. The Company has designed its products to
scale from focused business-critical applications consisting of hundreds of
user seats to enterprise-wide use consisting of multiple applications for
thousands of user seats at multiple sites. The Company believes that initial
customer success in capturing business-critical information by utilizing the
Company's EDMS family of products is an essential factor in the customer's
decision to deploy the Company's products throughout the enterprise. The
Company has a two-pronged strategy to drive towards enterprise deployment.
First, the Company provides targeted consulting and training services to its
customers and systems integrators. Second, the Company has established
strategic partnerships with major, or vertically focused, systems integrators,
including Andersen Consulting, Cap Gemini, Computer Sciences Corporation and
IBM/ISSC, which provide customization of the Company's EDMS products for
individual customer needs and integration with third-party applications. The
Company believes that migrating its customers from initial application usage
to enterprise-wide deployment provides a substantial growth opportunity.
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Utilize Multiple Distribution Channels. The Company's strategy is to expand
its multiple distribution channels to reach the broadest customer base in its
targeted industries. The Company has historically generated the majority of
its revenues from its direct sales force. More recently, the Company has
focused on complementing its direct sales channel with indirect channels,
primarily consisting of systems integrators and distributors. The Company has
a strong channel relationship with Xerox and certain Xerox affiliates, who
have served as systems integrators, resellers, and distributors for the
Company's products. Documentum intends to focus increased efforts on growing
its indirect sales channels to include value-added resellers, and to expand
both direct and indirect distribution channels on a worldwide basis by hiring
additional sales persons and recruiting additional integrators, particularly
in vertical industries.
CUSTOMERS
The Company has directly or indirectly licensed its products to more than
200 end user customers in a broad range of industries worldwide, including
pharmaceutical, chemical, manufacturing, and engineering companies, as well as
governmental agencies. Examples of customers who are using the Documentum EDMS
to accelerate their business-critical processes include:
Pharmaceutical: Glaxo-Wellcome, a worldwide pharmaceutical manufacturer with
operations in 120 countries, is using the Documentum EDMS to accelerate its
time to market for new drugs. The new drug submission process takes many years
and involves people throughout the organization to document each drug's
development and testing. In addition, the submission must be customized for
each country in which the drug is to be marketed. At Glaxo-Wellcome, the
Documentum EDMS replaces manual processes and paper distribution lists by
providing an accurate, easily accessible repository of drug information that
can be used and reused for simultaneous submissions in multiple markets, as
well as consistent, rapid responses to government agency inquiries.
Engineering: Black & Veatch, a worldwide engineering firm providing
engineering, procurement, and construction services to clients in a wide
variety of industries including power generation and waste water treatment, is
using the Documentum EDMS to cut turnaround time on procurement specifications
from two weeks to two days. At Black & Veatch, a single power plant project
procurement specification can run 500 to 600 pages, consisting of design
drawings as well as text. The Documentum-based system replaces a largely
manual process that scattered procurement documents on hundreds of computer
disks throughout the company. Now, engineers and architects can use their
desktop computers to access, modify and circulate the latest version of a
specification. Any changes they make to a specification are automatically
reflected in all versions, wherever they reside on the network.
Manufacturing: Ericsson Telecom AB, a worldwide manufacturer of
sophisticated, build-to-order switches and other telephony products, is using
the Documentum EDMS to help speed products to market by eliminating redundancy
and accelerating production cycles. Many of Ericsson's products are built to
individual customers' specifications--each requiring its own custom set of
manuals. Documenting a switch's parts, assembly and repair is a complex,
ongoing process involving engineers, technicians, designers, writers, editors
and administrators across the organization. Once the manual has been created,
managing and reusing the information throughout the entire product lifecycle
presents a major document management challenge. Ericsson was able to take
advantage of the Documentum EDMS's client/server architecture and development
tools to build a document management system which automates these complex
processes, replacing Ericsson's existing mainframe and paper-based systems.
MARKETING AND SALES
The Company sells its products through its own direct sales force as well as
complementary indirect channels primarily consisting of systems integrators
and distributors. The Company has 12 sales offices in the United States and
four in Europe, five distributors in Europe, Canada, Japan, and Australia, and
strategic relationships with more than 30 systems integrators worldwide.
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The Company targets global customers in key vertical markets. The Company's
field sales force conducts multiple presentations and demonstrations of the
Company's family of EDMS products to management and users at the customer site
as part of the direct sales effort. Sales cycles generally last from six to
twelve months. The direct sales force is responsible for local partner
support, joint sales efforts and management of multiple channels.
The Company's sales and marketing organization consisted of 109 employees as
of December 31, 1996. The sales staff is based at the Company's corporate
headquarters in Pleasanton, California and at field sales offices in the U.S.
metropolitan areas of Atlanta, Boston, Chicago, Dallas, Denver, Detroit,
Houston, Los Angeles, New York, Philadelphia, San Francisco, and Seattle and
abroad in Frankfurt, Munich, London and Paris. To support its sales force, the
Company conducts comprehensive marketing programs, which include public
relations, telemarketing, seminars, trade shows, education and user group
conferences.
STRATEGIC PARTNERSHIPS
Through its technology partners, Documentum is offering comprehensive
document management solutions that integrate with industry-standard hardware
platforms, RDBMSs, and enterprise applications--particularly those targeted to
key vertical markets such as process manufacturing. These partnerships ensure
that customers will have a document management solution that supports their
existing computing infrastructure and that is tailored to the specific
requirements of their industry.
PRODUCT DEVELOPMENT
The Company has committed, and expects to commit, substantial resources to
product development. The Company's existing products were designed after
extensive work with potential customers to assess their needs. The Company
supplements its product development efforts by reviewing customer feedback on
existing products and working with customers and potential customers to
anticipate future functionality requirements.
The Company expects to continue to enhance its existing products, develop
new products and augment its product base through acquisitions. As of December
31, 1996, the Company's research and development organization consisted of 74
full-time employees. During 1996, 1995 and 1994, research and development
expenses were $7.9 million, $4.5 million, and $2.5 million respectively.
Historically, the Company has expensed its software development costs as
incurred. The Company anticipates that it will continue to commit substantial
resources to research and development in the future.
The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and
technological developments, satisfy diverse and evolving customer requirements
and otherwise achieve market acceptance. There can be no assurance that the
Company will be successful in continuing to develop and market on a timely and
cost-effective basis fully functional product enhancements or new products
that respond to technological advances by others, or that its enhanced and new
products will achieve market acceptance. In addition, the Company has in the
past experienced delays in the development, introduction and marketing of new
or enhanced products, and there can be no assurance that the Company will not
experience similar delays in the future. Any failure by the Company to
anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
would have a material adverse effect on the Company's business, operating
results and financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is heavily dependent upon proprietary technology. The
Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. The Company presently has no
patents or patent applications pending. Despite the Company's efforts to
protect its proprietary
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rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. The Company is not aware that any of
its products infringes the proprietary rights of third parties. There can be
no assurance, however, that third parties will not claim infringement by the
Company with respect to current or future products. The Company expects that
software product developers will increasingly be subject to infringement
claims as the number of products and competitors in the Company's industry
segment grows and the functionality of products in different industry segments
overlaps. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
In addition, the Company also relies on certain software that it licenses
from third parties, including software that is integrated with internally
developed software and used in the Company's products to perform key
functions. There can be no assurances that such firms will remain in business,
that they will continue to support their products or that their products will
otherwise continue to be available to the Company on commercially reasonable
terms. The loss or inability to maintain any of these software licenses could
result in delays or reductions in product shipments until equivalent software
can be developed, identified, licensed and integrated, which would adversely
affect the Company's business, operating results and financial condition.
INDUSTRY STANDARDS
Documentum is committed to providing comprehensive, open document management
solutions targeted to customers' unique business requirements. This is evident
in the Company's support of industry standards as well as its strategic
relationships with select technology partners. Documentum participates
actively in the two leading organizations which have taken the initiative to
define standards specifically for the document management arena. These include
the Open Document Management API ("ODMA") and the Document Management Alliance
("DMA"). ODMA is developing an API which will enable document management
capabilities to be integrated into a wide range of desktop applications. DMA
is proposing a specification for broader interoperability and connectivity
between heterogeneous document management services, repositories and
applications. In 1996, ODMA formally accepted Documentum's query extension
enabling desktop application users to simultaneously search document
repositories from different vendors.
RISK FACTORS
In evaluating the Company's business, prospective investors should carefully
consider the following factors in addition to the other information presented
in this report.
Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
Results. Prior growth rates in the Company's revenue and operating results
should not be considered indicative of future growth, if any, or of future
operating results. Future operating results will depend upon many factors,
including the demand for the Company's products, the level of product and
price competition, the length of the Company's sales cycle, the size and
timing of individual license transactions, the delay or deferral of customer
implementations, the budget cycles of the Company's customers, the Company's
success in expanding its direct sales force and indirect distribution
channels, the timing of new product introductions and product enhancements by
the Company and its competitors, the mix of products and services sold, levels
of international sales, activities of and acquisitions by competitors, the
timing of new hires, changes in foreign currency exchange rates, the ability
of the Company
10
<PAGE>
to develop and market new products and control costs and general domestic and
international economic and political conditions. In addition, the operating
results of many software companies reflect seasonal trends, and the Company's
business, operating results and financial condition may be affected by such
trends in the future. The Company's sales generally reflect a relatively high
amount of revenues per order. The loss or delay of individual orders,
therefore, could have a significant impact on the revenues and quarterly
results of the Company. Moreover, the timing of license revenue is difficult
to predict because of the length of the Company's sales cycle, which is
typically six to twelve months from the initial contact. Because the Company's
operating expenses are based on anticipated revenue trends and because a high
percentage of the Company's expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of license transactions could
cause significant variations in operating results from quarter to quarter and
could result in losses. To the extent such expenses precede increased
revenues, the Company's operating results would be materially adversely
affected. As a result of these factors, operating results for any quarter are
subject to significant variation, and the Company believes that period-to-
period comparisons of its results of operations are not necessarily meaningful
and should not be relied upon as indications of future performance.
Furthermore, due to all of the foregoing factors, it is likely that in some
future quarter the Company's operating results will be below the expectations
of public market analysts and investors. In such event, the price of the
Company's common stock would likely be materially adversely affected.
Lengthy Sales and Implementation Cycles. The license of the Company's
software products is often an enterprise-wide decision by prospective
customers and generally requires the Company to engage in a lengthy sales
cycle (typically between six and twelve months) to provide a significant level
of education to prospective customers regarding the use and benefits of the
Company's products. Additionally, the size of the transaction and the
complexity of the arrangement can also cause delays in the sales cycle. The
implementation by customers of the Company's products involves a significant
commitment of resources by such customers over an extended period of time and
is commonly associated with substantial reengineering efforts. For these and
other reasons, the sales and customer implementation cycles are subject to a
number of significant delays over which the Company has little or no control.
Delay in the sale or customer implementation of a limited number of license
transactions could have a material adverse effect on the Company's business
and operations and cause the Company's operating results to vary significantly
from quarter to quarter. Therefore, the Company believes that its quarterly
operating results are likely to vary in the future.
Product Defects. Due to the complexity and sophistication of the Company's
software products, the Company's products from time to time contain defects or
"bugs" which can be difficult to correct. Furthermore, as the Company
continues to develop and enhance its products, there can be no assurance that
the Company will be able to identify and correct defects in such a manner as
will permit the timely introduction of such products. Moreover, despite
extensive testing, the Company has from time to time discovered defects only
after its systems have been used by many customers. There can be no assurance
that software defects will not cause delays in product introductions and
shipments, result in increased costs, require design modifications, or impair
customer satisfaction with the Company's products. Any such event could
materially adversely affect the Company's business, operating results and
financial condition.
Product Concentration. To date, substantially all of the Company's revenues
have been attributable to sales of licenses of the Documentum EDMS family of
products and related services. The Company currently expects the Documentum
EDMS family of products, and related services, to account for substantially
all of its future revenues. As a result, factors adversely affecting the
pricing of or demand for the Documentum EDMS products such as competition or
technological change could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's future
financial performance will depend, in significant part, on the successful
development, introduction and customer acceptance of new and enhanced versions
of the Documentum EDMS family of products. There can be no assurance that the
Company will continue to be successful in developing and marketing the
Documentum EDMS products.
End User Customer and Industry Concentration. A relatively small number of
end user customers account for a significant percentage of the Company's
revenues. In 1994, Glaxo-Wellcome accounted for approximately
11
<PAGE>
34% of license revenues. In addition, licenses to end users in the
pharmaceutical industry for 1996, 1995,and 1994, including Glaxo-Wellcome,
accounted for 21%, 31% and 71%, respectively, of license revenues. Certain of
these revenues were the result of sales by the Company's indirect channel
partners, including Xerox and certain Xerox affiliates. The Company expects
that sales of its products to a limited number of customers and industry
segments will continue to account for a high percentage of revenue for the
foreseeable future. In addition, the future success of the Company will depend
on its ability to obtain orders from new customers and its ability to
successfully market its products in industries other than the pharmaceutical
industry. The loss of a major customer or any reduction or delay in orders by
such customers, or the failure of the Company to successfully market its
products outside existing targeted industry segments would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Reliance on Certain Relationships. The Company has established strategic
relationships with a number of organizations that it believes are important to
its worldwide sales, marketing and support activities. The Company's
relationships with indirect channel partners and other consultants provide
marketing and sales opportunities for the Company's direct sales force, expand
the distribution of its products and broaden its product offerings through
product bundling. These relationships also assist the Company in keeping pace
with the technological and marketing developments of major vendors, and in
certain instances, provide the Company with technical assistance for the
Company's product development efforts. In particular, the Company has strategic
relationships with Xerox and certain Xerox affiliates, including various
distribution arrangements. In 1996, 1995 and 1994, license revenues associated
with these relationships accounted for approximately $5.3 million, $6.1 million
and $0.7 million, respectively, representing 15%, 30% and 8% of the Company's
license revenues, respectively. There can be no assurance that any customer,
systems integrator or distributor will continue to market or to purchase the
Company's products. The failure by the Company to maintain these relationships,
particularly with Xerox and its affiliates, or to establish new relationships
in the future, could have a material adverse effect on the Company's business,
results of operations and financial condition.
New Products and Rapid Technological Change. The document management software
market is characterized by rapid technological change, changes in customer
requirements, frequent new product introductions and enhancements and emerging
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards can render existing products obsolete
and unmarketable. Accordingly, the life cycles of the Company's products are
difficult to estimate. The Company's future success will depend in part upon
its ability to enhance current products and to develop and introduce new
products that respond to evolving customer requirements and keep pace with
technological developments and emerging industry standards, such as new
operating systems, hardware platforms, user interfaces and relational database
management system ("RDBMS") software. The Company's future success will also
depend in part on its ability to execute on its strategy to develop whole-
product solutions in certain target vertical industries. In addition, the
Company's future success will depend in part upon its ability to maintain and
enhance relationships with its technology partners, such as RDBMS vendors, in
order to provide its customers with integrated product solutions. There can be
no assurance that the Company will be successful in maintaining these
relationships or in developing and marketing product enhancements or new
products that respond to technological change, updates and enhancements to
third party products used in conjunction with the Company's products, changes
in customer requirements or emerging industry standards; that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products and enhancements; or
that any new products or enhancements that the Company may introduce will
adequately meet the requirements of the marketplace and achieve market
acceptance. Moreover, the Company has in the past experienced delays in the
release dates of enhancements to its EDMS products. If release dates of any
future EDMS enhancements are delayed or, if when released, fail to achieve
market acceptance, the Company's business, financial condition and results of
operations could be materially adversely affected. To date, the delays the
Company has experienced have been minor in nature and are often the result of
adding enhancements or functionality based upon customer feedback during beta
product versions. These delays have generally not exceeded three months in
duration from the Company's scheduled internal release dates, however, there
can be no assurance that the Company may not experience future delays in
product introduction. The inability of the
12
<PAGE>
Company, for technological or other reasons, to develop and introduce new
products or enhancements in a timely manner in response to changing customer
requirements, technological change or emerging industry standards, would have
a material adverse effect on the Company's business, results of operations and
financial condition.
Emerging Markets. The client/server application software market is a
relatively new market and is intensely competitive, highly fragmented and
subject to rapid change. The Company markets its products solely to customers
who have migrated their enterprise computing systems to client/server
computing environments. The Company's future financial performance will depend
in large part on continued growth in the number of organizations adopting
client/server computing environments. There can be no assurance that the
client/server market will maintain its current level of growth or continue at
all. If the client/server market fails to grow or grows more slowly than the
Company currently anticipates, the Company's business, operating results and
financial condition would be materially adversely affected.
Similarly, the market for document management software is intensely
competitive, highly fragmented and subject to rapid change. The Company's
future financial performance will depend primarily on growth in the number of
document management applications developed for use in client/server
environments. There can be no assurance that the market for document
management software will continue to grow or that, if it does grow,
organizations will adopt the Company's products. The Company has spent, and
intends to continue to spend, significant resources educating potential
customers about the benefits of its products. However, there can be no
assurance that such expenditures will enable the Company's products to achieve
any additional degree of market acceptance, and if the document management
software market fails to grow or grows more slowly than the Company currently
anticipates, the Company's business, operating results and financial condition
would be materially adversely affected.
In addition, the commercial market for products and services designed for
use with the Internet and the World Wide Web has only recently begun to
develop, and the success of the Company's products may depend, in part, on
their continued compatibility with the Internet and the Web. It is difficult
to predict with any assurance whether the Internet will prove to be a viable
commercial marketplace or whether the demand for Internet-related products and
services will increase or decrease in the future. The increased commercial use
of the Internet could require substantial modification and customization of
the Company's products and services and the continued introduction of new
products and services.
Intense Competition. The market for the Company's products is intensely
competitive, subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's products are targeted at the emerging market for open, client/server
software solutions, and the Company's competitors offer a variety of products
and services to address this market. The Company currently encounters direct
competition from a number of public and private companies such as Saros, a
FileNet Company, PC DOCS, Novasoft, OpenText, and Metaphase. Several of these
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name
recognition and a larger installed base of customers than the Company.
In addition, RDBMS vendors, such as Oracle, may compete with the Company in
the future. For example, Oracle has recently announced products that may
compete with the Company's products. Like the Company's current competitors,
many of these companies have longer operating histories, significantly greater
resources and name recognition and a larger installed base of customers than
the Company. Oracle and other potential competitors have well-established
relationships with current and potential customers and strategic partners of
the Company, have extensive knowledge of the relational database industry and
have the resources to enable them to more easily offer a single vendor
solution. As a result, these competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products, than can the Company.
The Company also faces indirect competition from systems integrators. The
Company relies on a number of systems consulting and systems integration firms
for implementation and other customer support services, as
13
<PAGE>
well as recommendations of its products during the evaluation stage of the
purchase process. Although the Company seeks to maintain close relationships
with these service providers, many of these third parties have similar, and
often more established, relationships with the Company's principal
competitors. If the Company is unable to develop and retain effective, long-
term relationships with these third parties, the Company's competitive
position would be materially adversely affected. Further, there can be no
assurance that these third parties, many of which have significantly greater
resources than the Company, will not market software products in competition
with the Company in the future or will not otherwise reduce or discontinue
their relationships with or support of the Company and its products.
It is also possible that new competitors such as Microsoft, or alliances
among competitors may emerge and rapidly acquire significant market share. The
Company also expects that competition will increase as a result of software
industry consolidations. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of the Company's prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition may result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on the Company's business, operating results
and financial condition. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition.
Management of Growth; Dependence Upon Key Personnel. The Company's ability
to compete effectively and to manage future anticipated growth, will require
the Company to expand, train and manage its employee work force. The Company's
plans include hiring a significant number of highly-qualified technical, sales
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to attract assimilate or
retain such key employees.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success is heavily dependent upon proprietary technology. The Company relies
primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which
afford only limited protection. The Company presently has no patents or patent
applications pending. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to as great an extent as do the laws of the
United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. The Company is
not aware that any of its products infringe the proprietary rights of third
parties. There can be no assurance, however, that third parties will not claim
infringement by the Company with respect to current or future products. The
Company expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
In addition, the Company also relies on certain software that it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. There
can be no assurances that such firms will remain in business, that they will
continue to support their products or that their products will otherwise
continue to be available to the Company on commercially reasonable terms. The
loss or inability to maintain any of these software licenses could result in
delays or
14
<PAGE>
reductions in product shipments until equivalent software can be developed,
identified, licensed and integrated, which would adversely affect the
Company's business, operating results and financial condition.
International Operations. The Company's sales are primarily to large
multinational companies. To service the needs of such companies, both
domestically and internationally, the Company and its support partners must
provide worldwide product support services. As a result, the Company intends
to continue expanding its existing international operations and enter
additional international markets, which will require significant management
attention and financial resources and could adversely affect the Company's
operating margins and earnings, if any. The Company opened an office in London
in April 1994, in Frankfurt in December 1994, in Paris in November 1994 and in
Munich in October 1996. Certain Xerox affiliates were responsible for
substantially all of the Company's product support in Europe during 1994 and
1995. In 1996, the Company established its own European technical support
operation, located in the London office. For 1996, 1995 and 1994,
international license revenues amounted to $10.0 million, $5.2 million, and
$0.7 million, respectively, representing 29%, 26% and 8% of the Company's
license revenues, respectively. In order to successfully expand international
sales, the Company must establish additional foreign operations, hire
additional personnel and develop relationships with additional international
vendors. To the extent that the Company is unable to do so in a timely manner,
the Company's growth, if any, in international sales will be limited, and the
Company's business, operating results and financial condition could be
materially adversely affected. In addition, there can be no assurance that the
Company will be able to maintain or increase international market demand for
its products.
Additional risks inherent in the Company's international business activities
generally include currency fluctuations, unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs of and the Company's
limited experience in localizing products for foreign countries, lack of
acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations,
potentially adverse tax consequences including restrictions on the
repatriation of earnings, and the burdens of complying with a wide variety of
foreign laws. To date, substantially all of the Company's international
revenues have been denominated in U.S. dollars. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in the currency exchange rates in the future will not have a
material adverse impact on revenues from direct international sales and thus
the Company's business, operating results or financial condition. There can be
no assurance that such factors will not have a material adverse effect on the
Company's future international operations and, consequently, the Company's
results of operations.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. However, it is possible that the
limitation of liability provisions contained in the Company's license
agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company may entail the risk of such
claims, and there can be no assurance that the Company will not be subject to
such claims in the future. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
Risk of Product Defects. Software products as complex as those offered by
the Company frequently contain errors or failures, especially when first
introduced or when new versions are released. Although the Company conducts
extensive product testing, the Company has in the past released products that
contain defects, and has discovered software errors in certain of its new
products and enhancements after their introduction. For example, the Company
experienced certain technical problems in the December 1994 release of its
product that were corrected in its June 1995 release. The Company could in the
future lose or delay recognition of revenues as a result of software errors or
defects. The Company's products are typically intended for use in applications
that may be critical to a customer's business. As a result, the Company
expects that its customers and potential customers have a greater sensitivity
to product defects than the market for software products generally. Although
the Company's business has not been adversely affected by any such errors to
date, there can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new
15
<PAGE>
products or releases after commencement of commercial shipments, resulting in
loss of revenue or delay in market acceptance, diversion of development
resources, damage to the Company's reputation, or increased service and
warranty costs, any of which could have a material adverse effect upon the
Company's business, operating results and financial condition.
Control By Existing Stockholders. The Company's executive officers,
directors and affiliated entities together beneficially own approximately
39.8% of the outstanding shares of Common Stock. In particular, Xerox owns
approximately 26% of the outstanding shares of Common Stock. As a result,
these stockholders are effectively able to exercise control over matters
requiring stockholder approval, including the election of directors, and
mergers, consolidations and sales of all or substantially all of the assets of
the Company. This may prevent or discourage tender offers for the Company's
Common Stock or changes in the control of the Company unless the terms are
approved by such stockholders.
Possible Volatility of Stock Price. The trading price of the Company's
Common Stock is subject to significant fluctuations in response to variations
in quarterly operating results, the gain or loss of significant orders,
changes in earning estimates by analysts, announcements of technological
innovations or new products by the Company or its competitors, general
conditions in the software and computer industries and other events or
factors. In addition, the stock market in general has experienced extreme
price and volume fluctuations which have affected the market price for many
companies in industries similar or related to that of the Company and which
have been unrelated to the operating performance of these companies. These
market fluctuations may adversely affect the market price of the Company's
Common Stock.
Effect of Certain Charter Provisions: Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The Company's Board of Directors has
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to those of the Common Stock.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue any shares of Preferred
Stock. Further, certain provisions of the Company's Amended and Restated
Certificate of Incorporation, including provisions that create a classified
board of directors, and certain provisions of the Company's Amended and
Restated Bylaws and of Delaware law could delay or make more difficult a
merger, tender offer or proxy contest involving the Company.
EXECUTIVE OFFICERS
The following is a list of the Company's executive officers as of February
28, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey A. Miller.... 45 President, Chief Executive Officer, and Director
Mark S. Garrett...... 39 Vice President, Chief Financial Officer and Secretary
Robert K. Reid....... 46 Vice President, Industry Solutions
Howard I. Shao....... 41 Vice President, Product Development
Paul J. Hoffman...... 46 Vice President, Worldwide Sales
</TABLE>
Jeffrey A. Miller has served as the Company's President, Chief Executive
Officer and member of the Board of Directors since July 1993. From April 1991
to March 1993, Mr. Miller was a division president at Cadence Design Systems,
Inc., a supplier of electronic design automation software ("Cadence"). From
February 1983 to April 1991, Mr. Miller was Vice President and General Manager
and Vice President of Marketing of Adaptec, Inc., a supplier of computer
input/output controllers. From 1976 to 1983, Mr. Miller held various positions
at Intel Corporation, a manufacturer of semiconductor components. Mr. Miller
received his M.B.A. and B.S. in Electrical Engineering and Computer Science
from the University of Santa Clara.
16
<PAGE>
Mark A. Garrett has served the Company's Vice President, Chief Financial
Officer and Secretary since January 1997. From February 1995 through December
1996, Mr. Garrett was Vice President of Worldwide Corporate Financial Planning
and Analysis at Cadence Design Systems, Inc., a supplier of electronic design
automation software ("Cadence"). From August 1994 to February 1995, Mr.
Garrett served as Finance Group Director for the Spectrum Services division at
Cadence. From January 1993 to July 1994, Mr. Garrett was Finance Group
Director for Technology Development at Cadence. From June 1991 to December
1992, Mr. Garrett was Division Controller and Finance Director for the Systems
and CAE Divisions of Cadence. From June 1979 to May 1991, Mr. Garrett held
various financial positions at IBM Corporation. Mr. Garrett received his
M.B.A. from Marist College and his B.S. and B.A. from Boston University.
Robert K. Reid has served the Company as Vice President of Industry
Solutions since January 1997. Prior to that, Mr. Reid was the Company's Vice
President of Marketing since August 1993. From 1988 to August 1993, Mr. Reid
was Vice President of Marketing for Octel Communications Corp., a voicemail
company. From 1983 to 1988, Mr. Reid was Vice President of Marketing for NBI,
Inc., an office systems company. From 1980 to 1983, Mr. Reid was Vice
President of Marketing for Zenith Data Systems Corp., a personal computer
company. Mr. Reid received his B.S. in Communications from the University of
Tennessee.
Howard I. Shao, a founder of the Company, has served as Vice President,
Engineering of the Company since June 1990. From 1984 to June 1990, Mr. Shao
held a variety of management positions at Ingres Corporation, a relational
database company ("Ingres"), including Director Product Development. From 1981
to 1984, Mr. Shao was the Manager of Department Database Processor at
TTI/Citicorp, a software division of Citicorp. Mr. Shao was a co-founder of
Transtech International, a software company. Mr. Shao received his M.B.A. from
Pepperdine University and a B.S. in Computer Science from the Massachusetts
Institute of Technology.
Paul J. Hoffman has served as the Company's Vice President, Worldwide Sales
since September of 1996. From September 1994 to September 1996, Mr. Hoffman
was Vice President, Worldwide Operations for Oracle Corporation ("Oracle"), a
relational database software company. From June 1992 until September 1994 he
served as Vice President, Direct Marketing Division, USA for Oracle and from
June 1990 until June 1992 he served as Area Vice President, West for Oracle.
Mr. Hoffman received his B.S. in Finance from Fairfield University.
EMPLOYEES
As of December 31, 1996, the Company employed 281 persons, including 109 in
sales and marketing, 37 in its consulting and training services organization,
23 in customer support, 74 in research and development and 38 in finance and
administration. Of these, 46 are located in Europe and the remainder are
located in North America. None of the Company's employees is represented by a
labor union. The Company has experienced no work stoppages and believes its
relationship with its employees is good. Competition for qualified personnel
in the Company's industry is intense. The Company believes that its future
success will depend in part on its continued ability to attract, hire and
retain qualified personnel.
ITEM 2. PROPERTIES
As of December 31, 1996 the Company leased all of its facilities and its
principal locations are in or near the following cities:
<TABLE>
<CAPTION>
LEASE
LOCATION SQUARE FEET EXPIRATION DATE PRINCIPAL ACTIVITIES
-------- ----------- --------------- --------------------
<S> <C> <C> <C>
Pleasanton, CA.......... 61,200 October, 2001 Corporate HQ, Development,
Sales, Marketing, Services and
support
Chicago, IL............. 9,624 July, 2001 Sales, Marketing, Services
Munich, Germany......... 7,000 October, 2001 Sales, Services
Stockley Park, England.. 5,073 December, 1999 Sales, Marketing, Services
</TABLE>
17
<PAGE>
The Company's principal administrative, engineering, manufacturing,
marketing and sales facilities total approximately 61,200 square feet and are
located in two buildings in Pleasanton, California under a lease which expires
in October, 2001. In addition, the Company leases offices for sales, marketing
and customer service activities in or near Atlanta, Georgia; Burlington,
Massachusetts; Southfield, Michigan; Saddlebrook, New Jersey; Chicago,
Illinois; Willow Grove, Pennsylvania; Irvine, California; Denver, Colorado;
Dallas, Texas; Houston, Texas; Bellevue, Washington; and outside of the United
States in Stockley Park, England; Paris, France and Munich, Germany.
In December of 1996, the Company signed a lease for approximately an
additional 30,000 square feet in Pleasanton, California beginning in March of
1997 and expiring in February, 2006. In 1997, the Company anticipates
expanding existing facilities depending upon the availability of suitable
additional space. Recently, commercial building vacancy rates have
significantly dropped in many of the markets where the Company has significant
operations. As a result, the Company could experience difficulty in obtaining
additional space for expansion. Failure to obtain space or to obtain it on
reasonably attractive commercial terms may inhibit the Company's ability to
grow, or otherwise adversely effect the Company's operations and financial
results.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter on the Nasdaq National
market under the symbol DCTM. In February 1996, the Company completed its
initial public offering of 2,058,000 shares of its common stock at an initial
offering price of $24.00 per share. The following table lists the high and low
sales price for each quarter of 1996 as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
Fourth quarter................................................. $41.500 $30.500
Third quarter.................................................. $33.000 $22.250
Second quarter................................................. $46.500 $29.875
First quarter (Subsequent to February 5)....................... $40.000 $28.000
</TABLE>
The trading price of the Company's Common Stock is subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of new products by the Company or its competitors, announcements
of technological innovations, as well as other events or factors. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price of many high
technology companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
effect the market price of the Company's Common Stock.
As of December 31, 1996, the approximate number of common stockholders of
record was 386.
The Company has never paid any cash dividends on its capital stock and does
not expect to pay any such dividends in the foreseeable future. In addition,
an existing bank credit agreement currently restricts the Company's ability to
pay cash dividends without the bank's consent.
18
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Licenses....................... $34,630 $20,377 $ 8,919 $ 1,557 $ 364
Services....................... 10,672 5,079 1,454 507 142
------- ------- ------- ------- -------
Total revenues............... 45,302 25,456 10,373 2,064 506
------- ------- ------- ------- -------
Cost of revenues:
Licenses....................... 1,923 1,188 518 134 3
Services....................... 6,845 3,324 1,304 283 67
------- ------- ------- ------- -------
Total cost of revenues....... 8,768 4,512 1,822 417 70
------- ------- ------- ------- -------
Gross profit..................... 36,534 20,944 8,551 1,647 436
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............ 19,909 12,513 6,254 1,595 179
Research and development....... 7,880 4,512 2,523 1,750 1,661
General and administrative..... 4,114 2,430 1,738 1,134 226
------- ------- ------- ------- -------
Total operating expenses..... 31,903 19,455 10,515 4,479 2,066
------- ------- ------- ------- -------
Income (loss) from operations.... 4,631 1,489 (1,964) (2,832) (1,630)
------- ------- ------- ------- -------
Interest and other income
(expense), net.................. 2,268 239 75 9 (31)
------- ------- ------- ------- -------
Income (loss) before income tax
provision....................... 6,899 1,728 (1,889) (2,823) (1,661)
Provision for income taxes....... (2,415) (468) -- -- --
------- ------- ------- ------- -------
Net income(loss)................. $ 4,484 $ 1,260 $(1,889) $(2,823) $(1,661)
======= ======= ======= ======= =======
Net income per common share(1)... $ 0.30 $ 0.10
======= =======
Shares used in per share
computation(1).................. 14,747 12,934
======= =======
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........ $ 5,369 $ 5,978 $ 6,289 $ 3,658 $ --
Short-term investments........... 46,803 -- -- -- --
Working capital (deficit)........ 51,821 4,624 5,256 3,630 (141)
Total assets..................... 74,944 16,501 10,916 5,368 182
Long-term obligations............ 211 691 544 542 911
Mandatorily redeemable
convertible preferred stock..... -- 13,391 13,391 8,940 --
Stockholders' equity (deficit)... 59,332 (5,746) (7,286) (5,479) (948)
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net income per share.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein as well as those
discussed under the caption "Risk Factors". Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this report. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances that
may subsequently arise. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission that attempt
to advise interested parties of the risks and factors that may affect the
Company's business. See "Risk Factors" in Item I, "Business", of this
document.
OVERVIEW
Documentum, which was formed in 1990, provides object-oriented,
client/server software solutions that enable large organizations to
effectively manage and optimize the use of their unstructured business-
critical information. From its inception through December 1992, the Company's
activities consisted primarily of developing its products, establishing its
infrastructure and conducting market research. The Company shipped the first
commercial version of its Documentum Server product in late 1992, and since
then substantially all of the Company's revenues have been from licenses of
its family of enterprise document management system ("EDMS") products and
related services, which include maintenance and support, training and
consulting services. The Company continues to invest in research and
development in order to update its family of products. During 1996, the
Company introduced and shipped (i) Release 3.0 of Documentum EDMS, an update
to the Company's core product with a range of new features; (ii) products for
delivering document management functionality to the World Wide Web, as well as
for Microsoft NT; (iii) and new intergration for users of Lotus Notes,
Interleaf users and SAP users. The Company expects that EDMS-related revenue
will continue to account for substantially all of the Company's revenues for
the foreseeable future. As a result, the Company's future operating results
are dependent upon continued market acceptance of EDMS and enhancements
thereto.
Since inception, the Company has invested significant resources in
developing its EDMS software, as well as building its sales, marketing and
general administrative organizations. As a result, since inception the
Company's operating expenses have increased in absolute dollar amounts and are
expected to continue to increase.
Although the Company has experienced significant revenue growth in recent
years, the Company does not believe that such growth rates are sustainable.
Accordingly, the rate at which the Company has grown in the past should not be
considered to be indicative of future revenue growth, if any, or future
operating results. There can be no assurance that the Company will remain
profitable on a quarterly basis. The Company's limited operating history makes
the prediction of future operating results difficult, if not impossible.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues:
Licenses........................................ 76.4% 80.0% 86.0%
Services........................................ 23.6% 20.0% 14.0%
------- ------- -------
Total revenues................................ 100.0% 100.0% 100.0%
------- ------- -------
Cost of revenues:
Licenses........................................ 4.3% 4.7% 5.0%
Services........................................ 15.1% 13.0% 12.6%
------- ------- -------
Total cost of revenues........................ 19.4% 17.7% 17.6%
------- ------- -------
Gross profit...................................... 80.6% 82.3% 82.4%
------- ------- -------
Operating expenses:
Sales and marketing............................. 43.9% 49.2% 60.3%
Research and development........................ 17.4% 17.7% 24.2%
General and administrative...................... 9.1% 9.6% 16.8%
------- ------- -------
Total operating expenses...................... 70.4% 76.5% 101.3%
------- ------- -------
Income (loss) from operations..................... 10.2% 5.8% (18.9%)
------- ------- -------
Interest and other income (expense), net.......... 5.0% 1.0% 0.7%
------- ------- -------
Income (loss)before income tax provision.......... 15.2% 6.8% (18.2%)
Provision for income taxes........................ (5.3%) (1.8%) 0.0%
------- ------- -------
Net income (loss)................................. 9.9% 5.0% (18.2%)
======= ======= =======
</TABLE>
Revenues
The Company's revenues are derived from perpetual licenses for its document
management software and related services, which include maintenance and
support, training and consulting services. License revenues are recognized
upon shipment of the product if no significant vendor obligations remain and
collection of the resulting receivable is probable. In instances where a
significant vendor obligation exists, revenue recognition is deferred until
the obligation has been satisfied. Allowances for estimated future returns are
provided upon shipment. Annual maintenance and support revenues are recognized
for providing ongoing support and product updates and are recognized ratably
over the term of the contract. Renewals of maintenance contracts are recorded
when collectibility is deemed probable. Revenues from training and consulting
are recognized when the services are performed and collectibility is deemed
probable.
License revenues increased by 70% to $34.6 million in 1996, by 128% to $20.4
in 1995 and by 473% to $8.9 million in 1994, representing 76%, 80% and 86% of
total revenues in the respective periods. The growth in license revenues was
due primarily to an increase in the number of licenses sold, reflecting
increased acceptance of the Company's EDMS family of products, new products
released during the year, and the expansion of the Company's sales
organization. Although the Company's customer base has grown as revenues have
increased, a relatively small number of end user customers have historically
accounted for a significant percentage of the Company's revenues. In 1996,
1995 and 1994 license revenues from Xerox and certain Xerox affiliates, as
systems integrators, a VAR and a distributor for the Company's products,
accounted for 15%, 30% and 8% of total license revenues respectively. In 1994,
license revenues from Glaxo-Wellcome accounted for 34% of total license
revenues. The loss of a major customer or any reduction or delay in orders by
such customers would have a material adverse effect on the Company's business,
operating results and financial condition.
21
<PAGE>
Service revenues increased by 110% to $10.7 million in 1996, by 249% to $5.1
million in 1995, and by 187% to $1.5 million in 1994, representing 24%, 20%
and 14% of total revenues in the respective periods. The increase in both
service revenue dollars and in service revenues as a percent of total revenues
was attributable to an increased demand for services as well as a larger
installed base of customers receiving ongoing maintenance, training and
support services and increases in the Company's professional services
consulting staff.
The Company markets its products through its direct sales force and its
indirect channel partners. Historically, the Company has generated the
majority of its revenues from its direct sales force. However, the Company has
also focused on complementing its direct sales channel with indirect channels,
consisting of systems integrators and distributors. Revenues from all indirect
channel partners comprised 32%, 36% and 18% of license revenues in 1996, 1995
and 1994 respectively. The increase in indirect channel revenues as a percent
of total license revenues in 1995 is due to two large transactions from Xerox
and certain Xerox affiliates which each exceeded 10% of total Company license
revenues for the year. License revenues from indirect channels include
revenues from Xerox and certain Xerox affiliates, who have acted as systems
integrators, a VAR and a distributor for the Company's products. In 1996, 1995
and 1994, revenues from Xerox and certain Xerox affiliates accounted for 47%,
84% and 43% of the indirect channel partner revenues, respectively. Xerox
owned approximately 26% of the Company's outstanding common shares as of
December 31, 1996. Management believes that the revenues, gross profit and
costs and expenses relating to transactions with Xerox are indicative of
amounts which would have been incurred or realized from nonrelated parties.
Revenues for any period from indirect partners including Xerox and affiliates
are subject to significant variations. As a result, the Company believes that
period to period comparisons of indirect revenues are not necessarily
meaningful and should not be relied upon as indications of future performance.
There can be no assurance that Xerox or the Company's other indirect channel
partners will elect or be able to continue to market or support EDMS
effectively, or that economic conditions or industry demand will not adversely
affect these partners.
International revenues represented 29%, 26% and 8% of license revenues in
1996, 1995 and 1994 respectively. The increase in international revenues as a
percent of license revenues for the year ended December 31, 1996 is due to the
expansion of the Company's sales force in Europe. A significant portion of the
international revenues are derived from the Company's indirect channel
partners, which include Xerox and certain Xerox affiliates. International
revenues are subject to significant variations. The Company classifies license
revenue as domestic or international based upon the billing location of the
customer. In many instances, especially with large purchases from
multinational companies, the customer has the right to deploy the licenses
anywhere in the world. Thus, the percentages discussed herein represent where
licenses were sold, and may or may not represent where the products are used.
As a result, the Company believes that period to period comparisons of
international revenues are not necessarily meaningful and should not be relied
upon as indications of future performance.
While the Company believes that large multinational organizations represent
a significant opportunity for revenue growth and the Company intends to
continue expansion of its international sales operations, there can be no
assurance that the Company will be successful in meeting the requirements of
these large organizations or that the Company will be able to effectively
support this international expansion. Both the Company's direct and indirect
international sales are primarily denominated in United States dollars and the
Company does not currently engage in hedging activities. Although exposure to
currency fluctuations to date has been insignificant, there can be no
assurance that fluctuations in the currency exchange rates in the future will
not have a material adverse impact on revenues from direct international sales
and thus the Company's business, operating results and financial condition.
Cost of revenues
Cost of license revenues consists primarily of the royalties paid to third-
party vendors. It also includes product costs such as packaging,
documentation, production and freight. Cost of license revenues increased by
62% to $1.9 million in 1996, by 129% to $1.2 million in 1995 and by 287% to
$518,000 in 1994, representing approximately 6% of the related license
revenues in 1996, 1995 and 1994. The increase in cost of license
22
<PAGE>
revenues was principally related to the increase in the number of software
licenses sold. The Company expects that the cost of license revenues will
continue to increase in dollar amount.
Cost of services revenues consists primarily of personnel-related costs
incurred in providing telephone support, consulting services and training to
customers. Cost of services revenues increased by 106% to $6.8 million in
1996, by 155% to $3.3 million in 1995 and by 361% to $1.3 in 1994,
representing 64%, 65% and 90% of the related services revenues in 1996, 1995
and 1994 respectively. The increase in cost of services revenues was a result
of increased personnel-related costs as the Company expanded its customer
support and training operations to support its increased installed customer
base in both the US and Europe, as well as payments to third parties for
support.
Operating Expenses
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, benefits, sales commissions and other expenses related to the direct
sales force, various marketing expenses and costs of other market development
programs. Sales and marketing expenses increased by 59% to $19.9 million in
1996, by 100% to $12.5 million in 1995 and by 292% to $6.3 million in 1994
representing 44%, 49% and 60% of total revenues for 1996, 1995 and 1994,
respectively. The increase in dollar amount was primarily due to the expansion
of the Company's sales force, related equipment and facility expenditures,
investment in building a European direct sales force and increased marketing
activities including public relations and promotional expenses. The decrease
as a percentage of revenues is primarily due to economies of scale realized as
certain expenses, such as management compensation and facilities, grew
proportionately less than revenues. The Company is in the process of
increasing its direct sales and marketing expenditures to address certain
international and vertical markets and expects that sales and marketing
expenses will increase in dollar amount to support the Company's anticipated
revenue growth.
Research and development. Research and development expenses consist
primarily of salaries and benefits for software developers, contracted
development efforts and related facilities costs. Research and development
expenses increased by 75% to $7.9 million in 1996, by 79% to $4.5 million in
1995 and by 44% to $2.5 million in 1994, representing 17%, 18%, and 24% of
total revenues in 1996, 1995 and 1994 respectively. The increase in dollar
amount reflects the expansion of the Company's engineering staff and related
costs required to support the development of new products and the enhancement
of existing products. Based on the Company's research and development process,
costs incurred between the establishment of technological feasibility and
general release have not been material and therefore have not been capitalized
in accordance with Financial Accounting Standards No. 86. The Company expects
research and development costs will continue to increase in dollar amount in
order to support increased development efforts to both existing products and
new products.
General and administrative. General and administrative expenses consist
primarily of personnel costs for finance, management information systems,
legal, human resources and general management and outside professional
services. General and administrative expenses increased by 69% to $4.1 million
in 1996, by 40% to $2.4 million in 1995 and by 53% to $1.7 million in 1994,
representing 9%, 10% and 17% of total revenues in 1996, 1995 and 1994
respectively. The increase in dollar amount is primarily due to increased
staffing and professional fees necessary to manage and support the Company's
growth. The Company expects general and administrative expenses to increase in
order to support the growing needs of the Company.
Interest and other income (expense), net
Interest and other income (expense), net consists primarily of interest
income earned on the Company's cash and cash equivalents and short term
investments, and other items including foreign exchange gains and losses and
interest expense. Interest and other income (expense), net increased by 849%
to $2.3 million in 1996, by 219% to $239,000 in 1995 and by 733% to $75,000 in
1994. The increase in dollar amount is primarily due to higher cash balances
resulting from the completion of the Company's initial public offering of
common stock completed in February 1996. To date, the Company's international
sales have been generally denominated in US
23
<PAGE>
dollars and the Company has not engaged in hedging activities as the exposure
to currency fluctuations has been insignificant. In the future, as the Company
expands its international operations, the Company expects to have an increased
amount of non-US dollar denominated contracts. Unexpected changes in the
exchange rates for these foreign currencies could result in significant
fluctuation in the foreign currency translation gains and losses in future
periods.
Provision for income taxes
The Company's effective tax rates for 1996 and 1995 were 35% and 27%,
respectively. The Company incurred a loss in 1994 and consequently recorded no
provision for income taxes. These rates differ from the statutory rate
primarily due to state and foreign taxes, as well as the utilization of tax
loss and credit carryforwards and the impact of releasing the previously
established valuation allowance. In accordance with Financial Accounting
Standards No. 109, "Accounting for Income Taxes", the Company provides a
valuation allowance for deferred tax assets when it is more likely than not,
based on available evidence, that some portion or all of the deferred assets
will not be realized. Based on a revaluation of the realizability of future
tax benefits based on income earned in 1996, creating available tax
carrybacks, the Company released the previously established valuation
allowance during 1996. Accordingly, the Company valued its deferred tax asset
at $1.3 million at December 31, 1996. The Company anticipates that its
effective tax rate will not increase significantly in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since 1993, the Company has financed its operations primarily through the
sale of stock and through cash generated from operations. In February 1996,
the Company completed its initial public offering, and its common stock began
trading on the Nasdaq National Market under the symbol DCTM. Through the
offering, the Company sold 2,058,000 shares of its common stock, and received
net proceeds of approximately $45 million cash, which has been invested in
investment grade securities.
The Company's cash and investments totaled $52.2 million at December 31,
1996 representing 70% of total assets. The Company has invested the Company's
cash in excess of current operating requirements in investment grade
securities. The investments have variable and fixed interest rates and short
term and long term maturities. In accordance with SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities" such investments are
classified as "available for sale".
Net cash provided by operating activities was $4.6 million and $1.5 million
in 1996 and 1995, respectively. Cash used in operating activities in 1994 was
$759,000. For the year ended December 31, 1996, the cash generated by
operations was primarily attributable to net income of $4.5 million, growth in
accrued liabilities of $3.4 million and deferred revenue of $2.8 million,
offset by the increase in accounts receivable of $8.1 million. In 1996,
capital expenditures of $5.2 million were primarily for computer equipment,
fixed assets and leasehold improvements acquired in conjunction with the
Company's expansion to new facilities.
The Company has a current line of credit facility which allows for
borrowings of up to $5.0 million at the bank's prime rate. This facility
expires in November, 1997 and the Company presently anticipates that it will
be able to renew the line of credit. At December 31, 1996, the Company had no
outstanding borrowings under its line of credit.
At December 31, 1996, the Company had $406,000 outstanding under a term note
payable to a bank. The balance of the term note is repayable in 10 equal
monthly payments of approximately $41,000 together with interest at the Bank's
prime rate plus 0.75%. The Company also had $371,000 outstanding under a
second term note payable to a bank. The balance of the term note is repayable
in 23 equal monthly payments of approximately $16,000 together with interest
at the Bank's prime rate plus 0.50%.
In addition, the Company may borrow up to an additional $1.5 million through
November 1997. Interest only is payable on such additional borrowings at the
Bank's prime rate plus 0.25% through November 1997 after
24
<PAGE>
which any outstanding balance is due in 24 equal installments. All obligations
shall bear interest, from and after the occurrence of an event of default, at
a rate equal to 5% points above the interest rate applicable immediately prior
to the occurrence of the event of default. Borrowings under the loan agreement
are secured by substantially all of the assets of the Company.
The Company currently has no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
facilities and capital leases.
The Company believes that its existing cash balances, its available bank
financing and the cash flows generated from operations, if any, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. A portion of the Company's cash
could be used to acquire or invest in complementary businesses or products or
obtain the right to use complementary technologies. The Company is currently
evaluating, in the ordinary course of business, potential investments such as
businesses, products or technologies. The Company has no current
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in Part IV Item 14.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
PART III
Certain information required by Part III is omitted from this Report and
will be included in the Registrant's definitive Proxy Statement which will be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers--See the section titled "Executive Officers" in Part
I, Item 1 hereof.
(b) Directors--The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Certain Transactions."
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT'S, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<C> <S> <C>
1. Consolidated Financial Statements
Report of Independent Accountants........................ F-1
Consolidated Balance Sheets as of December 31, 1996 and
1995..................................................... F-2
Consolidated Statement of Operations For the three years
ended December 31, 1996.................................. F-3
Consolidated Statement of Cash Flows For the three years
ended December 31, 1996.................................. F-4
Consolidated Statement of Changes in Stockholders'
Equity(Deficit) For the three years ended December 31,
1996..................................................... F-5
Notes to Consolidated Financial Statements............... F-6
2. Financial Statement Schedules For the three years ended
December 31, 1996
Schedule II--Valuation and Qualifying Accounts........... S-1
Schedules not listed above have been omitted because they
are either not applicable or the required information is
shown in the financial statements or the notes thereto.
3. Exhibits: See accompanying Index to Exhibits. The Exhibits listed in
the accompanying Index to Exhibits are filed or incorporated by
reference as part of this Form.
</TABLE>
(b) Reports on Form 8-K
None.
26
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS 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, ON THIS 21ST DAY OF MARCH, 1997.
Documentum, Inc.
/s/ Mark S. Garrett
By: _________________________________
MARK S. GARRETT
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints jointly and severally, Jeffrey A. Miller
and Mark S. Garrett, and each one of them, his or her attorneys-in-fact, each
with the power of substitution, for him or her in any way and all capacities,
to sign any and all amendments to this Annual Report (Form 10-K) and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each said attorneys-in-fact, or his substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 21st day of March, 1997.
SIGNATURE TITLE
/s/ Jeffrey A. Miller President, Chief Executive Officer
- ------------------------------------- and Direct (Principal Executive
JEFFREY A. MILLER Officer)
/s/ Mark S. Garrett Vice President and Chief Financial
- ------------------------------------- Officer (Principal Financial and
MARK S. GARRETT Accounting Officer)
/s/ Robert V. Adams Chairman
- -------------------------------------
ROBERT V. ADAMS
/s/ Kathryn C. Gould Director
- -------------------------------------
KATHRYN C. GOULD
/s/ Colin J. O'Brien Director
- -------------------------------------
COLIN J. O'BRIEN
/s/ John L. Walecka Director
- -------------------------------------
JOHN L. WALECKA
/s/ Edward J. Zander Director
- -------------------------------------
EDWARD J. ZANDER
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Documentum, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 26 present fairly, in all
material respects, the financial position of Documentum, Inc. and its
subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 24, 1997
F-1
<PAGE>
DOCUMENTUM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash....................................................... $ 5,369 $ 5,978
Short-term investments..................................... 46,803 --
Accounts receivable, net of allowances of $1,069 and $647.. 13,531 6,073
Other current assets....................................... 1,519 738
------- -------
Total current assets..................................... 67,222 12,789
Property and equipment, net.................................. 6,339 3,201
Other assets................................................. 1,383 511
------- -------
$74,944 $16,501
======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 1,488 $ 564
Accrued liabilities........................................ 8,124 4,693
Deferred revenue........................................... 4,956 2,164
Current portion of capital lease obligations............... 234 257
Current portion of term loans payable...................... 599 487
------- -------
Total current liabilities................................ 15,401 8,165
------- -------
Long term obligations:
Capital lease obligations, less current portion............ 33 286
Term loans payable, less current portion................... 178 405
------- -------
Total long-term obligations.............................. 211 691
------- -------
Mandatorily redeemable convertible preferred stock........... -- 13,391
------- -------
Commitments (Note 8)
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000 and 60,000 shares
authorized, none issued and outstanding
Common stock, $0.001 par value; 35,000 and 100,000 shares
authorized; 14,187 and 1,880 shares issued and outstanding
.......................................................... 14 2
Additional paid-in capital................................. 61,450 966
Cumulative translation adjustment.......................... 43 (55)
Accumulated deficit........................................ (2,175) (6,659)
------- -------
Total stockholders' equity (deficit)..................... 59,332 (5,746)
------- -------
$74,944 $16,501
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License (including $5,323, $6,104 and $698 from
a stockholder and its affiliates)............. $ 34,630 $ 20,377 $ 8,919
Services....................................... 10,672 5,079 1,454
-------- -------- --------
Total revenues............................... 45,302 25,456 10,373
-------- -------- --------
Cost of revenues:
License........................................ 1,923 1,188 518
Services....................................... 6,845 3,324 1,304
-------- -------- --------
Total cost of revenues....................... 8,768 4,512 1,822
-------- -------- --------
Gross profit..................................... 36,534 20,944 8,551
-------- -------- --------
Operating expenses:
Sales and marketing............................ 19,909 12,513 6,254
Research and development....................... 7,880 4,512 2,523
General and administrative..................... 4,114 2,430 1,738
-------- -------- --------
Total operating expenses..................... 31,903 19,455 10,515
-------- -------- --------
Income (loss) from operations.................... 4,631 1,489 (1,964)
Interest and other income (expense), net......... 2,268 239 75
-------- -------- --------
Income (loss) before income tax provision........ 6,899 1,728 (1,889)
Provision for income taxes....................... (2,415) (468) --
-------- -------- --------
Net income (loss)................................ $ 4,484 $ 1,260 $ (1,889)
======== ======== ========
Net income per share............................. $ .30 $ .10
======== ========
Shares used to compute net income per share(Note
2).............................................. 14,747 12,934
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 4,484 $ 1,260 $ (1,889)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................. 2,064 921 336
Provision for doubtful accounts................ 672 243 337
Deferred tax asset............................. (1,273) -- --
Changes in assets and liabilities:
Accounts receivable.......................... (8,130) (3,501) (1,820)
Other current assets and other assets........ (379) (809) (420)
Accounts payable............................. 924 110 297
Accrued liabilities.......................... 3,431 2,217 1,940
Deferred revenue............................. 2,792 1,063 460
------- ------- --------
Net cash provided by (used in) operating
activities................................ 4,585 1,504 (759)
------- ------- --------
Cash flows from investing activities:
Purchases of investments......................... (92,303) -- --
Sales of investments............................. 45,500
Purchases of property and equipment.............. (5,202) (2,750) (463)
------- ------- --------
Net cash used by investing activities...... (52,005) (2,750) (463)
------- ------- --------
Cash flows from financing activities:
Issuance of common stock......................... 47,105 335 82
Proceeds from term loan.......................... 387 973 --
Repayments on capital lease obligations.......... (276) (237) (107)
Repayment on term loan........................... (503) (81) --
Issuance of Series C preferred stock............. -- -- 3,878
------- ------- --------
Net cash provided by financing activities.. 46,713 990 3,853
------- ------- --------
Effect of exchange rate on changes in cash......... 98 (55) --
------- ------- --------
Net increase (decrease) in cash and cash equiva-
lents............................................. (609) (311) 2,631
Cash and cash equivalents at beginning of period... 5,978 6,289 3,658
------- ------- --------
Cash and cash equivalents at end of period......... $ 5,369 $ 5,978 $ 6,289
======= ======= ========
Supplemental schedule of noncash transactions:
Bridge financing, notes payable and accrued in-
terest exchanged for mandatorily redeemable con-
vertible preferred stock........................ $ -- $ -- $ 573
Capital lease obligations incurred............... $ -- $ -- $ 887
Common stock issued for notes receivable......... $ -- $ 116 $ 114
Supplemental schedule of cash flow information:
Interest paid.................................... $ 127 $ 101 $ 67
Income taxes paid................................ $ 2,776 $ 181 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
-------------- PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY (DEFICIT)
------ ------ ---------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December
31, 1993............... -- $-- $ 551 $-- $ (6,030) $ (5,479)
Common stock options
exercised.............. 880 1 81 -- -- 82
Net loss................ -- -- -- -- (1,889) (1,889)
------ ---- -------- ---- -------- --------
Balance as of December
31, 1994............... 880 1 632 -- (7,919) (7,286)
Common stock options
exercised.............. 1,000 1 303 -- -- 304
Stock compensation...... -- -- 31 -- -- 31
Foreign currency
translation
adjustment............. -- -- -- (55) -- (55)
Net income.............. -- -- -- -- 1,260 1,260
------ ---- -------- ---- -------- --------
Balance as of December
31, 1995............... 1,880 2 966 (55) (6,659) (5,746)
Common stock options
exercised.............. 324 -- 647 -- -- 647
Employee stock purchase
plan................... 60 -- 1,252 -- -- 1,252
Warrants exercised...... 73 -- -- -- -- --
Stock repurchases....... (12) -- (5) -- -- (5)
Mandatorily preferred
conversion............. 9,804 10 13,381 -- -- 13,391
Issuance of common stock
in public offering net
of issuance costs...... 2,058 2 45,038 -- -- 45,040
Stock compensation...... -- -- 72 -- -- 72
Payments on shareholder
notes.................. -- -- 99 -- -- 99
Foreign currency
translation
adjustment............. -- -- -- 98 -- 98
Net income.............. -- -- -- -- 4,484 4,484
------ ---- -------- ---- -------- --------
Balance as of December
31, 1996............... 14,187 $ 14 $ 61,450 $ 43 $ (2,175) $ 59,332
====== ==== ======== ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF THE COMPANY:
Description of business
Documentum, Inc. (the "Company") was incorporated in the state of Delaware
in January 1990 to develop, market and support a family of client/server and
worldwide Web software products that specifically address the challenges of
managing business-critical documents effectively across large enterprises. The
Documentum Enterprise Document Management System ("EDMS") automates and
accelerates the creation, modification and reuse of business-critical
documents and other unstructured data and the collaborative efforts involved
in these activities.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Documentum International, Inc., in the
United States, and Documentum Software Europe Ltd., in the United Kingdom. All
significant inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Foreign currency
The functional currency of the Company's United Kingdom subsidiary is the
local currency. Balance sheet accounts are translated into United States
dollars at exchange rates prevailing at balance sheet dates. Revenues, costs
and expenses are translated into United States dollars at average rates for
the period. Gains and losses resulting from translation are accumulated as a
component of stockholders' equity (deficit). Net gains and losses resulting
from foreign exchange transactions are included in the consolidated statement
of operations and were not significant during any of the periods presented. To
date, the company does not engage in hedging activities.
Revenue recognition
The Company's revenues are derived from perpetual licenses for its document
management software and related services, which include maintenance and
support, training and consulting services. License revenues are recognized
upon shipment of the product if no significant vendor obligations remain and
collection of the resulting receivable is probable. In instances where a
significant vendor obligation exists, revenue recognition is delayed until the
obligation has been satisfied. Allowances for estimated future returns, which
to date have been immaterial, are provided upon shipment. Annual maintenance
and support revenues consist of ongoing support and product updates and are
recognized ratably over the term of the contract. Revenues from training and
consulting are recognized when the services are performed. Payments received
in advance of revenue recognition are recorded as deferred revenue. The
Company has recognized revenues, for all periods presented, in accordance with
Statement of Position 91-1, "Software Revenue Recognition."
Cash and cash equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
F-6
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial investments
The company has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115") which requires investment securities to be classified as either held to
maturity, trading or available-for-sale. The adoption of SFAS 115 did not have
a material impact on the Company's financial condition or results of
operations.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash, short-term investments and
accounts receivable. The Company deposits substantially all of its cash with a
single financial institution. The Company's short-term investments, all of
which are classified as available-for-sale, are managed by a single financial
institution.
At December 31, 1996, the fair value of these short-term investments
approximated amortized cost with contractual maturities ranging from December
15, 1997 to December 1, 2029. The following table details the Company's short-
term investments at December 31, 1996:
<TABLE>
<CAPTION>
COST
-------
<S> <C>
Cash............................................................. $ 5,369
Certificates of deposit.......................................... 6,000
Medium term notes................................................ 15,088
U.S. Government agencies......................................... 6,914
Municipal bonds and notes........................................ 7,274
Corporate bonds and notes........................................ 4,655
Foreign debt securities.......................................... 2,042
Market auction preferred stock................................... 4,000
-------
$51,342
=======
</TABLE>
The carrying value of all other financial instruments approximated their
respective fair value at December 31, 1996. Securities with a maturity date of
one year or less, and securities in which management intends to sell in 1997,
are classified as short-term investments.
Concentration of credit risk
The Company generally does not require collateral for its accounts
receivable and maintains reserves for potential credit losses.
Sales to Xerox and affiliated entities accounted for 15% and 30% of 1996 and
1995 license revenues, respectively. Sales to a single customer accounted for
34% of 1994 license revenues.
At December 31, 1996, two customers comprised 26% of accounts receivable. At
December 31, 1995, two customers, including Xerox and affiliated entities
comprised 21% of accounts receivable. Revenues from export sales, primarily to
Europe, were approximately 29%, 26% and 8% of license revenues for the years
ended December 31, 1996, 1995 and 1994, respectively. Included in export sales
in 1996 (as a percentage of license revenues) are export sales to customers in
Europe for approximately 94%. Included in export sales in 1995 (as a
percentage of license revenues) are export sales to customers in Europe for
approximately 22%.
Property and equipment
Property and equipment, including leasehold improvements, are recorded at
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, three to six years, or the life
of the lease, whichever is shorter.
F-7
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Software development costs
Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards No. 86
("SFAS 86") requires the capitalization of certain software development costs
once technological feasibility is established. The capitalized cost is then
amortized on a straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenues, whichever is
greater. To date, the period between achieving technological feasibility,
which the Company has defined as the establishment of a working model, and the
general availability of such software has been short and software development
costs qualifying for capitalization have been insignificant. Accordingly, the
Company has not capitalized any software development costs.
Income taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109).
Under SFAS No. 109, deferred income tax liabilities and assets are determined
based on the difference between the financial reporting amounts and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates in effect for the years in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.
Equity-Based Compensation Plans
Effective for transactions entered into in fiscal years beginning after
December 15, 1995, SFAS No. 123, Accounting for Stock-Based Compensation under
a fair value based method is required. The Company, as allowed by SFAS No.
123, has elected to continue to measure compensation costs for its plans using
the intrinsic value base method of accounting for stock issued to employees.
However, as required by SFAS No. 123, pro forma disclosures of net income and
earnings per share are reflected in the notes to the financial statements as
if the fair value based method of accounting was adopted.
Net income per share
Net income per share is computed using the weighted average number of common
stock and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock (using the if
converted method) and stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation if their
effect is antidilutive. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletins, common and common equivalents shares, options and
warrants issued by the Company during the 12-month period prior to the
Company's initial public offering have been included in the calculation as if
they were outstanding for all periods prior to and including February 5, 1996.
Earnings per share prior to fiscal 1995 have not been presented since such
amounts are not deemed meaningful due to the significant change in the
Company's capital structure that will occur in connection with the initial
public offering.
Stockholders Equity
Common Stock as of December 31, 1996 reflects the sale of 2,058,000 shares
of common stock issued in the Company's initial public offering completed on
February 5, 1996. Aggregate net proceeds to the Company were $45,000,000. In
addition, Common Stock also reflects the conversion of all the Mandatorily
Redeemable Convertible Preferred Stock outstanding into an aggregate of
9,803,975 shares of common stock based on the shares of Mandatorily Redeemable
Convertible Preferred Stock outstanding as of December 31, 1995.
F-8
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Upon the closing of the Offering, the Company amended and restated its
Certificate of Incorporation reducing the authorized number of shares of
Common Stock to 35,000,000 and the authorized number of shares of Preferred
Stock to 5,000,000.
NOTE 3--RELATED PARTY TRANSACTIONS:
Xerox and affiliated entities
The Company has distribution agreements with Xerox and affiliated entities
which provide Xerox or its affiliates with the non-exclusive rights to sell
the Company's products in specified territories. The agreements have initial
terms of 18 to 24 months; however certain agreements may be renewed. In
addition, the Company has an agreement with Rank Xerox (UK) Limited; for Rank
Xerox (UK) Limited to provide support services to specified customers. This
agreement was terminated in July 1996. For the years ended December 31, 1996,
1995 and 1994, the Company recognized license revenues from Xerox and
affiliated entities of $5,323,000, $6,104,000 and $698,000, respectively, and
incurred expenses primarily for support services provided by Xerox and
affiliated entities of $410,000, $283,000, and $144,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. The net amount due from Xerox
and affiliated entities was $737,000 and $622,000 at December 31, 1996 and
1995, respectively. Management believes that the revenues, gross profit and
costs and expenses relating to these transactions are indicative of amounts
which would have been incurred or realized from nonrelated parties. At
December 31, 1996, Xerox owned approximately 26% of the Company's outstanding
common shares.
Notes receivable from stockholders
The Company has allowed certain employees to exercise stock options in
exchange for promissory notes. These notes generally bear interest at between
6.76% and 7.92% per annum payable annually in arrears, are secured by the
shares issued and are due five years after issuance; however, all amounts are
due and payable upon the employee's termination from the Company. At December
31, 1996 and 1995 the Company had $109,000 and $240,000 in note receivables,
respectively, due from stockholders which were included in additional paid in
capital.
NOTE 4--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment:
Computer equipment....................................... $ 5,466 $ 3,003
Office equipment......................................... 989 448
Furniture and fixtures................................... 1,396 561
Leasehold improvements and other......................... 2,004 641
------- -------
9,855 4,653
Accumulated depreciation and amortization................ (3,516) (1,452)
------- -------
$ 6,339 $ 3,201
======= =======
</TABLE>
At December 31, 1996 the Company had $882,000 of equipment under capital
leases, net of accumulated amortization of $794,000. At December 31, 1995 the
Company had $887,000 of equipment under capital leases, net of accumulated
amortization of $588,000.
F-9
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued liabilities:
Compensation and related benefits.......................... $3,617 $1,975
Taxes...................................................... 1,103 461
Other...................................................... 3,404 2,257
------- -------
$8,124 $4,693
======= =======
</TABLE>
NOTE 5--LINE OF CREDIT AND TERM LOAN:
At December 31, 1996, the Company has an unused bank line of credit (the
"Line of Credit") which provides for maximum borrowings up to $5,000,000,
bears interest at the bank's prime rate (8.25% at December 31, 1996) and is
secured by substantially all of the Company's assets. The Line of Credit,
which expires in November 1997, is subject to certain financial covenants.
At December 31, 1996, the Company has $406,000 outstanding under a term note
payable to a bank. The balance of the Term Loan is repayable in 10 equal
monthly payments of approximately $41,000 together with interest at the Bank's
prime rate plus 0.75%.
At December 31, 1996, the Company has $371,000 outstanding under a term note
payable to a bank. The balance of the Term Loan is repayable in 23 equal
monthly payments of approximately $16,000 together with interest at the Bank's
prime rate plus 0.5%.
In addition, the Company may borrow up to an additional $1,500,000 through
November 1997. Interest only is payable on such additional borrowings at the
Bank's prime rate plus 0.25% through November 1997 after which any outstanding
balance is due in 24 equal installments. All obligations shall bear interest,
from and after the occurrence of an event of default, at a rate equal to 5%
points above the interest rate applicable immediately prior to the occurrence
of the event of default. Borrowings under the Term Loan are secured by
substantially all of the assets of the Company.
NOTE 6--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
WARRANTS:
Preferred stock
At December 31, 1994 and 1995, the Company had 49,020,000 shares or
$13,391,000 of Mandatorily Redeemable Convertible Preferred Stock (the
"Preferred Stock") outstanding which was comprised of: 15,999,000 shares
designated, issued, and outstanding of Series A for $2,002,000; 27,396,000
shares designated, issued, and outstanding of Series B for $6,938,000; and
5,625,000 shares designated, issued, and outstanding of Series C for
$4,451,000.
On February 5, 1996, upon the closing of the offering, all of the
Mandatorily Redeemable Convertible Preferred Stock outstanding was
automatically converted into an aggregate of 9,803,975 shares of common stock
based on the Mandatorily Redeemable Convertible Preferred Stock that was
outstanding as of December 31, 1995:
Preferred stock warrants
In connection with a lease line of credit in March 1994, the Company granted
the lessor warrants to purchase 295,636 shares of the Company's Series B
Mandatorily Redeemable Convertible Preferred Stock. These warrants were fully
exercised on a net basis on December 18, 1996 and converted into 57,158 common
shares.
F-10
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 31, 1994, the Company granted the bank warrants to purchase
87,500 shares of the Company's Series C Mandatorily Redeemable Convertible
Preferred Stock, in connection with a line of credit and term note. These
warrants were fully exercised on a net basis on October 25, 1996 and converted
into 15,425 common shares.
NOTE 7--STOCK OPTION AND BENEFIT PLANS:
1993 Equity Incentive Plan
In March 1993, the Board of Directors adopted the 1993 Equity Incentive Plan
(the "Plan") providing for the issuance of nonstatutory common stock options
to employees and consultants of the Company. The Board of Directors has
amended the Plan providing for the grant of incentive stock options ("ISOs"),
stock bonuses and stock appreciation rights and allowing for the sale of
restricted stock. Under the Plan a total of 3,800,000 shares have been
authorized for issuance.
Options may be granted at an exercise price at the date of grant of not less
than the fair market value per share for ISOs and not less than 85% of the
fair market value per share for nonstatutory stock options, except for options
granted to a person owning greater than 10% of the total combined voting power
of all classes of stock of the Company, for which the exercise price of the
option must be not less than 110% of the fair market value. The fair market
value of the Company's common stock is determined by the Board of Directors or
a committee thereof.
Options granted under the Plan are exercisable at the date of grant and are
subject to repurchase by the Company at the option exercise price paid per
share with such repurchase right generally lapsing with respect to 25% after
the first year and ratably each month over the remaining thirty-six month
period.
In 1996, 1995 and 1994 the Company issued 571,900, 701,300, and 692,400
options under the Plan, respectively. At December 31, 1996, 360,000 shares
were subject to repurchase by the Company.
Non-employee Directors' Stock Option Plan
In November 1995, the Board of Directors adopted the 1995 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for the issuance of up to 150,000 nonstatutory stock options to non-
employee directors of the Company. Each non-employee director of the Company
will automatically be granted a nonstatutory option to purchase 15,000 shares
of Common Stock upon the later of the effective date of the initial public
offering or upon the date on which such person first becomes a director.
Thereafter, beginning June 30, 1997 each non-employee director of the Company
will be granted an annual option to purchase 5,000 shares of common stock
provided such person, on June 30th of each year, has served continuously as a
non-employee director for at least six months prior to such date. Options
under the Directors' Plan will be granted at the fair value of the stock and
will vest one-third at date of grant and the remaining options will vest in
two equal annual installments.
In 1996, the Company issued 75,000 options under the Directors' Plan.
1996 Non-officer Equity Incentive Plan
In October 1996, the Board of Directors adopted the 1996 Non-Officer Equity
Incentive Plan (the "Incentive Plan") providing for the issuance of either
nonstatutory common stock options, stock bonuses, or rights to purchase
restricted stock to employees and consultants of the Company. This plan
explicitly excludes directors and employees serving as officers of the
company. Under the Incentive Plan, a total of 600,000 shares have been
authorized for issuance.
F-11
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options may be granted at an exercise price at the date of grant of not less
than 85% of the fair market value per share for nonstatutory stock options,
stock bonuses and restricted stock purchases as determined by the Board of
Directors. Options granted under the Incentive Plan are exercisable only upon
vesting.
In 1996, the Company issued 142,301 options under the Incentive Plan.
A summary of activity under all the plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------
SHARES PRICE
--------- ------------
<S> <C> <C>
Outstanding as of December 31,1993.................. 1,694,913 $0.16-$ 0.31
=========
Granted........................................... 692,400 $0.16-$ 0.31
Exercised......................................... (879,562) $0.16-$ 0.31
Canceled.......................................... (20,057) $ 0.31
---------
Outstanding as of December 31, 1994................. 1,487,694 $0.16-$ 0.31
=========
Granted........................................... 701,300 $1.00-$ 9.00
Exercised......................................... (999,899) $0.16-$ 6.20
Canceled.......................................... (29,834) $0.31-$ 3.70
---------
Outstanding as of December 31, 1995................. 1,159,261 $0.16-$ 9.00
=========
Granted........................................... 789,201 $9.00-$46.00
Exercised......................................... (324,591) $0.31-$ 9.00
Canceled.......................................... (119,845) $0.31-$42.25
---------
Outstanding as of December 31, 1996................. 1,504,026 $0.16-$46.00
=========
</TABLE>
At December 31, 1996 options to purchase 270,226 shares were vested and
842,065 shares were available for future grant under all the plans.
During the year ended December 31, 1996, the Company had granted certain
options for the purchase of common stock on which the Company will amortize
approximately $73,000 annually of compensation expense over the four-year
vesting period of the options.
The following table summarizes information regarding stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------------
WEIGHTED-
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE
AT CONTRACTUAL AVERAGE AT WEIGHTED-
DECEMBER 31, LIFE EXERCISE DECEMBER 31, AVERAGE
RANGE OF EXERCISES PRICES 1996 (YEARS) PRICE 1996 EXERCISE PRICE
- ------------------------- ------------ ----------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 0.3121-$ 1.0000....... 311,463 7.39 $ 0.4762 311,463 $ 0.4762
$ 1.5000-$ 3.7500....... 317,155 8.51 2.3962 317,155 2.3962
$ 4.2500-$24.3125....... 409,258 8.65 17.5289 359,258 16.6283
$24.5000-$36.7500....... 340,800 9.55 32.3086 274,900 32.2263
$37.0000-$46.0000....... 125,350 9.68 40.0116 50,450 41.5946
--------- ---------
$ 0.3121-$46.0000....... 1,504,026 8.65 $16.0292 1,313,226 $13.5846
========= =========
</TABLE>
Options outstanding and options exercisable above do not include shares
subject to repurchase by the company at December 31, 1996.
F-12
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee Stock Purchase Plan
In November 1995, the Board of Directors adopted the Employee Stock Purchase
Plan (the "Purchase Plan"), which provides for the issuance of a maximum of
350,000 shares of common stock. Eligible employees can have up to 10% of their
earnings withheld, up to a maximum of $15,000 per calendar year, to be used to
purchase shares of the common stock on specified dates determined by the Board
of Directors. The price of common stock purchased under the Purchase Plan will
be equal to 85% of the lower of the fair market value of the common stock on
the commencement date of each offering period or the specified purchase date.
During 1996, approximately 60,000 common shares were purchased under the
Employee Stock Purchase Plan.
Pro Forma Stock Compensation Disclosure
The Company applies the intrinsic value method prescribed by APB No. 25,
Accounting for Stock Issued to Employees, in accounting for its stock-based
compensation plans. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with the fair value approach set
forth in SFAS No. 123, Accounting for Stock-Based Compensation, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Net income (in thousands):
As reported................................................ $4,484 $1,260
Pro forma.................................................. $2,015 $1,159
Earnings Per Share:
As reported................................................ $ 0.30 $ 0.10
Pro forma.................................................. $ 0.14 $ 0.09
</TABLE>
Earnings per share was computed using the method describe in note 2.
The fair value of each stock option grant on the date of grant was estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Volatility.................................................... 62.90% 62.90%
Risk-free interest rate....................................... 6.0% 5.96%
Dividend yield................................................ -- --
Expected lives................................................ 4 4
Weighted Average fair value................................... $31.57 $2.87
</TABLE>
The fair value of the shares granted under the Purchase Plan was estimated
using the Black-Scholes model with the following assumptions:
<TABLE>
<CAPTION>
1996
------
<S> <C>
Volatility........................................................ 62.90%
Risk-free interest rate........................................... 6.0%
Dividend yield.................................................... --
Expected lives.................................................... 2
Weighted Average fair value....................................... $31.57
</TABLE>
The pro forma effect on net income for 1996 and 1995 is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to January 1, 1995.
F-13
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
401(k) Plan
In November 1993, the Board of Directors adopted an employee savings and
retirement plan (the "401(k) Plan") covering substantially all of the
Company's employees. Pursuant to the 401(k) Plan, eligible employees may elect
to reduce their current compensation by up to the statutory prescribed limit
and have the amount of such reduction contributed to the 401(k) Plan. The
Company may make contributions to the 401(k) Plan on behalf of eligible
employees. Employees become 25 percent vested in the Company contributions
after one year of service, and increase their vested percentages by an
additional 25 percent for each year of service thereafter. The Company has not
made any contributions to the 401(k) Plan.
NOTE 8--COMMITMENTS:
Leases
The Company is obligated under non-cancelable operating leases for office
space and non-cancelable capital leases for equipment which expire at various
times through 1999. Certain leases for office space provide for scheduled rent
increases and contain options for additional space. Rent expense is recognized
ratably over the lease term. Future minimum lease commitments under these
leases at December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
LEASES
------
<S> <C>
Year ending December 31,
1997............................................................. $1,956
1998............................................................. 1,812
1999............................................................. 1,698
2000............................................................. 1,418
2001............................................................. 1,212
Thereafter....................................................... 1,806
------
$9,902
======
</TABLE>
Included in the above table for 1997 and 1998 are $247,000 and $34,000,
respectively, for future minimum lease commitments under capital lease
obligations which include $14,000 for interest. Total rent expense was
approximately $1,278,000, $696,000, $316,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
F-14
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES:
For the year ended December 31, 1994, the Company incurred losses and
consequently had no provision for income taxes. The provision for income taxes
for the year ended December 31, 1996 and December 31, 1995 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1996 1995
------- -----
<S> <C> <C>
Current:
Federal..................................................... $ 2,262 $ 217
State....................................................... 531 92
Foreign..................................................... 895 159
------- -----
3,688 468
------- -----
Deferred:
Federal..................................................... (1,144) --
State....................................................... (129) --
------- -----
(1,273) --
------- -----
$ 2,415 $ 468
======= =====
</TABLE>
The components of income (loss) before income tax provision are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
------------------------
<S> <C> <C> <C>
Domestic income (loss)............................ $5,190 $1,281 $(1,924)
Foreign income.................................... 1,709 447 35
------- ------- --------
Income (loss) before provision for income taxes... $6,899 $1,728 $(1,889)
======= ======= ========
</TABLE>
The tax provision is reconciled to the amount computed using the federal
statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995 1994
------- ----- -----
<S> <C> <C> <C>
Federal statutory tax provision (benefit)............. $ 2,345 $ 588 $(642)
State taxes, net of federal benefit................... 397 60 --
Future benefits not currently recognized.............. (1,100) 491 642
Utilization of tax loss and credit carryforward....... (130) (710) --
Foreign taxes......................................... 596 -- --
Other................................................. 307 39 --
------- ----- -----
$ 2,415 $ 468 $ --
======= ===== =====
</TABLE>
F-15
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based on available evidence, that some portion or all
of the deferred assets will not be realized. Based on a revaluation of the
realizability of future tax benefits based on income earned in 1996, creating
available tax carrybacks, the Company released $944,000 of the previously
established valuation allowance during 1996. The significant components of the
Company's deferred tax assets, that were included in current other assets and
other assets on the Balance Sheet, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
------ -----
<S> <C> <C>
Deferred tax assets:
Reserves and accruals........................................ $1,067 $ 944
Tax credit carryforwards..................................... 206 --
------ -----
1,273 944
Less deferred tax asset valuation allowance.................... -- (944)
------ -----
$1,273 $ --
====== =====
</TABLE>
F-16
<PAGE>
DOCUMENTUM, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Allowance for Doubtful Accounts (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1994.... $180 $337 $ 6 $ 511
Year Ended December 31, 1995.... $511 $243 $107 $ 647
Year Ended December 31, 1996.... $647 $672 $250 $1,069
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <S>
(1)3.1 Registrant's Amended and Restated Certificate of Incorporation
(2)3.2 Registrant's Amended and Restated Bylaws.
4.1 Reference is made to Exhibits 3.1 and 3.2
(2)4.2 Specimen stock certificate
(2)4.3 Amended and Restated Investor Rights Agreement, dated September 20,
1994, between the Registrant and certain investors.
(2)10.1 Registrant's 1993 Equity Incentive Plan, as amended.
(2)10.2 Form of Incentive Stock Option under the Equity Incentive Plan.
(2)10.3 Form of Nonstatutory stock Option under the Equity Incentive Plan.
(2)10.4 Form of Early Exercise Stock Purchase Agreement.
(1)10.5 Registrant's Employee Stock Purchase Plan, as amended.
(2)10.6 Registrant's 1995 Non-Employee Directors' Stock Option Plan.
(2)10.7 Form of Indemnity Agreement between the Registrant and its officers
and directors.
(2)10.8 Industrial Real Estate Lease, dated June 9, 1995, between the
Registrant and Sunol Center Associates.
(2)10.9 Letter Agreement, dated July 27, 1993, between the Registrant and
Jeffrey A. Miller.
(2)10.10 Business Loan Agreement, dated December 23, 1993, between the
Registrant and Silicon Valley Bank.
(2)10.11 Promissory Note and Loan modification Agreement, dated October 21,
1994 between the Registrant and Silicon Valley Bank.
(2)10.12 Loan Modification Agreement, dated July 27, 1995, between the
Registrant and Silicon Valley Bank.
Y(2)10.13 International Distributor Agreement, dated December 8, 1993, between
the Registrant and Xerox Canada Ltd.
Y(2)10.14 Agreement for the Supply of Services, dated April 5, 1995, between
the Registrant and Rank Xerox Limited.
(2)10.15 Series C Stock Purchase Agreement, dated September 20, 1994, between
the Registrant and certain other parties named therein.
(2)10.16 Promissory Note and Loan Modification Agreement, dated November 10,
1995, between the Registrant and Silicon Valley Bank.
Y(3)10.17 Services Partner Agreement, dated April 1, 1996, between the
Registrant and Xerox Corporation.
(4)10.18 Registrant's 1996 Non-Officer Equity Incentive Plan.
10.19 Letter of Agreement, dated December 9, 1996 between the Registrant
and Mark S. Garrett.
10.20 Lease agreement between Registrant and Britannia Hacienda IV Limited
Partnership.
11.1 Statement Regarding computation of Earnings Per Share.
(2)22.1 List of Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney. Reference is made to the Signature page.
27.1 Financial Data Schedule.
</TABLE>
- --------
Y Confidential treatment requested and granted for portions of this exhibit.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-01832) and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-
1, as amended (No. 33-80047) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Form 10-Q for the quarterly period
ended March 31, 1996 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-15239) and incorporated herein by reference.
<PAGE>
EXHIBIT 10.19
December 9, 1996
Mr. Mark Garrett
19664 Charters Avenue
Saratoga, CA 95070
Dear Mark,
It is our pleasure to offer you employment with Documentum, Inc. as Vice
President and Chief Financial Officer of Documentum, Inc., reporting to me. Your
start date will be no later than Monday, December 30, 1997. You will be located
in our Pleasanton office.
Your compensation program will be as follows:
Your base salary will be $14,166.67 per month. In addition, you will be
eligible for a $40,000 annual Executive Bonus per the terms and conditions of
our board-approved Executive Bonus Plan.
As an added incentive you will receive an option to purchase 100,000 shares of
Documentum common stock subject to board approval. Your options will vest
18,750 shares at the end of the first full, continuous year of employment, and
monthly for the next three years at a rate of 1,562 shares per month. In
addition, you will be eligible to vest the remaining 25,000 shares of stock
options at the end of your fifth full year of employment, or earlier upon
achieving the following company financial milestones:
. Vesting of 6,250 shares when the company has achieved its first $25M
revenue quarter, assuming you and the company are achieving our overall business
objectives at that time.
. Vesting of an additional 6,250 shares when the company has achieved
its first $50M revenue quarter, assuming you and the company are achieving our
overall business objectives at that time.
. Vesting of an additional 6,250 shares when the company has achieved
its first $75M revenue quarter, assuming you and the company are achieving our
overall business objectives at that time.
. Vesting of an additional 6,250 shares when the company has achieved
its first $100M revenue quarter, assuming you and the company are achieving our
overall business objectives at that time.
Also, you will receive a $25,000 sign-on bonus. Should you voluntarily leave
Documentum during your first year of employment, you will be required to
reimburse the company for the sign-on bonus as described in the following
schedule:
0 - 90 days = 100% 180 - 270 days = 50%
<PAGE>
90 - 180 days = 75% 270 - 365 days = 25%
Additionally, should your position be eliminated within the first 12 months of
employment due to the acquisition or merger of another company, you will be
provided with a severance package, including as a minimum, vesting of your stock
options through the initial 12 month period according to the schedule outlined
above.
You will be eligible to receive standard Documentum benefits as described in our
Benefits Handbook which will be provided to you on your date of hire.
Documentum may modify, revoke, suspend or terminate any of the terms, plans,
policies and/or procedures described in our Benefits Handbook or otherwise
communicated to you, in whole or in part, at any time, with or without notice.
In order to comply with the Immigration Reform and Control Act of 1986, you must
be an American citizen or have the authorization to work in the United States.
In either case, verification is required within 3 days of your date of hire.
Please bring the appropriate documentation with you on your first day of
employment.
We hope that this will be the beginning of a long and rewarding employment
relationship. However, you are not being promised any particular term of
employment. You are an employee at will and as such, you or Documentum may
terminate your employment at any time, with or without notice and with or
without cause. Neither this letter nor any of Documentum's plans or policies
constitute an employment contract or a contractual commitment.
Throughout your employment, you will be expected to abide by all of the
Company's policies and procedures, including those related to your officer role
with the company. By accepting this offer, you represent that your employment
with the Company will not violate any agreement or obligations that you may have
with any third party, including prior employers. You agree not to make any
unauthorized disclosure to the Company of, or use on behalf of the Company, any
confidential information belonging to any third party, including your former
employers. You represent that you do not possess any property containing a
third party's confidential and proprietary information.
Of course, during your employment with the Company, you may make use of
information generally known and used by persons with training and experience
comparable to your own, and information which is common knowledge in the
industry or is otherwise legally available in the public domain.
<PAGE>
In accordance with standard Documentum policy, this offer is contingent upon
you: (a) completing and executing the enclosed employee confidential information
agreement. (b) and returning this letter to Documentum.
This offer is in effect through Monday, December 16, 1996. Please indicate your
acceptance in all respects by signing the attached employee confidential
information agreement and returning this letter to me on or prior to December
16, 1996. I am looking forward to your accepting this offer and joining us in
this exciting business venture. If you have any questions, please call.
Sincerely,
Jeffrey A. Miller
President and CEO
<PAGE>
By my execution of this letter, I accept the offer of employment (and all of the
terms and conditions) above.
Please retain one copy for your records and return a fax copy to (510) 463-6850,
attention Kristine Blagden, Human Resources Department.
Signature:
-------------------------------------------
Print Name:
------------------------------------------
Date:
------------------------------------------------
Start Date:
------------------------------------------
Internal e-mail address
- -----------------------
What log-in would you like? ( Our standard is first initial, last name --
"psmith" but not to exceed 8 letters)
Choice 1
-----------------
Choice 2
-----------------
Actual name on business card
- ----------------------------
Please print below how you would like your name to appear on your business card.
-----
_________________________
================================================================================
Please complete this page and fax it to (510) 463-6850, attention Kristine
Blagden, Human Resources Department.
================================================================================
<PAGE>
EXHIBIT 10.20
LEASE
BETWEEN
BRITANNIA HACIENDA IV LIMITED PARTNERSHIP
("Landlord")
and
DOCUMENTUM, INC.
("Tenant")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1. PREMISES............................................. 1
1.1. Premises........................................ 1
1.2. Landlord's Reserved Rights...................... 1
2. TERM ................................................ 2
2.1. Term............................................ 2
2.2. Early Possession................................ 3
2.3. Delay in Possession............................. 3
2.4. Construction.................................... 3
2.5. Acknowledgement of Lease Commencement........... 4
2.6. Holding Over.................................... 4
2.7. Option to Extend Term........................... 4
3. RENTAL................................................ 5
3.1. Minimum Rental................................... 5
3.2. Late Charge...................................... 7
4. TAXES................................................. 7
4.1. Personal Property................................ 7
4.2. Real Property.................................... 7
5. OPERATING EXPENSES.................................... 8
5.1. Payment Of Operating Expenses.................... 8
5.2. Definition Of Operating Expenses................. 8
5.3. Determination Of Operating Expenses.............. 9
5.4. Final Accounting For Lease Year.................. 10
5.5. Proration........................................ 11
6. UTILITIES............................................. 11
6.1. Payment.......................................... 11
6.2. Interruption..................................... 11
7. ALTERATIONS........................................... 11
7.1. Right To Make Alterations........................ 11
7.2. Title To Alterations............................. 12
7.3. Tenant Fixtures.................................. 12
7.4. No Liens......................................... 12
8. MAINTENANCE AND REPAIRS............................... 12
8.1. Landlord's Work.................................. 12
8.2. Tenant's Obligation For Maintenance.............. 13
(a) Good Order, Condition And Repair............. 13
(b) Landlord's Remedy............................ 13
(c) Condition Upon Surrender..................... 13
9. USE OF PREMISES....................................... 14
9.1. Permitted Use................................... 14
9.2. No Nuisance..................................... 14
9.3. Compliance With Laws............................ 14
9.4. Liquidation Sales............................... 15
9.5. Environmental Matters........................... 15
10. INSURANCE AND INDEMNITY............................... 16
10.1. Insurance....................................... 16
10.2. Quality Of Policies And Certificates............ 17
10.3. Workers' Compensation........................... 17
10.4. Waiver Of Subrogation........................... 17
10.5. Increase in Premiums............................ 17
10.6. Indemnification................................. 17
10.7. Blanket Policy.................................. 17
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
11. SUBLEASE AND ASSIGNMENT.............................. 18
11.1. Assignnment And Sublease Of Premises........... 18
11.2. Rights Of Landlord............................. 19
12. RIGHT OF ENTRY AND QUIET ENJOYMENT.................... 19
12.1. Right to Entry................................. 19
12.2. Quiet Enjoyment................................ 19
13. CASUALTY AND TAKING................................... 19
13.1. Termination Or Reconstruction.................. 20
13.2. Tenant's Rights................................ 20
13.3. Lease To Remain In Effect...................... 20
13.4. Reservation Of Compensation.................... 21
13.5. Restoration Of Fixtures........................ 21
14. DEFAULT............................................... 21
14.1. Events Of Default.............................. 21
(a) Abandonment................................ 21
(b) Nonpayment................................. 21
(c) Other Obligations.......................... 21
(d) General Assignment......................... 22
(e) Bankruptcy................................. 22
(f) Receivership............................... 22
(g) Attachment................................. 22
(h) Insolvency................................. 22
14.2. Remedies Upon Tenant's Default................. 22
14.3. Remedies Cumulative............................ 23
15. SUBORDINATION, ATTORNMENT AND SALE.................... 23
15.1. Subordination To Mortgage...................... 23
15.2. Sale Of Landlord's Interest.................... 24
15.3. Estoppel Certificates.......................... 24
15.4. Subordination To CC&R's........................ 24
16. SECURITY.............................................. 25
16.1. Deposit........................................ 25
17. MISCELLANEOUS......................................... 25
17.1. Notices........................................ 25
17.2. Successors And Assigns......................... 26
17.3. No Waiver...................................... 26
17.4. Severability................................... 26
17.5. Litigation Between Parties.. .................. 27
17.6 Surrender...................................... 27
17.7. Construction................................... 27
17.8. Entire Agreement............................... 27
17.9. Governing Law.................................. 27
17.10. No Partnership................................. 27
17.11. Financial Information.......................... 27
17.12. Costs.......................................... 28
17.13. Time........................................... 28
17.14. Rules And Regulations.......................... 28
17.15. Brokers........................................ 28
17.16. Memorandum Of Lease............................ 28
17.17. Corporate Authority............................ 28
17.18. Landlord Defaults.............................. 28
</TABLE>
EXHIBITS
- --------
A Location Of Premises
B Real Property Description
C Construction
D Acknowledgement Of Lease Commencement
2
<PAGE>
LEASE
THIS LEASE is made and entered into as of the 6th day of December, 1996,
by and between BRITANNIA HACIENDA IV LIMITED PARTNERSHIP, a Delaware limited
partnership, hereinafter called "Landlord", and DOCUMENTUM, INC., a Delaware
corporation, hereinafter called "Tenant."
THE PARTIES AGREE AS FOLLOWS:
1. PREMISES
--------
1.1 Premises. Landlord leases to Tenant and Tenant hires and leases from
--------
Landlord, on the terms, covenants and conditions hereinafter set forth, the
premises (the "Premises") designated in Exhibit A attached hereto and
---------
incorporated herein by this reference, consisting of approximately 27,738
square feet of space located within Building F (the "Building") in the
BRITANNIA BUSINESS CENTER AT HACIENDA, PHASES III AND IV (the "Center") in the
CITY OF PLEASANTON, County of Alameda, State of California, commonly known as
5700 Stoneridge Drive, Suite __, (to be determined) Pleasanton, CA 94588 and
located on the real property (the "Property" described in Exhibit B attached
---------
hereto and incorporated herein by this reference, together with the
nonexclusive right to use any common areas improved and made available from
time to time for use by tenants of completed buildings in the Center, including
(but not limited to) any such common areas designated from time to time in any
Declaration of Covenants, Conditions and Restrictions or similar document
affecting the Center.
1.2. Landlord's Reserved Rights. Landlord reserves the right from time
--------------------------
to time to (i) install, use, maintain, repair and replace pipes, ducts,
conduits, wires and appurtenant meters and equipment for service to other parts
of the Building above the ceiling surfaces, below the floor surfaces, within the
walls or leading through the Premises in locations which will not materially
interfere with Tenant's use thereof, (ii) relocate any pipes, ducts, conduits,
wires and appurtenant meters and equipment included in the Premises which are so
located or located elsewhere outside the Premises, (iii) make alterations or
additions to the Building, (iv) construct, alter or add to other buildings or
improvements on the Property, (v) build adjoining to the Property, and (vi)
lease any part of the Property for the construction of improvements or
buildings. Landlord may modify or enlarge the common area, alter or relocate
accesses to the Premises, or alter or relocate any common facility. Landlord
shall not exercise rights reserved to it pursuant to this Section 1.2 in such a
manner as to materially impair Tenant's ability to conduct its activities in the
normal manner; provided, however, that the foregoing shall not limit or restrict
Landlord's right to undertake reasonable construction activity and Tenant's use
of the Premises shall be subject to reasonable temporary disruption incidental
to such activity diligently prosecuted. Nothwithstanding anything herein to the
contrary except with Tenant's prior written consent (which shall not be
unreasonably withheld or delayed), Landlord shall not exercise its rights under
this Section 1.2 in a manner which will result in a material change in the
original site plan for the Property, materially and adversely affect Tenant's
use of the Premises, reduce
1
<PAGE>
the number of parking spaces available to Tenant, or materially decrease the
parking ratio for the Center or the proximity of parking to the Premises.
2. TERM
----
2.1. Term. (a) The term of this occur of (i) the date which is five (5)
----
days after the date Landlord notifies Tenant that Landlord's work pursuant to
Section 2.4 and Exhibit C is substantially complete (but in no event before
---------
March 1, 1997), or (ii) the date Tenant takes occupancy of the Premises (except
as otherwise provided in Section 2.2), or (iii) March 1, 1997 (subject to
adjustment as hereinafter set forth), the earliest of such dates being herein
called the "Commencement Date," and shall end on the day immediately preceding
the date 120 Months thereafter, unless sooner terminated or extended (if
applicable) as hereinafter provided. For purposes of clause (i) of the first
sentence of this Section 2.1 (a), Landlord's work shall be deemed to be
"substantially complete" when all of the following have occurred: (A) all
improvements to be constructed by Landlord have been completed, except for
"punch list" items which do not materially interfere with Tenant's ability to
use the Premises for their intended purpose; (B) the City of Pleasanton has
issued a certificate of occupancy for the Premises; (C) all utilities reasonably
necessary for Tenant's use of the Premises for their intended purpose are
connected and available for use at the Premises; and (D) all improvements to be
constructed by Landlord as part of the common areas contemplated for, and
reasonably necessary for the use and enjoyment of, the Property have been
completed, except for "punch list" items which do not materially interfere with
Tenant's ability to use the Premises for their intended purpose, available for
use by Tenant. For purposes of clause (iii) of the first sentence of this
Section 2.1 (a), the specified date of March 1, 1997 shall be adjusted as
follows: The parties intend that Landlord shall have three (3) months to
substantially complete Landlord's work, beginning on the date on which Tenant
has delivered to Landlord, and Landlord and Tenant have mutually approved, (x) a
complete and final space plan for the interior improvements in the Premises and
(y) complete and final electrical, mechanical and other necessary specifications
for such improvements and for Tenant's proposed use of the Premises (the "Plan
Completion Date"). To the extent the time required to reach substantial
completion of Landlord's work exceeds three (3) months after the Plan Completion
Date, the March 1, 1997 date in clause (iii) of the first sentence of this
Section 2.1 (a) shall be extended by a number of days equal to the number of
days of such excess time; provided, however, that to the extent substantial
--------
completion of Landlord's work is delayed by (xx) any change requested by Tenant
in the final space plan and/or final specifications following the Plan
Completion Date and/or (yy) any negligence or willful misconduct of Tenant or
its agents, employees or contractors, the three (3) month period allowed for
substantial completion of Landlord's work shall be extended by a number of days
equal to the number of days of such delay (thus resulting in a reduction, by a
like number of days, of the extension of the March 1, 1997 date in clause (iii)
of the first sentence of this Section 2.1 (a)).
(b) Notwithstanding the provisions of Section 2.1 (a), Tenant shall have
a one-time right to terminate this Lease as of the fifth (5th) anniversary of
the Commencement Date, conditional only upon (i) Tenant giving written notice of
its exercise of such right to Landlord no later than the fourth (4th)
anniversary of the Commencement Date and (ii) Tenant paying to Landlord in cash,
on or before the fifth (5th) anniversary of the Commencement Date, a termination
payment in an amount equal to the sum of (A) the unamortized portion of
Landlord's total direct costs (as described in Section 3.1 (c) below) of
construction of tenant improvements in the Premises under Section 2.4 and
Exhibit C, assuming amortization on a "level payment" basis over the ten (10)
year base term of this
2
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Lease with interest imputed at the rate of ten percent (10%) per annum, plus (B)
an amount equal to three (3) months' minimum rent at the rate applicable in the
sixtieth (60th) month of the term of this Lease under Sections 3.1 (a) and (c)
hereof; provided, however, that if, in connection with any such exercise of
--------
Tenant's early termination right and prior to the fifth (5th) anniversary of the
Commencement Date, Landlord (or any affiliate of Landlord) and Tenant enter into
a mutually acceptable "new lease" for a larger space in the Britannia Business
Center at Hacienda (whether on Willow Road, Stoneridge Drive or Hopyard Road) or
in any other Britannia development owned by Landlord or by an affiliate of
Landlord in the San Francisco Bay Area, then Tenant shall be released from any
obligation to make the termination payment described in clause (ii) of this
sentence.
2.2. Early Possession. Tenant shall have the right to occupy or use the
----------------
Premises for the purpose of installing fixtures, equipment, furniture and
furnishings and other similar work preparatory to the commencement of business
in the Premises, prior to the Commencement Date set forth in Section 2.1, which
occupancy or use shall be subject to and upon all of the terms and conditions of
this Lease, excluding the obligation to pay rent and other charges; provided,
however, that such early possession shall not advance or otherwise affect the
termination date set forth in Section 2.1; and provided further, that Tenant
shall not interfere with or delay Landlord's contractors by such early
possession and shall indemnify, defend and hold harmless Landlord and its agents
and employees from and against any and all claims, demands, liabilities,
actions, losses, costs and expenses, including (but not limited to) reasonable
attorneys' fees, arising out of or in connection with Tenant's early entry upon
the Premises hereunder.
2.3. Delay In Possession. Landlord agrees to use its best reasonable
-------------------
efforts to complete prior to the Commencement Date the work described in Section
2.4 and Exhibit C; provided, however, Landlord shall not be liable for any
---------
damages caused by any delay in the completion of such work, nor shall any such
delay affect the validity of this Lease or the obligations of Tenant hereunder,
except as otherwise expressly provided in Section 2.1 (a) hereof with respect to
the determination of the Commencement Date.
2.4. Construction. The obligation of Landlord to perform work to improve
------------
the Premises for occupancy is set forth in Exhibit C attached hereto and
---------
incorporated herein by this reference. Except as set forth in this Section 2.4
and in Exhibit C, Landlord shall have no responsibilities or obligations with
---------
respect to preparation of the Premises for Tenant's occupancy. Acceptance by
Tenant of possession of the Premises after performance of such work, if any, by
Landlord shall constitute acceptance by Tenant of such work in its then
completed condition and Landlord shall have no further responsibility of any
kind or character for improvement of the Premises or in connection with such
work; provided, however, that within thirty (30) days after the Commencement
--------
Date, Tenant may furnish to Landlord a "punch list" identifying any items or
matters in the Premises which are not constructed in accordance with the plans
and specifications approved under Exhibit C hereto and Landlord shall promptly
---------
and diligently correct all such matters at its sole cost and expense; and
provided further, however, that notwithstanding anything to the contrary
- ----------------
contained herein, Landlord warrants to Tenant, effective as of the Commencement
Date, that (i) the Building, the interior improvements in the Premises and all
common areas necessary to serve the Building are substantially completed and
are free from material defects in design and construction, (ii) the electrical,
mechanical, plumbing, lighting, air conditioning and heating systems, and the
loading doors, if any, on the Building are in good operating condition (to the
extent necessary to serve the Premises) and are free of material defects in
design, equipment and/or
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installation, and (iii) the interior improvements in the Premises have been
constructed in compliance in all material respects with the plans and
specifications developed and approved pursuant to Exhibit C. If it is
---------
determined that the warranty set forth in the preceding sentence has been
violated in any respect, then it shall be the responsibility of Landlord, after
receipt of written notice from Tenant setting forth with specificity the nature
of the violation, to promptly, at Landlord's sole cost, correct the
condition(s) constituting such violation. Tenant's failure to give such written
notice to Landlord within one (1) year after the Commencement Date shall give
rise to a conclusive presumption that Landlord has complied with all Landlord's
obligations under this Section 2.4 and Exhibit C except with respect to latent
---------
defects. TENANT ACKNOWLEDGES THAT THE FOREGOING WARRANTIES ARE IN LIEU OF ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PHYSICAL CONDITION OF
THE BUILDING AND IMPROVEMENTS TO BE CONSTRUCTED BY LANDLORD AND THAT LANDLORD
MAKES NO OTHER WARRANTIES EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE.
2.5. Acknowledgement Of Lease Commencement. Upon commencement of the
-------------------------------------
term of this Lease, Landlord and Tenant shall execute a written acknowledgement
of the Commencement Date, date of termination and related matters, substantially
in the form attached hereto as Exhibit D (with appropriate insertions), which
---------
acknowledgement shall be deemed to be incorporated herein by this reference.
2.6. Holding Over. If Tenant holds possession of the Premises after the
------------
term of this Lease, with Landlord's written consent, then except as otherwise
specified in such consent, Tenant shall become a tenant from month to month at
125% of the rental and otherwise upon the terms herein specified for the period
immediately prior to such holding over and shall continue in such status until
the tenancy is terminated by either party upon not less than thirty (30) days
prior written notice. If Tenant holds possession of the Premises after the term
of this Lease without Landlord's written consent, then Landlord in its sole
discretion may elect (by written notice to Tenant) to have Tenant become a
tenant either from month to month or at will, at 150% of the rental (prorated
----
on a daily basis for an at-will tenancy, if applicable) and otherwise upon the
terms herein specified for the period immediately prior to such holding over,
or may elect to pursue any and all legal remedies available to Landlord under
applicable law with respect to such unconsented holding over by Tenant. Tenant
shall indemnify and hold Landlord harmless from any loss, damage, claim,
liability, cost or expense (including reasonable attorney's fees) resulting
from any delay by Tenant in surrendering the Premises (except with Landlord's
prior written consent), including but not limited to any claims made by a
succeeding tenant by reason of such delay. Acceptance of rent by Landlord
following expiration or termination of this Lease shall not constitute a
renewal of this Lease.
2.7. Option To Extend Term. Tenant shall have the option to extend the
---------------------
term of this Lease, at the minimum rental set forth in Section 3.1(d) and
otherwise upon all the terms and provisions set forth herein with respect to the
initial term of this Lease, for one additional period of five years, commencing
upon expiration of the initial term hereof. Exercise of such option with respect
to such extended term shall be by written notice to Landlord at least six (6)
months and not more than eight (8) months prior to the expiration of the initial
term hereof. If Tenant is in default of any material obligation hereunder on the
date of such notice or on the date any extended term is to commence, which
default is continuing beyond notice and the expiration of any applicable cure
period, then the option shall be of no force or effect, the extended term shall
not commence and this Lease shall expire at the end of the initial term hereof
(or at such earlier time as Landlord may elect pursuant to the default
provisions of this Lease). If
4
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Tenant properly exercises its extension option under this Section, then all
references in this Lease (other than in this Section 2.7) to the "term" of this
Lease shall be construed to include the extension term thus elected by Tenant.
Except as expressly set forth in this Section 2.7, Tenant shall have no right
to extend the term of this Lease beyond its prescribed term.
3. RENTAL
------
3.1. Minimum Rental.
--------------
(a) Tenant shall pay to Landlord as minimum rental for the Premises, in
advance, without deduction, offset, notice or demand, except as otherwise
provided herein, on or before the Commencement Date and on or before the first
day of each subsequent calendar month of the term of this Lease, the following
amounts per month:
Months Minimum Rental
------ --------------
0 - 4 $22,623.30
5 - 120 $29,124.90
In addition to the above, effective as of each anniversary of the
Commencement Date during the term of this Lease, minimum rental as per Section
3.1 (a) (and Section 3.1 (c), if applicable) will be increased by a factor of
four per cent (4%) per annum over the rental rates in effect immediately prior
to such anniversary.
If the obligation to pay minimum rental hereunder commences on other than
the first day of a calendar month or if the term of this Lease terminates on
other than the last day of a calendar month, the minimum rental for such first
or last month of the term of this Lease, as the case may be, shall be prorated
based on the number of days the term of this Lease is in effect during such
month. If an increase in minimum rental becomes effective on a day other than
the first day of a calendar month, the minimum rental for that month shall be
the sum of the two applicable rates, each prorated for the portion of the month
during which such rate is in effect.
(b) The minimum rental amounts specified in this Section 3.1 are based
upon an area of 27,738 square feet for the Premises. If the actual area of the
Premises, when completed, is greater or less than 27,738 square feet, the
minimum rental specified in this Section 3.1 shall be adjusted proportionately
to the change in the area of the Premises, as determined in good faith by
Landlord's architect on the basis of measurement from the exterior faces of
exterior walls, from the centerline of interior demising walls, and from the
drip line of any exterior overhangs.
(c) The minimum rental amounts specified in this Section 3.1 are based
upon an estimated tenant improvement allowance of Twenty Five Dollars ($25.00)
per square foot for the work to be performed by Landlord on the Premises under
Section 2.4 and Exhibit C. If Landlord's total direct costs of such work
---------
(including, but not limited to, construction costs, permit fees and charges,
architects', engineers' and other consulting and professional fees and all other
5
<PAGE>
related costs incurred in connection with the design and construction of
the work) exceed the product of Twenty Five Dollars ($25.00) times the area of
the Premises (in square feet) as determined in good faith by Landlord's
architect on the basis of measurement described in Section 3.1 (b), then
Tenant's minimum monthly rental hereunder, beginning on the Commencement Date
and continuing throughout the term hereof, shall be increased by an amount
equal to one percent (1%) of the amount by which such total costs exceed the
product of Twenty Five Dollars ($25.00) times such area.
Notwithstanding the above, Landlord is not committed to spend more than
Thirty Dollars ($30.00) per sq. ft. on these improvements.
(d) If Tenant properly exercises its right to extend the term of this
Lease pursuant to Section 2.7 hereof, the minimum rental during the first
extended term shall be equal to the fair market rental value of the Premises (as
theretofore improved under Section 2.4 and Exhibit C) (including any cost of
---------
living adjustments or other rental increase provisions then customary in the
relevant market for comparable commercial leases, determined as of the
commencement of such extended term in accordance with this paragraph). Upon
Landlord's receipt of a proper notice of Tenant's exercise of its option to
extend the term of this Lease, the parties shall have sixty (60) days in which
to agree on the fair market rental (including any applicable rental increase
provisions) for the Premises (as theretofore improved under Section 2.4 and
Exhibit C but specifically excluding any improvements which were installed by
- ---------
Tenant at its own cost) at the commencement of the extended term for the uses
permitted hereunder. If the parties agree on such fair market rental and rental
increase provisions (if any), they shall execute an amendment to this Lease
stating the amount of the applicable minimum monthly rental and any applicable
rental increase provisions. If the parties are unable to agree on such rental
(including any applicable rental increase provisions) within such sixty (60) day
period, then within fifteen (15) days after the expiration of such period each
party, at its cost and by giving notice to the other party, shall appoint a real
estate appraiser with at least five (5) years experience appraising similar
commercial properties in the city in which the Property is located or
neighboring areas to appraise and set the fair market rental and any applicable
rental increase provisions for the Premises at the commencement of the extended
term. If either party fails to appoint an appraiser within the allotted time,
and such failure continues for five (5) business days after written notice from
the other party that the party to which notice is given has failed to make a
timely appointment of an appraiser, then the single appraiser appointed by the
other party shall be the sole appraiser. If an appraiser is appointed by each
party and the two appraisers so appointed are unable to agree upon a fair market
rental (and any appropriate rental increase provisions) within thirty (30) days
after the appointment of the second, they shall appoint a third qualified
appraiser within ten (10) days after expiration of such thirty (30) day period;
if they are unable to agree upon a third appraiser, either party may, upon not
less than five (5) days notice to the other party, apply to the Presiding Judge
of the Superior Court for the county in which the Property is located for the
appointment of a third qualified appraiser. Each party shall bear its own legal
fees in connection with appointment of the third appraiser and shall bear one-
half of any other costs of appointment of the third appraiser and of such third
appraiser's fee. The third appraiser, however selected, shall be a person who
has not previously acted for either party in any capacity. Within thirty (30)
days after the appointment of the third appraiser, a majority of the three
appraisers shall set the fair market rental and any applicable rental increase
provisions for the extended term and shall so notify the parties. If a majority
are unable to agree within the allotted time, (i) the three appraised fair
market rentals shall be added together and divided by three and the resulting
quotient shall be the fair market rental for the extended term,
6
<PAGE>
and (ii) the mathematical average (or the nearest reasonable approximation
thereto) of the two rental increase provisions that are most closely comparable,
which determinations shall be binding on the parties and shall be enforceable in
any further proceedings relating to this Lease.
3.2. Late Charge. If Tenant fails to pay when due rental or other
-----------
amounts due Landlord hereunder, such unpaid amounts shall bear interest for the
benefit of Landlord at a rate equal to the lesser of eight percent (8%) per
annum or the maximum rate permitted by law, from the date due to the date of
payment. In addition to such interest, Tenant shall pay to Landlord a late
charge in an amount equal to five percent (5%) of any installment of minimum
rental and any other amounts due Landlord if not paid in full on or before the
fifth (5th) day following notice from Landlord that such rental or other amount
is due; provided however, that if any payment of rent or other amounts by
--------
Tenant is more than five (5) days late and Landlord gave written notice of
delinquency to Tenant prior to such payment, then for the next twelve (12)
calendar months after such written notice was given, Tenant shall be liable for
late charges on any further payment of rental or other amounts that is not paid
on or before the fifth (5th) day after such rental or other amount is due,
without any requirement of prior notice from Landlord to Tenant that such rental
- -------
or other amount is due. Tenant acknowledges that late payment by Tenant to
Landlord of rental or other amounts due hereunder will cause Landlord to incur
costs not contemplated by this Lease, including, without limitation, processing
and accounting charges and late charges which may be imposed on Landlord by the
terms of any loan relating to the Property. Tenant further acknowledges that is
extremely difficult and impractical to fix the exact amount of such costs and
that the late charge set forth in this Section 3.2 represents a fair and
reasonable estimate thereof. Acceptance of any late charge by Landlord shall not
constitute a waiver of Tenant's default with respect to overdue rental or other
amounts, nor shall such acceptance prevent Landlord from exercising any other
rights and remedies available to it. Acceptance of rent or other payments by
Landlord shall not constitute a waiver of late charges or interest accrued with
respect to such rent or other payments or any prior installments thereof, nor of
any other defaults by Tenant, whether monetary or nonmonetary in nature,
remaining uncured at the time of such acceptance of rent or other payments.
4. TAXES
-----
4.1. Personal Property. Tenant shall be responsible for and shall pay
-----------------
prior to delinquency all taxes and assessments levied against or by reason of
all alterations and additions and all other items installed or paid for by
Tenant under this Lease, and the personal property, trade fixtures and all of
the property placed by Tenant in or about the Premises. Upon request by
Landlord, Tenant shall furnish at any time during the term of this Lease any of
said alterations, additions or personal property, whether or not belonging to
Tenant, shall be taxed or assessed as part of the Property, then such tax or
assessment shall be paid by Tenant to Landlord immediately upon presentation by
Landlord of copies of the tax bills in which such taxes and assessments are
included and shall, for the purposes of this Lease, be deemed to be personal
property taxes or assessments under this Section 4.1.
4.2. Real Property. To the extent the real property taxes and
-------------
assessments on the Premises are assessed separately from the remainder of the
Property, Tenant shall be responsible for and shall pay prior to delinquency all
such taxes and assessments levied against the Premises. Upon request by
7
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Landlord, Tenant shall furnish Landlord with satisfactory evidence of
payment thereof. To the extent the Premises are taxed or assessed as part of
the Property, such real property taxes and assessments shall constitute
Operating Expenses (as that term is defined in Section 5.2 of this Lease) and
shall be paid in accordance with the provisions of Article 5 of this Lease.
5. OPERATING EXPENSES
------------------
5.1. Payment Of Operating Expenses
-----------------------------
(a) Tenant shall pay to Landlord, at the time and in the manner
hereinafter set forth, as additional rental, an amount equal to forty three
point one nine percent (43.19%) (Tenant's Operating Cost Share) of the
Operating Expenses defined in Section 5.2; provided however, that during the
--------
first four (4) months after the Commencement Date, Tenant's Operating Cost Share
shall be thirty-three point five percent (33.5%).
(b) Tenant's Operating Cost Share as specified in paragraph (a) of this
Section is based upon an area of 27,738 square feet for the Premises and an
aggregate area of 64,227 square feet for the buildings owned by Landlord on the
Property. If the actual area of the Premises (when completed) or of the
buildings owned by Landlord, as determined in good faith by Landlord's
architect on the basis of measurement described in Section 3.1 (b), differs
from the assumed numbers set forth above, Tenant's Operating Cost Share shall
be adjusted to reflect the actual areas so determined.
(c) If Landlord constructs additional buildings on the Property (or on
any adjacent property owned by Landlord and operated, for common area purposes,
on an integrated basis with the Property) from time to time, Tenant's Operating
Cost share shall be adjusted to be equal to the percentage determined by
dividing the gross square footage of the Premises (including any additional
space occupied by Tenant from time to time) by the gross square footage of all
buildings located on portions of the Property owned by Landlord (or any
applicable adjacent property owned by Landlord as described above). In
determining said percentage, a building shall be taken into account from and
after the date on which a tenant first enters into possession of the building or
a portion thereof.
5.2. Definition Of Operating Expenses. Subject to the exclusions and
--------------------------------
provisions hereinafter contained, the term "Operating Expenses" shall mean the
total costs and expenses incurred by or allocable to Landlord for management,
operation and maintenance of the Building and the Property (and any applicable
adjacent property owned by Landlord as described above), including, without
limitation, (i) insurance, property management, building maintenance,
landscaping and common area maintenance; (ii) all utilities and services; (iii)
real and personal property taxes and assessments or substitutes therefor and
new taxes on landlords in addition to taxes now in effect, but excluding (aa)
fees, exactions and taxes imposed as a condition to the issuance of any
entitlements or building permits related to the Property, and (bb) gift taxes,
inheritance taxes, transfer taxes and net income taxes of Landlord; (iv)
supplies, equipment, utilities and tools used in management, operation and
maintenance: (v) capital improvements to the Property or the buildings and
other improvements thereon, amortized over the reasonable useful life of the
applicable improvement, (aa) which reduce or will cause future reduction of
other items of Operating Expenses for which Tenant is otherwise required to
contribute (provided that the amortizable costs for this category of
--------
improvement shall be limited to the amount
8
<PAGE>
of the reasonably estimated savings to be produced thereby), or (bb) which
are required by any law, ordinance, regulation or order of any governmental
authority that becomes applicable to the Property after the Commencement Date,
or (cc) of which Tenant has use or which benefit Tenant (provided that
amortizable improvements under this category shall be limited to those which
are approved in writing by Tenant or which are merely a reasonably necessary
repair or replacement of an existing improvement with one of like kind and
quality, in which event no such approval by Tenant shall be required); and (vi)
any other costs allocable to or paid by Landlord, as owner of the Building,
pursuant to the terms of any declarations of covenants, conditions and
restrictions affecting the Property (or any applicable adjacent property owned
by Landlord as described above). Capital improvements shall not include any
costs attributable to increasing the size of or otherwise expanding the
Building or the cost of the work for which Landlord is required to pay under
Section 2.4. The distinction between items of ordinary operating maintenance
and repair and items of a capital nature shall be made in accordance with
generally accepted accounting principles applied on a consistent basis.
Notwithstanding any other provisions of this Section 5.2, Operating Expenses
shall not include any of the following:
(A) property management fees in excess of three percent of gross rents
from the Property;
(B) the cost to repair damage caused by (i) fire, earthquake or other
peril, or (ii) the negligence of Landlord, its agents, employees or
contractors, or the other tenants of the Property or their respective agents,
employees, contractors or invitees;
(C) costs associated with procurement of new tenants, preparation of
their spaces and enforcement of their leases, including (but not limited to)
brokerage commissions, tenant improvement costs and attorneys' fees;
(D) the cost of maintenance and repair of structural elements of the
buildings located on the Property from time to time;
(E) the cost to repair any defects in design, construction or equipment
for any building located on the Property from time to time, to the extent
resulting from or attributable to work undertaken by Landlord or by its
contractors on Landlord's behalf (including, but not limited to, costs to
correct any building code violations caused by or attributable to Landlord's
work);
(F) the cost to investigate and/or remediate any contamination by
hazardous or toxic substances or wastes, except to the extent caused by Tenant
or its agents, employees, contractors or invitees; or
(G) the cost to correct any violation of any declaration of covenants,
conditions and restrictions applicable to the Property, except to the extent
such violation is caused by Tenant or its agents, employees, contractors or
invitees.
5.3 Determination Of Operating Expenses. On or before the Commencement
-----------------------------------
Date and during the last month of each calendar year of the term of this Lease
("Lease Year"), or as soon thereafter as practical, Landlord shall provide
Tenant notice of Landlord's estimate of the Operating Expenses for the ensuing
Lease Year or applicable portion thereof. On or before the first day of each
month during the ensuing Lease Year or applicable portion thereof, beginning on
the Commencement Date, Tenant shall pay to Landlord Tenant's
9
<PAGE>
Operating Cost Share of the portion of such estimated Operating Expenses
allocable (on a prorate basis) to such month; provided, however, that if such
notice is not given in the last month of a Lease year, Tenant shall continue to
pay on the basis of the prior year's estimate, if any, until the month after
such notice is given. If at any time or times it appears to Landlord that the
actual Operating Expenses will vary from Landlord's estimate by more than five
percent (5%), Landlord may, by notice to Tenant, revise its estimate for such
year and subsequent payments by Tenant for such year shall be based upon such
revised estimate.
5.4 Final Accounting For Lease Year. Within ninety (90) days after the
-------------------------------
close of each Lease Year, or as soon after such 90-day period as practicable,
Landlord shall deliver to Tenant a statement of Tenant's Operating Cost Share
of the Operating Expenses for such Lease Year prepared by Landlord from
Landlord's books and records, which statement shall be final and binding on
Landlord and Tenant except as otherwise specifically provided herein. Failure
or inability of Landlord to deliver the annual statement within such ninety
(90) day period shall not impair or constitute a waiver of Tenant's obligation
to pay Operating Expenses, or cause Landlord to incur any liability for
damages. Notwithstanding any other provisions of this Section 5.4, within sixty
(60) days after receipt of any statement from Landlord setting forth actual
Operating Expenses and Tenant's Operating Cost Share for any period (a
"Statement"), Tenant shall have the right to audit or review, directly or
through its designated representative, Landlord's books and records relating to
Operating Expenses for the period covered by the Statement, provided that such
audit shall be exercisable only during normal business hours, on not less than
ten (10) days prior written notice to Landlord, and at Tenant's sole cost and
expense, except as hereinafter provided. To the extent that Tenant, on the
basis of such audit, disputes any item in the applicable Statement or in the
calculation of Tenant's obligations thereunder, Tenant shall give Landlord
written notice of the disputed items, in reasonable detail and with reasonable
supporting information, within thirty (30) days after the expiration of
Tenant's 60-day audit period, and Landlord and Tenant shall negotiate
diligently and in good faith to try to resolve the dispute. If Landlord and
Tenant are unable to resolve the dispute within thirty (30) days after
Landlord's receipt of Tenant's written notice specifying the disputed items,
then either party may elect, by written notice to the other, to have the
dispute resolved through an audit by an independent Certified Public Accountant
who has not previously rendered professional services to either party. Such
review and determination by an independent CPA shall be based on generally
accepted accounting principles and tax accounting principles, consistently
applied. The independent CPA shall be selected by mutual agreement of Landlord
and Tenant; if they are unable to agree on such selection within twenty (20)
days after a party's notice of desire to submit the dispute to a CPA review,
then the independent CPA shall be appointed by the Presiding Judge of the
Alameda County Superior Court upon application by either party (with notice to
the other party). If it is determined, on the basis of Landlord's Statement or
by mutual agreement of Landlord and Tenant or by independent CPA review, that
Tenant owes an amount that is more or less than the estimated payments
previously made by Tenant for the applicable period, then Tenant or Landlord,
as the case may be, shall pay the deficiency or overpayment to the other party
within thirty (30) days after final determination of such underpayment or
overpayment. The expenses of the independent CPA, if any, shall be borne by
Tenant unless the CPA's determination is that the Statement reflects an
overstatement of five percent (5%) or more in Tenant's obligation for Operating
Expenses for the applicable period, in which event the expenses of the
independent CPA shall be borne by Landlord. Each party agrees to maintain the
confidentiality of the findings of any audit in accordance with the provisions
of this Section 5.4.
10
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5.5 Proration. If the Commencement Date falls on a day other than the
---------
first day of a Lease Year or if this Lease terminates on a day other than the
last day of Lease Year, the amount of Tenant's Operating Cost Share payable by
Tenant applicable to such first and last partial Lease Year shall be prorated on
the basis which the numbers of days during such Lease Year in which this Lease
is in effect bears to 365. The termination of this Lease shall not affect the
obligations of Landlord and Tenant pursuant to Section 5.4 to be performed after
such termination.
6. UTILITIES
---------
6.1 Payment. Commencing with the Commencement Date and thereafter
-------
throughout the term of this Lease, Tenant shall pay, before delinquency, all
charges for water, gas, heat, light, electricity, power, sewer, telephone, alarm
system, janitorial and other services or utilities applied to or consumed in or
upon the Premises, including ant taxes on such services and utilities. It is the
intention of the parties that all such services shall be separately metered to
the Premises. In the event that any of such services supplied to the Premises
are not separately metered, then the amount thereof shall be an item of
Operating Expenses and shall be paid as provided in Article 5.
6.2 Interruption. There shall be no abatement of rent or other charges
------------
required to be paid hereunder and Landlord shall not be liable in damages or
otherwise for interruption of failure of any service or utility furnished to or
used in the Premises because of accident, making of repairs, alterations or
improvements, severe weather, difficulty or inability in obtaining services or
supplies, labor difficulties or any other cause. Notwithstanding the foregoing
provisions of this Section 6.2, however, in the event of any interruption or
failure of any services or utility to the Premises which is caused in whole or
in part by the negligence or willful misconduct of Landlord or its agents or
employees, which continues for more than 48 hours and which materially impairs
Tenant's ability to use the Premises for the intended purpose hereunder, then
Tenant's rental obligations under this Lease shall be abated in proportion to
the degree of impairment of Tenant's use of the Premises, and such abatement
shall be retroactive to the commencement of the interruption or failure and
shall continue until Tenant's use of the premises is no longer materially
impaired thereby.
7. ALTERATIONS
-----------
7.1. Right to Make Alterations. Tenant shall make no alterations,
-------------------------
additions or improvements to the Premises, other than interior non-structural
alterations not affecting any Building systems and costing less than Twenty-Five
Thousand Dollars ($25,000.00) in each instances, without the prior written
consent of Landlord. Tenant shall give prior written notice to Landlord of any
alterations, additions or improvements that do not require Landlord's prior
written consent under the preceding sentence, including copies of any plans and
specifications relating to such proposed alterations, additions or improvements.
All such alterations, additions or improvements shall be completed with due
diligence in a first-class workmanlike manner and in compliance with plans and
specifications approved in writing by Landlord (as to alterations, additions or
improvements for which Landlord's prior written consent is required) and all
applicable laws, ordinances, rules and regulations. If Tenant wishes to know in
advance whether it will be required to remove any specific alteration, addition,
or
11
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improvement upon termination of this Lease, as contemplated in Section 7.2
hereof, then Tenant shall make an express request for such a determination by
Landlord at the time Tenant requests Landlord's approval of, or gives Landlord
prior notice of, the applicable alteration, addition or improvement; if Tenant
makes such a written request and Landlord does not, in response thereto, advise
Tenant that Landlord intends to require (or at least to reserve the right to
require) removal of the applicable alteration, addition or improvement upon
termination of this Lease, then Landlord shall not be entitled to later request
such removal, notwithstanding any contrary provisions in Section 7.2 hereof.
7.2. Title To Alterations. All alterations, additions and improvements
--------------------
installed pursuant to this Lease shall be part of the Building and the property
of Landlord, unless Landlord elects to require Tenant to remove the same upon
the termination of this Lease; provided, however, that the foregoing shall not
apply to Tenant's movable furniture and trade fixtures not affixed to the
Property.
7.3. Tenant Fixtures. Notwithstanding the foregoing, Tenant may install,
---------------
remove and reinstall trade fixtures without Landlord's prior written consent,
except that any fixtures which are affixed to the Premises or which affect the
exterior or structural portions of the Building shall require Landlord's
written approval (which approval shall not be unreasonably withheld). The
foregoing shall apply to Tenant's signs, logos and insignia, all of which
Tenant shall have the right to place and remove and replace solely with
Landlord's prior written consent as to location, size and composition (which
consent shall not be unreasonably withheld). Tenant shall immediately repair
any damage caused by installation and removal of fixtures under this Section
7.3.
7.4. No Liens. Tenant shall at all times keep the Premises free from all
--------
liens and claims of any contractors, subcontractors, materialmen, suppliers or
any other parties employed either directly or indirectly by Tenant in
construction work on the Premises. Tenant may contest any claim of lien, but
only if, prior to such contest, Tenant either (i) posts security in the amount
of the claim, plus estimated costs and interest, or (ii) records a bond of a
responsible corporate surety in such amount as may be required to release the
lien from the Premises. Tenant shall indemnify, defend and hold Landlord
harmless against liability, loss, damage, cost and all other expenses,
including, without limitation, reasonable attorneys' fees, arising out of claims
of any lien for work performed or materials or supplies furnished at the
request of Tenant or persons claiming under Tenant.
8. MAINTENANCE AND REPAIRS
-----------------------
12
<PAGE>
8.1. Landlord's Work.
---------------
(a) Landlord shall repair and maintain or cause to be repaired and
maintained those portions of the Building outside of the Premises, the common
areas of the Property, and the roof, exterior walls and other structural
portions of the Building. The cost of all work performed by Landlord under this
Section 8.1 (a) shall be an Operating Expense hereunder, except as otherwise
expressly provided in Section 5.2 hereof and/or to the extent such work (i) is
required due to the negligence of Landlord or any other tenant of the Building,
(ii) is a service to a specific tenant or tenants, other than Tenant, for which
Landlord has received or has the right to receive full reimbursement, (iii) is
a capital expense not includible as an Operating Expense under Section 5.2
hereof, or (iv) is required due to the negligence or willful misconduct of
Tenant or its agents, employees or invitees (in which event Tenant shall bear
the full cost of such work pursuant to the indemnification provided in Section
10.6 hereof). Tenant
13
<PAGE>
knowingly and voluntarily waives the right to make repairs at Landlord's
expense, or to offset the cost thereof against rent, under any law, statute,
regulation or ordinance now or hereafter in effect.
(b) Notwithstanding any contrary provisions of Section 8.1 (a) hereof or
of any other provision of this Lease, to the extent a substantially complete
replacement (as opposed to ordinary or routine maintenance or repair) is
required from time to time with respect to the roof or major building systems
(HVAC, plumbing, electrical and mechanical systems) of the Building, Landlord
shall perform such replacement when and as reasonably required. To the extent
such replacement is required as a result of defective design, construction,
installation or materials, or as a result of the negligence or willful
misconduct of Landlord or its agents or employees, or as a result of the
negligence or willful misconduct of any other tenant of the Property other than
Tenant or of any such other tenant's agents, employees or invitees, such
replacement shall be at Landlord's sole cost and expense, subject to any rights
of reimbursement Landlord may have against contractors, suppliers, other tenants
or other third parties. To the extent such replacement is required as a result
of the negligence or willful misconduct or Tenant or its agents, employees or
invitees, Tenant shall bear the full cost of such work pursuant to the
indemnification provided in Section 10.6, but subject to the waiver of liability
set forth in Section 10.4 hereof. To the extent such replacement is required as
a result of casualty or condemnation, the provisions of Article 13 hereof shall
be controlling. To the extent such replacement is required due to ordinary wear
and tear or obsolescence, the cost of such replacement shall be amortized by
Landlord over the useful life of the replacement improvement or system and
Tenant shall reimburse to Landlord, as additional rent and not as an Operating
Expense, on a monthly basis or at other regular intervals as reasonably
requested by Landlord, Tenant's pro rata share (calculated on the same basis as
Tenant's Operating Cost Share) of the amortized cost of such replacement
allocable to the period of time from the date of replacement until the
expiration of the term of this Lease.
8.2. Tenant's Obligation for Maintenance.
-----------------------------------
(a) Good Order. Condition and Repair. Subject to the provisions of
--------------------------------
Section 2.4 hereof, by accepting possession of the Premises, Tenant acknowledges
that the Premises are in good and sanitary order, condition and repair. Except
as provided in Section 8.1 hereof, Tenant at its sole cost and expense shall
keep and maintain in good and sanitary order, condition and repair the Premises
and every part thereof, wherever located, including but not limited to the
signs, interior, the face of the ceiling over Tenant's floor space, HVAC
equipment and related mechanical systems serving the Premises (for which
equipment and systems Tenant shall enter into a service contract with a person
or entity designated or approved by Landlord), all doors, door checks, windows,
plate glass, door fronts, exposed plumbing and sewage and other utility
facilities, fixtures, lighting, wall surfaces, floor surfaces and ceiling
surfaces and all other interior repairs, foreseen and unforeseen, as required.
(b) Landlord's Remedy. If Tenant, after notice from Landlord, fails to
-----------------
make or perform promptly any repairs or maintenance which are the obligation of
Tenant hereunder, Landlord shall have the right, but shall not be required, to
enter the Premises and make the repairs or perform the maintenance necessary to
restore the Premises to good and sanitary order, condition and repair.
Immediately on demand from Landlord, the cost of such repairs shall be due and
payable by Tenant to Landlord.
(c) Condition Upon Surrender. At the expiration or sooner termination of
------------------------
this Lease, Tenant shall surrender the Premises, including any
14
<PAGE>
additions, alterations and improvements thereto, broom clean, in good and
sanitary order, condition and repair, ordinary wear and tear and damage due to
casualty and condemnation excepted, first, however, removing all goods and
effects of Tenant and all and fixtures and items required to be removed or
specified to be removed at Landlord's election pursuant to this Lease, and
repairing any damage caused by such removal. Tenant expressly waives any and
all interest in any personal property and trade fixtures not removed from the
Premises by Tenant at the expiration or termination of this Lease, agrees that
any such personal property and trade fixtures may, at Landlord's election, be
deemed to have been abandoned by Tenant, and authorizes Landlord (at its
election and without prejudice to any other remedies under this Lease or under
applicable law) to remove and either retain, store or dispose of such property
at Tenant's cost and expense, and Tenant waives all claims against Landlord for
any damages resulting from any such removal, storage, retention or disposal.
9. USE OF PREMISES
---------------
9.1. Permitted Use. Tenant shall use the Premises solely for general
-------------
office and administrative purposes, non-retail marketing and sales
demonstrations and training classes, and for no other purpose without the prior
written consent of Landlord (which consent shall not be unreasonably withheld).
9.2. No Nuisance. Tenant shall not use the Premises for or carry on or
-----------
permit upon the Premises or any part thereof any offensive, noisy or dangerous
trade, business, manufacture, occupation, odor or fumes, or any nuisance or
anything against public policy, nor interfere with the rights or business of
any other tenants or of Landlord in the Building, nor make any other
unreasonable use of the Premises. Tenant shall not do or permit anything to be
done in or about the Premises, nor bring nor keep anything therein, which will
in any way cause the Premises to be uninsurable with respect to the insurance
required by this Lease or with respect to standard fire and extended coverage
insurance with vandalism, malicious mischief and riot endorsements.
9.3. Compliance With Laws. Tenant shall not use the Premises or permit
--------------------
the Premises to be used in whole or in part for any purpose or use that is in
violation of any applicable laws, ordinances, regulations or rules of any
governmental agency or public authority. Tenant shall keep the Premises equipped
with all safety appliances required by law, ordinance or insurance on the
Premises, or any order or regulation of any public authority because of Tenant's
particular use of the Premises (excluding any certificate of occupancy to be
obtained by Landlord under Sections 2.1 and 2.4). Tenant shall procure all
licenses and permits required for use of the Premises. Tenant shall use the
Premises in strict accordance with all applicable ordinances, rules, laws and
regulations and shall comply with all requirements of all governmental
authorities now in force or which may hereafter be in force pertaining to the
use of the Premises by Tenant, including, without limitation, regulations
applicable to noise, water, soil and air pollution, and making such
nonstructural alterations and additions thereto as may be required from time to
time by such laws, ordinances, rules, regulations and requirements of
governmental authorities or insurers of the Premises (collectively,
"Requirements" because of Tenant's construction of improvements in or other
particular use of the Premises. Any structural alterations or additions required
from time to time by applicable Requirements because of Tenant's construction of
improvements in or other particular use of the Premises shall, at Landlord's
election, either (i) be made by Tenant, at Tenant's sole cost and expense, in
accordance with the procedures and standards set forth in Section 7.1 for
alterations by Tenant, or (ii) be made
15
<PAGE>
by Landlord at Tenant's sole cost and pay to Landlord as additional rent, within
ten (10) days after demand by Landlord, an amount equal to all costs incurred by
landlord in connection with such alterations or additions. The judgment of any
court, or the admission by Tenant in any proceeding against Tenant, that Tenant
has violated any law, statute, ordinance or governmental rule, regulation or
requirement shall be conclusive of such violation as between Landlord and
Tenant. Notwithstanding any other provisions of this Section 9.3, in no event
shall Tenant be liable or obligated (A) to make any seismic upgrades or
improvements, unless (and then only to the extent) required as a result of any
alterations, additions or improvements made by Tenant in or about the Premises;
(B) to remove or encapsulate any asbestos, unless (and then only to the extent)
such asbestos was brought onto the Property by Tenant or its agents, employees,
contractors or invitees; or (C) to undertake any action to comply with the
Americans with Disabilities Act, unless (and then only to the extent) such
action is required as a result of Tenant's particular use of the Premises, the
conduct of Tenant's business or the making of any alterations, additions or
improvements by Tenant in or about the Premises.
9.4. Liquidation Sales. Tenant shall not conduct or permit to be
-----------------
conducted any bankruptcy sale, liquidation sale, or going out of business sale,
in, upon or about the Premises, whether said auction or sale be voluntary,
involuntary or pursuant to any assignment for the benefit of creditors, or
pursuant to any bankruptcy or other insolvency proceeding.
9.5. Environmental Matters. Without limiting the generality of Tenant's
---------------------
obligations set forth in Section 9.3 of this Lease:
(a) Tenant shall not cause or permit any hazardous or toxic substance or
hazardous waste (as defined in any federal, state or local law, ordinance or
regulation applicable to such substances or wastes) to be brought upon, kept,
stored or used on or about the Property without the prior written consent of
Landlord. Nothing in this Section 9.5 (a) shall, however, prohibit Tenant from
using ordinary office and cleaning products and other materials reasonably
necessary for the conduct of Tenant's business for the permitted uses described
in Section 9.1 hereof, regardless of whether such materials constitute
hazardous or toxic substances or hazardous wastes, so long as Tenant provides
Landlord with prior or concurrent written notice of such use (other than with
respect to ordinary office and cleaning products, for which no such notice is
required) and complies with the requirements of Sections 9.5 (b) and (c) with
respect to such use.
(b) Tenant shall comply with all applicable laws, rules, regulations,
orders, permits, licenses and operating plans of any governmental authority
with respect to the receipt, use, handling, generation, transportation,
storage, treatment, release and/or disposal of hazardous or toxic substances or
wastes in the course of or in connection with the conduct of Tenant's business
on the Property, and shall provide Landlord with copies of any and all permits,
licenses, registrations and other similar documents that authorize Tenant to
conduct any such activities in connection with Tenant's use of the Property.
(c) Tenant shall indemnify, defend and hold Landlord harmless from and
against any and all claims, losses, damages, liabilities, costs, legal fees and
expenses of any sort arising out of or relating to (i) any failure by Tenant to
comply with any provisions of subparagraph (a) or (b) above, or (ii) any
receipt, use, handling, generation, transportation, storage, treatment, release
and/or disposal of any hazardous or toxic substances or wastes on or about the
Property by Tenant in connection with Tenant's use or occupancy of the Property
16
<PAGE>
or as a result of any intentional or negligent acts or omissions of Tenant
or of any agent or employee of Tenant.
(d) Landlord represents and warrants to Tenant that the Building and
Premises are free of asbestos, lead paint and, to the best of Landlord's
knowledge, any other hazardous or toxic substances or wastes. Landlord shall
indemnify, defend and hold Tenant harmless from and against any and all claims,
losses, damages, liabilities, costs, legal fees and expenses of any sort
arising out of or relating to (i) the presence on the Property of any hazardous
or toxic substances or wastes present on the Property as of the Commencement
Date, and/or (ii) any unauthorized release into the environment of hazardous or
toxic substances or wastes to the extent they result from the negligence of or
willful misconduct or omission by landlord or its agents or employees.
(e) The provisions of this Section 9.5 shall survive the termination of
this Lease.
10. INSURANCE AND INDEMNITY
-----------------------
10.1. Insurance.
---------
(a) Tenant shall procure and maintain in full force and effect at all
times during the term of this Lease, at Tenant's cost and expense comprehensive
public liability and property damage insurance to protect against any liability
to the public, or to any invitee of Tenant or Landlord, arising out of or
related to the use of or resulting from any accident occurring in, upon or about
the Premises, with limits of liability of not less than (i) One Million dollars
($1,000,000.00) for injury to or death of one person, (ii) Three Million Dollars
($3,000,000.00) for personal injury or death, per occurrence, and (iii) Five
Hundred Thousand Dollars ($500,000.00) for property damage, or a combined single
limit of public liability and property damage insurance of not less than Five
Million Dollars ($5,000,000.00). Such insurance shall name Landlord and its
general partners and Managing Agent as additional insureds thereunder. The
amount of such insurance shall not be construed to limit any liability or
obligations of Tenant under this Lease.
(b) Landlord shall procure and maintain in full force and effect at all
times during the term of this Lease, at Landlord's cost and expense (but
reimbursable as an Operating Expense under Section 5.2 hereof), fire and "all
risk" extended coverage property damage insurance for the Building and interior
improvements that are the property of Landlord and for the improvements in the
Common Areas of the Property, on a full replacement cost basis, with rental
loss insurance. Such insurance may include earthquake and/or flood coverage to
the extent Landlord in its discretion elects to carry such coverage, and shall
have such commercially reasonable deductibles and other terms as Landlord in
its discretion determines to be appropriate. Landlord shall have no obligation
to carry property damage insurance for any alterations, additions or
improvements installed by Tenant on or about the Premises.
10.2. Quality Of Policies and Certificates. All policies of insurance
------------------------------------
required to be maintained by Tenant hereunder shall be issued by responsible
insurers and shall be written as primary policies not contributing with and not
in excess of any coverage that Landlord may carry. Tenant shall deliver to
Landlord copies of policies or certificates of insurance showing that said
policies are in effect. The coverage provided by such policies shall include
the clause or endorsement referred to in Section 10.4. If Tenant fails to
acquire, maintain or renew any insurance required to be maintained by it under
this Article 10 or to
17
<PAGE>
pay the premium therefor, then Landlord, after prior notice to Tenant, at
Landlord's option and in addition to its other remedies, but without obligation
so to do, may procure such insurance, and any sums expended by it to procure
any such insurance shall be repaid upon demand, with interest as provided in
Section 3.2 hereof. Tenant shall obtain written undertakings from each insurer
under policies required to be maintained by it to notify all insureds
thereunder at least thirty (30) days prior to cancellation, amendment or
revision of coverage.
10.3. Workers' Compensation. Tenant shall maintain in full force and
---------------------
effect during the term of this Lease workers' compensation insurance covering
all of Tenant's employees working on the Premises.
10.4. Waiver of Subrogation. To the extent permitted by law and without
---------------------
affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the
other for (i) damages for injury to or death of persons, (ii) damage to
property, (iii) damage to the Premises or any part thereof, or (iv) claims
arising by reason of any of the foregoing, but only to the extent that any of
the foregoing damages and claims under subparts (i)-(iv) hereof are covered,
and only to the extent of such coverage, by insurance actually carried or
required to be carried hereunder by either Landlord or Tenant. This provision
is intended to waive fully, and for the benefit of each party, any rights and
claims which might give rise to a right of subrogation in any insurance
carrier. Each party shall procure a clause or endorsement on any policy
required under this Article 10 denying to the insurer rights of subrogation
against the other party to the extent rights have been waived by the insured
prior to the occurrence of injury or loss. Coverage provided by insurance
maintained by Tenant under this Article 10 shall not be limited, reduced or
diminished by virtue of the subrogation waiver herein contained.
10.5. Increase In Premiums. Tenant shall do all acts and pay all
--------------------
expenses necessary to insure that the Premises are not used for purposes
prohibited by any applicable fire insurance, and that Tenant's use of the
Premises complies with all requirements necessary to obtain any such insurance.
If Tenant uses or permits the Premises to be used in a manner which increases
the existing rate of any insurance on the Premises carried by Landlord, Tenant
shall pay the amount of the increase in premium caused thereby, and Landlord's
cost of obtaining other replacement insurance policies, including any increase
in premium, within ten (10) days after demand therefor by Landlord.
10.6. Indemnification.
---------------
(a) Tenant shall indemnify, defend and hold Landlord, its partners,
shareholders, officers, directors, affiliates, agents, employees and
contractors, harmless from any and all liability for injury to or death of any
person, or loss of or damage to the property of any person and all actions,
claims, demands, costs (including, without limitation, reasonable attorneys'
fees), damages or expenses of any kind arising therefrom which may be brought
or made against Landlord or which Landlord may pay or incur by reason of the
use, occupancy and enjoyment of the Premises by Tenant or any invitees,
sublessees, licensees, assignees, employees, agents or contractors of Tenant or
holding under Tenant from any cause whatsoever other than negligence or willful
misconduct or omission by Landlord, its agents, employees or contractors, or
breach by Landlord of its obligations hereunder. Landlord, its partners,
shareholders, officers, directors, affiliates, agents, employees and
contractors shall not be liable for, and Tenant hereby waives all claims
against such persons for, damages to goods, wares and merchandise in or upon
the Premises, or for
18
<PAGE>
injuries to Tenant, its agents or third persons in or upon the Premises,
from any cause whatsoever other than negligence or willful misconduct or
omission by Landlord, its agents, employees or contractors. Tenant shall give
prompt notice to Landlord of any casualty or accident in, on or about the
Premises.
(b) Landlord shall indemnify, defend and hold Tenant, its partners,
shareholders, officers, directors, affiliates, agents, employees and
contractors, harmless from any and all liability for injury to or death of any
person or loss of or damage to the property of any person, and all actions,
claims, demands, costs (including, without limitation, reasonable attorneys'
fees), damages or expenses of any kind arising therefrom which may be brought
or made against Tenant or which Tenant may pay or incur, to the extent such
liabilities or other matters arise by reason of any negligence or willful
misconduct or omission by Landlord, its agents, employees or contractors.
10.7. Blanket Policy. Any policy required to be maintained hereunder may
--------------
be maintained under a so-called "blanket-policy" insuring other parties and
other locations so long as the amount of insurance required to be provided
hereunder is not thereby diminished.
11. SUBLEASE AND ASSIGNMENT
-----------------------
11.1. Assignment And Sublease Of Premises. Tenant shall not have the
-----------------------------------
right or power to assign its interest in this Lease, or make any sublease, nor
shall any interest of Tenant under this Lease be assignable involuntarily or by
operation of law, without on each occasion obtaining the prior written consent
of Landlord, which consent shall not be unreasonably withheld. Any purported
sublease or assignment of Tenant's interest in this Lease requiring but not
having received Landlord's consent thereto shall be void. Without limiting the
generality of the foregoing, Landlord may withhold consent to any proposed
subletting or assignment solely on the ground that the use by the proposed
subtenant or assignee is reasonably likely to be incompatible with Landlord's
use of the balance of the Building or Property. Any dissolution, consolidation,
merger or other reorganization of Tenant, or any sale or transfer of the stock
of or other interest in Tenant, or any series of one or more of such events,
involving in the aggregate a change of fifty percent (50%) or more in the
beneficial ownership of Tenant or its assets shall be deemed to be an assignment
hereunder and shall be void without the prior written consent of Landlord as
required above. Notwithstanding the foregoing or anything in this Section 11.1
to the contrary, Tenant may assign this Lease or sublet the Premises, in whole
or in part, without Landlord's consent (but with prior or concurrent written
notice to Landlord), to (a) any entity controlled by, controlling or under
common control with Tenant, including any entity resulting from a
reincorporation of Tenant in another state, or (b) any entity or person which
acquires by merger, consolidation or otherwise substantially all of the assets
of Tenant, provided that any such assignee assumes in full, in writing and for
the benefit of Landlord, the obligations of Tenant under this Lease and that the
net worth of the assignee is equal to or greater than that of Tenant immediately
prior to the applicable transfer. In addition, Landlord's consent shall not be
required for a sale or transfer of the capital stock of Tenant (x) if such sale
or transfer occurs in connection with a bona fide financing or capitalization
for the benefit of Tenant and does not constitute part of a dissolution,
consolidation, merger or reorganization of Tenant as specifically described
above, or (y) during any period in which Tenant has a class of publicly traded
stock.
19
<PAGE>
11.2 Rights Of Landlord. Consent by Landlord to one or more assignments
------------------
of this Lease or to one or more sublettings of the Premises, or collection of
rent by Landlord from any assignee or sublessee, shall not operate to exhaust
Landlord's rights under this Article 11, nor constitute consent to any
subsequent assignment or subletting. No assignment of Tenant's interest in this
Lease and no sublease shall relieve Tenant of its obligations hereunder,
notwithstanding any waiver or extension of time granted by Landlord to any
assignee or sublessee, or the failure of Landlord to assert its rights against
any assignee or sublessee, and regardless of whether Landlord's consent thereto
is given or required to be given hereunder. In the event of a default by any
assignee, sublessee or other successor of Tenant in the performance of any of
the terms or obligations of Tenant under this Lease, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies against any
such assignee, sublessee or other successor. In addition, Tenant immediately and
irrevocably assigns to Landlord, as security for Tenant's obligations under this
Lease, all rent from any subletting of all or a part of the Premises as
permitted under this Lease, and Landlord, as Tenant's assignee and as attorney-
in-fact for Tenant, or any receiver for Tenant appointed on Landlord's
application, may collect such rent and apply it toward Tenant's obligations
under this Lease; except that, until the occurrence of an act of default by
Tenant, Tenant shall have the right to collect such rent.
12. RIGHT OF ENTRY AND QUIET ENJOYMENT
----------------------------------
12.1. Right Of Entry. Landlord and its authorized representatives shall
--------------
have the right to enter the Premises at any time during the term of this Lease
during normal business hours and upon not less than twenty-four (24) hours
prior notice, except in the case of emergency, for the purpose of inspecting
and determining the condition of the Premises or for any other proper purpose
including, without limitation, to make repairs, replacements or improvements
which Landlord may deem necessary, to show the Premises to prospective
purchasers, to show the premises to prospective tenants, and to post notices of
nonresponsibility. Landlord shall not be liable for inconvenience, annoyance,
disturbance, loss of business, quiet enjoyment or other damage or loss to
Tenant by reason of making any repairs or performing any work upon the Premises
and the obligations of Tenant under this Lease shall not thereby be affected in
any manner whatsoever, provided, however, Landlord shall use reasonable efforts
to minimize the inconvenience to Tenant's normal business operations caused
thereby.
12.2. Quiet Enjoyment. Landlord covenants that Tenant, upon paying the
---------------
rent and performing its obligations hereunder and subject to all the terms and
conditions of this Lease, shall peacefully and quietly have, hold and enjoy the
Premises throughout the term of this Lease, or until this Lease is terminated as
provided by this Lease.
13. CASUALTY AND TAKING
-------------------
13.1. Termination Or Reconstruction. If during the term of this Lease
-----------------------------
the Premises or Building, or any substantial part of either, (i) is damaged
materially by fire or other casualty or by action of public or other authority
in consequence thereof, (ii) is taken by eminent domain or by reason of any
public improvement or condemnation proceeding, or in any manner by exercise of
the right of eminent domain (including any transfer in avoidance of an exercise
of the power of eminent domain), or (iii) receives irreparable damage by reason
of anything lawfully done under color of public or other authority, this Lease
shall terminate
20
<PAGE>
as to the entire Premises at either Landlord's or Tenant's election, by
written notice given to the other party within sixty (60) days after the damage
or taking has occurred, subject to the following limitations (and, to the
extent applicable, the limitations set forth in Section 13.2):
(a) in the case of damage or destruction prior to the final year of the
term of this Lease, (i) Tenant's termination right shall be exercisable only if
the time reasonably estimated by Landlord's architect or contractor to be
required for the repair or restoration of the Building to the extent necessary
to permit Tenant to resume substantially all of its normal business activities
therein (the "Estimated Rebuilding Period"), which time estimate shall be given
by Landlord to Tenant in writing within forty-five (45) days after the date of
the damage or destruction, exceeds one hundred eighty (180) days from the date
of the damage or destruction, and (ii) Landlord's termination right shall be
exercisable only if either the Estimated Rebuilding Period exceeds one hundred
twenty (120) days from the date of the damage or destruction or the reasonably
estimated cost of such repair or restoration is not covered by insurance
proceeds reasonably available for such repair or restoration under the
insurance required to be maintained by Landlord under Section 10.1 (b) hereof;
(b) in the case of damage or destruction during the final year of the
term of this Lease, (i) Tenant's termination right shall be exercisable only if
the Estimated Rebuilding Period, which estimate shall be given by Landlord to
Tenant in writing within thirty (30) days after the date of the damage or
destruction, exceeds ninety (90) days from the date of the damage or
destruction, and (ii) Landlord's termination right shall be exercisable only if
either the Estimated Rebuilding Period exceeds ninety (90) days from the date of
the damage or destruction or the reasonably estimated cost of such repair or
restoration is not covered by insurance proceeds reasonably available for such
repair or restoration under the insurance required to be maintained by Landlord
under Section 10.1 (b) hereof; and
(c) in the case of damage or destruction during the final year of the
initial term of this Lease, if Tenant's extension option under Section 2.7
hereof has not been exercised and has not yet expired under the terms of
Section 2.7 hereof, and if Tenant thereafter exercises such extension option
within thirty (30) days after the date of such damage or destruction, then the
limitations applicable to the respective termination rights of the parties
shall be those set forth in Section 13.1(a) rather than Section 13.1(b).
If neither party elects to terminate this Lease pursuant to the foregoing
termination rights (if any) and/or Section 13.2 (if applicable), then Landlord
shall promptly and diligently repair any such damage and restore the Premises
(to the extent of Landlord's work therein under Section 2.4 and Exhibit C) and
---------
the Building as nearly as reasonably possible to the condition existing before
the damage or taking.
13.2. Tenant's Rights. If any portion of the Premises is so taken by
---------------
condemnation, Tenant may elect to terminate this Lease if the portion of the
Premises taken is of such extent and nature as substantially to handicap,
impede or permanently impair Tenant's use of the balance of the Premises.
Tenant must exercise its right to terminate by giving notice to Landlord within
thirty (30) days after the nature and extent of the taking have been finally
determined. If Tenant elects to terminate this Lease, Tenant shall also notify
Landlord of the date of termination, which date shall not be earlier than
thirty (30) days nor later than ninety (90) days after Tenant has notified
Landlord of its election to terminate, except that this Lease shall terminate
on the date of taking
21
<PAGE>
if the date of taking falls on any date before the date of termination
designated by Tenant.
13.3. Lease To Remain In Effect. It neither Landlord nor Tenant
-------------------------
terminates this Lease as hereinabove provided, this Lease shall continue in full
force and effect, except that minimum monthly rental and Tenant's Operating Cost
Share shall abate to the extent Tenant's use of the Premises is impaired during
the period from the date of the casualty or taking until the repair or
restoration of the Premises is completed. Each party waives the provisions of
Code of Civil Procedure Section 1265.130, allowing either party to petition the
Superior Court to terminate this Lease in the event of a partial condemnation of
the Premises.
13.4. Reservation Of Compensation. Landlord reserves, and Tenant waives
---------------------------
and assigns to Landlord, all rights to any award or compensation for damage to
the Premises, Building, Property and the leasehold estate created hereby,
accruing by reason of any taking in any public improvement, condemnation or
eminent domain proceeding or in any other manner by exercise of the right of
eminent domain or of anything lawfully done by public authority, except that
Tenant shall be entitled to any and all compensation or damages paid for or on
account of Tenant's moving expenses, trade fixtures, equipment and any leasehold
improvements in the Premises, the cost of which was borne by Tenant, but only to
the extent of the then remaining unamortized value of such improvements computed
on a straight-line basis over the term of this Lease. Tenant covenants to
deliver such further assignments of the foregoing as Landlord may from time to
time request.
13.5. Restoration of Fixtures. If Landlord repairs or causes repair of
-----------------------
the Premises after such damage or taking, Tenant at its sole expense shall
repair and replace promptly all fixtures, equipment and other property of Tenant
located at, in or upon the Premises and all additions, alterations and
improvements and all other items installed or paid for by Tenant under this
Lease that were damaged or taken, so as to restore the same to a condition
substantially equal to that which existed immediately prior to the damage or
taking. Tenant shall have the right to make modifications to the Premises,
fixtures and improvements, subject to the prior written approval of Landlord. In
its review of Tenant's plans and specifications, Landlord may take into
consideration the effect of the proposed modifications on the exterior
appearance, the structural integrity and the mechanical and other operating
systems of the Building.
14. DEFAULT
-------
14.1. Events Of Default. The occurrence of any of the following shall
-----------------
constitute an event of default on the part of Tenant:
(a) Abandonment. Abandonment of the Premises. For purposes of this
-----------
Section 14.1 (a), "abandonment" shall be defined as the absence of Tenant from
the Premises for fifteen (15) consecutive days or more while there exists an
event of default on the part of Tenant under any other provision of this Section
14.1, which default has not been cured on or before the expiration of such 15
day period;
(b) Nonpayment. Failure to pay, when due, any amount payable to Landlord
----------
hereunder, such failure continuing for a period of five (5) days after written
notice of such failure;
22
<PAGE>
(c) Other Obligations. Failure to perform any obligation, agreement or
-----------------
covenant under this Lease other than those matters specified in subsection (b)
hereof, such failure continuing for fifteen (15) days after written notice of
such failure. If it is not possible to cure such default within fifteen (15)
days, Tenant shall commence cure within said fifteen (15) day period and shall
proceed diligently to complete cure;
(d) General Assignment. A general assignment by Tenant for the benefit
------------------
ot creditors;
(e) Bankruptcy. The filing of any voluntary petition in bankruptcy by
----------
Tenant, or the filing of an involuntary petition by Tenant's creditors, which
involuntary petition remains undischarged for a period of thirty (30) days. In
the event that under applicable law the trustee in bankruptcy or Tenant has the
right to affirm this Lease and continue to perform the obligations of Tenant
hereunder, such trustee or Tenant shall, in such time period as may be
permitted by the bankruptcy court having jurisdiction, cure all defaults of
Tenant hereunder outstanding as of the date of the affirmance of this Lease and
provide to Landlord such adequate assurances as may be necessary to ensure
Landlord of the continued performance of Tenant's obligations under this Lease.
Specifically, but without limiting the generality of the foregoing, such
adequate assurances must include assurances that the Premises continue to be
operated only for the use permitted hereunder. The provisions hereof are to
assure that the basic understandings between Landlord and Tenant with respect
to Tenant's use of the Premises and the benefits to Landlord therefrom are
preserved, consistent with the purpose and intent of applicable bankruptcy laws;
(f) Receivership. The employment of a receiver appointed by court order
------------
to take possession of substantially all of Tenant's assets or the Premises, if
such receivership remains undissolved for a period of thirty (30) days;
(g) Attachment. The attachment, execution or other judicial seizure of
----------
all or substantially all of Tenant's assets or the Premises, if such attachment
or other seizure remains undismissed or undischarged for a period of thirty (30)
days after the levy thereof; or
(h) Insolvency. The admission by Tenant in writing of its inability to
----------
pay its debts as they become due, the filing by Tenant of a petition seeking any
reorganization or arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, the filing by Tenant of an answer admitting or failing timely to
contest a material allegation of a petition filed against Tenant in any such
proceeding or, if within thirty (30) days after the commencement of any
proceeding against Tenant seeking any reorganization or arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, such proceeding shall not have
been dismissed.
14.2. Remedies Upon Tenant's Default.
------------------------------
(a) Upon the occurrence of any event of default described in Section
14.1 hereof, Landlord, in addition to and without prejudice to any other rights
or remedies it may have, shall have the immediate right to re-enter the Premises
or any part thereof and repossess the same, expelling and removing therefrom all
persons and property (which property may be stored in a public warehouse or
elsewhere at the cost and risk of and for the account of Tenant), using such
force as may be necessary to do so (as to which Tenant hereby waives any claim
for loss or damage that may thereby occur). In addition to or in
23
<PAGE>
lieu of such re-entry, and without prejudice to any other rights or
remedies it may have, Landlord shall have the right either (i) to terminate
this Lease and recover from Tenant all damages incurred by Landlord as a result
of Tenant's default, as hereinafter provided, or (ii) to continue this Lease in
effect and recover rent and other charges and amounts as they become due.
(b) Even if Tenant has breached this Lease or abandoned the Premises,
this Lease shall continue in effect for so long as Landlord does not terminate
Tenant's right to possession under subsection (a) hereof and Landlord may
enforce all of its rights and remedies under this Lease, including the right to
recover rent as it becomes due, and Landlord, without terminating this Lease,
may exercise all of the rights and remedies of a lessor under California Civil
Code Section 1951.4 (lessor may continue lease in effect after lessee's breach
and abandonment and recover rent as it becomes due, it lessee has right to
sublet or assign, subject only to reasonable limitations), or any successor Code
section. Acts of maintenance, preservation or efforts to relet the Premises or
the appointment of a receiver upon application of Landlord to protect Landlord's
interests under this Lease shall not constitute a termination of Tenant's right
to possession.
(c) If Landlord terminates this Lease pursuant to this Section 14.2,
Landlord shall have all of the rights and remedies of a landlord provided by
Section 1951.2 of the Civil Code of the State of California, or any successor
Code section.
14.3. Remedies Cumulative. All rights, privileges and elections or
-------------------
remedies of Landlord contained in this Article 14 are cumulative and not
alternative to the extent permitted by law and except as otherwise provided
herein.
15. SUBORDINATION, ATTORNMENT AND SALE
----------------------------------
15.1. Subordination To Mortgage. This Lease, and any sublease entered
-------------------------
into by Tenant under the provisions of this Lease, shall be subject and
subordinate to any ground lease, mortgage, deed of trust, sale/leaseback
transaction or any other hypothecation for security now or hereafter placed upon
the Building, the Property, or both, and the rights of any assignee of Landlord
or mortgagee, trustee, beneficiary, landlord or leaseback lessor under any of
the foregoing, and to any and all advances made on the security thereof and to
all renewals, modifications, consolidations, replacements and extensions
thereof; provided however, that such subordination in the case of any future
--------
ground lease, mortgage, deed of trust, sale/leaseback transaction or any other
hypothecation for security placed upon the Building, the Property, or both shall
be conditioned on Tenant's receipt from the ground lessor, mortgagee, trustee,
beneficiary or leaseback lessor of a nondisturbance agreement in a form
reasonably acceptable to Tenant, confirming that so long as Tenant is not in
default hereunder, Tenant's right hereunder shall not be disturbed by such
person or entity following any foreclosure or other acquisition of the Property;
and provided further, that Tenant's obligations under this Lease shall be
----------------
conditioned on Tenant's receipt, within thirty (30) days after mutual execution
of this Lease, from SDK Incorporated and from any other ground lessor,
mortgagee, trustee, beneficiary or leaseback lessor currently owning or holding
a security interest in the Property, of a nondisturbance agreement in a form
reasonably acceptable to Tenant, confirming that so long as Tenant is not in
default hereunder, Tenant's rights hereunder shall not be disturbed by such
person or entity following any foreclosure or other acquisition of the Property.
If Landlord fails to deliver such signed nondisturbance agreement to Tenant
within
24
<PAGE>
such 30 day period, then Tenant may terminate this Lease by written notice
to Landlord at any time prior to Landlord's delivery of such signed
nondisturbance agreement, in which event Landlord shall refund any security
deposit and other amounts prepaid by Tenant and neither party shall have any
further liability under this Lease. If any mortgagee, trustee, beneficiary,
ground lessor, sale/leaseback lessor or assignee elects to have this Lease be
an encumbrance upon the Property prior to the lien of its mortgage, deed of
trust, ground lease or leaseback lease or other security arrangement and gives
notice thereof to Tenant, this Lease shall be deemed prior thereto, whether
this Lease is dated prior or subsequent to the date thereof or the date of
recording thereof. Tenant, and any sublessee, shall execute such documents as
may reasonably be requested by any mortgagee, trustee, beneficiary, ground
lessor, sale/leaseback lessor or assignee to evidence the subordination herein
set forth or to make this Lease prior to the lien of any mortgage, deed of
trust, ground lease, leaseback lease or other security arrangement, as the case
may be. Upon any default by Landlord in the performance of its obligations
under any mortgage, deed of trust, ground lease, leaseback lease or assignment,
Tenant (and any sublessee) shall attorn to the mortgagee, trustee, beneficiary,
ground lessor, leaseback lessor or assignee thereunder upon demand and shall
execute and deliver any instrument or instruments confirming the attornment
herein provided for.
15.2. Sale of Landlord's Interest. Upon Landlord's entire interest in
---------------------------
the Building and Property, Landlord shall be relieved of its obligations
hereunder with respect to liabilities accruing from and after the date of such
sale, transfer or assignment; provided, however, that such relief from
liabilities (i) shall be effective only if and to the extent that the transferee
expressly assumes in writing, for the benefit of Tenant, Landlord's obligations
under this Lease, (ii) shall not apply to Landlord's environmental
indemnification under Section 9.5 (d) hereof unless the transferee has,
immediately after the transfer, a net worth equal to or greater than that of
Landlord immediately prior to the transfer, and (iii) shall not in any event
apply to Landlord's obligations with respect to the initial improvement of the
Premises under Section 2.4 and Exhibit C.
---------
15.3. Estoppel Certificates. Either party shall at any time and from
---------------------
time to time, within ten (10) days after written request by the other party,
execute, acknowledge and deliver to the requesting party a certificate in
writing, stating: (i) that this Lease is unmodified and in full force and
effect, or if there have been any modifications, that this Lease is in full
force and effect as modified and stating the date and the nature of each
modification; (ii) the date to which rental and all other sums payable hereunder
have been paid; (iii) that the requesting party is not in default in the
performance of any of its obligations under this Lease, that the responding
party has given no notice of default to the requesting party and that no event
has occurred which, but for the expiration of the applicable time period, would
constitute an event of default hereunder (or, if any such defaults or events
exist, specifying the same); and (iv) such other matters as may reasonably be
requested by the requesting party or any institutional lender, mortgagee,
trustee, beneficiary, ground lessor, sale/leaseback lessor or prospective
purchaser of the Property. Any such certificate provided under this Section 15.3
may be relied upon by any lender, mortgagee, trustee, beneficiary, assignee or
successor in interest to the requesting party, by any prospective purchaser, by
any purchaser on foreclosure or sale, or upon any grant of a deed in lieu of
foreclosure of any mortgage or deed of trust on the Property or Premises, or by
any other third party. Failure to execute and return within the required time
any estoppel certificate requested hereunder shall be deemed to be an admission
of the truth of the matters set forth in the form of certificate submitted to
Tenant for execution.
25
<PAGE>
15.4. Subordination To CC&R'S. This Lease, and any permitted sublease
-----------------------
entered into by Tenant under the provisions of this Lease, shall be subject and
subordinate (a) to any declarations of covenants, conditions and restrictions
recorded by Landlord with respect to the Property from time to time, provided
that the terms of such declarations are reasonable and do not discriminate
against Tenant relative to other tenants occupying portions of the Property,
and (b) to the Declaration of Covenants, Conditions and Restrictions for
Hacienda Business Park (No. 2), as amended from time to time (the "Master
Declaration"), the provisions of which Master Declaration are an integral part
of this Lease. Tenant expressly agrees to comply in all applicable respects
with the provisions of the Master Declaration, as provided under Section 12.3
thereof. Tenant agrees to execute, upon request by Landlord, any documents
reasonably required from time to time to evidence the subordination provided in
this Section 15.4.
16. SECURITY
--------
16.1. Deposit. Concurrently with Tenant's execution of this Lease,
-------
Tenant shall deposit with Landlord the sum of Twenty Nine Thousand One Hundred
Twenty Four Dollars and 90/100 ($29,124.90), which sum (the "Security Deposit")
shall be held by Landlord as security for the faithful performance of all of the
terms, covenants, and conditions of this Lease to be kept and performed by
Tenant during the term hereof. If Tenant defaults with respect to any provision
of this Lease, including, without limitation, the provisions relating to the
payment of rental and other sums due hereunder, Landlord shall have the right,
but shall not be required, to use, apply or retain all or or any part of the
Security Deposit for the payment of rental or any other amount which Landlord
may spend or may become obligated to spend by reason of Tenant's default or to
compensate Landlord for any other loss or damage which Landlord may suffer by
reason of Tenant's default. If any portion of the Security Deposit is so used or
applied, Tenant shall, within ten (10) days after written demand therefor,
deposit cash with Landlord in an sufficient amount to restore the Security
Deposit to its original amount and Tenant's failure to do so shall be a material
breach of this Lease. Landlord shall not be required to keep any deposit under
this Section separate from Landlord's general funds, and Tenant shall not be
entitled to interest thereon. Subject to Landlord's right to use, apply or
retain the Security Deposit as described above and subject to applicable law,
the Security Deposit, or any balance thereof, shall be returned to Tenant or, at
Landlord's option, to the last assignee of Tenant's interest hereunder, at the
expiration or earlier termination of the term of this Lease and after Tenant has
vacated the Premises. In the event of termination of Landlord's interest in this
Lease, Landlord shall transfer all deposits then held by Landlord under this
Section to Landlord's successor in interest, whereupon Tenant agrees to release
Landlord from all liability for the return of such deposit or the accounting
thereof.
17. MISCELLANEOUS
-------------
17.1. Notices. All notices, consents, waivers and other communications
-------
which this Lease requires or permits either party to give to the other shall be
in writing and shall be deemed given when delivered personally (including
delivery by private courier or express delivery service) or four (4) days after
deposit in the United States mail, registered or certified mail, postage
prepaid, addressed to the parties at their respective addresses as follows:
26
<PAGE>
To Tenant: (until Commencement Date)
Documentum, Inc.
5671 Gibraltar Drive
Pleasanton, CA 94588
Attn: Director of Legal Affairs
(after Commencement Date)
Documentum, Inc.
5700 Stoneridge Drive, Suite (to be determined)
Pleasanton, CA 94588
Attn: Director of Legal Affairs
with copy to: Cooley Godward, LLP
3000 Sand Hill Road, Building 3, Suite 230
Menlo Park, CA 94025
Attn: Mark Tanoury
To Landlord: BRITANNIA HACIENDA IV LIMITED PARTNERSHIP
c/o Britannia Stoneridge, LLC
1939 Harrison Street, Suite 412
Park Plaza Building
Oakland, CA 94612
Attn: T.J. Bristow
with copy to: Folger, Levin and Kahn, LLP
Embarcadero Center West
275 Battery Street, 23rd Floor
San Francisco, CA 94111
Attn: Donald E. Kelley, Jr.
or to such other address as may be contained in a notice at least fifteen
(15) days prior to the address change from either party to the other given
pursuant to this Section. Rental payments and other sums required by this Lease
to be paid by Tenant shall be delivered to Landlord at Landlord's address
provided in this Section, or to such other address as Landlord may from time to
time specify in writing to Tenant, and shall be deemed to be paid only upon
actual receipt.
17.2. Successors And Assigns. The obligations of this Lease shall run
----------------------
with the land, and this Lease shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns, except that the
original Landlord named herein and each successive Landlord under this Lease
shall be liable only for obligations accruing during the period of its ownership
of the Property, said liability terminating upon termination of such ownership
and passing to the successor lessor.
17.3. No Waiver. The failure of Landlord to seek redress for violation,
---------
or to insist upon the strict performance, of any covenant or condition of this
Lease shall not be deemed a waiver of such violation, or prevent a subsequent
act which would originally have constituted a violation from having all the
force and effect of an original violation.
27
<PAGE>
17.4. Severability. If any provision of this Lease or the application
------------
thereof is held to be invalid or unenforceable, the remainder of this Lease or
the application of such provision to persons or circumstances other than those
as to which it is invalid or unenforceable shall not be affected thereby, and
each of the provisions of this Lease shall be valid and enforceable, unless
enforcement of this Lease as so invalidated would be unreasonable or grossly
inequitable under all the circumstances or would materially frustrate the
purposes of this Lease.
17.5. Litigation Between Parties. In the event of any litigation
--------------------------
between the parties hereto growing out of this Lease, the prevailing party shall
be reimbursed for all reasonable costs, including, but not limited to,
reasonable accountants' fees and attorneys' fees. "Prevailing Party" within the
meaning of this Section shall include, without limitation, a party who dismisses
an action for recovery hereunder in exchange for payment of the sums allegedly
due, performance of covenants allegedly breached or consideration substantially
equal to the relief sought in the action.
17.6. Surrender. A voluntary or other surrender of this Lease by Tenant,
---------
or a mutual termination thereof between Landlord and Tenant, shall not result in
a merger but shall, at the option of Landlord, operate either as an assignment
to Landlord of any and all existing subleases and subtenancies, or a termination
of all or any existing subleases and subtenancies. This provision shall be
contained in any and all assignments or subleases made pursuant to this Lease.
17.7. Construction. The provisions of this Lease shall be construed as a
------------
whole according to their common meaning and not strictly for or against Landlord
or Tenant. The captions preceding the text of each Section and subsection hereof
are included only for convenience of reference and shall be disregarded in the
construction or interpretation of this Lease.
17.8. Entire Agreement. This written Lease, together with the exhibits
----------------
hereto, contains all the representations and the entire understandings between
the parties hereto with respect to the subject matter hereof. Any prior
correspondence, memoranda or agreements are replaced in total by this Lease and
the exhibits hereto. This Lease may be modified only by an agreement in writing
signed by each of the parties.
17.9. Governing Law. This Lease and all exhibits hereto shall be
-------------
construed and interpreted in accordance with and be governed by all the
provisions of the laws of the State of California.
17.10. No Partnership. Nothing contained in this Lease shall be
--------------
construed as creating any type or manner of partnership, joint venture or Joint
enterprise with or between Landlord and Tenant.
17.11. Financial Information. From time to time Tenant shall promptly
---------------------
provide directly to prospective lenders and purchasers of the Premises
designated by Landlord such financial information pertaining to the financial
status of Tenant as Landlord may reasonably request; provided, Tenant shall be
permitted to provide such financial information in a manner which Tenant deems
reasonably necessary to protect the confidentiality of such information. In
addition, from time to time, Tenant shall provide Landlord with such financial
information pertaining to the financial status of Tenant as Landlord may
reasonably request. Landlord agrees that all financial information supplied to
Landlord by Tenant shall be treated as confidential material, and shall not be
disseminated to any party or entity (including any entity affiliated with
Landlord)
28
<PAGE>
without Tenant's prior written consent. For purposes of this Section,
without limiting the generality of the obligations provided herein, it shall be
deemed reasonable for Landlord to request copies of Tenant's most recent
audited annual financial statements, or, if audited statements have not been
prepared, unaudited financial statements for Tenant's most recent fiscal year,
accompanied by a certificate of Tenant's chief finandal officer that such
financial statements fairly present Tenant's financial condition as of the
date(s) indicated.
Landlord and Tenant recognize the need of Tenant to maintain the
confidentiality of information regarding its financial status and the need of
Landlord to be informed of, and to provide to prospective lenders and
purchasers of the Premises, financial information pertaining to Tenant's
financial status. Landlord and Tenant agree to cooperate with each other in
achieving these needs within the context of the obligations set forth in this
Section.
17.12. Costs. If Tenant requests the consent of Landlord under any
-----
provisions of this Lease for any act that Tenant proposes to do hereunder,
including, without limitation, assignment or subletting of the Premises, Tenant
shall, as a condition to doing any such act and the receipt of such consent,
reimburse Landlord promptly for any and all reasonable costs and expenses
incurred by Landlord in connection therewith, including, without limitation,
reasonable attomeys' fees.
17.13. Time. Time is of the essence of this Lease, and of every term and
----
condition hereof.
17.14. Rules And Regulations. Tenant shall observe and obey such rules
---------------------
and regulations as Landlord may promulgate from time to time for the safety,
care, cleanliness, order and use of the Premises and the Building.
17.15. Brokers. Landlord agrees to pay a brokerage commission to Cornish
-------
& Carey and Colliers and Parrish in connection with the consummation of this
Lease in accordance with a separate agreement. Tenant represents and warrants
that no other broker participated in the consummation of this Lease and agrees
to indemnify, defend and hold Landlord harmless against any liability, cost or
expense, including, without limitation, reasonable attorneys' fees, arising out
of any claims for brokerage commissions or other similar compensation in
connection with any conversations, prior negotiations or other dealings by
Tenant with any other broker.
17.16. Memorandum Of Lease. At any time during the term of this Lease,
-------------------
either party, at its sole expense, shall be entitled to record a memorandum of
this Lease and, if either party so elects, both parties agree to cooperate in
the preparation, execution, acknowledgment and recordation of such document in
reasonable form.
17.17. Corporate Authority. The person signing this Lease on behalf of
-------------------
Tenant warrants that he or she is fully authorized to do so and, by so doing to
bind Tenant. As evidence of such authority, Tenant shall deliver to Landlord,
upon or prior to execution of this Lease, a certified copy of a resolution of
Tenant's board of directors authorizing the execution of this Lease and naming
the officer that is authorized to execute this Lease on behalf of Tenant.
17.18. Landlord Defaults. If Landlord fails to perform any obligation,
-----------------
agreement or covenant under this Lease which relates specifically to the
Premises and does not materially affect other tenants of the Property (such as,
by way of example and not limitation, Landlord's obligation to maintain the
roof, exterior walls and other structural portions of the Building to the
extent such
29
<PAGE>
portions are part of or relate directly to the Premises), and If such failure
continues for fifteen (15) days after written notice of such failure is given by
Tenant to Landlord or, if such default is curable in nature but it is not
reasonably possible to cure such default within fifteen (15) days, Landlord
fails to commence cure within such fifteen (15) day period or thereafter fails
to proceed diligently to complete cure, then Tenant shall have the right to
perform such obligation or cure such default of Landlord, and Landlord shall
reimburse Tenant for the reasonable cost thereof, together with interest at the
rate specified in the first sentence of Section 3.2 hereof from the date of
payment by Tenant to the date of reimbursement by Landlord, within fifteen (15)
days after written notice from Tenant of the completion and cost of such cure,
accompanied by copies of invoices or other supporting documentation. Under no
circumstances, however, shall Tenant have any right to offset the cost of any
such cure against rent or other charges failing due from time to time under this
Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the day and year first set forth above.
"Landlord" "Tenant"
BRITANNIA HACIENDA IV DOCUMENTUM, INC.
LIMITED PARTNERSHIP, a Delaware corporation
a Delaware Limited Partnership
By: BRITANNIA STONERIDGE, By:
LLC, General Partner, Its:
By:
_________________
T. J. Bristow
Manager
30
<PAGE>
EXHIBITS
EXHIBIT A Location of Premises
EXHIBIT B Real Property Description
EXHIBIT C Construction
EXHIBIT D Acknowledgement of Lease Commencement
LOCATION OF PREMISES
--------------------
Map of Premises. (Not Included)
Exhibit A
---------
REAL PROPERTY DESCRIPTION
-------------------------
Parcel One (on which Building is located):
- ----------
Improved real property located in the City of Pleasanton, County of Alameda,
State of California, more particularly described as follows:
Parcel B of Parcel Map No. 6874, Filed September 20, 1995, In Book 221 of
Parcel Maps, at Pages 25 - 26, Alameda County Records.
Subject to easements, restrictions and other matters of record affecting
title.
Parcel Two (balance of Center, on which adjacent building is located):
- ----------
Improved real property located in the City of Pleasanton, County of
Alameda, State of California, more particularly described as follows:
Parcel A of Parcel Map No. 6874, filed September 20, 1995 in Book 221 of
Parcel Maps at Pages 25-26, Alameda County Records.
Subject to easements, restrictions and other matters of record affecting
title.
EXHIBIT B
---------
CONSTRUCTION
-------------
Landlord, at its sole cost and expense (subject to the rental adjustment
provisions hereafter set forth), using architects and contractors selected by
Landlord in its sole discretion, shall undertake and diligently complete,
subject to delays for causes beyond its reasonable control (excluding financial
inability), interior tenant improvements in accordance with the Approved Plans
and Specifications as hereinafter defined.
The plans and specifications that will be necessary for construction of
the Interior improvements shall be prepared by Landlord and its architect on the
basis of a space plan and preliminary specifications to be provided by Tenant,
and shall be subject to mutual approval by Landlord and Tenant, such approval
not to be unreasonably withheld or delayed (whereupon such plans and
specifications shall become the "Approved Plans and Specifications"). Detailed
working drawings shall then be prepared by Landlord's architect on the basis of
the Approved Plans and Specifications, with any material changes from the
Approved Plans and Specifications to be subject to mutual approval by Landlord
and Tenant, such approval not to be unreasonably withheld or delayed; provided.
however, that any changes required from time to time in the Approved Plans and
Specifications, in the working drawings and/or in the final plans and
specifications as a result of applicable law or governmental requirements, or at
the insistence of any other third party whose approval may be required with
respect to such improvements, or as a result of unanticipated conditions
encountered in the course of construction, may be implemented by Landlord after
prior written notice to Tenant, but shall not require Tenant's approval or
consent (although Landlord agrees to give reasonable consideration to Tenant's
views regarding functional characteristics of any such required changes).
Landlord's work shall be performed in a good and workmanlike manner and
shall conform to the Approved Plans and Specifications (as modified from time
to time), all applicable governmental codes, laws and regulations in force at
the time such work is completed (including but not limited to the Americans
with Disabilities Act) and otherwise in accordance with Section 2.4 of the
Lease. Landlord shall obtain all permits, licenses and approvals required in
connection with the construction of such improvements. Landlord shall use its
best reasonable efforts to complete such work prior to the Commencement Date,
subject to the effects of any delays caused by or attributable to Tenant or any
other circumstances beyond Landlord's reasonable control (excluding financial
inability). Landlord and Tenant shall use their respective best reasonable
efforts to develop, review and approve (to the extent required under this
Exhibit C), as promptly as reasonably possible, all drawings, plans and/or
specifications necessary to create and implement the Approved Plans and
Specifications.
The cost of construction of Landlord's work under Section 2.4 and this
Exhibit C shall generally be borne by Landlord at its sole cost and expense, up
to a maximum expenditure by Landlord of Twenty-Five Dollars ($25.00) per square
foot as contemplated in Section 3.1 (c) of the Lease. To the extent such cost
of construction exceeds $25.00 per square foot, the excess shall result in a
rental adjustment in accordance with Section 3.1 (c) of the Lease.
Notwithstanding such rental adjustment provisions, Landlord is not required
under any circumstances to spend more than Thirty Dollars (30.00) per
square foot for its work under Section 2.4 and this Exhibit C, and Landlord
shall be entitled to take such limitation into account in determining whether
to approve any features proposed by Tenant as part of the process of
developing, modifying (if necessary) and implementing the Approved Plans and
Specifications.
31
<PAGE>
EXHIBIT C
---------
ACKNOWLEDGEMENT OF LEASE COMMENCEMENT
-------------------------------------
This Acknowledgement is executed as of , 19 . by BRITANNIA HACIENDA IV
LIMITED PARTNERSHIP, a Delaware limited partnership ("Landlord"), and
Documentum, Inc., a Delaware corporation ("Tenant"), pursuant to Section 2.5 of
the Lease dated . 19_ between Landlord and Tenant (the "Lease") covering
premises located at Pleasanton, CA 94588 (the "Premises").
Landlord and Tenant hereby acknowledge and agree as follows:
1. The Commencement Date under the Lease is 19_.
2. The termination date under the Lease shall be 19 . subject to any
applicable provisions of the Lease for extension or early termination thereof.
3. The final cost of the tenant improvements for the Premises is
. Based on that cost, the applicable rental adjustment (if any) and/or
payment (if any) required under the Lease is as follows (if none, so state):
.
4. Tenant accepts the Premises and acknowledges the satisfactory
completion of all improvements therein (if any) required to be made by Landlord,
subject only to any applicable "punch list" or similar procedures specifically
provided under the Lease and to the other provisions of Section 2.4 and Exhibit
of the Lease.
EXECUTED as of the date first set forth above.
"Landlord" "Tenant"
BRITANNIA HACIENDA IV DOCUMENTUM, INC., a
LIMITED PARTNERSHIP, a Delaware corporation
Delaware limited partnership
By : BRITANNIA STONERIDGE, LLC,
General Partner By: ________________________
By: ________________________ Its: _______________________
T.J. Bristow
Manager
EXHIBIT D
---------
32
<PAGE>
DOCUMENTUM, INC.
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1996 1995
--------- ---------
<S> <C> <C>
Net Income............................................. $ 4,484 $ 1,260
Primary Shares outstanding:
Weighted average shares outstanding during the
period.............................................. 13,788 1,574
Common stock equivalent shares....................... 959 11,360(1)
--------- ---------
14,747 12,934
========= =========
Fully diluted shares outstanding:
Weighted average shares outstanding during the
period.............................................. 13,788 1,574
Common stock equivalent shares....................... 967 11,360(1)
--------- ---------
14,755 12,934
========= =========
Primary net income per common stock and common stock
equivalent share...................................... $ .30 $ .10
========= =========
Fully diluted net income per common stock and common
stock equivalent share................................ $ .30 $ .10
========= =========
</TABLE>
- --------
(1) Pursuant to Securities and Exchange Commission staff accounting bulletins,
common and common equivalent shares, options and warrants issued by the
company during the twelve month period prior to the initial public
offering have been included as if they were outstanding for all periods
presented.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-08709 and No. 333-15239) of Documentum, Inc. of
our report dated January 24, 1997 appearing on page F-1 of this Form 10-K.
PRICE WATERHOUSE
San Jose, California
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,369
<SECURITIES> 46,803
<RECEIVABLES> 14,600
<ALLOWANCES> 1,069
<INVENTORY> 0
<CURRENT-ASSETS> 67,222
<PP&E> 9,855
<DEPRECIATION> 3,515
<TOTAL-ASSETS> 74,944
<CURRENT-LIABILITIES> 15,401
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 59,318
<TOTAL-LIABILITY-AND-EQUITY> 74,944
<SALES> 34,630
<TOTAL-REVENUES> 45,302
<CGS> 1,923
<TOTAL-COSTS> 8,768
<OTHER-EXPENSES> 31,903
<LOSS-PROVISION> 65,158
<INTEREST-EXPENSE> 129
<INCOME-PRETAX> 6,899
<INCOME-TAX> 2,415
<INCOME-CONTINUING> 4,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,484
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
