-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UFsYxAc4S6QaseicjgdSBnx9oDYlrrdnf02kJqyY/87FTKhT12VD9FgcfYcITtEh zLEtZ4uTLP74kCnjrXcnSA== 0000892569-98-002670.txt : 19980929 0000892569-98-002670.hdr.sgml : 19980929 ACCESSION NUMBER: 0000892569-98-002670 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOFAX IMAGE PRODUCTS INC CENTRAL INDEX KEY: 0001045035 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 330114967 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23119 FILM NUMBER: 98715922 BUSINESS ADDRESS: STREET 1: 3 JENNER ST CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 7147271733 MAIL ADDRESS: STREET 1: 3 JENNER ST CITY: IRVINE STATE: CA ZIP: 92618 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 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 JUNE 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File Number 000-23119 KOFAX IMAGE PRODUCTS, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0114967 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 Jenner Street, Irvine, California 92618 (Address of principal executive offices) (Zip Code) (949) 727-1733 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of $6.75 per share of Common Stock on August 31, 1998, as reported on the Nasdaq National Market, was approximately $17,860,000. The number of outstanding shares of the registrant's Common Stock, par value $.001 per share, was 5,261,666 on August 31, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for Registrant's 1998 Annual Meeting of Stockholders to be held November 17, 1998 are incorporated by reference in Part III of this Form 10-K. 2 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY INDEX
ITEM PAGE NUMBER NUMBER - ------ ------ PART I. ITEM 1. Business.............................................................. 3 ITEM 2. Properties............................................................ 32 ITEM 3. Legal Proceedings..................................................... 33 ITEM 4. Submission of Matters to a Vote of Security Holders................... 33 PART II. ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters............................................................... 34 ITEM 6. Selected Financial Data............................................... 35 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 36 ITEM 8. Consolidated Financial Statements and Supplementary Data.............. 43 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................. 43 PART III. ITEM 10. Directors and Executive Officers of the Registrant.................... 44 ITEM 11. Executive Compensation................................................ 46 ITEM 12. Security Ownership of Certain Beneficial Owners and Management........ 46 ITEM 13. Certain Relationships and Related Transactions........................ 46 PART IV. ITEM 14. Exhibits, Consolidated Financial Statements, Financial Statement Schedule, and Reports on Form 8-K..................................... 47 SIGNATURES
2 3 PART I This Annual Report on Form 10-K contains forward-looking statements relating to future events or the future financial performance of the Company, including but not limited to statements contained in "Factors That May Affect Future Operating Results," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Readers are cautioned that such statements, which may be identified by words including "anticipates," "believes," "intends," "estimates," "expects," and similar expressions, are only predictions or estimations and are subject to known and unknown risks and uncertainties. In evaluating such statements, readers should consider the various factors identified in this Annual Report on Form 10-K, including matters set forth in "Factors That May Affect Future Operating Results," which could cause actual events, performance or results to differ materially from those indicated by such statements. ITEM 1. BUSINESS GENERAL Kofax Image Products, Inc. ("Kofax" or the "Company") is a leading supplier of both application software and scanner enhancement products for the imaging, workflow and document management market. The Company specializes in the document capture segment of the market, which involves converting paper documents to digital electronic images, enhancing and indexing the images, and then compressing them for routing and storage. The Company's products are used in conjunction with industry standard personal computers and personal computer operating systems. The Company sells its products to a wide variety of document imaging, workflow and document management solution providers including value-added resellers, system integrators, independent software vendors and computer companies. INDUSTRY BACKGROUND Despite the proliferation of computers, the Association for Information and Image Management estimates that more than 90% of all business information continues to be stored in paper form. In fact, data processing and word processing have created more paper rather than less. Document imaging systems are designed to increase operating efficiencies in paper intensive industries by converting paper documents into electronic images and then managing the routing and storage of these images. Some of the many uses of document imaging systems include expediting the processing of loan applications by financial institutions, processing of insurance claims, speeding the processing of new drug applications with the FDA for pharmaceutical companies, and archiving images for local government agencies such as land deed offices and tax assessors. 3 4 The benefits of imaging systems include saving companies money by providing less expensive storage of documents; improving customer service by allowing workers faster access to files; allowing multiple users to access files simultaneously; and providing remote access to documents via commercial telephone lines or the Internet. To allow documents to be electronically stored, retrieved and routed, most imaging systems perform the following functions: o DOCUMENT CAPTURE performs the initial scanning and indexing of paper documents. o OPTICAL STORAGE is used for permanent storage of the scanned digital images. o DOCUMENT MANAGEMENT provides centralized management and administration of large volumes of documents. o WORKFLOW allows for the automation of routine work processes by routing documents electronically throughout an organization. Document capture and optical storage are critical components of all imaging and workflow systems. Document capture subsystems perform the initial scanning and conversion of paper documents into digital images as well as the indexing of the documents. Indexing is frequently assisted by optical character recognition (OCR), which recognizes typewritten characters and converts them into computer-readable text, and by image cleanup, which improves the accuracy of OCR and makes images more readable. Optical storage is the most commonly used method of permanently storing scanned images because of its low cost and high reliability. Optical disks and optical "jukeboxes" (robotic devices that manage large libraries of optical disks) are managed by specialized software that allows users to retrieve optical disks, read and write files from them, and perform automatic backups. THE KOFAX(R) SOLUTION Kofax develops, markets and supports three product lines for imaging, workflow and document management applications. Of these, two are software applications that manage the capture and long-term storage of documents for production level workflow and document management systems and the third is a family of image processing accelerators and development tools. The Company believes that its product lines are well positioned to take advantage of major trends in the imaging, workflow and document management market. 4 5 Component Software Until the mid-1990s, most imaging, workflow and document management solutions were closed monolithic systems supplied by turnkey vendors. Beginning in 1995, however, specialized vendors began competing with these turnkey imaging systems by selling individual software components through networks of VARs and system integrators who would then integrate components from different vendors into a complete solution for end users. Component systems have the advantage of being more flexible, less costly, and easier to upgrade than comparable turnkey systems. In an effort to capitalize on the component software trend, Kofax began shipping its Ascent(R) family of software applications in January 1995. The first Ascent application, Ascent Capture(R), was designed to reduce the cost of the scanning and indexing process, which involves significant human involvement and is therefore an expensive ongoing function of most imaging, workflow and document management systems. Ascent Capture reduces manual labor by using automated recognition techniques such as OCR and bar code recognition and by automating the flow of images through the entire capture process. In addition, sophisticated validation techniques ensure the accuracy of the indexing process without requiring costly human intervention. In 1996, the Company introduced Ascent Storage(TM), an application for managing image repositories on optical jukeboxes. In component based systems, applications such as Ascent Capture and Ascent Storage are combined by resellers and system integrators with other software components, such as document management software from Documentum, Inc., to form complete imaging, workflow and document management solutions. Image Processing Accelerators Kofax's first products, image processing accelerators, were designed to give PCs sufficient processing power to operate high-speed scanners and then compress and store the resulting images. The acceptance of PCs as replacements for proprietary imaging workstations grew as Microsoft Windows became the most popular operating system for document imaging applications and as PC-based LANs gained acceptance for large-scale business applications. More recently, as the speed and sophistication of imaging systems has increased, so too have the requirements for image processing. To meet this demand, Kofax continues to provide a family of hardware accelerators and development tools that allow Pentium-class PCs to perform high-speed scanning, image cleanup, and recognition functions, including operations such as deskewing, despeckling, line removal, bar code recognition, and forms recognition. These functions, which have grown increasingly CPU intensive, make document images more readable, allow OCR to operate more accurately and decrease the storage requirements for compressed images. 5 6 In order to cause these image processing functions to execute at the rated speed of modern scanners (40 to 200 pages per minute), Kofax develops core algorithms that can be used on the most cost-effective platform available in any particular system. This involves producing algorithms that execute variously on host PCs, on RISC processors embedded in hardware accelerators, on DSPs, or on proprietary ASICs. By balancing the execution of algorithms across these processors, Kofax systems can simultaneously perform multiple image processing functions at speeds as high as 250 images per minute. STRATEGY Kofax's primary growth strategy is to expand its addressable markets by developing new products that leverage its core document processing technologies. Execution of the Company's strategy involves the following key elements: Expand Addressable Market for Component Software Kofax is expanding into two new markets related to document capture and optical storage in which it does not presently compete: o Forms processing involves capturing data from printed forms and storing the information in a database. Today, this data entry market is primarily manual, with workers reading paper documents and keying information into a mainframe database. Kofax plans to compete in this substantial market with a forthcoming version of Ascent Capture that performs image assisted data entry, in which paper forms are scanned, zoned, OCRed, and the data stored with little or no human participation. This software will make use of sophisticated forms recognition technology to automatically recognize different form types, zonal image cleanup algorithms to optimize different parts of the forms for the highest possible accuracy in automated recognition, handprint recognition techniques in addition to OCR (machine print) techniques, and automated validation procedures to ensure the accuracy of the index data. o In August, 1998, Kofax introduced a version of Ascent Storage for Windows NT networks that makes an optical jukebox look like an ordinary magnetic drive on the network. It requires no programming and can be used with any standard Windows application. The Company expects this new version of Ascent Storage will broaden the market for Ascent Storage to include Kofax's entire current distribution channel of VARs and distributors. 6 7 Expand Addressable Market for Scanner Enhancement Products Kofax is applying its accelerator technology to a new market. In addition to image processing functions performed by Kofax accelerators in host PCs, scanner manufacturers use specialized scanner resident image processing boards to perform certain types of basic image manipulation that are best executed on raw image data before it is passed to the PC. Kofax has developed advanced technologies that the Company believes will allow it to compete aggressively in this market on an OEM basis, providing scanner manufacturers with a low-cost image processing board that provides enhanced functionality. One such technology, which we're calling Virtual ReScan(TM), or VRS, leverages our extensive research and development in high speed grayscale image processing. Company tests indicate that this proprietary technology promises to significantly improve image readability and OCR accuracy, and reduce scanning costs. The Company has demonstrated VRS to several major scanner vendors and is currently in contractual discussions with some of them. The Company does not expect to generate a material amount of revenue from this product until after the end of fiscal year 1999. Leverage and Expand Distribution Channels Kofax has pursued a two-tier distribution strategy, through stocking distributors and value-added resellers, for eight years and believes it has developed considerable expertise in selling to and supporting these channels. Kofax plans to emphasize the further development and support of its growing reseller channel. A critical element of the Company's strategy to continue to increase revenues of our component software products, Ascent Capture and Ascent Storage, is to continue to grow our Ascent reseller base and also to increase their productivity through improved training, product and marketing support, and reseller management. For instance, previous versions of Ascent Storage required significant programming to use and were targeted primarily at a fairly small base of OEMs and ISVs. The recently released Version 4 is an optical storage solution that can be easily installed and serviced by our existing channel of certified resellers who specialize in document management solutions. Adding this channel, along with this product's new features, significantly expands the Company's addressable market for Ascent Storage. In addition, the Company has planned an aggressive sales and promotional launch of Ascent Storage 4 in fiscal 1999. A key element of this campaign is a major incentive program for Ascent Storage distributors and resellers that will encourage them to learn and sell this new product as soon as possible. 7 8 PRODUCTS Kofax offers products in two basic areas, both aimed at the imaging, workflow and document management market: o Component Application Software. The Ascent family of software applications today consists of Ascent Capture, a scanning and indexing application, and Ascent Storage, an optical storage manager for Windows NT networks. o Scanner Enhancement Products. This area includes the KIPP(R) and Adrenaline(R) families of PC-based hardware accelerators for scanning and image processing; developers' toolkits for scanning, image processing and optical storage; and OEM hardware designed to improve image quality inside a scanner. Component Application Software The Ascent family is a set of standalone software applications designed to be used in conjunction with software applications from other vendors to form a complete imaging, workflow and document management system. Ascent applications are independent of both database and network operating system selection, allowing them to work in a high percentage of existing corporate IT environments. The first Ascent product commenced shipment in January 1995, and sales of Ascent products accounted for approximately 26% of the Company's fiscal 1998 net sales. The Company expects that its Ascent products will contribute an increasing share of the Company's net sales in the future. See "Factors That May Affect Future Operating Results -- Dependence on a Limited Number of Products for Current and Future Operating Results." Ascent Capture is a batch-oriented document capture software application designed to process up to 100,000 documents per day at high throughput and low cost. The goal of Ascent Capture is to reduce the long-term operating cost of production document capture by incorporating key technologies that are normally found only in expensive turnkey imaging systems. 8 9 Document capture is a sequential process that involves several steps, each of which typically executes on a workstation on a network. The table below explains each of the steps that make up a complete document capture subsystem.
OPERATION DESCRIPTION ASCENT BENEFITS - --------- ----------- --------------- Scanning Converts paper documents Ascent Capture implements a batch into digital images. scanning system to increase throughput and reduce the number of scanners and scanner operators required. OCR and Image Cleans up image, reads and Image processing cleans up the scanned Processing retrieves index keywords. image and makes OCR more accurate. Preprinted forms can be zoned and automatically indexed by optical character recognition of the zones. Indexing and Assigns index keywords to Bar codes can automate indexing and Quality Assurance all documents so that they reduce hand keying. For manual indexing, can be retrieved later. input screens are designed for efficient "heads up" indexing. To ensure accuracy, custom validation rules can be enforced for each index field. Rescanning Sends poorly scanned Ascent Capture keeps track of rejected documents back to be pages and allows rescanning of single rescanned. pages within a batch. Rescanned pages are automatically inserted back into batches in the proper order. Release Exports images to long-term Ascent Capture supports release of storage and indexes to a documents to standard optical systems permanent database. and common SQL databases. Database schema conversion is built into the Ascent Capture system.
In Ascent Capture, each of these operations is integrated via internal queues that provide scalability and flexibility. This allows Ascent Capture to be used in many different environments, from mid-range systems with only a few stations to enterprise installations with multiple scanners feeding multiple OCR, index, rescan and release stations. Ascent's internal routing system maximizes efficiency for every station and operator. 9 10 A typical mid-range capture system consists of one or two scan/rescan stations and two to four stations performing image processing, OCR, indexing and release. Ascent Capture has a recommended end user list price of $7,995 for each high-end scan station, $3,495 for each mid-range scan station, and $2,495 for all other stations, such as OCR, indexing or release. An update service, available at a price equal to 15% of the software's list price, provides customers with software upgrades for a period of 12 months. Ascent Storage is an optical storage manager for Windows NT networks. It allows an optical jukebox to appear to the network as a very large magnetic disk and allows any ordinary Windows application to read and write files to the jukebox. Ascent Storage supports WORM (nonerasable) optical drives, MO (rewritable) drives, and optical jukeboxes that use mechanical robotics to swap libraries of optical disks into a single drive on an as-needed basis. The goal of Ascent Storage is to allow document management applications to access optical storage, which is inherently slower than magnetic storage, in the most efficient possible way. Ascent Storage can be easily customized via Visual Basic to communicate directly with optical jukeboxes on the network and intelligently pre-fetch archived files from optical to magnetic storage, providing users with the fastest possible file access. In addition, Ascent Storage allows system managers to manage off-line volumes (off-line disks that have been removed from the jukebox and stored on a shelf), make real time backups, and check the status and performance of all optical devices on their network. Ascent Storage is priced on a device basis. Each optical device on the network requires a separate Ascent Storage license, ranging in price from $995 for a standalone optical drive to $29,995 for a large optical jukebox. An update service, available at a price equal to 15% of the software's list price, provides customers with software upgrades for a period of 12 months. Scanner Enhancement Products Kofax manufactures a wide variety of hardware and toolkits designed to accelerate scanning and image processing functions on PCs. Kofax accelerator boards are used to connect high-speed scanners to PCs and perform critical image processing operations on the images after they are scanned. Kofax's current generation of accelerators, sold under the brand name Adrenaline, contain memory, an on-board RISC processor, one or two DSP devices, and proprietary ASICs that accelerate functions that are too processor intensive to execute efficiently on the PC's processor. 10 11 Because standard processors commonly used in PCs are optimized to work on bytes rather than bits, even fast PCs driven by Pentium-class processors are poorly suited to perform image processing and are typically unable to perform complex image processing in real time. Kofax accelerators are designed primarily to optimize these image processing operations. Typical image processing functions performed by Kofax hardware accelerators include image deskewing, despeckling, deshading, line removal, edge enhancement, bar code recognition, forms recognition, and others, all of which execute in real time at scanner speeds of 40 to 200 pages per minute. The Adrenaline family includes four models with list prices of $3,500 and $1,500 for the two hardware models and prices of $1,100 and $400 for the two software engines. The hardware accelerators are generally used to connect scanners that run at approximately 40 pages per minute and above while the software engines are entry level products that support only scanners with speeds of up to approximately 30 pages per minute. Special versions of the hardware accelerators are available for IBM ImagePlus systems. These versions accounted for about 8% of total fiscal 1998 accelerator revenue. These IBM-specific products have list prices ranging from $4,000 to $9,000. An internal development project called Virtual ReScan, or VRS, will result in a scanner resident image processing board that will be sold on an OEM basis to scanner vendors and shipped as an integral part of the scanner. VRS is expected to begin shipments in early 1999 and will perform extremely high-speed functions designed to improve image quality inside the scanner before the image is delivered to the PC. These functions include grayscale thresholding, certain types of image manipulation and cleanup, and automatic page segmentation. Other functions will be added on a custom basis depending on the requirements of the particular OEM. Software toolkit products are designed for system developers creating customized imaging and workflow solutions. The software toolkits provide a powerful and easy environment for developing custom document capture and document storage applications that take advantage of the features of Kofax hardware accelerators and optical storage management software. 11 12 ImageControls(R) is a set of 32-bit ActiveX controls designed for use with Visual Basic and Visual C++. Using ImageControls, developers can build applications that run on either Windows NT or Windows 95 workstations and perform high-speed scanning, printing, image display, image cleanup (deskew, despeckle, line removal, etc.), bar code recognition, and automatic forms recognition. Three versions of the toolkit are available, ranging in price from $1,000 to $5,000. Developer toolkits do not contribute significant revenue to the Company but are an important part of its overall marketing strategy. When a Kofax toolkit is used to build an application, support is automatically built in for Adrenaline hardware accelerators. Sales of these products therefore depend heavily on gaining widespread use of Kofax toolkits among application developers in the document management market. TECHNOLOGY/RESEARCH AND DEVELOPMENT As of June 30, 1998, the Company's research and development group consisted of 70 employees, of which 58 people manage, develop or test the Company's software products. During the fiscal years ended June 30, 1998, 1997 and 1996, research and development expenses were $7.8 million, $6.7 million, and $5.1 million respectively. The Company anticipates that it will continue to commit substantial resources to product development in the future. See "Factors That May Affect Future Operating Results -- Rapid Technological Change." As is common in the imaging, workflow and document management industry, the Company licenses various software from third parties and includes or uses such software in certain of the Company's application software products. Currently, royalties payable under such license arrangements are not significant in relation to the selling price of the software products. Algorithm Development An important aspect of the Company's research and development effort involves developing proprietary, state-of-the-art image processing algorithms. These algorithms are highly specialized and depend on a detailed knowledge of advanced mathematics and computational processes. These algorithms are encapsulated in proprietary ASICs, digital signal processor code and traditional C and assembly language code. The Company's library of algorithms covers two basic areas: Recognition. This includes algorithms such as bar code recognition, patch code detection and automatic forms recognition. These algorithms are widely used to automate the indexing of scanned documents, thus lowering the ongoing labor cost of the imaging operation. 12 13 Image enhancement. These algorithms are used to clean up scanned images so that recognition operations run with greater accuracy. Image enhancement is used to improve both the Company's recognition functions and recognition functions performed by third party products, such as OCR and handprint recognition. This is a key area of development, as very small increases in OCR accuracy can save substantial amounts in annual operating costs for an imaging installation. A key part of this development is tuning the Company's algorithms for maximum speed. Customers typically prefer to perform image processing during scanning, which can only be done if all required algorithms execute in less time than it takes to scan a page (usually one second or less). The Company believes that its ability to perform image processing in real time is one of its key competitive advantages. The software development group includes engineers with significant design experience in applied and theoretical image processing, real-time operating systems, Microsoft operating systems, user interfaces, and embedded systems and firmware. The software development group was an early adopter of object oriented software development tools and now maintains an expanding base of reusable code. The hardware design group includes engineers with significant design experience in high-speed digital electronics, ASICs, field programmable gate arrays, computer buses, complex computer systems and design for manufacturability. SALES AND DISTRIBUTION Kofax pursues a two-tier distribution strategy, the first tier being stocking distributors while the second tier are solution providers such as system integrators and value-added resellers (VARs). During fiscal 1998, Kofax had 64 stocking distributors in 39 countries who accounted for 79% of net sales. Most of the Company's distributors specialize in document image processing as either their sole business or as a major component of their business. In fiscal 1998, two of these distributors, Law-Cypress Distributing Co. and Tech Data Corporation, accounted for 17% and 13%, respectively, of the Company's total net sales. See "Factors That May Affect Future Operating Results -- Dependence Upon Distribution Channels." In addition, the Company has a field sales force that works closely with its distributor and reseller channel. Kofax maintains six sales offices in the U.S. staffed by technical sales managers and application engineers. The Company's European headquarters in London covers Western Europe, Eastern Europe, Africa and the Middle East. Two full-time sales people based in the Irvine, California office cover Asia and South America. In fiscal 1998, approximately 67% of net sales were generated in the United States, 24% in Europe and 9% in Asia, South America and the rest of the world. 13 14 Kofax products generally reach the end user through the Company's two distribution channels. Each of these sales channels plays a different role in the Company's overall distribution strategy: Distributors. Most Kofax products flow initially through one of the Company's distributors. Distributors service a large base of VARs and system integrators and are responsible for handling credit issues and stocking product to provide quick shipping turnaround. The Company's distributors generally do not stock significant amounts of inventory of the Company's products, as these products are typically incorporated by resellers into complete imaging, workflow and document management systems which are configured shortly before scheduled delivery to end-user customers. VARs/Resellers. VARs and resellers typically integrate Kofax products into a specific solution that they then sell to an existing base of customers in such markets as healthcare, banking, insurance, transportation and government. The Company has selected and trained over 450 Ascent Certified Resellers (ACRs) who incorporate the Company's Ascent software line into complete imaging, workflow and document management systems. The ACRs are the primary focus of the Company's component software sales strategy and, accordingly, the Company is investing significantly in growing, training and supporting this base of resellers. 14 15 END USER CUSTOMERS Although Kofax generally does not sell products directly to end users, the Company has an extensive and diverse list of end-user customers who are serviced and supported by its reseller partners. The list below, which was derived from the Company's database of warranty registration cards received over the past year, is illustrative of the wide range of industries and organizations using the Company's products. There can be no assurance that any of the listed organizations have purchased a material amount of the Company's products or that they will purchase the Company's products in the future. MANUFACTURING FINANCIAL/BANKING SYSTEM INTEGRATORS Procter & Gamble GE Capital Services EDS Corp. BMW AG United Bank of Switzerland Lucent Technologies Dow Corning Chase Manhattan Bank Unisys Corporation NATIONAL GOVERNMENT OIL AND CHEMICALS STATE AND LOCAL GOVERNMENT U.S. Customs Service The British Petroleum Co. PLC Wisconsin Dept. of Justice U.S. Army Chevron Corporation Denver Water Dept. U.S. Dept. of Treasury The Dow Chemical Co. City of Minneapolis ELECTRONICS SERVICES/DISTRIBUTION EDUCATION Digital Equipment Corp. Automobile Club of So. Calif. Cal State University, Hayward General Electric Avis Rent A Car, Inc. University of Oklahoma Hewlett-Packard Company SYSCO Corp. University of Wisconsin PHARMACEUTICAL INSURANCE ENERGY Merck & Co., Inc. Equitable Life Assurance British Gas Transco Warner Lambert Co. Blue Cross/Blue Shield Petro-Canada Glaxo Wellcome PLC Delta Dental Plans Association Consolidated Edison, Inc.
MARKETING The bulk of the Company's marketing efforts are aimed at generating short-term leads for itself and its distribution partners. Promotional efforts are closely tracked and follow-up surveys help determine the effectiveness of various marketing programs. This process is automated and is designed to ensure that leads are fulfilled promptly and by the appropriate channel partner. Longer term marketing efforts include education of end users via periodic roadshows, trend and opinion articles placed in key publications, and meetings with industry analysts. The Company actively uses its marketing efforts to position itself as both a technological leader and an active supporter of industry trade associations and standards committees. Currently, the Company's Chief Executive Officer is Chairman of the Board of Directors of the industry's largest trade association, the Association for Information and Image Management. The Company has several specialized marketing programs designed to reach specific audiences. The first three of these programs are used to promote the Ascent product family and are considered important to the long-term success of Ascent: 15 16 The Ascent Reseller Program is designed to attract qualified resellers for the Company's Ascent family of products. Resellers are accepted into the program if they meet a set of predefined criteria that include a minimum level of technical expertise, experience in the imaging channel and payment of a $3,000 fee. Benefits of the program include demonstration software, free training, collateral materials, lead support and cooperative marketing funds. The Component Application Partner Program is aimed at other software vendors in the document management and workflow market who make products complementary to Ascent Capture and Ascent Storage. Companies are accepted into the program if they support the engineering work required to write an interface between Ascent and their products. Benefits include extensive technical support, cooperative marketing opportunities and reference sales. Training is provided for the Ascent product family to all qualified resellers and, for a fee, to interested end users. The basic training class is three days long and costs $1,495. The ImageControls ISV Program is targeted at independent software vendors and provides incentives for these vendors to use Kofax toolkits and support Kofax accelerators. Benefits of this program include reduced price software and hardware, lead support, and cooperative advertising. CUSTOMER SUPPORT The Company believes its ability to provide comprehensive service, support and training to its distributors, resellers and customers is an important factor in its business. A high level of continuing service and support is fundamental to helping developers, distributors and resellers be successful in selling and supporting the Company's products. The Company's customer support and training departments currently provide the following services: Technical Support. A support staff of 11 engineers provides telephone, fax and electronic mail support to the entire customer base. Additionally, authorized resellers and subscribers to the support service program have extended access to the Company's Internet support site, which contains technical articles, programming tips and source code samples. Ascent Certified Resellers are entitled to full support under their reseller program while Ascent end users may purchase an annual support contract for $995. For software developers who purchase toolkit products, the Company provides four months of free technical support, after which annual support costs are between $795 and $995. End users of the Company's software and hardware engines may contact this group at no charge for routine product installation and configuration questions. 16 17 Software Upgrades. Customers of the Company's developer software toolkit products receive free software upgrades as part of their subscription to the Company's technical support program. Customers of the Ascent application software products may purchase an update service for 15% of the product's list price, which provides the customer with software upgrades for a period of 12 months. Customer Education. The Company provides comprehensive product training to authorized resellers of the Company's Ascent family of application software products. Hardware Repair or Replacement. The Company provides a warranty on all of its hardware products for up to two years after installation. Customers with hardware problems during the warranty period may return their hardware directly to the Company, or in some cases to their local authorized distributor, for free repair or replacement. Customers with hardware problems not covered under warranty may purchase hardware repair service for a flat fee plus shipping costs. The Company maintains sales and support offices in the United States and Europe. The Company believes that existing field sales and support facilities are adequate to meet its current requirements. The Company plans to continue to expand its field sales and support facilities worldwide where appropriate to further penetrate existing and new market opportunities. COMPETITION In the imaging, workflow and document management industry, the market for scanner enhancement hardware and software application components is highly competitive and is characterized by rapid changes in technology and frequent introductions of new platforms and features. The Company expects competition to increase as other companies introduce additional and more competitive products in the emerging imaging, workflow and document management market. In its accelerator board and developer toolkit business, the Company competes primarily with a number of small private companies. In its Ascent business, Kofax competes indirectly against suppliers of turnkey systems as well as directly with other component software vendors, more of whom are expected to enter the market over the next few years. Some of the Company's existing competitors, as well as a number of potential competitors, in the document imaging application software segment of the market have larger technical staffs, greater brand name recognition and market presence, more established and larger marketing and sales organizations and substantially greater financial resources than the Company. 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 have a material adverse effect on the Company's business, operating results, cash flows and financial condition. 17 18 The Company believes that the competitive factors affecting the market for the Company's products include product performance, price and quality; product functionality and features; the availability of products for existing and future platforms; the ease of integration of the products with other hardware and software components of document imaging systems; and the quality of customer support services, documentation and training. The relative importance of each of these factors depends upon the specific end user involved. There can be no assurance that the Company will be able to compete effectively with respect to any of these factors. The Company's present or future competitors may be able to develop products comparable or superior to those offered by the Company or adapt more quickly than the Company to new technologies or evolving customer requirements. In order to remain successful in the imaging, workflow and document management market, the Company must respond to technological change, customer requirements and competitors' current products, product enhancements and innovations. In particular, the Company is currently developing additional products and product enhancements in an effort to address customer requirements in response to technological changes. However, there can be no assurance that the Company will successfully complete the development or introduction of these products on a timely basis or that these products will achieve market acceptance. Accordingly, there can be no assurance that the Company will be able to continue to compete effectively in its market, that competition will not intensify or that future competition will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Factors That May Affect Future Operating Results -- Impact of Competition." INTELLECTUAL PROPERTY The Company believes that its success is strongly related to its reputation for technology, product innovation, technical competence, technical customer support and the response of management to customers' needs. The Company currently holds no patents and relies on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements, licensing arrangements and other security measures (which afford only limited protection) to establish and protect its software, proprietary algorithms and other proprietary technology. Despite these precautions, there can be no assurance that the Company will be successful in protecting its proprietary technology, or that the Company's competitors will not independently develop products or technologies that are substantially equivalent or superior to the Company's products and technologies. It is possible that unauthorized third parties will copy or reverse engineer portions of the Company's products or otherwise obtain and use information which the Company regards as proprietary. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. The failure or inability of the Company to protect its intellectual property rights could have a material adverse effect on its business, operating results, cash flows and financial condition. 18 19 The PC hardware and software industry is characterized by vigorous protection of intellectual property rights, which has resulted in significant and often protracted and expensive litigation. Litigation may be necessary to protect the Company's intellectual property rights and trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. There can be no assurance that infringement, invalidity, right to use or ownership claims by third parties will not be asserted against the Company in the future. The Company expects that it will increasingly be subject to such claims as the number of products and competitors in the imaging, workflow and document management market grows and the functionality of such products overlaps with other industry segments. If any claims or actions are asserted against the Company, the Company may seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that a license will be available upon reasonable terms, if at all. In addition, should the Company decide to litigate such claims, such litigation could be expensive, protracted and time consuming, could divert management's attention from other matters, could cause product shipment delays and could materially adversely affect the Company's business, operating results, cash flows and financial condition, regardless of the outcome of the litigation. Kofax(R), KIPP(R), ImageControls(R), Ascent(R), Ascent Capture(R), StorageControls(R), Adrenaline(R) and NetScan(R) are registered trademarks of the Company. Ascent Storage(TM) and Virtual ReScan(TM) are trademarks of the Company and are the subject of pending trademark registration applications. Alliance(SM) and The Component Imaging Company(SM) are servicemarks of the Company and are the subject of pending servicemark registration applications. MANUFACTURING AND SUPPLIERS The Company manufactures its products at its headquarters facility in Irvine, California. The Company's manufacturing strategy focuses on producing high quality products while controlling costs and maintaining the flexibility necessary to introduce new products quickly and react to changing customer demand. The Company's manufacturing operations consist primarily of materials and procurement management, functional 19 20 testing and final assembly of products, burn-in, quality assurance and shipping. The Company employs one local independent subcontractor to perform printed circuit board level assembly. The Company purchases all components and raw materials and consigns them to its assembly subcontractor. Cable assemblies are purchased complete from a company that specializes in cable assembly manufacture. The Company has in-house software duplication capability, but also uses subcontractors for software duplication. Each of the Company's products undergoes thorough testing and quality inspection at the final assembly stages of production. The Company purchases circuit boards, integrated circuits and other components from third parties. The Company's dependence on third-party suppliers involves several risks, including limited control over pricing, availability, quality and delivery schedules. The Company is dependent on sole-source suppliers for ASICs and certain critical components used in its products. The Company generally purchases sole-sourced components pursuant to purchase orders placed in the ordinary course of business and has no guaranteed supply arrangements with any of its sole-source suppliers. There can be no assurance that the Company will not experience quality control problems or supply shortages for these components in the future. Although the Company has attempted to mitigate these risks by identifying alternate sources of sole-sourced components and buying significant safety stocks. Any quality control problems or interruptions in supply with respect to one or more components could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. Because of the Company's reliance on these vendors, the Company may also be subject to increases in component costs which could materially adversely affect its business, operating results, cash flows and financial condition. The Company relies on third-party subcontractors for the manufacture of certain of its products and components such as cable assemblies and circuit boards. Reliance on third-party subcontractors involves several risks, including the potential inadequacy of capacity, the unavailability of or interruptions in access to certain process technologies and reduced control over product quality, delivery schedules, manufacturing yields and costs. Shortages of raw materials to or production capacity constraints at the Company's subcontractors could negatively affect the Company's ability to meet its production obligations and result in increased prices for affected parts. Any such factor may result in delays in shipments of the Company's products or increases in the prices of components, either of which could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Factors That May Affect Future Operating Results -- Dependence on Suppliers and Subcontractors." 20 21 BACKLOG The Company typically ships its products within a short period after acceptance of purchase orders from distributors and other customers. Accordingly, the Company typically does not have a material backlog of unfilled orders, and net sales in any quarter are substantially dependent on orders booked in that quarter. Any significant weakening in customer demand would therefore have an almost immediate adverse impact on the Company's operating results and on the Company's ability to maintain profitability. EMPLOYEES As of June 30, 1998, the Company employed 167 individuals, including 70 in research and development, 61 in sales, marketing and customer support, 13 in manufacturing and 23 in administration, finance and information systems. The Company regularly seeks to identify skilled engineering and other potential employee candidates, and has found that competition for qualified personnel in the computer software industry is intense. The Company believes that its ability to recruit and retain highly skilled technical and other management personnel will be critical to its ability to execute its business plans. None of the Company's employees is represented by a labor union or is subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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 results to differ 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 below as well as those discussed elsewhere in this Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual 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 Annual 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. 21 22 Probable Fluctuations in Quarterly Operating Results The Company's operating results have been, and its future operating results are expected to be, subject to fluctuations due to a number of factors, including the timing of orders from, and shipments to, major customers; the timing of new product introductions by the Company or its competitors; variations in the mix of products sold by the Company; changes in pricing policies by the Company, its competitors or its suppliers, including possible decreases in average selling prices of the Company's products in response to competitive pressures; product returns or price protection charges from customers; market acceptance of new and enhanced versions of the Company's products; the availability and cost of key components; the availability of manufacturing capacity; delays in the introduction of new products or product enhancements by the Company, the Company's competitors or other providers of hardware, software and components for the imaging, workflow and document management market; dependence upon capital spending budgets; dependence on suppliers of scanners and their ability to supply scanners to the marketplace; fluctuations in general economic conditions; and the unpredictability of all of the foregoing. In addition, the Company has at times experienced quarter-to-quarter declines in net sales. The Company believes that these fluctuations in net sales result primarily from the budgeting and purchasing cycles of its customers and, during the summer months, from European holiday closures. As a result, 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's expense levels are relatively fixed in the short term and are based on the Company's sales forecasts; however, because substantially all of the Company's net sales in each quarter result from orders received and shipped in that quarter, net sales are difficult for the Company to forecast accurately. The Company operates with little product backlog because its products are typically shipped shortly after orders are received. In addition, a significant portion of the Company's sales are made through indirect channels and are difficult to predict. Any significant reduction in customer demand in a particular quarter would therefore have an almost immediate adverse effect on the Company's operating results. If significant shortfalls were to occur between forecasted and actual orders, as has occurred in the past and as may occur in the future, the Company might not be able to reduce its expenses proportionately and in a timely manner. This could compound the resulting adverse effect on operating results. In addition, in order to promptly fill orders, the Company maintains inventories of finished goods and components with long lead times, which could result in writedowns of inventory in the future and could contribute to quarterly fluctuations in operating results. The 22 23 Company's gross profit margins may be adversely affected by the introduction of new products and changes in product mix. Accordingly, there can be no assurance that the Company will be able to sustain its current gross profit margins. The Company also may reduce prices or increase spending in response to competition or to pursue new market opportunities, which may adversely affect the Company's operating results. Due to the foregoing factors, the Company's operating results may be below the expectations of public market analysts and investors in some future quarters, which would likely result in a decline in the trading price of the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on a Limited Number of Products for Current and Future Operating Results The Company focuses exclusively on document imaging hardware and software. Historically, the Company has derived substantially all of its net sales from its family of accelerator boards, software development tools and accessories. This family of products is expected to continue to account for a majority of the Company's net sales for the foreseeable future. The Company believes that as its family of accelerator boards and related products continues to mature, sales of these products will grow at slower than historical rates, and there can be no assurance that the Company will be able to sustain the current level of growth of such sales. Any reduction in the demand for the Company's family of accelerator boards and related products due to introductions by the Company's competitors of products based on new technologies or new industry standards, a decline in the demand for computer systems or document imaging products, product obsolescence or any other reason would have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Products." In January 1995, the Company introduced its Ascent line of document image processing application software for Microsoft Windows. The Company is directing a significant amount of its research and development expenditures to the development of its Ascent products and plans to devote significant marketing efforts to promotion of its Ascent products. The Company believes that its Ascent products, together with other products under development, will contribute an increasing share of the Company's net sales in the future as the market for accelerator boards and related products continues to mature. Accordingly, the Company believes that its operating results will in the future become substantially dependent on the Company's ability to increase sales of its Ascent products, achieve market acceptance of new products 23 24 under development and develop future products. There can be no assurance that the Company will be successful in increasing sales of its Ascent products, achieving market acceptance of its new products under development or developing additional products. Failure to increase sales of the Company's Ascent products, achieve market acceptance of products under development or develop additional products would have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Products." Dependence on Imaging, Workflow and Document Management Market and Component Software Strategy Substantially all of the Company's net sales have been attributable to sales of document imaging products, and these products are currently expected to account for substantially all of the Company's future net sales. The imaging, workflow and document management market is a rapidly evolving market. If this 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 Company has focused its product development efforts on a component software strategy rather than seeking to develop a complete turnkey imaging solution. If the component software approach does not continue to achieve significant market acceptance, or develops more slowly than the Company expects, the Company's business, operating results, cash flows and financial condition could be materially adversely affected. See "Business -- Industry Background." Rapid Technological Change The market for the Company's document image processing products is characterized by rapid technological advances, changes in end user requirements, frequent new product introductions and enhancements and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render the Company's existing products and products under development obsolete and unmarketable. For example, increasing speeds of future generation Pentium-class microprocessors in standard PCs could reduce demand for the Company's hardware accelerator products, which could have a material adverse effect upon the Company's business, operating results, cash flows and financial condition. The Company's future success will depend upon its ability to address the increasingly sophisticated needs of its customers by enhancing its current products and by developing and introducing on a timely basis new products that lead or keep pace with technological developments and emerging industry standards, respond to evolving end user requirements and achieve market acceptance. Any failure by the Company to anticipate or adequately respond to technological developments or end user requirements, or any significant delays in product development or introduction could result in a loss of competitiveness or net sales. In the past, the Company has experienced delays in the introduction of new products and product 24 25 enhancements. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new products on a timely basis or at all, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and sale of these products, or that any of its new products or product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for technological or any other reasons, to develop, introduce and sell its products in a timely manner, the Company's business, operating results, cash flows and financial condition would be materially adversely affected. From time to time, the Company or its present or future competitors may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycles of the Company's existing products. There can be no assurance that announcements of currently planned or other new products will not cause customers to delay or alter their purchasing decisions in anticipation of such products, which could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Products," "-- Competition" and "-- Technology/Research and Development." Impact of Competition The market for imaging, workflow and document management hardware and software components is highly competitive and is characterized by rapid changes in technology and frequent introductions of new platforms and features. The Company expects competition to increase as other companies introduce additional and more competitive products in this developing market. In its accelerator board and developer toolkit business, the Company competes primarily with a number of small private companies. In its Ascent business, to which the Company is a relative newcomer, Kofax competes indirectly against large suppliers of turnkey systems, as well as directly with other component software vendors, more of whom are expected to enter the market over the next few years. Some of the Company's existing and potential competitors in the application software segment of the document imaging market have larger technical staffs, greater brand name recognition and market presence, more established and larger marketing and sales organizations and substantially greater financial resources than the Company. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. The Company believes that the competitive factors affecting the market for the Company's products include product performance, price and quality; product functionality and features; the availability of 25 26 products for existing and future platforms; the ease of integration of the products with other hardware and software components of document imaging systems; and the quality of support services, product documentation and training. The relative importance of each of these factors depends upon the specific customer involved. There can be no assurance that the Company will be able to compete effectively with respect to any of these factors. The Company's present or future competitors may be able to develop products comparable or superior to those offered by the Company or adapt more quickly than the Company to new technologies or evolving customer requirements. In order to remain competitive in the document imaging market, the Company must respond to technological change, customer requirements, and competitors' current products, product enhancements and innovations. The Company introduced its Ascent line of application software products in January 1995, has recently developed its new generation of accelerator boards and is currently developing additional product enhancements to these products in an effort to address customer requirements and respond to technological changes. However, there can be no assurance that the Company will successfully complete the development or introduction of these products on a timely basis or that these products will achieve market acceptance. Accordingly, there can be no assurance that the Company will be able to continue to compete effectively in the document imaging market, that competition will not intensify or that future competition will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Business -- Competition." Dependence on Scanner Manufacturers The Company's accelerator boards and Ascent Capture software are used in conjunction with high-end production scanners which are manufactured and supplied by several domestic and Japanese scanner manufacturers and vendors. The Company's sales of these products are dependent on the number of scanners that are produced and distributed by these scanner manufacturers and vendors. Any decrease in the number of scanners in the marketplace may decrease the number of accelerator boards sold by the Company. Manufacturers and distributors of scanners may encounter a variety of difficulties that may reduce the number of scanners produced and shipped to consumers during the period of such difficulty, all of which are beyond the Company's control. There can be no assurance that manufacturers and distributors will not experience difficulties in producing or shipping scanners or, if such difficulties arise, that they will be resolved in a timely manner, resulting in a lower than expected number of scanners in the marketplace. Any decrease in the number of scanners produced and shipped to consumers could materially adversely effect the Company's business, operating results, cash flows and financial condition. 26 27 Dependence Upon Distribution Channels The Company relies heavily on its distributors and resellers for the marketing and distribution of its products. In fiscal 1998, two of the Company's distributors, Law-Cypress Distributing Co. and Tech Data Corporation accounted for 17% and 13%, respectively, of the Company's total net sales. The concentration of sales to a limited number of distributors increases the credit risk of sales to such distributors. If one or more of the Company's principal distributors became insolvent or otherwise terminated its relationship with the Company, the Company's business, operating results, cash flows and financial condition could be materially adversely affected. The Company's products are hardware and software components of complete imaging, workflow and document management systems. As such, sales of the Company's products depend, in significant part, upon purchases of imaging, workflow and document management systems, which include products supplied by vendors other than the Company. As a result, sales of the Company's products are subject to a variety of factors outside of the Company's control, including the ability of its resellers to successfully sell their complete solutions to end users. The Company's agreements with resellers and distributors do not require minimum purchases, are generally not exclusive and in many cases may be terminated by either party without cause. There can be no assurance that these resellers and distributors will continue to carry the Company's products or that they will give a high priority to the marketing of the Company's products. In addition, there can be no assurance that the Company will retain any of its current resellers or distributors or that, if the Company were to lose any reseller or distributor, the Company would be successful in recruiting replacement organizations to represent it. Any changes in the Company's distribution channels could materially adversely affect the Company's business, operating results, cash flows and financial condition. See "Business -- Sales and Distribution." Dependence on Intellectual Property and Proprietary Rights The Company currently holds no patents and relies on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements, licensing arrangements and other security measures (which afford only limited protection) to establish and protect its software, proprietary algorithms and other proprietary technology. There can be no assurance that the Company will be successful in protecting its proprietary technology, or that the Company's competitors will not independently develop products or technologies that are substantially equivalent or superior to the Company's products and technologies. It is possible that third parties will copy or reverse engineer portions of the Company's products or otherwise obtain and use information which the Company regards as proprietary. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. The failure or inability of the Company to protect its intellectual property rights could have a material adverse effect on its business, operating results, cash flows and financial condition. 27 28 The PC hardware and software industry is characterized by vigorous protection of intellectual property rights, which has resulted in significant and often protracted and expensive litigation. Litigation may be necessary to protect the Company's intellectual property rights and trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. There can be no assurance that infringement, invalidity, right to use or ownership claims by third parties will not be asserted against the Company in the future. The Company expects that it will increasingly be subject to such claims as the number of products and competitors in the document image processing market grows and the functionality of such products overlaps with other industry segments. If any claims or actions are asserted against the Company, the Company may seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that a license will be available upon reasonable terms if at all. In addition, should the Company decide to litigate such claims, such litigation could be expensive, protracted and time consuming, could divert management's attention from other matters, could cause product shipment delays and could materially adversely affect the Company's business, operating results, cash flows and financial condition, regardless of the outcome of the litigation. See "Business -- Intellectual Property." Dependence on Suppliers and Subcontractors The Company purchases circuit boards, integrated circuits and other components from third parties. The Company's dependence on third-party suppliers involves several risks, including limited control over pricing, availability, quality and delivery schedules. The Company is dependent on sole-source suppliers for ASICs and certain other components used in its products. The Company generally purchases sole-sourced components pursuant to purchase orders placed in the ordinary course of business and has no guaranteed supply arrangements with any of its sole-source suppliers. There can be no assurance that the Company will not experience quality control problems or supply shortages with respect to these components in the future. Any quality control problems or interruptions in supply with respect to one or more components could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. Because of the Company's reliance on these suppliers, the Company may also be subject to increases in component costs, which could materially adversely affect its business, operating results, cash flows and financial condition. See "Business -- Manufacturing and Suppliers." 28 29 The Company relies on third-party subcontractors for the manufacture of certain of its products and components, such as cable assemblies and circuit boards. Reliance on third-party subcontractors involves several risks, including the potential inadequacy of capacity, the unavailability of or interruptions in access to certain process technologies and reduced control over product quality, delivery schedules, manufacturing yields and costs. Shortages of raw materials or production capacity constraints at the Company's subcontractors could negatively affect the Company's ability to meet its production obligations and result in increased prices for, or unavailability of, affected parts. Any such reduction, constraint or unavailability could result in shipment delays of the Company's products or increases in the prices of components, either of which could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Business -- Manufacturing and Suppliers." Dependence on Key Personnel The Company's success depends on the continued service of key management personnel, including David S. Silver, Chief Executive Officer. None of the Company's personnel is subject to an employment agreement with the Company. In addition, the competition to attract, retain and motivate qualified technical, sales and operations personnel is intense. The Company has at times experienced, and continues to experience, difficulty in recruiting qualified personnel, particularly in software development and customer support. The Company's ability to compete effectively and to manage future anticipated growth will also require the Company to recruit additional qualified personnel. There can be no assurance that the Company can retain its key personnel or attract other qualified personnel in the future. The failure to attract or retain such persons could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Business -- Employees". Dependence on Capital Spending Substantially all of the Company's net sales are derived from the sale of hardware and software components for use in imaging, workflow and document management systems purchased by end users such as large corporations and domestic and foreign governmental agencies. The decision to purchase an imaging, workflow and document management system generally involves a significant commitment of capital, with the attendant delays associated with significant capital expenditures. The Company's future success is directly dependent upon the capital expenditure budgets of its customers and the continued demand by such customers for imaging, workflow and document management systems. 29 30 Certain industries that utilize imaging, workflow and document management systems, such as the financial services industry, are highly cyclical, and companies in such industries may experience economic downturns, which could lead to significant reductions in capital expenditures. In addition, many domestic and foreign governmental agencies have experienced budget deficits that have also led to significant reductions in capital expenditures. The Company's operations may in the future be subject to substantial period-to-period fluctuations as a consequence of such industry patterns and such factors affecting capital spending. There can be no assurance that any such decrease in capital spending will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. Risks Associated With International Sales In fiscal 1998, 1997 and 1996, international sales represented approximately 33%, 34% and 36%, respectively, of the Company's net sales, and the Company believes that its future growth is dependent in part upon its ability to increase sales in international markets. The Company intends to attempt to continue to expand its operations outside of the United States and enter additional international markets, which will require significant management attention and financial resources. There can be no assurance, however, that the Company will be able to successfully maintain or expand its international sales. International sales are subject to inherent risks, including changes in regulatory requirements, tariffs and other barriers, fluctuating exchange rates, difficulties in staffing and managing foreign sales and support operations and the possibility of greater difficulty in accounts receivable collection. To date, the Company has avoided the risk of fluctuating exchange rates associated with international sales by selling its products in United States currency, however, there can be no assurance that the Company will be able to continue to do so. There can be no assurance that any of these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, operating results, cash flows and financial condition. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Overview" and "-- Results of Operations - -- Net Sales." Risk of Defects The Company has occasionally discovered errors or defects in its products after their commercial shipment. Although to date such defects and errors have not been significant, there can be no assurance that significant defects and errors will not be discovered in new products, existing products or in new versions or enhancements of existing products, and if discovered, will be successfully and timely corrected. Discovery of errors or defects in the Company's products after 30 31 commercial shipment could result in adverse customer reaction, negative publicity regarding the Company or its products, a delay in or failure to achieve market acceptance or a diversion of management and product development resources, any of which could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. Potential Effect of Anti-Takeover Provisions 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, qualifications, limitations and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. 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 could have the effect of delaying or preventing a change of control. Further, Section 203 of the General Corporation Law of Delaware prohibits the Company from engaging in certain business combinations with interested stockholders. These provisions may have the effect of delaying or preventing a change in control of the Company without action by the stockholders, and could therefore adversely affect the price of the Common Stock. Risks Associated With Acquisitions. From time to time, the Company expects to make acquisitions of, or significant investments in, businesses that offer complementary products and technologies. Such future acquisitions or investments would expose the Company to the risks commonly encountered in acquisitions of businesses. Such risks include, among others, difficulty of assimilating the operations, information systems and personnel of the acquired businesses; the potential disruption of the Company's ongoing business; the inability of management to maximize the financial and strategic position of the Company through the successful incorporation of acquired employees and customers; the maintenance of uniform standards, controls, procedures and policies; and the impairment of relationships with employees and customers as a result of any integration of new management personnel. There can be no assurance that any potential acquisition will be consummated or, if consummated, that it will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 31 32 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. See "Market for Registrant's Common Stock and Related Stockholder Matters". Year 2000 Issues. It is possible that the currently installed computer systems, software products or other business systems of the Company's distributors, resellers, suppliers, manufacturers or customers, working either alone or in conjunction with other software systems, will not accept input of, store, manipulate and output dates in the Year 2000 or thereafter without error or interruption (the "Year 2000 Problem"). The Company's software products do not have any material Year 2000 Problems. In addition, the Company has completed a review of its business systems, including its computer systems, and based on information gathered to date, has determined that such systems are also not subject to any material Year 2000 Problems. The Company is querying its distributors, resellers, suppliers, manufacturers and customers as to their progress in identifying and addressing Year 2000 Problems. The failure of the Company or its distributors, resellers, suppliers, manufacturers and customers to complete the conversions or upgrades necessary to fully address the Year 2000 Problem in a timely manner could have a material adverse effect on the Company's business, results of operations, cash flows and financial condition. ITEM 2. PROPERTIES The Company currently leases approximately 44,000 square feet of space in Irvine, California, which serves as its headquarters. This space is used for research and development, manufacturing, sales and marketing, customer support and administration. The Company's lease expires in February 1999. The Company expects to relocate its headquarters in March 1999 to a 59,000 square foot facility in an adjoining business park in Irvine, California. The new lease expires in March, 2004, and has two three-year options to extend the lease. Rent expense will increase annually as a result of this relocation. The Company also leases approximately 10,000 square feet of space in Tyngsboro, Massachusetts, which is occupied by the Ascent Storage development team. This lease expires in August 2000. 32 33 The Company also maintains a number of sales and support offices in the United States and Europe. The Company believes that existing field sales and support facilities are adequate to meet its current requirements. The Company plans to continue to expand its field sales and support facilities worldwide where appropriate to further penetrate existing and new market opportunities. ITEM 3. LEGAL PROCEEDINGS On September 26, 1997, VisionShape, Inc. ("VisionShape") filed suit against the Company in the Superior Court of Orange County, California. VisionShape claims that the Company's Adrenaline accelerator boards prevent the use of software other than the Company's software, which, the complaint alleges, creates a monopoly or otherwise constitutes a tying arrangement in violation of state and federal antitrust laws. VisionShape seeks unspecified monetary damages and costs as well as equitable remedies, including an order enjoining the Company from selling its Adrenaline accelerator boards. VisionShape also seeks treble damages and attorneys' fees. On May 27, 1998, the Superior Court held that VisionShape failed to state a cause of action against the Company and ordered the suit dismissed on July 15, 1998. The dismissal is subject to appeal and the Company and VisionShape are discussing settlement options. Based upon information currently available to the Company, the Company believes VisionShape's claims are without merit and intends to contest vigorously any action against the Company. However, it is too early to determine the outcome of such suit and there can be no assurance as to the eventual outcome of such actions. Any determination against the Company in the litigation or the settlement of such claims could have a material adverse effect on the Company's business, results of operation, cash flows and financial condition. The Company is not a party to any other material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 1998. 33 34 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "KOFX". The Company completed its initial public offering of its Common Stock on October 10, 1997 at an offering price of $11.00 per share. The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported by the Nasdaq National Market.
High Low ------ ------ Fiscal 1998: Second Quarter (from October 10, 1997) $11.75 $4.00 Third Quarter $ 8.00 $5.00 Fourth Quarter $ 8.25 $6.125
As of June 30, 1998, the number of stockholders of record was 191. This number does not account for Common Stock registered in street name. Accordingly, the actual number of holders of record of the Company's Common Stock may be significantly greater than the number indicated above. The Company has never declared or paid any cash dividends on shares of its Common Stock. The Company currently intends to retain all available funds for use in the operation of its business, or to acquire or invest in complementary businesses or products or obtain the right to use complementary technologies, and does not intend to pay any cash dividends in the foreseeable future. Future cash dividends, if any, will be determined by the Board of Directors. The payment of cash dividends by the Company is restricted by the Company's current bank credit facilities, which contain restrictions prohibiting the Company from paying any cash dividends without the bank's prior approval, and future borrowings may contain similar restrictions. On April 27, 1998, the Company announced that its board of directors had authorized a program for repurchase of up to 500,000 shares, or approximately 9.5%, of Kofax's outstanding Common Stock, to be used to fund stock option exercises, employer equity compensation plans, and an employee stock purchase plan. The Company repurchased 100,000 shares of its common stock during fiscal 1998 for approximately $0.6 million. 34 35 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below as of and for each of the five years in the period ended June 30, 1998 have been derived from the audited consolidated financial statements and notes thereto audited by Deloitte & Touche LLP, independent auditors, of which the consolidated financial statements and notes thereto as of June 30, 1998 and 1997 and for each of the three years in the period ended June 30, 1998 are included elsewhere in this Annual Report on Form 10-K. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.
FISCAL YEAR ENDED JUNE 30, --------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales $33,375 $29,266 $ 24,964 $21,085 $18,076 Cost of sales 7,819 7,720 7,926 7,218 6,394 ------- ------- -------- ------- ------- Gross profit 25,556 21,546 17,038 13,867 11,682 Operating expenses: Sales and marketing 10,706 9,565 7,456 5,977 4,817 Research and development 7,826 6,653 5,090 3,693 3,455 General and administrative 2,672 1,936 1,748 1,554 1,383 Acquired in-process research and development costs -- -- 4,177 -- -- ------- ------- -------- ------- ------- Total operating expenses 21,204 18,154 18,471 11,224 9,655 ------- ------- -------- ------- ------- Income (loss) from operations 4,352 3,392 (1,433) 2,643 2,027 Other income, net 759 69 200 264 51 ------- ------- -------- ------- ------- Income (loss) before provision (benefit) for income taxes 5,111 3,461 (1,233) 2,907 2,078 Provision (benefit) for income taxes 1,968 1,326 (500) 1,096 586 ------- ------- -------- ------- ------- Net income (loss) $ 3,143 $ 2,135 $ (733) $ 1,811 $ 1,492 ======= ======= ======== ======= ======= Basic net income (loss) per share $ 0.75 $ 1.37 $ (0.82) ======= ======= ======== Diluted net income (loss) per share $ 0.62 $ 0.52 $ (0.82) ======= ======= ======== Basic weighted average common shares (Note 1) 4,197 1,319 1,305 ======= ======= ======== Diluted weighted average common shares (Note 1) 5,073 4,126 1,305 ======= ======= ======== Net income (loss) applicable to common stockholders $ 3,143 $ 1,801 $(1,067) ======= ======= ======= BALANCE SHEET DATA: Cash, cash equivalents and investments $20,865 $ 5,404 $ 3,514 $ 6,759 $ 5,119 Working capital 24,149 8,676 6,949 9,382 7,774 Total assets 32,115 16,327 14,141 13,018 10,631 Long-term notes payable -- 427 799 -- -- Total stockholders' equity(1) 27,625 12,254 10,106 10,832 9,008
- ---------- (1) Includes amounts attributable to the outstanding shares of the Company's Redeemable Convertible Preferred Stock, which was converted into common stock at the time of the Company's initial public offering. 35 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 "Factors That May Affect Future Operating Results". Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. 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 Annual 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. OVERVIEW Kofax Image Products was founded in 1985 to develop image processing accelerator boards that could be added to PCs and other desktop workstations to facilitate high-speed scanning, compression, manipulation and printing of document images. The products were targeted at the emerging market of document image processing. Today Kofax develops, markets and supports three product lines for imaging, workflow and document management applications. The fastest growing products are software applications that manage the capture and long-term storage of documents for production level workflow and document management systems. The original image processing hardware and development tools business is in its fourth generation, currently generates gross margins of approximately 70%, and continues to generate significant profit for investment into the faster growing software businesses. Fiscal year 1998 total software revenue was $10.2 million, or about 31% of revenue. This was a 70% increase over fiscal 1997 software revenue. Substantially all of this increased software revenue was generated from the Company's Ascent software business. During fiscal 1998 the Company signed and trained over 150 new Ascent resellers focused on document management and workflow solutions. Revenue from the Company's family of image processing boards and development tools has grown modestly over the past two years, and the Company expects that to continue for the foreseeable future. The Company believes that the accelerator board and development tools business will continue to account for a majority of 36 37 the Company's net sales for the next two to three years. The Company also expects that its Ascent software products, together with other products under development, will contribute an increasing share of the Company's net sales in the future. Net sales represent gross sales less discounts, returns and adjustments. The Company's net sales have grown from $287,000 in fiscal 1987 to $33.4 million in fiscal 1998. The Company's revenue growth has resulted from the expansion of the document image processing market, as well as from the growing market acceptance of the Company's products. The Company typically ships its products within a short period after acceptance of purchase orders from distributors and other customers. Accordingly, the Company typically does not have a material backlog of unfilled orders at the end of any quarter. Net sales of scanner enhancement products (KIPP, Adrenaline, and ImageControls) amounted to 74.5% of fiscal 1998 revenue. Net sales of Ascent component software products amounted to 25.5% of fiscal 1998 revenue compared to 17.7% in fiscal 1997 and 8.5% in fiscal 1996. International sales (primarily to western European countries) accounted for approximately 33%, 34% and 36% of net sales during fiscal 1998, 1997 and 1996, respectively. Approximately 4%, 5%, and 6% of international sales during fiscal 1998, 1997, and 1996, respectively, were attributable to countries in Asia and the Pacific Rim. Sales to Asia and Pacific Rim countries were relatively flat in absolute dollars from fiscal 1997 to fiscal 1998. The Company does not expect that sales from this region will increase until the current economic difficulties in Asia and the Pacific Rim end. The Company has not had any sales from Russia or China to date, and the Company has no current sales or marketing plans for Russia or China. Management expects that the Company's international operations will continue to provide a significant portion of total net sales; however, international sales could be adversely affected if the U.S. dollar continues to strengthen against international currencies. To date the Company has not had any exposure to foreign currency fluctuations. The adoption of the "Euro" by the European community in 1999 may lead the Company to transact its European sales in "Euros", which may result in the realization of foreign exchange gains or losses in the future. The Company sells its products primarily through a two-tier channel of stocking distributors and solution providers, such as system integrators and value-added resellers (VARs). Net sales through stocking distributors amounted to 79% of fiscal 1998 revenue. The Company has six domestic and three European sales offices to support its distributors and resellers. Revenue from hardware and software sales is recognized at the time of shipment in accordance with AICPA Statement of Position 91-1, Software Revenue Recognition. Distributors have certain rights of return and exchange privileges. The Company's distributors generally do not stock significant amounts of inventory of 37 38 the Company's products, as these products are typically incorporated by resellers into complete imaging, workflow and document management systems which are configured shortly before scheduled delivery to end-user customers. The Company records estimates for such rights of return and exchange privileges based on historical experience. The Company provides a warranty for its products against defects in materials and workmanship. A provision for estimated warranty costs is recorded at the time of sale. The Company has been profitable for the last 28 quarters, with the exception of the quarter ending December 1995, when $4,158,500 was charged to acquired in-process research and development expenses in connection with the acquisition of certain net assets of LaserData, Inc. ("LaserData"). See Note 3 of Notes to Consolidated Financial Statements. Cost of sales primarily consist of the costs of components and subassemblies, labor and manufacturing overhead and, with respect to the Company's software products, software duplication and royalty expenses. The Company believes that its gross margins reflect the high content of proprietary firmware in the Company's hardware accelerator boards as well as the increasing percentage of total software revenue in the Company's product mix. Sales and marketing expenses consist primarily of salaries and commissions, customer support, trade shows, advertising and other promotional expenses. General and administrative expenses consist of personnel costs for administration, finance, information systems, human resources and general management, as well as professional services. Research and development expenses consist primarily of personnel costs and overhead costs relating to occupancy. The Company's research and development personnel costs increased substantially in January 1996 because of the LaserData acquisition. Despite the fact that the Company's net sales have increased, research and development expenses as a percentage of net sales are relatively high because of the high software content of the Company's KIPP and Adrenaline family of products and the development of its Ascent application software products. The Company expects that research and development expenses will continue to increase in absolute amounts and will fluctuate as a percentage of net sales, depending upon the timing of material research and product development projects. As of June 30, 1998, the Company did not have any capitalized software development expenses. See Note 2 of Notes to Consolidated Financial Statements. The Company expects the effective tax rate in future periods to approximate the statutory rate. 38 39 RESULTS OF OPERATIONS The following table sets forth certain income and expense items as a percentage of net sales for the periods indicated.
FISCAL YEAR ENDED JUNE 30, -------------------------- 1998 1997 1996 ------- ------- ------ Net sales 100.0% 100.0% 100.0% Cost of sales 23.4 26.4 31.8 ------ ------ ------ Gross profit 76.6 73.6 68.2 Operating expenses: Sales and marketing 32.1 32.7 29.9 Research and development 23.5 22.7 20.4 General and administrative 8.0 6.6 7.0 Acquired in-process research and development costs 16.7 ---- ---- ---- Total operating expenses 63.6 62.0 74.0 ---- ---- ---- Income (loss) from operations 13.0 11.6 (5.8) Other income, net 2.3 0.2 0.9 ---- ---- ---- Income (loss) before provision (benefit) for income taxes 15.3 11.8 (4.9) Provision (benefit) for income taxes 5.9 4.5 (2.0) ---- ---- ---- Net income (loss) 9.4% 7.3% (2.9)% ==== ==== ====
Net Sales. Net sales were $33.4 million, $29.3 million and $25.0 million in fiscal 1998, 1997, and 1996, respectively. Net sales increased 14.0%, 17.2%, and 18.4% in fiscal 1998, 1997, and 1996, respectively. Revenues from the Ascent software business were $8.5 million, $5.1 million, and $2.1 million in fiscal 1998, 1997, and 1996, respectively. The increase in fiscal 1998 and 1997 net sales was primarily attributable to these increases in the sales of the Company's Ascent software products. Gross Profit. As a percentage of net sales, gross profit represented 76.6%, 73.6% and 68.2% in fiscal 1998, 1997 and 1996, respectively. The increase in the gross profit percentage in fiscal 1998 as compared to fiscal 1997 was primarily attributable to increasing sales of Ascent software products which have higher gross profit rates. The increase in fiscal 1997 was attributable to several factors, including increasing sales of the Company's Ascent software products, changes in accelerator board product mix and declining costs of DRAM components used in the Company's accelerator boards. Sales and Marketing. Sales and marketing expenses were $10.7 million, $9.6 million and $7.5 million in fiscal 1998, 1997 and 1996, respectively. As a percentage of net sales, sales and marketing expenses represented 32.1%, 32.7% and 29.9% in fiscal 1998, 1997 and 1996, respectively. The increase in fiscal 1998 was primarily attributable to approximately $0.7 million for continued growth of personnel and increased costs of compensation. The increase in fiscal 1997 was primarily attributable to approximately $0.7 million for increased personnel and marketing related expenses to launch NetScan(R), a product that was recently discontinued, and approximately $1.2 million for the continued growth of personnel and promotional expenses for the Ascent software products. The Company expects that sales and marketing expenses will continue to increase in absolute dollar amounts and will fluctuate as a percentage of net sales. 39 40 Research and Development. Research and development expenses were $7.8 million, $6.7 million and $5.1 million in fiscal 1998, 1997 and 1996, respectively. As a percentage of net sales, research and development expenses represented 23.5%, 22.7% and 20.4% in fiscal 1998, 1997 and 1996, respectively. Approximately $1.2 million and $0.7 million, respectively, of the fiscal 1998 and fiscal 1997 increases in research and development expenditures were primarily due to increased compensation costs for personnel, consultants, and contract labor working on Ascent Capture, Ascent Storage, Adrenaline, ImageControls, and NetScan product development. $0.8 million of the fiscal 1997 increase was related to the acquisition of the Ascent Storage development team which was only included in fiscal 1996 results for six months. The Company expects that research and development expenses will continue to increase in absolute dollar amounts and will fluctuate as a percentage of net sales depending upon the timing of material research and development projects. General and Administrative. General and administrative expenses were $2.7 million, $1.9 million and $1.7 million in fiscal 1998, 1997 and 1996, respectively. As a percentage of net sales, general and administrative expenses were 8.0%, 6.6% and 7.0% in fiscal 1998, 1997 and 1996, respectively. The increase in fiscal 1998 was primarily attributable to increased information systems expenses for compensation and infrastructure additions, and the increased accounting, legal, and other expenses related to the Company becoming a public company. The Company anticipates that it will incur increased general and administrative costs in the future related to the additional insurance and administrative requirements of a public company. Acquired In-Process Research and Development Costs. Acquired in-process research and development costs of $4.2 million in fiscal 1996 represented an allocation of a portion of the purchase price of the acquisition of certain net assets of LaserData to in-process research and development costs, which had no future alternative use, based on management assumptions. Other Income, Net. Other Income, net is primarily interest income earned on short-term investments and investments held to maturity, less interest expense on long-term notes payable. Other Income, net was $0.8 million, $0.1 million, and $0.2 million in fiscal 1998, 1997, and 1996, respectively. As a percentage of net sales, other income, net was 2.3%, 0.2%, and 0.9% in fiscal 1998, 1997, and 1996, respectively. The increase in fiscal 1998 was due to interest income from the $11.9 million increase in short-term investments from the proceeds of the Company's initial public offering and a reduction in interest expense from repayment of long-term notes payable. The decrease in fiscal 1997 was primarily attributable to a decrease in short-term investments and an increase in interest expense on long-term notes payable; both of which resulted from the fiscal 1996 acquisition of certain net assets of LaserData. 40 41 LIQUIDITY AND CAPITAL RESOURCES The Company financed its operations and capital requirements from 1986 through 1989 from the sale of approximately $4.0 million of preferred stock and, thereafter, through cash flow from operations. In October 1997, the Company completed its initial public offering selling 1,300,000 shares of its common stock, and received net proceeds, after subtracting expenses incurred in the offering, of approximately $12.6 million. The Company's primary sources of funds at June 30, 1998 consisted of approximately $20.9 million of cash, cash equivalents and investments. As of June 30, 1998 cash and cash equivalents totaled $16.5 million, an increase of $15.7 million from June 30, 1997. Net cash provided by operating activities during fiscal 1998 was approximately $5.3 million, and was generated primarily from net income, depreciation, and amortization. During fiscal 1998, the Company used cash in investing activities of approximately $0.9 million for capital expenditures and additions to short-term investments. The Company currently has no significant capital expenditure commitments. Net cash provided by financing activities was $11.4 million, primarily resulting from the proceeds from the Company's initial public offering. The Company has an unsecured $2.0 million revolving credit line with Silicon Valley Bank (the "Bank") and as of June 30, 1998 had no outstanding balance under the revolving line of credit. The revolving line of credit expires in January 1999, and the Company intends to enter into negotiations with the Bank for the renewal of the line of credit. The line of credit agreement requires the Company to maintain its primary banking relationship with the Bank while any obligations to the Bank remain outstanding, prohibits the incurrence of additional debt from sources other than the Bank, except for purchases or leases of equipment up to $700,000, requires the Company to maintain certain tangible net worth levels and profitability levels and restricts the payment of dividends without the Bank's prior approval. In January 1996, the Company entered into a three-year, $1,150,000 term loan. The proceeds from the Company's public offering were used to prepay the remaining term loan balance of $0.7 million. On April 24, 1998 the Company's board of directors authorized a program for repurchase of up to 500,000 shares, or approximately 9.5%, of Kofax's outstanding Common Stock, to be used to fund stock option exercises, employer equity compensation plans, and an employee stock purchase plan. The Company repurchased 100,000 shares of its common stock during fiscal 1998 for approximately $0.6 million. Aside from this program, the Company currently has no significant capital spending or purchase commitments other than normal purchase commitments and commitments under facilities leases. 41 42 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. See "Factors That May Affect Future Operating Results -- Risks Associated with Acquisitions". Quantitative and Qualitative Disclosures about Market Risk At June 30, 1998, the Company had an investment portfolio of fixed income securities, including those classified as cash equivalents, of approximately $20.0 million. These securities are subject to interest rate fluctuations. An increase in interest rates could adversely affect the market value of the Company's fixed income securities. As of June 30, 1998, the weighted average maturity of the Company's portfolio was 44 days. The market value changes for increases in short-term treasury security yields are not material due to the overall short-term maturity of the Company's portfolio. The Company limits its exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for its fixed income portfolios. At the present time, the maximum average maturity of the Company's overall investment portfolio is limited by policy to 36 months. The guidelines also establish credit quality standards, limits on exposure to one issue, issuer, as well as the type of instrument. Due to the limited duration and credit risk criteria established in the Company's guidelines, the exposure to market and credit risk is not expected to be material. The Company does not use derivative financial instruments in its investment portfolio to manage interest rate risk. RECENT ACCOUNTING PRONOUNCEMENT For the years beginning after July 1, 1998, the Company will adopt SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The Company is reviewing the impact of the disclosures required by such statements on its financial statements. 42 43 For fiscal years beginning after December 31, 1997, the Company will adopt Statement of Position 97-2, "Software Revenue Recognition". The Company is reviewing the impact of this Statement on its financial statements, and does not believe this Statement will have a material effect on its financial statements. YEAR 2000 ISSUES. It is possible that the currently installed computer systems, software products or other business systems of the Company's distributors, resellers, suppliers, manufacturers or customers, working either alone or in conjunction with other software systems, will not accept input of, store, manipulate and output dates in the Year 2000 or thereafter without error or interruption (the "Year 2000 Problem"). The Company's software products do not have any material Year 2000 Problems. In addition, the Company has completed a review of its business systems, including its computer systems, and based on information gathered to date, has determined that such systems are also not subject to any material Year 2000 Problems. The Company is querying its distributors, resellers, suppliers, manufacturers and customers as to their progress in identifying and addressing Year 2000 Problems. The failure of the Company or its distributors, resellers, suppliers, manufacturers and customers to complete the conversions or upgrades necessary to fully address the Year 2000 Problem in a timely manner could have a material adverse effect on the Company's business, results of operations, cash flows and financial condition. 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 43 44 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 The executive officers and directors of the Company, and their ages as of June 30, 1998, are as follows:
NAME AGE POSITION ---- --- -------- David S. Silver 40 Chief Executive Officer, President and Chairman of the Board Dean A. Hough 39 Vice President, Engineering and Director Richard M. Murphy 51 Vice President, Sales Ronald J. Fikert 49 Vice President, Finance, Chief Financial Officer and Secretary Kevin Drum 39 Vice President, Marketing Alexander P. Cilento(2) 49 Director William E. Drobish(2) 59 Director Clifford L. Haas(1) 41 Director B. Allen Lay(1) 63 Director David C. Seigle(1)(2) 58 Director
- ---------- (1) Member of the Compensation Committee. (2) Member of Audit Committee. David S. Silver co-founded the Company in August 1985 and has served as President and Chief Executive Officer and a director of the Company since its inception. From 1982 to 1985, Mr. Silver was employed by FileNet Corporation, a manufacturer of document image processing systems, as a member of the development team for the FileNet imaging system. Prior to 1982, Mr. Silver held various engineering positions with MAI Basic Four Corporation, a manufacturer of computer equipment and associated application software programs. Dean A. Hough co-founded the Company in August 1985 and has served as a Vice President and a Director of the Company since that time. From 1983 to 1985, Mr. Hough was employed by FileNet Corporation, where he participated in the development of a variety of the imaging components of the FileNet imaging system. Prior to 1983, Mr. Hough held various design and engineering positions with MAI Basic Four Corporation and Scientific Atlanta, a manufacturer of scientific instruments and equipment. 44 45 Richard M. Murphy joined the Company as a Vice President, Sales in November 1989. From 1984 to 1989, Mr. Murphy held various sales management positions with Emulex Corporation, a manufacturer of computer storage, communications, graphics and peripheral products, where he served as Vice President, Domestic Sales from September 1987 to January 1989 and as Vice President, North American Sales from January 1989 to November 1989. Prior to 1984, Mr. Murphy held various sales positions with Hamilton-Avnet Electronics, Kierulff Electronics and Telefile Computer Products. Ronald J. Fikert joined the Company as Vice President, Finance in February 1990. From March 1989 to February 1990, Mr. Fikert worked as an independent management consultant. From 1984 to 1989, Mr. Fikert was employed by General Monitors, a manufacturer of sensing, monitoring and detection equipment, where he served as Controller. From 1979 to 1984, he was employed by Modular Command Systems, a manufacturer of electronic communications hardware and software, as Vice President, Finance and Secretary. Prior to joining Modular Command Systems, Mr. Fikert was Director of Finance for Esterline Electronics, a manufacturer of electronic products, and was an accountant with Arthur Andersen & Co. Mr. Fikert is a Certified Public Accountant. Kevin Drum joined the Company in November 1992 and was promoted to Vice President, Marketing in July 1995. Prior to that time, his positions with the Company included Director of Marketing and Senior Product Manager. From 1984 to 1992, Mr. Drum was employed by Emulex Corporation, where he served as a senior product manager from 1988 to 1992. Alexander P. Cilento has been a member of the Company's Board of Directors since 1986. Since 1991, Mr. Cilento has been a General Partner of Aspen Venture Partners, a private venture capital investment partnership. From 1985 through 1991, Mr. Cilento was employed by 3i Securities Corporation, a venture capital investment firm, where he served as Vice President. William E. Drobish has been a member of the Company's Board of Directors since 1986. Since 1998, Dr. Drobish has been President of Ditrans, a developer of digital transceivers for the wireless industry, and since 1984 an instructor at the University of California, Irvine's Extension Program. Dr. Drobish was a founder, Vice President, director and Secretary of Silicon Systems, Inc., a manufacturer of integrated circuits. Dr. Drobish is also a director of Technology Modeling Associates, Inc., a provider of physical simulation software to support integrated circuit design and manufacturing. Clifford L. Haas has been a member of the Company's Board of Directors since 1987. Mr. Haas is a general partner of Sigma Partners and Sigma Associates, private venture capital investment partnerships, which he has been associated with since 1985. 45 46 B. Allen Lay has been a member of the Company's Board of Directors since 1990. Since 1982, Mr. Lay has been a general partner of Southern California Ventures, a private venture capital investment partnership. Mr. Lay also serves as a director of the following public companies: PairGain Technologies, Inc., a provider of telecommunications products; ViaSat, Inc., a provider of wireless telecommunications products; and Helisys, Inc., a provider of rapid prototyping systems. David C. Seigle has been a member of the Company's Board of Directors since 1992. From 1996 to 1998, Mr. Seigle was president of Technology's Edge, a franchisor of technology integrators. From 1992 to 1996 Mr. Seigle was a consultant and private investor. From 1982 to 1991, Mr. Seigle was employed by FileNet Corporation in various positions, including Senior Vice President of International Operations from 1987 to 1991. Mr. Seigle is currently a director of Interface Systems, Inc., a manufacturer and distributor of computer peripherals and software. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed in connection with its 1998 Annual Meeting of Stockholders under the heading "Compensation of Executive Officers." 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 to be filed in connection with its 1998 Annual Meeting of Stockholders 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 to be filed in connection with its 1998 Annual Meeting of Stockholders under the heading "Compensation Committee Interlocks and Insider Participation." 46 47 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form: 1. Consolidated Financial Statements Page ---- Independent Auditors' Report F-1 Consolidated Balance Sheets as of June 30, 1998 and 1997 F-2 Consolidated Statements of Operations for the years ended June 30, 1998, 1997 and 1996 F-3 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1998, 1997 and 1996 F-4 Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996 F-5 Notes to Consolidated Financial Statements F-6 2. Financial Statement Schedule for the three years ended June 30, 1998 Schedule II - Valuation and Qualifying Accounts All 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. (b) Reports on Form 8-K The Company filed no Current Reports on Form 8-K during the last quarter of the period covered by this Report. 47 48 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KOFAX IMAGE PRODUCTS, INC. Dated: September 28, 1998 /s/ Ronald J. Fikert ----------------------------- Ronald J. Fikert Chief Financial Officer POWER OF ATTORNEY We, the undersigned directors and officers of Kofax Image Products, Inc., do hereby constitute and appoint David S. Silver and Ronald J. Fikert, or either of them, with full power of substitution and resubstitution, our true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or either of them, or their substitutes, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulation, and requirements of the Securities and Exchange Commission in connection with this Annual Report on Form 10-K, including specifically, but without limitation, power and authority to sign for us or any of us in our names and in the capacities indicated below, any and all amendments; and we do hereby ratify and confirm all that the said attorneys and agents, or either of them, shall 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 28th day of September, 1998.
Signature Title --------- ----- /s/ David S. Silver Chairman, President, Chief Executive - ---------------------------------- Officer (principal executive officer) David S. Silver /s/ Ronald J. Fikert Vice President, Chief Financial - ---------------------------------- Officer, Treasurer and Secretary Ronald J. Fikert (principal financial and accounting officer) /s/ Alexander P. Cilento Director - ---------------------------------- Alexander P. Cilento /s/ William E. Drobish Director - ---------------------------------- William E. Drobish /s/ Clifford L. Haas Director - ---------------------------------- Clifford L. Haas /s/ Dean A. Hough Director - ---------------------------------- Dean A. Hough /s/ B. Allen Lay Director - ---------------------------------- B. Allen Lay /s/ David C. Seigle Director - ---------------------------------- David C. Seigle
48 49 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Kofax Image Products, Inc.: We have audited the accompanying consolidated balance sheets of Kofax Image Products, Inc. and its subsidiary (the Company) as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Kofax Image Products, Inc. and its subsidiary as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Costa Mesa, California July 31, 1998 49 50 CONSOLIDATED FINANCIAL STATEMENTS KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, ---------------------------- 1998 1997 -------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 16,522,200 $ 801,500 Investments (Note 4) 4,342,800 4,602,900 Accounts receivable, net of allowance for doubtful accounts and sales returns of $458,600 in 1998 and $422,900 in 1997 (Note 6) 5,260,800 4,133,800 Inventories (Note 5) 1,565,000 2,011,700 Deferred income taxes (Note 7) 606,000 566,700 Prepaid expenses and other current assets 342,000 204,500 ------------- ------------ Total current assets 28,638,800 12,321,100 PROPERTY: Machinery and equipment 5,343,900 4,878,800 Furniture and fixtures 905,500 865,900 Leasehold improvements 379,800 260,600 ------------- ------------ 6,629,200 6,005,300 Less accumulated depreciation and amortization (4,889,000) (4,040,100) ------------- ------------ Property, net 1,740,200 1,965,200 NONCURRENT DEFERRED INCOME TAXES (Note 7) 1,342,900 1,463,700 OTHER ASSETS, net 393,200 576,900 ------------- ------------ $ 32,115,100 $ 16,326,900 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of note payable (Note 6) $ -- $ 394,300 Accounts payable 1,207,200 771,900 Accrued compensation and related costs 1,237,000 1,044,100 Accrued warranty 148,400 185,400 Accrued cooperative marketing (Note 9) 445,200 335,500 Deferred revenue (Note 2) 588,200 356,400 Other accrued liabilities (Note 7) 863,800 557,900 ------------- ------------ Total current liabilities 4,489,800 3,645,500 LONG-TERM NOTES PAYABLE (Note 6) -- 427,100 REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 8), $.001 par value; 5,000,000 shares authorized; 2,667,002 shares issued and outstanding in 1997 -- 7,146,200 COMMITMENTS AND CONTINGENCIES (Notes 9 and 12) STOCKHOLDERS' EQUITY (Notes 1 and 8): Common stock, $.001 par value; 40,000,000 shares authorized; 5,307,416 and 1,327,256 shares issued and outstanding in 1998 and 1997, respectively 17,125,700 172,000 Retained earnings 11,135,900 4,936,100 Treasury Stock, 100,000 shares at cost (636,300) -- -------------- ------------ Total stockholders' equity 27,625,300 5,108,100 ------------- ------------ $ 32,115,100 $ 16,326,900 ============= ============
See accompanying notes to consolidated financial statements. 50 51 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, ------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Net sales (Notes 9 and 10) $ 33,375,100 $ 29,265,700 $ 24,964,000 Cost of sales 7,818,700 7,720,100 7,926,200 ------------ ------------ ------------ Gross profit 25,556,400 21,545,600 17,037,800 Operating expenses (Notes 3 and 9): Sales and marketing 10,706,400 9,565,300 7,456,600 Research and development 7,825,900 6,652,500 5,089,700 General and administrative 2,672,000 1,935,900 1,748,100 Acquired in-process research and development costs 4,176,800 ------------ ------------ ------------ Total operating expenses 21,204,300 18,153,700 18,471,200 ------------ ------------ ------------ Income (loss) from operations 4,352,100 3,391,900 (1,433,400) Other income, net (Note 6) 758,800 69,300 200,500 ------------ ------------ ------------ Income (loss) before provision (benefit) 5,110,900 3,461,200 (1,232,900) Provision (benefit) for income taxes (Note 7) 1,967,700 1,325,900 (499,800) ------------ ------------ ------------ Net income (loss) $ 3,143,200 $ 2,135,300 $ (733,100) ============ ============ ============ Basic net income (loss) per share $ .75 $ 1.37 $ (0.82) ============ ============ ============ Diluted net income (loss) per share $ .62 $ .52 $ (0.82) ============ ============ ============ Basic weighted average common shares 4,197,100 1,319,100 1,305,200 ============ ============ ============ Diluted weighted average common shares (Note 2) 5,072,600 4,125,800 1,305,200 ============ ============ ============ Net income (loss) applicable to common stockholders (Note 2) $ 3,143,200 $ 1,801,300 $ (1,067,100) ============ ============ ============
See accompanying notes to consolidated financial statements. 51 52 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended June 30, 1998, 1997 and 1996
COMMON STOCK ---------------------- RETAINED SHARES AMOUNT EARNINGS TOTAL --------- ----------- ---------- ---------- BALANCES, July 1, 1995 1,297,519 $ 151,900 $ 4,201,900 $ 4,353,800 Issuance of common stock 14,025 7,500 -- 7,500 Repurchase of common stock (125) -- -- -- Accretion to current liquidation or redemption value of preferred stock -- -- (334,000) (334,000) Net loss -- -- (733,100) (733,100) -------- ----------- ----------- ----------- BALANCES, June 30, 1996 1,311,419 159,400 3,134,800 3,294,200 Issuance of common stock 15,837 12,600 -- 12,600 Accretion to current liquidation or redemption value of preferred stock -- -- (334,000) (334,000) Net income -- -- 2,135,300 2,135,300 -------- ----------- ----------- ----------- BALANCES, June 30, 1997 1,327,256 172,000 4,936,100 5,108,100 Issuance of common stock for stock option plan 81,100 92,500 -- 92,500 Issuance of common stock for employee stock purchase plan 32,058 153,900 -- 153,900 Issuance of common stock for initial public offering 1,300,000 12,617,700 -- 12,617,700 Repurchase of common stock (100,000) -- -- (636,300) Accretion to current liquidation or redemption value of preferred stock -- -- (83,500) (83,500) Conversion of redeemable convertible preferred stock to common stock 2,667,002 4,089,600 3,140,100 7,229,700 Net income -- -- 3,143,200 3,143,200 -------- ----------- ----------- ----------- BALANCES, June 30, 1998 5,307,416 $17,125,700 $11,135,900 $27,625,300 ========= =========== =========== ===========
See accompanying notes to consolidated financial statements. 52 53 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, ------------------------------------ 1998 1997 1996 ----------- ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3,143,200 $ 2,135,300 $ (733,100) Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of effects of acquisition: Depreciation and amortization 1,511,400 1,496,500 1,162,200 Acquired in-process research and development costs -- -- 4,176,800 Provision for doubtful accounts and sales returns 35,700 41,400 199,800 Provision for inventory reserves (74,600) 189,600 184,100 Disposal of property 97,500 900 1,200 Deferred income taxes 81,500 (130,000) (1,523,100) Changes in operating assets and liabilities, net of effect of acquisition: Accounts receivable (1,162,700) (82,300) (656,900) Inventories 521,300 (331,800) (217,300) Prepaid expenses and other current assets (137,500) (14,200) (53,600) Accounts payable 435,300 58,700 (636,000) Accrued compensation and related costs 192,900 325,900 7,400 Accrued warranty (37,000) 30,700 (27,300) Accrued cooperative marketing 109,700 82,200 32,500 Other accrued liabilities and deferred revenue 537,700 (131,100) 208,300 ----------- ----------- ----------- Net cash provided by operating activities 5,254,400 3,671,800 2,125,000 CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in short-term investments 260,100 (1,829,800) 1,363,700 Acquisition of property (1,156,100) (1,532,200) (1,289,400) (Increase) decrease in other assets (44,100) 66,400 (139,300) Cash paid for acquisition -- -- (4,610,600) ----------- ----------- ----------- Net cash used in investing activities (940,100) (3,295,600) (4,675,600) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable -- -- 1,150,000 Principal payments on notes payable (821,400) (328,600) (487,500) Net proceeds from issuance of common stock 12,864,100 12,600 7,500 Repurchase of common stock (636,300) -- -- ----------- ----------- ----------- Net cash provided by (used in) financing activities 11,406,400 (316,000) 670,000 ----------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,720,700 60,200 (1,880,600) CASH AND CASH EQUIVALENTS, beginning of year 801,500 741,300 2,621,900 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $16,522,200 $ 801,500 $ 741,300 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 27,100 $ 108,800 $ 54,200 =========== =========== =========== Income taxes paid $ 1,396,000 $ 1,427,800 $ 1,018,000 =========== =========== =========== SCHEDULE OF NONCASH TRANSACTIONS -- The Company acquired certain assets of LaserData, Inc. during the year ended June 30, 1996 (Note 3). In conjunction with the acquisition, certain liabilities were assumed as follows: Fair value of assets acquired $ 1,394,800 Acquired in-process research and development costs 4,176,800 Acquired developed technology 652,100 Cash paid (4,610,600) ----------- Liabilities assumed $ 1,613,100 ===========
NONCASH ACTIVITY -- During the three years ending June 30, 1998, 1997 and 1996, the Company recorded accretion of $83,500, $334,000, and $334,000 respectively for the increase in the liquidation or redemption value of the redeemable convertible preferred stock (Note 8). See accompanying notes to consolidated financial statements. 53 54 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL AND NATURE OF OPERATIONS Kofax Image Products (the Company) was incorporated in California on August 13, 1985 and reincorporated in the State of Delaware on February 13, 1996. The reincorporation resulted in a change in the Company name from Kofax Image Products to Kofax Image Products, Inc., a change in the authorized number of shares of common stock from 10,000,000 to 40,000,000, and a change in the par value of both the Company's common stock and preferred stock from no par value to $.001 par value. All share amounts have been restated to reflect the reincorporation of the Company. The Company is a leading supplier of application software, developers toolkits, and image processing hardware for the imaging, workflow and document management market. The Company specializes primarily in the area of document capture, which involves converting paper documents into electronic images, indexing the documents, and then compressing and routing the images across a network for permanent storage. The Company's products are all designed for use on Windows-based PC platforms and industry standard network operating systems. The Company sells its products through a worldwide network of distributors, value added resellers, systems integrators, and Original Equipment Manufacturers (OEMs). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents -- Short-term investments which have an original maturity of three months or less are considered cash equivalents. Investments -- The Company accounts for its investments under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 requires investments to be classified into one of three categories: held-to-maturity securities, trading securities and available-for-sale securities. At June 30, 1998, all of the Company's investments were considered to be held-to-maturity securities, which are reported at amortized cost. The Company has the positive intent and ability to hold these securities to maturity. 54 55 Accounts Receivable -- Accounts receivable arise in the normal course of granting trade credit terms to customers. The Company performs credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses. At June 30, 1998 and 1997, 32.3% and 30%, respectively, of the Company's accounts receivable were due from two distributors. Inventories -- Inventories are stated at the lower of first-in, first-out cost or market. Property -- Property is stated at cost. Depreciation and amortization are computed using the straight-line method over the shorter of the estimated useful lives of the related assets, which are generally between two and five years, or the term of the related lease agreement, if applicable. Other Assets -- Other assets include intangible assets and prepaid license and royalty fees. Intangible assets represent the estimated value of the developed technology acquired from LaserData (Note 3). Such intangibles are amortized on a straight-line basis over three years, the estimated useful life. Prepaid license and royalty fees are recorded at cost and amortized based on estimated total revenue for the related product with an annual minimum equal to the straight-line amortization over a maximum period of two years. Software development costs -- Software development costs incurred subsequent to establishing the technological feasibility of a product would be capitalized and amortized over the life of the related product, which typically ranges from 12 to 24 months. Because the Company believes that its current process for developing new software products is essentially completed concurrently with the establishment of technological feasibility, no costs are capitalized as of June 30, 1998 and 1997. Long-Lived Assets -- The Company accounts for the impairment and disposition of long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS No. 121, long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. There was no impairment of the value of such assets for the year ended June 30, 1998. Income Taxes -- The provision for income taxes is determined in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. 55 56 Revenue Recognition and Right of Return -- Revenues from software and hardware sales are recognized upon the later of shipment of the related product or transfer of title and are in accordance with Statement of Position 91-1, Software Revenue Recognition, as there are no significant vendor obligations or post-contract support at the time of delivery. The Company also offers its distributors certain rights of return, price protection and exchange privileges on sales. The Company records estimates for such rights of return, price protection and exchange privileges at the time of product sale, based on historical experience. Revenue from service and post-contract customer support is recorded as deferred revenue and recognized ratably over the term of the contract. Product Warranty -- The Company provides a warranty for its products against defects in materials and workmanship. A provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. Net Income Per Share -- Effective December 15, 1997, the Company adopted SFAS No. 128, "Earnings per Share," which changes the method used to calculate earnings per share and requires restatement of all prior periods. The new requirements include a calculation of basic earnings per share, from which the dilutive effect of stock options is excluded, and a calculation of diluted earnings per share. Diluted net income per share amounts are based upon the weighted average number of common shares and dilutive common equivalent shares using the treasury stock method for each period presented. The Company believes that diluted net income per share provides the most meaningful comparison between periods. The following table reconciles the weighted average shares outstanding for basic and diluted earnings per share for the periods presented.
YEAR ENDED JUNE 30, ------------------------------------------ 1998 1997 1996 ------------------------------------------ Net income (loss) $3,143,200 $2,135,300 $ (733,100) Accretion to current redemption value of preferred stock (334,000) (334,000) ---------- ---------- ----------- Net income (loss) applicable to common stockholders $3,143,200 $1,801,300 $(1,067,100) Basic net income per common share: Weighted average of actual common shares outstanding 4,197,100 1,319,100 1,305,200 ========== ========== =========== Basic net income (loss) per common share $ 0.75 $ 1.37 $ (0.82) ========== ========== =========== Diluted net income (loss) per common share: Net income (loss) $3,143,200 $2,135,300 $(1,067,100) Weighted average of actual common shares outstanding 4,197,100 1,319,100 1,305,200 Conversion of preferred stock into common stock 745,300 2,667,000 ---------- ---------- ----------- Weighted average of common shares outstanding 4,942,400 3,986,100 1,305,200 Weighted average of common share equivalents: Weighted average options outstanding 343,800 383,800 Shares assumed to be repurchased using the treasury stock method (213,600) (244,100) ---------- ---------- ----------- Weighted average number of common and common equivalent shares 5,072,600 4,125,800 1,305,200 ========== ========== =========== Diluted net income (loss) per common share $ 0.62 $ 0.52 $ (0.82) ========== ========== ===========
56 57 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net Income (Loss) Applicable to Common Stockholders -- Net income applicable to common stockholders represents net income less the accretion attributable to the preferred stock redemption value (Note 8). Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation -- The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (Note 8). Supplier and Subcontractor Concentration -- The Company purchases circuit boards, integrated circuits and other components from third parties. The Company's dependence on third-party suppliers involves several risks, including limited control over pricing, availability, quality and delivery schedules. The Company is dependent on sole-source suppliers for ASICs and certain other critical components used in its products. The Company generally purchases sole-sourced components pursuant to purchase orders placed in the ordinary course of business and has no guaranteed supply arrangements with any of its sole-source suppliers. There can be no assurance that the Company will not experience quality control problems or supply shortages for these components in the future. Any quality control problems or interruptions in supply with respect to one or more components could have a material adverse effect on the Company's business, operating results and financial condition. Because of the Company's reliance on these suppliers, the Company may also be subject to increases in component costs which could materially adversely affect its business, operating results and financial condition. The Company relies on third-party subcontractors for the manufacture of certain products and components such as cable assemblies and circuit boards. Reliance on third-party subcontractors involves several risks, including the potential inadequacy of capacity, the unavailability of or interruptions in access to certain process technologies and reduced control over product quality, delivery 57 58 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) schedules, manufacturing yields and costs. Shortages of raw materials to or production capacity constraints at the Company's subcontractors could negatively affect the Company's ability to meet its production obligations and result in increased prices for affected parts. Any such reduction or constraint could result in shipment delays of the Company's products or increases in the prices of components, either of which could have a material adverse effect on the Company's business, operating results and financial condition. 3. ACQUISITION On December 30, 1995, the Company acquired certain assets and assumed certain liabilities of LaserData, Inc. ("LaserData"), a developer of optical storage and document management software and related hardware products. The purpose of the acquisition was to acquire LaserData's optical storage product (which was previously a component of LaserData's systems product), in-process research and development and the related development team. The asset acquisition was accounted for as a purchase, and the purchase price of $4,610,600, including transaction expenses, was allocated to tangible net liabilities acquired of $218,300, intangible assets of $652,100, and in-process research and development expenses of $4,176,800, which had no future alternative use, based on management assumptions. The accompanying consolidated statements of operations include the results of operations of LaserData, Inc. from its acquisition date of December 30, 1995. The following unaudited pro forma information presents results of operations of the Company for the year ended June 30, 1996 as if the asset acquisition had been consummated as of the beginning of fiscal 1996. The pro forma information is presented for information purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined enterprise. YEAR ENDED JUNE 30, 1996 ------------- Net sales $28,273,600 Net income (loss) $ (949,000) 58 59 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS Held-to-maturity investments were comprised of the following:
GROSS UNREALIZED MATURITY AMORTIZED ------------------ ESTIMATED DESCRIPTION DATES COST GAINS LOSSES FAIR VALUE - ------------------------ ------------ ----------- -------- -------- ----------- June 30, 1998 U.S. Treasury securities and obligations of U.S. government authorities and agencies Within one year $ 4,313,400 $ 600 $ 7,200 $ 4,306,800 Mortgage-backed securities Five years through ten years 29,400 1,100 28,300 ----------- ----- ------- ----------- $ 4,342,800 $ 600 $ 8,300 $ 4,335,100 =========== ===== ======= ===========
GROSS UNREALIZED MATURITY AMORTIZED ------------------ ESTIMATED DESCRIPTION DATES COST GAINS LOSSES FAIR VALUE - ------------------------ ------------ ----------- -------- -------- ----------- June 30, 1997 U.S. Treasury securities and obligations of U.S. government authorities and agencies Within one year $ 4,560,500 $ -- $ 4,700 $ 4,555,800 Mortgage-backed securities Five years through ten years 42,400 1,400 41,000 ----------- ----- ------- ----------- $ 4,602,900 $ -- $ 6,100 $ 4,596,800 =========== ===== ======= ===========
5. INVENTORIES Inventories, which include material, labor and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market and consist of the following at June 30: 1998 1997 ---------- ---------- Raw materials $ 826,600 $1,063,300 Work-in-process 511,200 550,100 Finished goods 227,200 398,300 ---------- ---------- $1,565,000 $2,011,700 ========== ========== 6. NOTES PAYABLE The Company has a financing agreement with a bank expiring in January 1999, providing for borrowings under a line of credit up to the lesser of $2,000,000 or 80% of eligible accounts receivable (as defined) at the bank's prime rate (8.5% at June 30, 1998). Borrowings under the line of credit are unsecured. There were no borrowings outstanding under the financing agreement at June 30, 1998 and 1997. The financing agreement contains certain restrictive covenants, including certain tangible net worth levels, current ratio percentages, profitability levels and the nonpayment or declaration of cash dividends, with which the Company was in compliance at June 30, 1998. 59 60 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In January 1996, the Company entered into a three-year, $1,150,000 term loan. The loan bears interest at the bank's prime rate plus 1.0% (9.5% at June 30, 1997) with interest payable on a monthly basis. The remaining principal balance of $690,000 was paid in full in October 1997 after the completion of the Company's initial public offering. Interest expense was $20,335, $106,783 and $54,212 for fiscal 1998, 1997 and 1996, respectively. 7. INCOME TAXES The components of the Company's income tax provision (benefit) are as follows:
1998 1997 1996 ---------- ---------- ----------- Current $1,886,200 $1,455,900 $ 1,023,300 Deferred 81,500 (130,000) (1,523,100) ---------- ---------- ----------- Total $1,967,700 $1,325,900 $ (499,800) ========== ========== ===========
Reconciliations between the provision for income taxes for fiscal 1998, 1997 and 1996 and the amounts computed by applying the federal statutory tax rate to income before the provision for income taxes are as follows:
1998 1997 1996 ------------------ ------------------- ------------------- AMOUNT % AMOUNT % AMOUNT % ----------- -- ----------- -- ---------- ---- Provision for income taxes at statutory rate $ 1,788,800 35% $ 1,211,400 35% $ (431,500) (35)% State income taxes, net of federal income tax benefit 163,400 3 140,100 4 (61,600) (5) Benefit of foreign sales corporation subsidiary (108,900) (2) (97,500) (3) (70,900) (6) Other 124,400 2 71,900 2 64,200 5 ----------- ---- ----------- ---- ---------- ---- Provision for income taxes $ 1,967,700 38% $ 1,325,900 38% $ (499,800) (41)% =========== ==== =========== ==== ========== ====
At June 30, the Company's net deferred tax assets consisted of the following:
1998 1997 ------------- ------------ Bad debt and sales return reserves $ 188,000 $ 188,600 Inventory reserves 118,300 157,300 Uniform capitalization of inventories 57,700 53,100 Accrued vacation and bonus 95,900 74,600 Warranty reserves 60,800 80,500 State taxes (82,800) (72,400) Depreciation 166,600 160,200 Difference between book and tax basis of acquired in-process research and development and other intangible assets 1,226,200 1,303,300 Other reserves 118,200 85,200 ------------ ---------- Net deferred tax assets $ 1,948,900 $2,030,400 ============ ==========
60 61 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCKHOLDERS' EQUITY On October 16, 1997, the Company completed its initial public offering of 2,000,000 shares of common stock at $11.00 per share. 1,300,000 shares were sold by the Company resulting in net proceeds of approximately $12.6 million. The remaining 700,000 shares were sold by certain selling stockholders. Additional information is contained in the Company's Prospectus dated October 10, 1997 which was part of the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission. The Company has authorized 5,000,000 shares of $.001 par value preferred stock, 2,667,002 shares of which have been designated as Series A, B or C preferred stock. The Company issued 750,000 shares of its Series A redeemable convertible preferred stock in exchange for $482,400, 1,117,002 shares of its Series B redeemable convertible preferred stock in exchange for $1,628,800, and 800,000 shares of its Series C redeemable convertible preferred stock in exchange for $1,978,400. The preferred stock had preference in liquidation and was redeemable at any time at the election of the stockholders, in each case at $.6667 per share for Series A, $1.50 per share for Series B and $2.50 per share for Series C. The preferred stock had voting rights and entitled the holder to an 8% cumulative dividend upon liquidation or redemption. The value of the preferred stock has been accreted to reflect the current redemption or liquidation value, which includes cumulative dividends in arrears amounting to $3,056,600 as of June 30, 1997. The preferred stock was converted into 2,667,002 shares of common stock at the completion of the Company's initial public offering and the amount previously accreted were credited to stockholders' equity. During 1986, the Company adopted a stock purchase plan for key employees, directors and consultants. The plan was later amended in 1992 (the "Amended Plan") to include the granting of incentive stock options and nonqualified stock options. The Amended Plan provides for the granting of options to purchase or the right to purchase up to an aggregate of 1,250,000 shares of the Company's common stock at the fair market value at the date of grant or not less than 85% of the fair market value at the date of grant for nonqualified options and stock purchases (110% of fair market value if sold to individuals holding 10% or more of the voting power of the then outstanding shares). Shares sold or options granted under the plan generally vest over a four-year period, starting with the date of employment or the respective vesting date as determined by the Board of Directors, and terminate no later than ten years from the date of grant. The Amended Plan also provides that, upon termination of employment of a stockholder, the Company may repurchase any sold but unvested restricted shares at the original purchase price, plus 5% interest per year. 61 62 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Amended Plan was terminated in November 1996, on the tenth anniversary of the Effective Date of such plan and no options or rights to purchase may be granted under the plan, but option agreements, stock purchase agreements and rights to purchase then outstanding shall continue in effect in accordance with their respective terms. On June 19, 1996, the Company adopted an incentive stock option, nonqualified stock option and restricted stock purchase plan (the "1996 Plan") for qualified employees, officers and directors (including nonemployee directors) and consultants. The 1996 Plan provides for the granting of options to purchase or the right to purchase up to an aggregate of 800,000 shares, as amended, of the Company's common stock at the fair market value at the date of grant for an incentive stock option or not less than 85% of the fair market value at the date of grant for nonqualified options (110% of fair market value if an option is granted to a 10% stockholder on the date of grant). The purchase price per share of restricted stock covered by each right to purchase shall not be less than 85% of the fair market value on the date the right to purchase is granted (110% of fair market value at the date of grant if the right to purchase is granted to a 10% stockholder on the date of grant). The following is a summary of stock option activity and weighted average exercise prices for each of the three years in the period ended June 30, 1998:
NUMBER OF SHARES WEIGHTED AVERAGE PROVIDED FOR PRICE RANGE PER SHARE EXERCISE PRICE --------------------- -------------------------- --------------------- NONQUALIFIED NONQUALIFIED NONQUALIFIED OPTIONS OPTIONS OPTIONS OPTIONS OPTIONS OPTIONS ------- ------------ ------------- ------------ ------- ------------ BALANCES, July 1, 1995 192,750 .50 - 1.60 $ 0.73 $ -- Granted 142,975 13,000 2.50 - 5.00 5.00 $4.13 Exercised (14,025) .50 - .60 $ 0.54 Canceled (16,950) .50 - 5.00 $ 1.98 ------- ------ BALANCES, June 30, 1996 304,750 13,000 .50 - 5.00 5.00 $ 2.27 $5.00 Granted (weighted average fair value of $1.10) 123,400 5.00 - 5.00 $ 5.00 Exercised (15,837) .50 - 5.00 $ 0.80 Canceled (40,500) .50 - 5.00 $ 3.22 ------- ------ BALANCES, June 30, 1997 371,813 13,000 $ .50 - $5.00 $5.00 $ 3.13 $5.00 Granted (weighted average fair value of $2.85) 111,350 $5.00 - $7.50 $ 6.59 Exercised (81,100) $0.50 - $5.00 $ 1.81 Canceled (48,563) $0.60 - $7.50 $ 6.18 ------- ------ BALANCES, June 30, 1998 353,500 13,000 $0.50 - $7.50 $5.00 $ 4.19 $5.00 ======= ====== Exercisable as of June 30, 1998 133,611 8,000 $ 3.00 $5.00 ======= ======
At June 30, 1998, 605,175 shares of common stock were available for issuance under the Company's stock option and purchase plan. 62 63 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Additional information regarding options outstanding as of June 30, 1998 is as follows:
WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE EXERCISE PRICES JUNE 30,1998 LIFE IN YEARS PRICE JUNE 30,1998 PRICE - --------------- ------------ ------------- ---------- ------------ --------- $.50-- .60 48,500 0.90 $0.60 39,500 $0.60 1.20-- 1.60 19,100 1.58 $1.39 14,225 $1.39 2.50-- 3.50 30,725 2.05 $2.50 13,336 $2.50 5.00-- 5.00 203,375 3.34 $5.00 72,825 $5.00 5.50-- 7.50 64,800 4.57 $6.13 1,725 $5.50 -------- -------- $.50-- 7.50 366,500 3.03 $4.22 141,611 $3.18 ======== ========
On August 27, 1997 the Company adopted its 1997 Stock Option Plan for Non-Employee Directors (the "Director Plan"), covering an aggregate of 100,000 shares of common stock. Under the Director Plan, each non-employee director of the Company who was a director of the Company on August 27, 1997, or who is thereafter elected as a director during the term of the Director Plan, shall be granted an option consisting of 10,000 shares of common stock, which option shall vest and become exercisable at the rate of 25% per year over the four-year period following the grant date. The exercise price of all options granted under the Director Plan shall be 100% of the fair market value of the common stock on the date of grant, and all such options shall have a term of 10 years. In addition, at each anniversary during such non-employee director's term of office such non-employee director shall receive an additional option covering 2,500 shares of common stock, with the same vesting schedule, subject to the limitations set forth in the Director Plan. During the year ended June 30, 1998 the Company issued 50,000 shares under the Director Plan with a weighted average price per share of $11.00, a weighted average fair value per share of $5.17, and the weighted average remaining contractual life of the outstanding shares was 4.28 years. At June 30, 1998, 50,000 shares were available for issuances under the Director Plan. The Company has adopted an Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 150,000 shares of common stock. The Purchase Plan, which is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code, will be implemented by calendar year offerings with purchases occurring at three-month intervals commencing on the date of the Company's IPO. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 15% of an employee's compensation. The price of stock purchased under the Purchase Plan will be 85% of the lower of the fair market value of the common stock at the beginning of the calendar year offering period or on the applicable purchase date. During the year ended June 30, 1998, 32,058 shares of common stock were issued under the Purchase Plan with a weighted average price per share of $4.80 and weighted average fair value per share of $1.64. At June 30, 1998, 117,942 shares were reserved for issuances under the Purchase Plan. As discussed in Note 2, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations. No compensation expense has been recognized in the financial statements for employee stock arrangements. SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income (loss) and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1996. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, 63 64 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions: Expected life, 48 months, stock volatility of 0.40 in fiscal 1998 and 0.00 in fiscal 1997 and fiscal 1996; risk-free interest rates, 5.69% in fiscal 1998, 6.40% in fiscal 1997 and 5.63% in fiscal 1996 and no dividends during the expected term. The Company's calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the fiscal 1998, 1997, and 1996 awards had been amortized to expense over the vesting period of the awards, net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1998 1997 ---------- ---------- Pro forma net income $2,970,650 $2,091,393 Pro forma basic net income per share $ 0.71 $ 1.33 Pro forma diluted net income per share $ 0.59 $ 0.51 The impact of outstanding nonvested stock options granted prior to 1996 has been excluded from the pro forma calculation; accordingly, the fiscal 1998, 1997 and 1996 pro forma adjustments are not indicative of future period pro forma adjustments when the calculation will apply to all applicable stock options. On April 24, 1998 the Company's board of directors authorized a program for repurchase of up to 500,000 shares, or approximately 9.5%, of Kofax's outstanding common stock, to be used to fund stock option exercises, employer equity compensation plans, and an employee stock purchase plan. Repurchases may be made from time to time by the Company in the open market or in block purchases in compliance with Securities and Exchange Commission guidelines. 64 65 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. COMMITMENTS The Company leases its production and office facilities under operating leases, expiring on various dates through fiscal 2003. The leases require the Company to pay certain building operating costs. Rent, which is recognized ratably over the terms of the leases, and related building maintenance costs was $887,500, $744,300 and $609,500 during fiscal 1998, 1997 and 1996, respectively. Future minimum annual lease commitments at June 30, 1998 under noncancelable facility and other operating leases that have initial or remaining terms in excess of one year are as follows: Fiscal year ending June 30: 1999 $ 824,200 2000 983,800 2001 884,200 2002 896,900 2003 932,200 2004 555,800 ---------- Total minimum payments required $5,077,100 ========== The Company has also entered into various licensing agreements which require per unit fees or royalties between 3.5% and 5.0% of net sales of certain products. The agreements are generally in effect over the life of the products. Royalty expense for fiscal 1998, 1997 and 1996 was $671,900, $390,400 and $102,000, respectively. Royalty fees of $146,900 and $116,600 were accrued for as of June 30, 1998 and 1997. The Company has agreements with various domestic distributors which are cancelable at specified dates defined in the agreements. The agreements allow for one or more of the following: certain price protection provisions, the right to exchange inventories provided that subsequent purchases are made and/or the right to return Company inventories for refunds of between 80% and 100% of the actual net invoice price paid by the distributor upon termination of the distribution agreement. The Company offers a program to certain distributors to provide for reimbursement of qualified cooperative marketing costs (as defined). Amounts reimbursed under such programs were $434,100, $372,900 and $301,600 in fiscal 1998, 1997 and 1996, respectively. 65 66 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EXPORT SALES AND SIGNIFICANT CUSTOMERS The Company had export sales as a percentage of net sales for each of the three years ended June 30, as follows: 1998 1997 1996 ---- ---- ---- Europe 24% 25% 26% Asia 4 5 6 Other 5 4 4 ---- ---- ---- 33% 34% 36% ==== ==== ==== The Company had sales to certain distributors as a percentage of net sales for the three years ended June 30, as follows: 1998 1997 1996 ---- ---- ---- Law-Cypress Distributing Co 17% 14% 16% Tech Data Corporation 13% 14% 13% Cranel Inc -- 10% -- A decision by a significant customer to decrease the amount purchased from the Company could have a material adverse effect on the Company's financial condition and results of operations. 11. 401(K) SAVINGS PLAN The Company has a 401(k) savings plan (the "Plan"). The Plan is a defined contribution plan for all full-time employees (participants) of the Company who have reached age 21 and have met the required service of 90 days. The Plan permits a participant to contribute up to the lesser of 15% of the participant's compensation for that calendar year or $10,000 for 1998. The Plan provides for employer discretionary contributions determined by the Board of Directors on an annual basis. Participant contributions are fully vested at all times. Employer contributions vest at a rate of 20% per year after the second year of participation. Employer contributions of $90,000 and $67,500 were made to the Plan in fiscal 1998 and 1997. There were no employer contributions to the Plan during fiscal 1996. 12. CONTINGENCIES On September 26, 1997, VisionShape, Inc. ("VisionShape") filed suit against the Company in the Superior Court of Orange County, California. VisionShape claims that the Company's Adrenaline accelerator boards prevent the use of software other than the Company's software, which, the complaint alleges, creates a monopoly or otherwise constitutes a tying arrangement in violation of state and federal antitrust laws. VisionShape seeks unspecified monetary damages and costs as well as equitable remedies, including an order enjoining the Company from selling its Adrenaline accelerator boards. VisionShape also seeks treble damages and attorneys' fees. On May 27, 66 67 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1998, the Superior Court held that VisionShape failed to state a cause of action against the Company and ordered the suit dismissed on July 15, 1998. The dismissal is subject to appeal and the Company and VisionShape are discussing settlement options. Based upon information currently available to the Company, the Company believes VisionShape's claims are without merit and intends to contest vigorously any action against the Company. However, it is too early to determine the outcome of such suit and there can be no assurance as to the eventual outcome of such actions. Any determination against the Company in the litigation or the settlement of such claims could have a material adverse effect on the Company's business, results of operation, cash flows and financial condition. The Company is also involved from time to time in litigation or claims arising in the ordinary course of its business. While the ultimate liability, if any, arising from these claims cannot be predicted with certainty, the Company believes that the resolution of these matters will not likely have a material adverse effect on the Company's financial statements. 13. RECENT ACCOUNTING PRONOUNCEMENTS For the years beginning after July 1, 1998, the Company will adopt SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The Company is reviewing the impact of the disclosures required by such statements on its financial statements. For fiscal years beginning after December 15, 1997, the Company will adopt Statement of Position 97-2, "Software Revenue Recognition". The Company is reviewing the impact of this Statement on its financial statements, and does not believe this Statement will have a material effect on its financial statements. 14. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA The following table sets forth certain unaudited quarterly consolidated financial information for the fiscal years ended June 30, 1998 and 1997. In the opinion of management, this information has been presented on the same basis as the audited Consolidated Financial Statements appearing elsewhere in this report, and includes all adjustments, consisting only of normal recurring adjustments and accruals, that the Company considers necessary for a fair presentation. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period. The unaudited quarterly information should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto appearing elsewhere in this document. Quarterly net income per share has been restated to comply with SFAS No. 128. The Company believes that diluted net income per share provides the most meaningful comparison between periods. 67 68 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTER ENDED ---------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, ------------- ------------ --------- -------- (in thousands, except per share data) Fiscal 1998 - ----------- Net sales $ 7,851 $ 8,074 $ 8,509 $ 8,941 Gross profit 5,990 6,099 6,564 6,903 Income from operations 1,018 1,041 1,124 1,169 Net income $ 657 $ 760 $ 834 $ 892 Basic net income per share $ 0.43 $ 0.15 $ 0.16 $ 0.17 Diluted net income per share $ 0.16 $ 0.14 $ 0.15 $ 0.16 Fiscal 1997 - ----------- Net sales $ 6,581 $ 7,429 $ 7,648 $ 7,608 Gross profit 4,723 5,371 5,713 5,739 Income from operations 611 924 954 903 Net income $ 384 $ 571 $ 604 $ 576 Basic net income per share $ 0.23 $ 0.37 $ 0.39 $ 0.37 Diluted net income per share $ 0.09 $ 0.14 $ 0.15 $ 0.14
68 69 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at charged to beginning costs and Balance at of year expenses Deductions end of year ---------- ----------- ---------- ----------- Year ended June 30, 1996: Allowance for doubtful accounts and sales returns $363,000 140,300 (121,800) $381,500 Obsolete inventory reserve $158,400 184,100 (169,000) $173,500 Year ended June 30, 1997: Allowance for doubtful accounts and sales returns $381,500 155,800 (114,400) $422,900 Obsolete inventory reserve $173,500 376,500 (186,800) $363,200 Year ended June 30, 1998: Allowance for doubtful accounts and sales returns $422,900 124,400 (88,700) $458,600 Obsolete inventory reserve $363,200 369,200 (443,900) $288,500
69 70 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION - ----------- ---------------------------------------------------------- -------- 3.1 Restated Certificate of Incorporation of the Company (1) 3.2 Bylaws of the Company, as amended (1) 3.3 Certificate of Amendment of Certificate of Incorporation of (1) the Company 4.1 Specimen Certificate of Common Stock (1) 10.1 Amended and Restated Incentive Stock Option, Nonqualified (1) Stock Option and Restricted Stock Purchase Plan (the "1992 Plan"), as amended on September 11, 1992 10.2 Form of Incentive Option Agreement pertaining to the 1992 (1) Plan 10.3 Form of Nonqualified Option Agreement pertaining to the 1992 (1) Plan 10.4 Form of Restricted Stock Agreement pertaining to the 1992 (1) Plan 10.5 1996 Incentive Stock Option, Nonqualified Stock Option and (1) Restricted Stock Purchase Plan (the "1996 Plan") 10.6 Form of Stock Option Agreement pertaining to the 1996 Plan (1) 10.7 Intentionally omitted 10.8 Kofax Image Products, Inc. 1997 Stock Option Plan for (1) Non-Employee Directors (the "Director Plan") 10.9 Form of Stock Option Agreement pertaining to the Director (1) Plan 10.10 Kofax Image Products, Inc. 1997 Employee Stock Purchase Plan (1) 10.11 Form of Indemnification Agreement for Officers and Directors (1) of the Company 10.12 Loan and Security Agreement, dated February 28, 1992, (1) between the Company and Silicon Valley Bank; Amendment to Loan Agreement, dated March 9, 1993; Amendment to Loan and Security Agreement, dated October 10, 1994; Amendment to Loan and Security Agreement, dated October 5, 1995; Amendment to Loan and Security Agreement, dated January 26, 1996; and Amendment to Loan and Security Agreement, dated October 31, 1996
71
EXHIBIT NO. DESCRIPTION LOCATION - ----------- ---------------------------------------------------------- -------- 10.13 First Restated Registration Rights Agreement, dated as of (1) March 6, 1989, by and among the Company and the Purchasers identified therein 10.14 Lease, dated March 31, 1988, between The Irvine Company, as (1) Landlord, and the Company, as Tenant, relating to the Company's Irvine, California offices; First Amendment to Lease, dated March 7, 1990; Second Amendment to Lease, dated May 4, 1990; Third Amendment to Lease, dated August 22, 1991; Fourth Amendment to Lease, dated March 15, 1994; and Fifth Amendment to Lease, dated September 25, 1996 10.15 Net Lease, dated February 24, 1989, between LaserData, Inc. (1) and Vesper Properties I Trust; Amendment 1, dated September 11, 1991; Amendment No. 2, dated August 31, 1994; and Amendment No. 3, dated July 24, 1997 10.16 Asset Purchase Agreement, dated December 30, 1995, between (1) the Company and LaserData, Inc. 10.17 Distributor Agreement, dated August 16, 1990, between the (1) Company and Law-Cypress Distributing 10.18 Distributor Agreement, dated March 1, 1993, between the (1) Company and Tech Data Corporation; Modification Agreement, dated September 24, 1996; Letter Amendment, dated October 16, 1996; Addendum, dated October 23, 1996 10.19 Distributor Agreement, dated July 25, 1990, between the (1) Company and Cranel Inc. 10.20 License Agreement, dated September 10, 1996, between the (1) Company and CAERE Corporation 10.21 Software License Agreement, dated October 1, 1993, between (1) the Company and Softbridge Inc. 10.22 Software License Agreement, dated June 1, 1993, between the (1) Company and Pixel Translations, Inc.; Modification to Software License Agreement, dated July 1, 1995; and Modification to Software License Agreement, dated June 1, 1996 10.23 Services Contract, dated September 25, 1995, between the (1) Company and Midcontinent Business Systems, Inc.
2 72
EXHIBIT NO. DESCRIPTION LOCATION - ----------- ---------------------------------------------------------- -------- 10.24 License Contract, dated July 1, 1996, between the Company (1) and Midcontinent Business Systems, Inc. 10.25 NEST SDK Developer Product Distribution License Exhibit, (1) dated July 31, 1996, between the Company and Novell, Inc. 10.26 Temporary Distribution License, dated October 17, 1996, (1) between the Company and Novell, Inc. 10.27 Silicon Valley Bank Amendment to Loan and Security Agreement (2) dated September 18, 1997 10.28 Silicon Valley Bank Amendment to Loan and Security Agreement (3) dated January 6, 1998 10.29 Technology Agreement, dated February 25, 1998, between the * Company and Eastman Kodak Company 10.30 Amendment to Software License Agreement between the Company * and Pixel Translations, Inc., dated June 1, 1998 (4) 10.31 Lease, dated June __, 1998, between Magellan Irvine Oaks * Limited Partnership, as Landlord, and the Company, as Tenant 11.1 Computation of Diluted Net Income and Diluted Net Income * Per Share 23.1 Consent of Deloitte & Touche LLP * 24.1 Power of Attorney (included on the Signature Page of this * Annual Report on Form 10-K) 27.1 Financial Data Schedule *
- --------------- * Filed herewith (1) Incorporated by reference to the referenced exhibit number to the Company's Registration Statement on Form S-1, Reg. No. 333-34531. (2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (4) Registrant has sought confidential treatment pursuant to Rule 24b-2 for portions of the referenced exhibit. 3 EX-10.29 2 TECHNOLOGY AGREEMENT 1 EXHIBIT 10.29 TECHNOLOGY AGREEMENT This agreement (the "Agreement") is made effective February 25, 1998 (the "Effective Date") by and between Eastman Kodak Company, 343 State Street, Rochester, NY 14650 ("Kodak") and Kofax Image Products, 3 Jenner Street, Irvine, CA 92718 ("Kofax"). WHEREAS, Kodak owns certain adaptive threshold processing (ATP) technology which is a Kodak-patented algorithm that contains intelligent filters that dramatically lower the amount of image noise and which produces sharper, cleaner scans. (The filters also minimize artifacts on white-to-black and black-to-white transitions); and WHEREAS, Kofax desires to incorporate such ATP technology into a chip known as KATE (Kofax Advanced Thresholding Engine); and WHEREAS, Kodak is willing to license ATP technology for such use; and WHEREAS, Kodak may wish to purchase KATE chips from Kofax; and WHEREAS, Kofax is willing to sell KATE chips to Kodak; and WHEREAS, Kofax desires to purchase certain ATP chips proprietary to Kodak from NEC/RYOSAN; and WHEREAS, Kodak is agreeable to such purchase; NOW THEREFORE, Kodak and Kofax have agreed as follows: 1. LICENSE OF ATP TECHNOLOGY TO KOFAX 1.1 Kodak grants and agrees to grant to Kofax a nonexclusive, worldwide, royalty-bearing license to use the Kodak schematics to derive source code in VHDL format for Kodak ATP technology, but solely to incorporate Kodak ATP technology in net list form into the Kofax KATE chip, and to distribute the Kodak ATP technology, as so incorporated, to third parties. Kofax, in turn, will provide Kodak with the modified source code, with respect to the ATP technology, in VHDL format as implemented in the Kofax KATE chip and Kodak shall be the owner of such modified source code and net lists with respect to the ATP technology. Kofax shall be the owner of the KATE chip and retain all modifications and derivations thereof, excluding the ATP technology referred to above. Kofax has the right to use the ATP technology in KATE as specified above. This license also applies to bug fixes, new features and new software versions provided by Kodak hereunder; provided that Kodak reserves the right to negotiate a different royalty structure for new features and new software versions. 2 1.2 Kodak grants and agrees to grant to Kofax a nonexclusive, worldwide license to use the Kodak ATP software, but solely (i) to demonstrate ATP technology to third parties, and (ii) on a server or set up workstation to download ATP technology to networked PCs. 2. PURCHASE OF KATE CHIPS BY KODAK 2.1 Kofax agrees to sell KATE chips to Kodak. Kodak is, however, under no obligation to purchase KATE chips. 2.2 It is understood by Kodak that, as of the Effective Date, the specifications for KATE were not finalized. The parties agree to work cooperatively to incorporate maximum practical value to Kodak in the KATE chip, including but not limited to, the desire to incorporate backward compatibility with existing Kodak ATP chips. 2.3 KATE chips purchased by Kodak may be distributed to third parties only as incorporated into a Kodak product. Under no circumstances may they be sold as a stand-alone product. 2.4 Kodak may purchase KATE chips directly from Kofax. The parties will investigate the possibility of Kodak purchasing KATE chips directly from the Manufacturing foundry. Kodak shall purchase KATE chips at Kofax's cost. 3. SOURCING OF ATP CHIPS FROM NEC/RYOSAN 3.1 Subject to Kofax's compliance with the terms of this Section 3, and payment of royalties as set forth in Section 5, Kodak authorizes Kofax to purchase Kodak's ATP Chip, Kodak P/N/ 9B6927 (NEC P/N UPD65806GD-060-LML) directly from RYOSAN. Kodak will notify NEC/RYOSAN that Kofax is an authorized purchaser. Order Placement Contact: Ryosan 1220-2 Tebiro Kamakura-City Kanagawa, 248 Japan Attn: Mr. Norihiro Kimura Tel. 81-467-32-2316 Fax. 81-467-32-1539 3.2 Kofax agrees that all claims for defective chips purchased by Kofax from RYOSAN, and all communications relating to such defective chips will be submitted through Kodak. * Confidential Portions Have Been Omitted and Filed Separately with the Commission. 2 3 4. LICENSE FEES 4.1 Kofax will pay Kodak a one-time, non-refundable, non-creditable technology license fee of [ * ] due and payable prior to first customer shipment by Kofax of a production product containing ATP technology. 4.2 Kofax will pay Kodak a one-time, non-refundable, non-creditable software license fee of [ * ] due and payable prior to first customer shipment by Kofax of a production product containing ATP software technology. 4.3 Should Kodak elect to purchase KATE chips, Kodak will pay Kofax a one-time, non-refundable, non-creditable technology license fee of [ * ] due and payable prior to first customer shipment by Kodak of a product containing a KATE chip. 5. ROYALTIES 5.1 For the license granted in Section 1.1, Kofax shall pay to Kodak a per unit royalty for each unit of KATE produced by or for Kofax and sold to parties other than Kodak. Cumulative Units of Kate Per Unit Royalty ------------------------ ---------------- [ * ] 5.2 For each ATP chip purchased by Kofax under Section 3, Kofax shall pay Kodak a per unit royalty as follows: Cumulative Units of ATP Chips Per Unit Royalty ----------------------------- ---------------- [ * ] * Confidential Portions Have Been Omitted and Filed Separately with the Commission. 3 4 5.3 For each unit of KATE purchased by Kodak, Kodak shall pay Kofax a per unit royalty as follows: Cumulative Units of KATE Per Unit Royalty ------------------------ ---------------- [ * ] 6. COST AND MINIMUM ORDER QUANTITY, ATP CHIPS 6.1 Kofax may purchase ATP chips from NEC/RYOSAN at the same per unit price as is charged Kodak. Such price is currently as follows: Cumulative Volume Unit Price (Yen) ----------------- ---------- [ * ] 6.2 Minimum order quantity is 100 pieces. 6.3 The pricing above is based on stair-step pricing and is cumulative over the term of the agreement. 7. PAYMENT AND AUDITING 7.1 Royalty reports and royalty payments shall be made thirty (30) days after the close of the calendar quarter in which the royalties accrued. Each report shall show the royalty calculation. Contacts for Royalty Payments and Invoices: ------------------------------------------ For Kodak: For Kofax: Ms. Patricia Young Ms. Karen Rickerson Eastman Kodak Company Kofax Image Products 343 State Street 3 Jenner Street Rochester, NY 14650-0907 Irvine, CA 92718 4 5 7.2 Audit. Each party agrees to allow a mutually acceptable, independent, certified public accountant to audit its accounting records upon which the royalty reports are based, provided that such accountant shall hold such records in strictest confidence except as necessary to provide a summary report on the accuracy of such royalty reports. Any such audit shall be permitted within thirty (30) days of receipt of a written request to audit, during normal business hours, at a time mutually agreed upon. The cost of such audit will be borne by the auditing party. Audits shall not be made more frequently than annually and shall not unreasonably interfere with normal business activities. The determination of the payments due under this Agreement shall be deemed conclusive unless, within twelve (12) months from date of payment, notification is made in writing of any probably error in such payments disclosed by royalty reports or an inspection by such audit. 8. DISCLOSURE 8.1 Kofax is authorized by Kodak to reveal to any third party as they deem necessary, or as may be required by law, the inclusion of Kodak ATP technology in KATE. Kofax will advise Kodak when a third party has been disclosed. 8.2 With at least sixty (60) days prior written notice to Kofax, Kodak may make a public announcement of the fact that Kodak ATP technology is incorporated into Kofax products. 8.3 With at least sixty (60) days prior written notice to Kodak, Kofax may make a public announcement of the fact that Kodak ATP technology is incorporated into Kofax products. 8.4 The specific details of this Agreement will not be shared by either party without the written consent of the other party. 9. MARKETING 9.1 Neither party has any obligation to use the other party's products or technologies, however, it is understood that it is Kofax's intention to use Kodak ATP technology, ATP software, and ATP chips. 9.2 Kofax, once it has commenced use of Kodak ATP technology, ATP software, or ATP chips shall give Kodak a minimum of sixty (60) days prior written notice before discontinuing their use. * Confidential Portions Have Been Omitted and Filed Separately with the Commission. 5 6 10. SIMILAR TECHNOLOGIES Nothing herein shall be construed as preventing either party from obtaining from third parties or developing or having developed technologies similar in function to those provided hereunder by the other party, without reliance upon any intellectual property rights of the other party. 11. WARRANTS 11.1 Each party warrants that it has all rights necessary to grant to the other party the rights and licenses granted herein. 11.2 DISCLAIMER OF WARRANTY. THE FOREGOING WARRANTIES ARE THE SOLE AND EXCLUSIVE WARRANTIES GIVEN BY EITHER PARTY IN CONNECTION WITH THIS AGREEMENT, EXPRESS OR IMPLIED, AND EACH PARTY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 12. INDEMNIFICATION Each party will defend, indemnify, and hold harmless the other party against any claim that any products, software, or technologies (collectively, "Products") as delivered by one party to the other party directly infringe any third party's patent, copyright or trade secret. A party's obligation to defend, indemnify and hold harmless the other party will be subject to the following terms and conditions: (a) The obligation will arise only if the indemnified party gives the indemnifying party prompt notice of the infringement claim and grants the indemnifying party, in writing, exclusive control over its defense and settlement; (b) The obligation will cover only the Products as delivered by one party to the other party, and not to any correction, modification, or addition made by anyone, whether with or without authorization, where the product without such correction, modification or addition would not infringe; (c) The obligation will not cover (i) any claim based on the use of any of the Products to practice a process or the furnishing of any information, service, or technical support, or (ii) any claim that any of the Products infringes any third party's rights as used in combination with any products not supplied by the party which supplied the Products, if that claim could have been avoided by the use of the Product without combination with other products; 6 7 (d) Should a party's use of any such Products or any part thereof be enjoined, or in the event that the party supplying Products desires to minimize its liability hereunder, the supplying party will, at its option and expense: (i) procure a license from the person claiming or likely to claim infringement; (ii) modify the Products, as appropriate, to avoid the claim of infringement, as long as modification for this purpose does not materially impair the operation thereof; or (iii) substitute fully equivalent non-conforming Products for the infringing items. If none of the foregoing is feasible, either party may terminate this Agreement. THE FOREGOING STATES SUPPLIER'S EXCLUSIVE OBLIGATION WITH RESPECT TO CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS OF ANY KIND. 13. PROTECTION OF SCHEMATICS/SOURCE CODE AND OTHER CONFIDENTIAL INFORMATION Kofax understands that the schematics/source code of ATP software, and the net lists provided hereunder (the "Materials") contain valuable proprietary and confidential information of Kodak and therefore agrees: (a) to use the Materials only in accordance with the terms of this Agreement; (b) to limit access to those employees who are directly involved in accomplishment of such purposes; (c) to include on all copies of Materials the copyright and proprietary information notices of Kodak; (d) to take appropriate action, by instruction, agreement, or otherwise, with any person having access to Materials to enable Kofax to satisfy its obligations under this Agreement; (e) to protect the Materials from disclosure using at least the same degree of care Kofax uses to protect its own information of similar nature and value. OTHER CONFIDENTIAL INFORMATION Other confidential information to be shared under this Agreement shall be governed by the terms and conditions of the Confidentiality Agreement signed by the parties on January 25, 1997, with the following amendments: 1. Paragraph 2 shall also include ATP Technology. 2. Paragraph 3 shall also include KATE. 7 8 3. Subparagraph 5(b) is deleted and replaced with the following: "disclosed during the term of the Technology Agreement (TA) between the companies dated _______________." 4. Paragraph 6 is modified as follows: "...expires 2 years after the Effective Date." is modified to "...expires five (5) years after the termination of the TA." 14. LIMITATION OF LIABILITY NEITHER PARTY SHALL BE LIABLE FOR ANY SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES EVEN IF INFORMED OF THE POSSIBILITY THEREOF IN ADVANCE. 15. TERM This Agreement shall be effective on the Effective Date and shall terminate on the fifth anniversary thereof unless earlier terminated as set forth below. 16. TERMINATION 16.1 Causes for Termination 16.1.1 As provided in Section 15. 16.1.2 By only the non-breaching party on the thirtieth (30th) day after either party gives the other notice of a material breach by the other of any terms or conditions of this Agreement, unless the breach is cured prior to that day. 16.2 The Effect of Termination 16.2.1 All licenses granted the breaching party shall immediately terminate, provided that the rights of the purchasers of products incorporating the technology shall continue for such products purchased prior to termination of this Agreement. 16.2.2 All rights granted the breaching party to purchase the other party's technology, directly or indirectly, shall terminate immediately. 16.2.3 All accrued royalties shall be immediately due and payable. 8 9 16.2.4 The breaching party shall have sixty (60) days in which to dispose of inventory containing the non-breaching parties' technology after which time the breaching party may not transfer such inventory to any third party. 16.2.5 All outstanding orders for the non-breaching party's technology, direct or indirect, shall be immediately canceled. 16.2.6 All provisions of this Agreement which by their nature should survive termination shall survive termination. 16.2.7 The breaching party shall, within thirty (30) days of termination, return to the other party all of the other party's information, documentation, and technology in its possession or under its control. 17. GENERAL PROVISIONS 17.1 Assignment. Neither party may assign any rights or delegate any duties under this Agreement by operation of law or otherwise without the other party's prior written consent, and any attempt to do so without that consent will be void. Subject to the foregoing, this Agreement will bind and inure to the benefit of the parties and their respective successors and permitted assigns. 17.2 Choice of Law. Notwithstanding the place where this Agreement is executed, or where obligations under this Agreement are performed, the parties expressly agree that this Agreement and any claim or controversy arising out of or relating to rights and obligations of the parties under it will be governed by and construed in accordance with the substantive laws of the State of New York, without regard to its conflicts of laws principles or the provisions of the United Nations Convention on Contracts for the International Sale of Goods or the United Nations Convention on the Limitation Period in the International Sale of Goods, as each is amended; and all actions arising out of or related to this Agreement, the performance or breach of it or any warranties under it must be filed in the New York State Courts with jurisdiction in Monroe County, New York or in the United States District Court of the Western District of New York. The parties hereby submit to the nonexclusive personal jurisdiction of, and waive any objection against, the aforementioned Courts. 17.3 Amendment. This Agreement may be amended or supplemented only by a writing that refers explicitly to this Agreement and that is signed on behalf of both parties. No purchase order, invoice or similar document which is in conflict with or inconsistent with this Agreement will affect this Agreement even if accepted by the receiving party. 17.4 Waiver. No waiver will be implied from conduct or failure to enforce rights. No waiver will be effective unless in a writing signed on behalf of the party against whom the waiver is asserted. 9 10 17.5 Contingencies. Neither party will have the right to claim damages or to terminate this Agreement as a result of the other party's failure or delay in performance due to circumstances beyond its reasonable control, such as labor disputes, strikes, lockouts, shortages of or inability to obtain labor, energy, components, raw materials or supplies, war, riot, insurrection, epidemic, act of God, or governmental action not the fault of the non-performing party. 17.6 Severability. If any part of this Agreement is found invalid or unenforceable, that part will be enforced to the maximum extent permitted by law, and the remainder of this Agreement will remain fully in force. 17.7 Equitable Relief. Either party may apply for injunctive, preliminary, or other equitable relief to remedy any actual or threatened dispute hereunder. 17.8 Entire Agreement. This Agreement, including all Schedules hereto, which are hereby incorporated by reference, represents the entire agreement between the parties relating to its subject matter and supersedes all prior representations, discussions, negotiations and agreements, whether written or oral. 17.9 Notices. All notices, reports, requests, approvals, and other communications required or permitted under this Agreement must be in writing. They will be deemed given when (a) delivered personally, (b) sent by commercial overnight courier with written verification or receipt, (c) upon receipt or refusal of receipt if sent by registered or certified mail, postage prepaid or (d) facsimile onto confirmation of successful transmission. All communications must be sent to the receiving party's Initial Address for Notice on the signature pages or to any other address that the receiving party may have provided for purposes of notice by notice as provided in this paragraph. 17.10 Fees. In any suit to enforce this Agreement, the prevailing party will have the right to recover costs and reasonable fees of attorneys, accountants and other professionals, including costs and fees on appeal. 17.11 Relationship of Parties. The parties to this Agreement are independent contractors. There is no relationship of agency, partnership, joint venture, employment or franchise between the parties. Neither party has the authority to bind the other or to incur any obligation on its behalf. 17.12 Paragraph Headings and Language Interpretation. The paragraph headings contained herein are for reference only and shall not be construed as substantive parts of this Agreement. The use of the singular or plural form shall include the other form, and the use of the masculine, feminine or neuter gender shall include the other genders. 10 11 17.13 Conflicts in Documentation. In case of any conflicts between this Agreement and any prior agreements on the same subject, Purchase Orders, acceptances, correspondence, memoranda, listing sheets and other documents, this Agreement shall govern and prevail, and the conflicting terms and conditions of any such documents shall be deemed deleted and shall not be binding upon either party. IN WITNESS WHEREOF, the parties have executed this Agreement through their duly authorized representatives as of the Effective Date set forth above. KOFAX IMAGE PRODUCTS Initial Address for Notice: By: /s/ DAVID S. SILVER 3 Jenner Street --------------------------------- Irvine, CA 92718 Name: Mr. David S. Silver Attn: President, Kofax Image Products ------------------------------ Fax: 714-727-3144 Title: Chief Executive Officer, President EASTMAN KODAK COMPANY Initial Address for Notice: By: /s/ CANDY OBOURN 343 State Street --------------------------------- Rochester, NY 14650 Name: Ms. Candy Obourn Attn: President, Business Imaging ------------------------------ Systems Title: President, Business Imaging Systems 11 EX-10.30 3 AMENDMENT TO SOFTWARE 1 EXHIBIT 10.30 MODIFICATION TO SOFTWARE LICENSE AGREEMENT THIS AGREEMENT is entered into effective as of June 1, 1998 by and between Pixel Translations, a division of Cornerstone Imaging, Inc., a Delaware corporation ("Pixel") and Kofax Image Products, a California corporation ("Kofax") to modify the Software License Agreement between the parties dated June 1, 1993 as previously amended on July 1, 1995 and June 1, 1996 as follows: Section 9.1 is amended for the purpose of extending the term of the agreement to read as follows: 9.1 Term. The term of this Agreement shall commence on the effective date set forth above and shall continue for a period of one year from that date (the "Initial Term"). Unless Kofax or Pixel gives written notice that it elects not to renew the Agreement at least thirty (30) days prior to the end of the Initial Term, the Agreement shall automatically renew for an additional one year term (a "Subsequent Term"). Similarly, unless Kofax or Pixel gives written notice that it elects not to renew the Agreement at least thirty (30) days prior to the end of a Subsequent Term, the Agreement shall automatically renew for an additional one year Subsequent Term; provided, however, that the Agreement shall not be automatically renewed under any circumstances for more than a total of six Subsequent Terms. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in their respective names and by their duly authorized officers. Pixel Translations 1710 Fortune Drive, Suite 200 San Jose, CA 95131 USA By: /s/ [SIG] ------------------------------ Title: Vice President ---------------------------- Kofax Image Products 3 Jenner Street Irvine, CA 92718 USA By: /s/ [SIG] ------------------------------- Title: Manager, Product Marketing ---------------------------- -1- EX-10.31 4 LEASE 1 EXHIBIT 10.31 OFFICE LEASE ------------ IRVINE OAKS EXECUTIVE PARK -------------------------- MAGELLAN IRVINE OAKS LIMITED PARTNERSHIP, an Arizona limited partnership, as Landlord, and KOFAX IMAGE PRODUCTS, INC., a Delaware corporation, as Tenant. IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 2 IRVINE OAKS EXECUTIVE PARK -------------------------- INDEX -----
ARTICLE SUBJECT MATTER PAGE - ------- -------------- ---- ARTICLE 1 PREMISES, BUILDING, PROJECT, AND COMMON AREAS................................5 ARTICLE 2 LEASE TERM; OPTION TERMS.....................................................8 ARTICLE 3 BASE RENT...................................................................11 ARTICLE 4 ADDITIONAL RENT.............................................................12 ARTICLE 5 USE OF PREMISES.............................................................21 ARTICLE 6 SERVICES AND UTILITIES......................................................22 ARTICLE 7 REPAIRS.....................................................................23 ARTICLE 8 ADDITIONS AND ALTERATIONS...................................................25 ARTICLE 9 COVENANT AGAINST LIENS......................................................27 ARTICLE 10 INSURANCE...................................................................27 ARTICLE 11 DAMAGE AND DESTRUCTION......................................................31 ARTICLE 12 NONWAIVER...................................................................32 ARTICLE 13 CONDEMNATION................................................................33 ARTICLE 14 ASSIGNMENT AND SUBLETTING...................................................34 ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF TRADE FIXTURES..............38 ARTICLE 16 HOLDING OVER................................................................39 ARTICLE 17 ESTOPPEL CERTIFICATES.......................................................39 ARTICLE 18 SUBORDINATION...............................................................40
-i- 3 ARTICLE 19 DEFAULTS; REMEDIES..........................................................41 ARTICLE 20 COVENANT OF QUIET ENJOYMENT.................................................44 ARTICLE 21 INTENTIONALLY DELETED.......................................................44 ARTICLE 22 INTENTIONALLY DELETED.......................................................44 ARTICLE 23 SIGNS.......................................................................44 ARTICLE 24 COMPLIANCE WITH LAW.........................................................45 ARTICLE 25 LATE CHARGES................................................................45 ARTICLE 26 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT........................46 ARTICLE 27 ENTRY BY LANDLORD...........................................................46 ARTICLE 28 TENANT PARKING..............................................................47 ARTICLE 29 MISCELLANEOUS PROVISIONS....................................................47
EXHIBITS A OUTLINE OF PREMISES B TENANT WORK LETTER C FORM OF NOTICE OF LEASE TERM DATES D RULES AND REGULATIONS E FORM OF TENANT'S ESTOPPEL CERTIFICATE F RESERVED AND VISITOR PARKING SPACES -ii- 4 IRVINE OAKS EXECUTIVE PARK -------------------------- INDEX OF MAJOR DEFINED TERMS ----------------------------
LOCATION OF DEFINITION IN DEFINED TERMS OFFICE LEASE - ------------- ------------ Abatement Event.............................................................................43 Abatement Notice............................................................................43 ADA.........................................................................................53 Additional Rent.............................................................................11 Alterations.................................................................................25 Applicable Laws.............................................................................53 Approved Working Drawings....................................................................3 Architect....................................................................................2 Base Building...........................................................................23, 25 Base Rent...................................................................................11 Base, Shell, and Core........................................................................1 Brokers.....................................................................................51 Building.....................................................................................5 Building Direct Expenses....................................................................12 Building Operating Expenses.................................................................12 Building Tax Expenses.......................................................................12 Code.........................................................................................1 Common Areas.................................................................................6 Comparable Buildings.........................................................................7 Construction Drawings........................................................................2 Contractor...................................................................................3 Cosmetic Alterations........................................................................24 Cost Pools..................................................................................18 Cost Proposal.............................................................................3, 4 Design Plans.................................................................................1 Direct Expenses.............................................................................12 Engineers....................................................................................2 Estimate....................................................................................19 Estimate Statement..........................................................................19 Estimated Payment...........................................................................19 Existing Leases..............................................................................7 Expense Payment.............................................................................18 Expense Year................................................................................12 Final Space Plan.............................................................................2 Final Working Drawings.......................................................................3 First Offer Commencement Date................................................................8
-iii- 5 First Offer Notice...........................................................................7 First Offer Rent.............................................................................7 First Offer Space............................................................................6 Force Majeure...............................................................................49 Hazardous Material..........................................................................15 Hazardous Materials.........................................................................53 Holdover Rent................................................................................9 Irvine Oaks Executive Park...................................................................5 Landlord.....................................................................................1 Landlord Parties............................................................................27 Landlord Supervision Fee..................................................................2, 4 Lease........................................................................................1 Lease Commencement Date......................................................................8 Lease Expiration Date........................................................................8 Lease Term................................................................................6, 8 Lease Year...................................................................................8 Mail........................................................................................50 Management Fee Cap..........................................................................15 Mortgagees..................................................................................39 Notices.....................................................................................50 Operating Expenses..........................................................................12 Option Rent.................................................................................10 Option Rent Notice..........................................................................11 Option Term.................................................................................10 Original Improvements.......................................................................29 Original Tenant..............................................................................6 Other Improvements..........................................................................52 Over Allowance Amount........................................................................4 Permits......................................................................................3 Premises.....................................................................................5 Premises Delivery............................................................................9 Project......................................................................................5 Project Direct Expenses.....................................................................12 Proposition 13..............................................................................17 Ready for Occupancy..........................................................................9 Reimbursement Holdover Time Period...........................................................9 Renovations.................................................................................53 Rent........................................................................................11 rentable square feet.........................................................................6 Specifications...............................................................................2 Standard Improvement Package.................................................................2 Statement...................................................................................18 Subject Space...............................................................................33 Summary......................................................................................1 Superior Rights..............................................................................7
-iv- 6 Tax Expenses................................................................................16 Tenant.......................................................................................1 Tenant Improvement Allowance.................................................................1 Tenant Improvement Allowance Items...........................................................2 Tenant Improvements..........................................................................1 Tenant Parties..............................................................................27 Tenant Work Letter...........................................................................5 Tenant's Architect...........................................................................2 Tenant's Building Share.....................................................................18 Tenant's Project Share......................................................................18 Tenant's Subleasing Costs...................................................................35 Time Deadlines...............................................................................3 Transfer....................................................................................36 Transfer Notice.............................................................................33 Transfer Premium............................................................................35 Transfer Response Notice....................................................................36 Transferee..................................................................................33 Transfers...................................................................................33
-v- 7 IRVINE OAKS EXECUTIVE PARK -------------------------- OFFICE LEASE ------------ This Office Lease (the "LEASE"), dated as of the date set forth in Section 1 of the Summary of Basic Lease Information (the "SUMMARY"), below, is made by and between MAGELLAN IRVINE OAKS LIMITED PARTNERSHIP, an Arizona limited partnership ("LANDLORD"), and KOFAX IMAGE PRODUCTS, INC., a Delaware corporation ("TENANT"). SUMMARY OF BASIC LEASE INFORMATION ----------------------------------
TERMS OF LEASE DESCRIPTION - -------------- ----------- 1. Date: June __, 1998 2. Premises (Article 1). 2.1 Building: That certain building to be constructed by Landlord in accordance with the terms of the Tenant Work Letter, which is to be located at 16245 Laguna Canyon Road, Irvine, California 2.2 Premises: Approximately 58,814 rentable square feet of space (subject to adjustment as set forth in Section 1.2 of this Lease) comprising the entire Building, as further set forth in EXHIBIT A to the Office Lease. 2.3 Project: Irvine Oaks Executive Park 16245 - 16277 Laguna Canyon Road Irvine, California 92718 3. Lease Term (Article 2). 3.1 Length of Term: Five (5) years. 3.2 Lease Commencement Date: The earlier to occur of (i) the date upon which Tenant first commences to conduct business in the Premises and (ii) the Monday following the date upon which the Premises are "Ready for Occupancy," as that term is defined in the Tenant Work Letter, which date is anticipated to be February 1, 1999.
-1- IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 8
TERMS OF LEASE DESCRIPTION - -------------- ----------- 3.3 Lease Expiration Date: The last day of the month in which the 5th anniversary of the Lease Commencement Date occurs. 4. Base Rent (Article 3): (Subject to adjustment as set forth in Section 1.2 of the Lease).
Monthly Monthly Rental Rate Annual Installment per Rentable Lease Year Base Rent of Base Rent Square Foot ---------- --------- ------------ ----------- 1 $811,633.20 $67,636.10 $1.15 2 $846,921.60 $70,576.80 $1.20 3 $882,210.00 $73,517.50 $1.25 4 $917,498.40 $76,458.20 $1.30 5 $952,786.80 $79,398.90 $1.35
5. Tenant's Share (Article 4): 5.1 Tenant's Building Share: 100%. 5.2 Tenant's Project Share: Approximately 18.6%. (Subject to adjustment as set forth in Section 1.2 of the Lease). 6. Permitted Use (Article 5): General office use and/or engineering, testing, light manufacturing and storage of small electronic components consistent with a first- class office park 7. Security Deposit (Article 21): None. 8. Parking Ratio (Article 28): Up to four (4) parking spaces for every 1,000 rentable square feet of the Premises, of which ten (10) parking spaces shall be reserved parking spaces, subject to the provisions of Article 28.
-2- IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 9
TERMS OF LEASE DESCRIPTION - -------------- ----------- 9. Address of Tenant Kofax Image Products, Inc. (Section 29.18): 3 Jenner Irvine, California 92618 Attention: Mr. Ron Fikert (Prior to Lease Commencement Date) and Irvine Oaks Executive Park 16245 Laguna Canyon Road Irvine, California 92618 Attention: Mr. Ron Fikert (After Lease Commencement Date) 10. Address of Landlord (Section 29.18): LaSalle Partners 16261 Laguna Canyon Road Irvine, California 92618 Attention: Property Manager and Magellan Corporations 2198 East Camelback Road Suite 325 Phoenix, Arizona 85016 Attention: Mr. Brian Snider and (only as to notices of default and other legal notices) Allen, Matkins, Leck, Gamble & Mallory 1999 Avenue of the Stars, Suite 1800 Los Angeles, California 90067 Attention: Anton N. Natsis, Esq.
-3- IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 10
TERMS OF LEASE DESCRIPTION - -------------- ----------- 11. Broker(s) (Section 29.24): CB Richard Ellis 24422 Avenida La Carlota, Suite 120 Laguna Hills, California 92653 Attention: Mr. Scott Johnstone and Grubb & Ellis 4695 MacArthur Court, Suite 600 Newport Beach, California 92660 Attention: Mr. Gary Allen 12. Additional Tenant Rights: Two (2) Options to Extend the Lease Term for a period of Three (3) years each, pursuant to the terms of Section 2.2 of this Lease. 13. Tenant Improvement Allowance (Exhibit B, Section 2.1): $1,416,175.00.
-4- IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 11 ARTICLE 1 PREMISES, BUILDING, PROJECT, AND COMMON AREAS 1.1 PREMISES, BUILDING, PROJECT AND COMMON AREAS. 1.1.1 THE PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises set forth in Section 2.2 of the Summary (the "PREMISES"). The outline of the Premises is set forth in EXHIBIT A attached hereto and each floor or floors of the Premises has the number of rentable square feet as set forth in Section 2.2 of the Summary. The parties hereto agree that the lease of the Premises is upon and subject to the terms, covenants and conditions herein set forth, and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of such terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. The parties hereto hereby acknowledge that the purpose of EXHIBIT A is to show the approximate location of the Premises in the "Building," as that term is defined in Section 1.1.2, below, only, and such Exhibit is not meant to constitute an agreement, representation or warranty as to the construction of the Premises, the precise area thereof or the specific location of the "Common Areas," as that term is defined in Section 1.1.3, below, or the elements thereof or of the accessways to the Premises or the "Project," as that term is defined in Section 1.1.2, below. Except as specifically set forth in this Lease and in the Tenant Work Letter attached hereto as EXHIBIT B (the "TENANT WORK LETTER"), Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Premises. Tenant also acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty regarding the condition of the Premises, the Building or the Project or with respect to the suitability of any of the foregoing for the conduct of Tenant's business, except as specifically set forth in this Lease and the Tenant Work Letter. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Building were at such time in good and sanitary order, condition and repair, subject to Landlord's obligation to complete punch list items, if any, as provided in the Tenant Work Letter. 1.1.2 THE BUILDING AND THE PROJECT. The Premises are a part of the building set forth in Section 2.1 of the Summary (the "BUILDING"). The Building shall be constructed by Landlord in accordance with the terms of the Tenant Work Letter, and shall be part of an office project known as "IRVINE OAKS EXECUTIVE PARK." The term "PROJECT," as used in this Lease, shall mean (i) the Building and the Common Areas, (ii) the land (which is improved with landscaping, parking areas and other improvements) upon which the Building and the Common Areas are located, (iii) the other office buildings located within the Project and the land upon which such adjacent office buildings are located, and (iv) at Landlord's discretion, any additional real property, areas, land, buildings or other improvements added thereto outside of, but contiguous to, the Project. 1.1.3 COMMON AREAS. Tenant shall have the non-exclusive right to use in common with other tenants in the Project, and subject to the rules and regulations referred to in - 5 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 12 Article 5 of this Lease, those portions of the Project which are provided, from time to time, for use in common by Landlord, Tenant and any other tenants of the Project (such areas, together with such other portions of the Project designated by Landlord, in its discretion, including certain areas designated for the exclusive use of certain tenants, or to be shared by Landlord and certain tenants, are collectively referred to herein as the "COMMON AREAS"). The manner in which the Common Areas are maintained and operated shall be at the sole discretion of Landlord and the use thereof shall be subject to such rules, regulations and restrictions as Landlord may make from time to time; provided that Landlord shall maintain and operate the Common Areas in a manner consistent with that of other first-class office buildings in the vicinity of the Building and enforce such rules, regulations and restrictions in a consistent and nondiscriminatory manner regarding all tenants and occupants of the Project. Landlord reserves the right to close temporarily, make alterations or additions to, or change the location of elements of the Project and the Common Areas; provided that Tenant shall have right of access to the Premises and the Project twenty-four (24) hours per day, seven (7) days per week during the "LEASE TERM," as that term is defined in Section 2.1 of this Lease, except to the extent necessary for any of the foregoing alterations, additions, changes or repairs to the Project, Premises or Common Areas, provided, in such event Section 19.5 of this Lease shall apply. 1.2 VERIFICATION OF RENTABLE SQUARE FEET OF PREMISES, BUILDING, AND PROJECT. For purposes of this Lease, "RENTABLE SQUARE FEET" shall be calculated based on the "drip line" area of the Building, as measured to the exterior walls on each floor of the Building, without exclusions for any soffits or penetrations. The "USABLE SQUARE FEET" of the Premises shall be determined pursuant the Standard Method For Measuring Office Buildings, ANZI Z65.1996 ("BOMA"). The rentable square footage of the Project shall include all of the Building Common Areas. Following the "Lease Commencement Date," as that terms is defined in Article 3, below, Landlord shall verify the rentable square footage of Premises. In the event that the rentable area of the Premises, the Building and/or the Project shall change due to such verification, or due to subsequent alterations and/or other modifications to the Premises, the Building and/or the Project, the rentable area of the Premises, the Building and/or the Project, as the case may be, shall be appropriately adjusted as of the date of such alteration and/or other modification, based upon the written verification by Landlord's space planner of such revised rentable area. In the event of any such adjustment to the rentable area of the Premises, the Building and/or the Project, all amounts, percentages and figures appearing or referred to in this Lease based upon such rentable area (including, without limitation, the amount of the "Rent" and any "Security Deposit," as those terms are defined in Article 4 and Article 21 of this Lease, respectively and "Tenant's Project Share," as that term is defined in Section 4.2.10, below) shall be modified in accordance with such determination. 1.3 RIGHT OF FIRST OFFER. Landlord hereby grants to the Tenant named in the Summary (the "ORIGINAL TENANT") an ongoing right of first offer during the Lease Term to lease any space in any other building in the Project as space becomes available (the "FIRST OFFER SPACE"). Notwithstanding the foregoing, such first offer right of Tenant shall (i) commence only following the expiration or earlier termination of any leases currently in effect for any premises in the Project or the initial lease(s) entered into by Landlord with a third party or parties which are currently under negotiation, if the same are consummated, for First Offer Space those certain - 6 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 13 buildings located in the Project, commonly known as 16271 and 16241 Laguna Canyon Road, including any renewal of such lease(s), whether or not such renewal is pursuant to an express written provision in such lease(s), and regardless of whether any such renewal is consummated pursuant to a lease amendment or a new lease (the "EXISTING LEASES") and (ii) be subordinate and secondary to all rights of expansion, first refusal, first offer or similar rights set forth in such Existing Leases with respect to the First Offer Space (collectively, the "SUPERIOR RIGHTS"). Tenant's right of first offer shall be on the terms and conditions set forth in this Section 1.3. 1.3.1 PROCEDURE FOR OFFER. Prior to entering into a new lease for the First Offer Space other than pursuant to a Superior Right, Landlord shall notify Tenant (the "FIRST OFFER NOTICE") when and if the First Offer Space becomes available for lease to third parties other than the holders of the Superior Rights. Pursuant to such First Offer Notice, Landlord shall offer to lease to Tenant the First Offer Space. The First Offer Notice shall describe the space so offered to Tenant and shall set forth the "First Offer Rent," as that term is defined in Section 1.3.3 below, the rentable and usable square footage, and the other economic terms upon which Landlord is willing to lease such space to Tenant. 1.3.2 PROCEDURE FOR ACCEPTANCE. If Tenant wishes to exercise Tenant's right of first offer with respect to the space described in the First Offer Notice, then within five (5) business days of delivery of the First Offer Notice to Tenant, Tenant shall deliver notice to Landlord of Tenant's intention to exercise its right of first offer with respect to the entire space described in the First Offer Notice on the terms contained in such notice. If Tenant does not so notify Landlord within the five (5) business day period, then Landlord shall be free to lease the space described in the First Offer Notice to anyone to whom Landlord desires on any terms Landlord desires. Notwithstanding anything to the contrary contained herein, Tenant must elect to exercise its right of first offer, if at all, with respect to all of the space offered by Landlord to Tenant, and Tenant may not elect to lease only a portion thereof. 1.3.3 FIRST OFFER RENT. The rent payable by Tenant for the First Offer Space (the "FIRST OFFER RENT") shall be equal to the rent (including additional rent and considering any "base year" or "expense stop" applicable thereto), including all escalations, at which tenants, as of the "First Offer Commencement Date," as that term is defined in Section 1.3.5, below, are leasing non-sublease, non-encumbered, non-equity, non-renewal, non-expansion space comparable in size, location and quality to the First Offer Space for a similar lease term, in an arms length transaction, which comparable space is located in the Project, or, if there are not at least three (3) current comparable transactions in the Project, then located in the "Irvine Spectrum" area in Irvine, California (collectively, "COMPARABLE BUILDINGS"), in either case taking into consideration the following concessions: (a) rental abatement concessions, if any, being granted such tenants in connection with such comparable space, (b) tenant improvements or allowances provided or to be provided for such comparable space, taking into account, and deducting the value of, the existing improvements in the First Offer Space, such value to be based upon the age, design, quality of finishes, and layout of the improvements and the extent to which the same could be utilized by a general office user, (c) any period of rental abatement, if any, granted to tenants in comparable transactions in connection with the design, permitting and construction of tenant improvements in such comparable spaces, and (d) other reasonable monetary concessions, if any, being granted - 7 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 14 such tenants in connection with such comparable space; provided, however, that in calculating the First Offer Rent, no consideration shall be given to the fact that Landlord is or is not required to pay a real estate brokerage commission in connection with Tenant's lease of the First Offer Space or the fact that Landlord is or is not paying real estate brokerage commissions in connection with such comparable space. 1.3.4 CONSTRUCTION IN FIRST OFFER SPACE. Tenant shall take the First Offer Space in its "as is" condition, and if Tenant elects to construct improvements in the First Offer Space, then such construction shall be performed in compliance with the terms of Article 8 of this Lease. 1.3.5 AMENDMENT TO LEASE. If Tenant timely exercises Tenant's right to lease the First Offer Space as set forth herein, Landlord and Tenant shall within fifteen (15) days thereafter execute an amendment to this Lease for such First Offer Space upon the terms and conditions as set forth in the First Offer Notice and this Section 1.3. Tenant shall commence payment of rent for the First Offer Space, and the term of the First Offer Space shall commence upon the date of delivery of the First Offer Space to Tenant (the "FIRST OFFER COMMENCEMENT DATE") and terminate coterminously with the expiration or earlier termination of this Lease. 1.3.6 TERMINATION OF RIGHT OF FIRST OFFER. The rights contained in this Section 1.3 shall be personal to the Original Tenant, and may only be exercised by the Original Tenant (and not any assignee, sublessee or transferee of Tenant's interest in this Lease) if Tenant occupies the entire Premises as of the date of the attempted exercise of the right of first offer by Tenant and as of the scheduled date of delivery of such First Offer Space to Tenant. Tenant shall not have the right to lease the First Offer Space, as provided in this Section 1.3, if, as of the date of the attempted exercise of the right of first offer by Tenant, or as of the scheduled date of delivery of such First Offer Space to Tenant, Tenant is in default under this Lease beyond the applicable cure period provided in this Lease or Tenant has previously been in default under this Lease beyond the applicable cure period provided in this Lease more than twice. The right of first offer granted herein shall terminate upon the failure by Tenant to exercise its right of first offer with respect to the First Offer Space offered by Landlord. ARTICLE 2 LEASE TERM; OPTION TERMS 2.1 INITIAL TERM. The terms and provisions of this Lease shall be effective as of the date of this Lease. The term of this Lease (the "LEASE TERM") shall be as set forth in Section 3.1 of the Summary, shall commence on the date set forth in Section 3.2 of the Summary (the "LEASE COMMENCEMENT DATE"), and shall terminate on the date set forth in Section 3.3 of the Summary (the "LEASE EXPIRATION DATE") unless this Lease is sooner terminated as hereinafter provided. For purposes of this Lease, the term "LEASE YEAR" shall mean each consecutive twelve (12) month period during the Lease Term. At any time during the Lease Term, Landlord may deliver to Tenant a notice in the form as set forth in EXHIBIT C, attached hereto, as a confirmation only of - 8 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 15 the information set forth therein, which Tenant shall execute and return to Landlord within five (5) days of receipt thereof. 2.2 DELAY IN DELIVERY OF THE PREMISES. If the Premises are not "READY FOR OCCUPANCY," as that term is defined in Section 5.1 of the Tenant Work Letter, as of February 1, 1999, and provided any such delay is not the result of "Tenant Delay," as that term is defined in Section 5.2 in the Tenant Work Letter, Landlord will pay to Tenant, upon Tenant's presentation to Landlord of evidence of payment by Tenant to Tenant's current landlord of any increased rental resulting from Tenant's holdover, fifty percent (50%) of any increased amount of rental due as a result of Tenant's failure to vacate its existing premises at 3 and 5 Jenner, Irvine, California ("Holdover Rent") incurred by Tenant during the "Reimbursement Holdover Time Period," as hereinafter calculated (which monthly amount shall be prorated on a day-by-day basis). For purposes herein, the "Reimbursement Holdover Time Period" shall be the number of days calculated between February 1, 1999, and the earlier of: (i) the date the Premises are Ready for Occupancy, and (ii) the date Tenant commences business in the Premises, and for those number of days, Landlord shall be responsible for the Holdover Rent on a daily prorated basis; provided, however, if Tenant is required to pay Holdover Rent for a full month notwithstanding the fact that Tenant holds over for less than a month, and Tenant provides Landlord with evidence of such full month payment, Landlord shall pay Tenant the amounts hereinabove specified for a full month rather than on a prorated basis. 2.3 Termination Based on Delay in Delivery of the Premises. 2.3.1 Outside Date of Premises Delivery. If the Premises are not Ready for Occupancy and Landlord does not cause the delivery (the "Premises Delivery") to occur by September 1, 1999 (the "Outside Date"), then the sole remedy of Tenant for such failure shall be the right to deliver a notice to Landlord (a "Termination Notice") electing to terminate this Lease effective upon the date occurring five (5) business days following receipt by Landlord of the Termination Notice (the "Effective Date"). The Termination Notice must be delivered by Tenant to Landlord, if at all, not earlier than the Outside Date (as the same may be extended pursuant to the terms of Section 2.3.2 below) nor later than five (5) business days after the Outside Date. The effectiveness of any such Termination Notice delivered by Tenant to Landlord shall be governed by the terms of this Section 2.3. 2.3.2 Extension of Outside Date Prior to the Delivery of Termination Notice. If a Termination Notice has not been delivered by Tenant to Landlord and, prior to the Outside Date, Landlord determines that the Premises Delivery will not occur by the Outside Date, Landlord shall have the right to deliver a written notice to Tenant stating Landlord's opinion as to the date by which the Premises Delivery shall occur, and Tenant shall be required, within five (5) business days after receipt of such notice, to deliver a notice to Landlord pursuant to which Tenant shall elect to either terminate this Lease, in which case this Lease shall immediately terminate and be of no further force and effect, or to agree to extend the Outside Date to that date set forth in such notice delivered by Landlord. Failure by Tenant to deliver such notice or to so elect shall be deemed Tenant's agreement to extend the Outside Date set forth in Landlord's notice to Tenant. If Tenant agrees to extend the Outside Date, Landlord shall have a continuing right to - 9 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 16 deliver a notice to Tenant which requests Tenant to so elect to either terminate this Lease or to further extend the Outside Date as set forth in this Section 2.3.2, above, until the occurrence of the delivery or until this Lease is terminated. 2.3.3 Other Terms. The date of the Premises Delivery, the Effective Date and the Outside Date shall be extended to the extent of any Tenant Delays. Upon any termination as set forth in Section 2.3, Landlord and Tenant shall be relieved from any and all liability to each other resulting hereunder except that Landlord shall return to Tenant any prepaid rent. Tenant's rights to terminate this Lease, as set forth in this Section 2.3, shall be Tenant's sole and exclusive remedy at law or in equity for the failure of the Premises Delivery to occur as set forth above. 2.3 OPTION TERM. 2.3.1 OPTION RIGHT. Landlord hereby grants the Original Tenant two (2) options to extend the Lease Term for a period of three (3) years each (each, an "OPTION Term"), which options shall be exercisable only by written notice delivered by Tenant to Landlord as provided below, provided that, as of the date of delivery of such notice, Tenant is not in default under this Lease beyond the applicable cure period provided in this Lease and Tenant has not previously been in default under this Lease beyond the applicable cure period provided in this Lease more than twice. Upon the proper exercise of any such option to extend, and provided that, as of the end of the initial Lease Term as initial Option Term, as the case may be, Tenant is not in default under this Lease and Tenant has not previously been in default under this Lease more than once, the Lease Term, as it applies to the Premises, shall be extended for a period of three (3) years. The rights contained in this Section 2.3 shall be personal to the Original Tenant and may only be exercised by the Original Tenant (and not any assignee, sublessee or other transferee of Tenant's interest in this Lease) if the Original Tenant occupies the entire Premises. 2.3.2 OPTION RENT. The rent payable by Tenant during the Option Term (the "OPTION RENT") shall be equal to the greater of (i) the Rent being paid by Tenant as of the expiration of the initial Lease Term, or initial Option Term, as the case may be, and (ii) the rent including all escalations, at which, as of the commencement of the Option Term, tenants are leasing non-sublease, non-encumbered, non-equity space in Comparable Buildings for a term of three (3) years, taking into consideration the following concessions: (a) rental abatement concessions, if any, being granted such tenants in connection with such comparable space; (b) tenant improvements or allowances provided or to be provided for such comparable space, taking into account, and deducting the value of, the existing improvements in the Premises, such value to be based upon the age, quality and layout of the improvements and the extent to which the same can be utilized by Tenant based upon the fact that the precise tenant improvements existing in the Premises are specifically suitable to Tenant; and (c) other reasonable monetary concessions, if any, being granted such tenants in connection with such comparable space; provided, however, that in calculating the Option Rent, no consideration shall be given to the fact that Landlord is or is not required to pay a real estate brokerage commission in connection with Tenant's right to lease the Premises during the Option Term or the fact that Landlord is or is not paying real estate brokerage commissions in connection with such comparable space. - 10 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 17 2.3.3 EXERCISE OF OPTION. The options contained in this Section 2.2 shall be exercised by Tenant, if at all, only in the following manner: (i) Tenant shall deliver written notice to Landlord not more than thirteen (13) months nor less than twelve (12) months prior to the expiration of the initial Lease Term or initial Option Term, as applicable, stating that Tenant is interested in exercising its option; (ii) Landlord, after receipt of Tenant's notice, shall deliver notice (the "OPTION RENT NOTICE") to Tenant not less than ten (10) months prior to the expiration of the initial Lease Term or initial Option Term, as applicable, setting forth the Option Rent; and (iii) if Tenant wishes to exercise such option, Tenant shall, on or before the earlier of (A) the date occurring nine (9)months prior to the expiration of the initial Lease Term or initial Option Term, as applicable, and (B) the date occurring thirty (30) days after Tenant's receipt of the Option Rent Notice, exercise the option by delivering written notice thereof to Landlord. ARTICLE 3 BASE RENT Tenant shall pay, without prior notice or demand, to Landlord or Landlord's agent at the management office of the Project, or, at Landlord's option, at such other place as Landlord may from time to time designate in writing, by a check for currency which, at the time of payment, is legal tender for private or public debts in the United States of America, base rent ("BASE RENT") as set forth in Section 4 of the Summary, payable in equal monthly installments as set forth in Section 4 of the Summary in advance on or before the first day of each and every calendar month during the Lease Term, without any setoff or deduction whatsoever, except as otherwise provided in this Lease. The Base Rent for the first full month of the Lease Term shall be paid at the time of Tenant's execution of this Lease. If any Rent payment date (including the Lease Commencement Date) falls on a day of the month other than the first day of such month or if any payment of Rent is for a period which is shorter than one month, the Rent for any fractional month shall accrue on a daily basis for the period from the date such payment is due to the end of such calendar month or to the end of the Lease Term at a rate per day which is equal to 1/365 of the applicable annual Rent. All other payments or adjustments required to be made under the terms of this Lease that require proration on a time basis shall be prorated on the same basis. ARTICLE 4 ADDITIONAL RENT 4.1 GENERAL TERMS. In addition to paying the Base Rent specified in Article 3 of this Lease, Tenant shall pay "Tenant's Building Share" of the annual "Building Direct Expenses," and "Tenant's Project Share" of the annual "Project Direct Expenses" as those terms are defined in Section 4.2, below. Such payments by Tenant, together with any and all other amounts payable by Tenant to Landlord pursuant to the terms of this Lease, are hereinafter collectively referred to as the "ADDITIONAL RENT", and the Base Rent and the Additional Rent are herein collectively referred to as "RENT." All amounts due under this Article 4 as Additional Rent shall be payable - 11 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 18 for the same periods and in the same manner as the Base Rent. Without limitation on other obligations of Tenant which survive the expiration of the Lease Term, the obligations of Tenant to pay the Additional Rent provided for in this Article 4, which accrues during Lease Term, shall survive the expiration of the Lease Term. 4.2 DEFINITIONS OF KEY TERMS RELATING TO ADDITIONAL RENT. As used in this Article 4, the following terms shall have the meanings hereinafter set forth: 4.2.1 "PROJECT DIRECT EXPENSES" shall mean the portion of "Direct Expenses," as that term is defined in Section 4.2.5 below, which is not attributable to any particular Building in the Project, but which instead relates to the Project as a whole. 4.2.2 "BUILDING DIRECT EXPENSES" shall mean "Building Operating Expenses" and "Building Tax Expenses", as those terms are defined in Sections 4.2.3 and 4.2.4, below, respectively. 4.2.3 "BUILDING OPERATING EXPENSES" shall mean the portion of "Operating Expenses," as that term is defined in Section 4.2.7 below, allocated to the tenants of the Building pursuant to the terms of Section 4.3.1 below. 4.2.4 "BUILDING TAX EXPENSES" shall mean that portion of "Tax Expenses", as that term is defined in Section 4.2.8 below, allocated to the tenants of the Building pursuant to the terms of Section 4.3.1 below. 4.2.5 "DIRECT EXPENSES" shall mean "Operating Expenses" and "Tax Expenses." 4.2.6 "EXPENSE YEAR" shall mean each calendar year in which any portion of the Lease Term falls, through and including the calendar year in which the Lease Term expires, provided that Landlord, upon notice to Tenant, may change the Expense Year from time to time to any other twelve (12) consecutive month period, and, in the event of any such change, Tenant's Share of Building Direct Expenses shall be equitably adjusted for any Expense Year involved in any such change. 4.2.7 "OPERATING EXPENSES" shall mean all expenses, costs and amounts of every kind and nature which Landlord pays or accrues during any Expense Year because of or in connection with the ownership, management, maintenance, security, repair, replacement, restoration or operation of the Project, or any portion thereof. Without limiting the generality of the foregoing, Operating Expenses shall specifically include any and all of the following: (i) the cost of supplying all utilities, the cost of operating, repairing, maintaining, and renovating the utility, telephone, mechanical, sanitary, storm drainage, and elevator systems, and the cost of maintenance and service contracts in connection therewith; (ii) the cost of licenses, certificates, permits and inspections and the cost of contesting any governmental enactments which may affect Operating Expenses, and the costs incurred in connection with a transportation system management program or similar program; (iii) the cost of all insurance carried by Landlord in connection with the Project (excluding earthquake insurance) as reasonably determined by Landlord; (iv) the cost of landscaping, relamping, and all supplies, tools, equipment and materials - 12 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 19 used in the operation, repair and maintenance of the Project, or any portion thereof; (v) the cost of parking area repair, restoration, and maintenance ; (vi) fees and other costs, including management fees, consulting fees, legal fees and accounting fees, of all contractors and consultants in connection with the management, operation, maintenance and repair of the Project; (vii) payments under any equipment rental agreements and the fair rental value of any management office space; (viii) wages, salaries and other compensation and benefits, including taxes levied thereon, of all persons engaged in the operation, maintenance and security of the Project; (ix) costs under any instrument pertaining to the sharing of costs by the Project; (x) operation, repair, maintenance and replacement of all systems and equipment and components thereof of the Building; (xi) the cost of janitorial, alarm, security and other services, replacement of wall and floor coverings, ceiling tiles and fixtures in common areas, maintenance and replacement of curbs and walkways, repair to roofs and re-roofing; (xii) amortization (including interest on the unamortized cost) of the cost of acquiring or the rental expense of personal property used in the maintenance, operation and repair of the Project, or any portion thereof; (xiii) the cost of capital improvements or other costs incurred in connection with the Project (A) which are intended to effect economies in the operation or maintenance of the Project, or any portion thereof, to the extent of cost savings reasonably anticipated by Landlord at the time of such expenditure to be incurred in connection therewith, (B) that are required to comply with present or anticipated conservation programs, (C) which are replacements or modifications of nonstructural items located in the Common Areas required to keep the Common Areas in good order or condition, (D) that are required under any governmental law or regulation or (E) which are reasonably determined by Landlord to be in the best interests of the Building and/or the Project; provided, however, that any capital expenditure shall be amortized over its useful life as Landlord shall reasonably determine, and the unamortized cost of the same shall bear interest at the rate of ten percent (10%) per annum or such higher rate as was paid by Landlord on funds borrowed for the purpose of purchasing, installing, and constructing such capital improvements; and (xiv) costs, fees, charges or assessments imposed by, or resulting from any mandate imposed on Landlord by, any federal, state or local government for fire and police protection, trash removal, community services, or other services which do not constitute "Tax Expenses" as that term is defined in Section 4.2.8, below, unless such cost, fee, charge or assessment is imposed as a result of Landlord's violation of such mandate. Notwithstanding the foregoing, Operating Expenses shall not include: (a) costs, including marketing costs, legal fees, space planners' fees, advertising and promotional expenses, and brokerage fees incurred in connection with the original construction or development, or original or future leasing of the Project, and costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements made for tenants in the Project (other than Tenant) or incurred in renovating or otherwise improving, decorating, painting or redecorating any portion of the Project for tenants or other occupants of the Project (excluding, however, such costs relating to any common areas of the Project or parking facilities which benefit all Project tenants); (b) except as set forth in items (xii), (xiii), and (xiv) above, depreciation, interest and principal payments on mortgages and other debt costs, if any, penalties and - 13 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 20 interest, costs of capital repairs and alterations, and costs of capital improvements and equipment; (c) costs for which the Landlord is reimbursed by any tenant or occupant of the Project or by insurance by its carrier or any tenant's carrier or by anyone else, and electric power costs for which any tenant directly contracts with the local public service company; (d) any bad debt loss, rent loss, or reserves for bad debts or rent loss; (e) costs associated with the operation of the business of the partnership or entity which constitutes the Landlord, as the same are distinguished from the costs of operation of the Project (which shall specifically include, but not be limited to, accounting costs associated with the operation of the Project). Costs associated with the operation of the business of the partnership or entity which constitutes the Landlord include costs of partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except as the actions of the Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of the Landlord's interest in the Project, and costs incurred in connection with any disputes between Landlord and its employees, between Landlord and Project management, or between Landlord and other tenants or occupants, and Landlord's general corporate overhead and general and administrative expenses; (f) the wages and benefits of any employee who does not devote substantially all of his or her employed time to the Project unless such wages and benefits are prorated to reflect time spent on operating and managing the Project vis-a-vis time spent on matters unrelated to operating and managing the Project; provided, that in no event shall Operating Expenses for purposes of this Lease include wages and/or benefits attributable to personnel above the level of Project manager or Project engineer; (g) amount paid as ground rental for the Project by the Landlord; (h) except for a Project management fee to the extent allowed pursuant to item (m), below, overhead and profit increment paid to the Landlord or to subsidiaries or affiliates of the Landlord for services in the Project to the extent the same exceeds the costs of such services rendered by qualified, first-class unaffiliated third parties on a competitive basis; (i) any compensation paid to clerks, attendants or other persons in commercial concessions operated by the Landlord, provided that any compensation paid to any concierge at the Project shall be includable as an Operating Expense; (j) rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment which if purchased the cost of which would be excluded from Operating Expenses as a capital cost, except equipment not affixed to the Project which is used in providing janitorial or similar services and, further excepting from - 14 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 21 this exclusion such equipment rented or leased to remedy or ameliorate an emergency condition in the Project ; (k) all items and services for which Tenant or any other tenant in the Project reimburses Landlord or which Landlord provides selectively to one or more tenants (other than Tenant) without reimbursement; (l) costs, other than those incurred in ordinary maintenance and repair, for sculpture, paintings, fountains or other objects of art; (m) fees payable by Landlord for management of the Project in excess of five percent (5%) (the "Management Fee Cap") of gross receipts; (n) any costs expressly excluded from Operating Expenses elsewhere in this Lease; (o) rent for any office space occupied by Project management personnel to the extent the size or rental rate of such office space exceeds the size or fair market rental value of office space occupied by management personnel of the Comparable Buildings in the vicinity of the Building, with adjustment where appropriate for the size of the applicable project; (p) costs arising from the negligence or wilful misconduct of Landlord or its agents, employees, vendors, contractors, or providers of materials or services; (q) costs incurred to comply with laws relating to the removal of hazardous material (as defined under applicable law) and asbestos containing material (collectively, "Hazardous Material") which was in existence in the Building or on the Project prior to the Lease Commencement Date, and was of such a nature that a federal, State or municipal governmental authority, if it had then had knowledge of the presence of such Hazardous Material, in the state, and under the conditions that it then existed in the Building or on the Project, would have then required the removal of such Hazardous Material or other remedial or containment action with respect thereto; and costs incurred to remove, remedy, contain, or treat Hazardous Material, which Hazardous Material is brought into the Building or onto the Project after the date hereof by Landlord or any other tenant of the Project and is of such a nature, at that time, that a federal, State or municipal governmental authority, if it had then had knowledge of the presence of such Hazardous Material, in the state, and under the conditions, that it then exists in the Building or on the Project, would have then required the removal of such Hazardous Material or other remedial or containment action with respect thereto; (r) costs arising from Landlord's charitable or political contributions; (s) any gifts provided to any entity whatsoever, including, but not limited to, Tenant, other tenants, employees, vendors, contractors, prospective tenants and agents; - 15 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 22 (t) the cost of any magazine, newspaper, trade or other subscriptions; (u) any costs covered by any warranty, rebate, guarantee or service contract which are actually collected by Landlord (which shall not prohibit Landlord from passing through the costs of any such service contract if otherwise includable in Operating Expenses); (v) marketing costs, including, but not limited to, leasing commissions, attorneys' fees and court costs in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with present or prospective tenants or other occupants of the Building, including attorneys' fees and other costs and expenditures incurred in connection with disputes with present or prospective tenants or other occupants of the Building: (w) advertising and promotional expenditures, and costs of signs in or on the Building identifying the owner of the Building or other tenants' signs; (x) bad debt expenses and interest, principal, points and fees on debts (except in connection with the financing of items which may be included in Operating Expenses) or amortization on any mortgage or mortgages or any other debt instrument encumbering the Building or the Project (including the land on which the Building is situated); (y) tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments or file returns when due; (z) costs of correcting defects in the initial construction of the Building or any portion thereof, or repair and/or replacement of any of the original materials or equipment required as a result of such defects; (aa) costs incurred due to a violation by Landlord or any tenant or occupant (other than Tenant) of any term or condition of any lease or rental arrangement covering space in the Project; (bb) any interest or penalties incurred as a result of Landlord's failure to pay any bill when due; and (cc) reserves for anticipated future expenses to the extent not budgeted to be incurred within the year in which they are collected or the immediately following year. 4.2.8 TAXES. 4.2.8.1 "Tax Expenses" shall mean all federal, state, county, or local governmental or municipal taxes, fees, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary, (including, without limitation, real estate - 16 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 23 taxes, general and special assessments, transit taxes, leasehold taxes or taxes based upon the receipt of rent, including gross receipts or sales taxes applicable to the receipt of rent, unless required to be paid by Tenant, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances, furniture and other personal property used exclusively in connection with the Project, or any portion thereof), which shall be paid or accrued during any Expense Year (without regard to any different fiscal year used by such governmental or municipal authority) because of or in connection with the ownership, leasing and operation of the Project, or any portion thereof. 4.2.8.2 Tax Expenses shall include, without limitation: (i) Any tax on the rent, right to rent or other income from the Project, or any portion thereof, or as against the business of leasing the Project, or any portion thereof; (ii) Any assessment, tax, fee, levy or charge in addition to, or in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June 1978 election ("PROPOSITION 13") and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants, and, in further recognition of the decrease in the level and quality of governmental services and amenities as a result of Proposition 13, Tax Expenses shall also include any governmental or private assessments or the Project's contribution towards a governmental or private cost-sharing agreement for the purpose of augmenting or improving the quality of services and amenities normally provided by governmental agencies; (iii) Any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the Rent payable hereunder, including, without limitation, any business or gross income tax or excise tax with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof; and (iv) Any assessment, tax, fee, levy or charge, upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises. 4.2.8.3 Any costs and expenses (including, without limitation, reasonable attorneys' fees) reasonably incurred in attempting to protest, reduce or minimize Tax Expenses shall be included in Tax Expenses in the Expense Year such expenses are paid. Tax refunds shall be credited against Tax Expenses and refunded to Tenant regardless of when received, based on the Expense Year to which the refund is applicable, provided that in no event shall the amount to be refunded to Tenant for any such Expense Year exceed the total amount paid by Tenant as Additional Rent under this Article 4 for such Expense Year. If Tax Expenses for any period during the Lease Term or any extension thereof are increased after payment thereof for any reason, including, without limitation, error or reassessment by applicable governmental or municipal authorities, Tenant shall pay Landlord upon demand Tenant's Share of any such increased Tax Expenses included by Landlord as Building Tax Expenses pursuant to the terms of this Lease. Notwithstanding anything to the contrary contained in this Section 4.2.8 (except as set forth in Section 4.2.8.1, above), there shall be excluded from Tax Expenses (i) all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, - 17 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 24 estate taxes, federal, state and local income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents, receipts or income attributable to operations at the Project), (ii) any items included as Operating Expenses, and (iii) any items paid by Tenant under Section 4.5 of this Lease. 4.2.9 "TENANT'S BUILDING SHARE" shall mean the percentage set forth in Section 6.1 of the Summary. 4.2.10 "TENANT'S PROJECT SHARE" "Tenant's Project Share" shall mean the percentage set forth in Section 6.2 of the Summary. 4.3 ALLOCATION OF DIRECT EXPENSES. 4.3.1 METHOD OF ALLOCATION. The parties acknowledge that the Building is a part of a multi-building project and that the Project Direct Expenses should be shared between the tenants of the Building and the tenants of the other buildings in the Project. Accordingly, as set forth in Section 4.2 above, Direct Expenses (which consists of Operating Expenses and Tax Expenses) are determined annually for the Project as a whole, and a portion of the Direct Expenses, which portion shall be determined by Landlord on an equitable basis, shall be allocated to the tenants of the Building (as opposed to the tenants of any other buildings in the Project) and such portion shall be the Building Direct Expenses for purposes of this Lease. Such portion of Direct Expenses allocated to the tenants of the Building shall include all Direct Expenses attributable solely to the Building. 4.3.2 COST POOLS. Landlord shall have the right, from time to time, to equitably allocate some or all of the Project Direct Expenses among different portions or occupants of the Project (the "COST POOLS"), in Landlord's discretion. Such Cost Pools may include, but shall not be limited to, the office space tenants of a building of the Project or of the Project, and the retail space tenants of a building of the Project or of the Project. The Direct Expenses within each such Cost Pool shall be allocated and charged to the tenants within such Cost Pool in an equitable manner. The Direct Expenses within any such Cost Pool shall be allocated and charged to the tenants within such Cost Pool in an equitable manner, as reasonably determined by Landlord in accordance with sound real estate management principles, provided Landlord shall not apply such principles in a manner which discriminates against Tenant's particular use of the Premises. 4.4 CALCULATION AND PAYMENT OF ADDITIONAL RENT. For each Expense Year ending or commencing within the Lease Term, Tenant shall pay to Landlord, in the manner set forth in Section 4.4.1, below, and as Additional Rent, an amount equal to the sum of (i) Tenant's Share of Building Direct Expenses for such Expense Year and (ii) Tenant's Project Share of Project Direct Expenses for such Expense Year (collectively, the "EXPENSE PAYMENT"). 4.4.1 STATEMENT OF ACTUAL DIRECT EXPENSES AND PAYMENT BY TENANT. Landlord shall endeavor to give to Tenant within one hundred eighty (180) days following the end of each Expense Year, a statement (the "STATEMENT") which shall state the Building Direct Expenses and Project Direct Expenses incurred or accrued for such preceding Expense Year, and which shall indicate the amount of the Expense Payment. The failure of Landlord to furnish the - 18 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 25 Statement for any Expense Year within the time provided above, however, shall not prejudice Landlord or Tenant from enforcing its rights under this Article 4. Upon receipt of the Statement for each Expense Year commencing or ending during the Lease Term, Tenant shall pay, with its next installment of Base Rent due, the full amount of the Expense Payment for such Expense Year, less the amounts, if any, paid during such Expense Year as an "Estimated Payment," as that term is defined in Section 4.4.2, below. In the event the amount of the Expense Payment for any Expense Year is less than the Estimated Payment paid by Tenant for such Expense Year, Tenant shall receive a credit in the amount of Tenant's overpayment against Rents next due under this Lease. Even though the Lease Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Building Share of Building Direct Expenses and Tenant's Project Share of Project Direct Expenses for the Expense Year in which this Lease terminates, Tenant shall immediately pay to Landlord such amount within ten (10) business days of receipt of the applicable Statement, and if Tenant paid more as an Estimated Payment than the amount set forth in the applicable Statement, Landlord shall, within ten (10) business days after delivery of the applicable Statement, deliver a check payable to Tenant in the amount of the overpayment. The provisions of this Section 4.4.1 shall survive the expiration or earlier termination of the Lease Term. 4.4.2 STATEMENT OF ESTIMATED DIRECT EXPENSES. In addition, Landlord shall endeavor to give Tenant a yearly expense estimate statement (the "ESTIMATE STATEMENT") which shall set forth Landlord's reasonable estimate (the "ESTIMATE") of what the total amount of Building Direct Expenses and Project Direct Expenses for the then-current Expense Year shall be and the estimated payment (the "ESTIMATED PAYMENT") which shall be based upon the Estimate. The failure of Landlord to timely furnish the Estimate Statement for any Expense Year shall not preclude Landlord from enforcing its rights to collect any Estimated Payment under this Article 4, nor shall Landlord be prohibited from revising any Estimate Statement or Estimated Payment theretofore delivered to the extent necessary. Thereafter, Tenant shall pay, with its next installment of Base Rent due, a fraction of the Estimated Payment for the then-current Expense Year (reduced by any amounts paid pursuant to the next to last sentence of this Section 4.4.2). Such fraction shall have as its numerator the number of months which have elapsed in such current Expense Year, including the month of such payment, and twelve (12) as its denominator. Until a new Estimate Statement is furnished (which Landlord shall have the right to deliver to Tenant at any time), Tenant shall pay monthly, with the monthly Base Rent installments, an amount equal to one-twelfth (1/12) of the total Estimated Payment set forth in the previous Estimate Statement delivered by Landlord to Tenant. Landlord shall maintain books and records with respect to Building Direct Expenses and Project Direct Expenses in accordance with generally accepted accounting and management practices, consistently applied. 4.5 TAXES AND OTHER CHARGES FOR WHICH TENANT IS DIRECTLY RESPONSIBLE. 4.5.1 PERSONAL PROPERTY TAXES. Tenant shall be liable for and shall pay prior to delinquency, taxes levied against Tenant's equipment, furniture, fixtures and any other personal property located in or about the Premises. If any such taxes on Tenant's equipment, furniture, fixtures and any other personal property are levied against Landlord or Landlord's property or if the assessed value of Landlord's property is increased by the inclusion therein of a value placed - 19 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 26 upon such equipment, furniture, fixtures or any other personal property and if Landlord pays the taxes based upon such increased assessment, which Landlord shall have the right to do regardless of the validity thereof but only under proper protest if requested by Tenant, Tenant shall upon demand repay to Landlord the taxes so levied against Landlord or the proportion of such taxes resulting from such increase in the assessment, as the case may be. 4.5.2 "ABOVE-STANDARD" IMPROVEMENTS. If the tenant improvements in the Premises, whether installed and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation in excess of the highest per square foot value of improvements in the Building for which Landlord passes through Tax Expenses without direct charge, then the Tax Expenses levied against Landlord or the property by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of Section 4.5.1, above. 4.5.3 OTHER TAXES. Notwithstanding any contrary provision herein, Tenant shall pay prior to delinquency any (i) rent tax or sales tax, service tax, transfer tax or value added tax, or any other applicable tax on the rent or services herein or otherwise respecting this Lease, (ii) taxes assessed upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion of the Project, including the Project parking facility; or (iii) taxes assessed upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. 4.5.4 SERVICE CHARGES. To the extent that Landlord provides any services directly to Tenant, which are not otherwise included in Direct Expenses, including, without limitation, janitorial, locksmithing, lamp replacement, or repair and maintenance services, Tenant shall pay to Landlord, as Additional Rent and concurrently with Tenant's payment of Base Rent to Landlord, the sum of all costs of Landlord of such services, plus an administration fee. 4.6 LANDLORD'S BOOKS AND RECORDS. Within one (1) year after receipt of a Statement by Tenant, if Tenant disputes the amount of Additional Rent set forth in the Statement, an independent certified public accountant (which accountant must be qualified and experienced in reviewing financial operating records of landlords of office buildings and employed by a firm which derives its primary revenues from its accounting practice and must not be paid on a contingency fee basis), designated and paid for by Tenant, may, after reasonable notice to Landlord and at reasonable times, inspect Landlord's records with respect to the Statement at Landlord's offices, provided that Tenant is not then in default under this Lease beyond the applicable cure period provided in this Lease, and Tenant has paid all amounts required to be paid under the applicable Estimate Statement and Statement, as the case may be. In connection with such inspection, Tenant and Tenant's agents must agree in advance to follow Landlord's reasonable rules and procedures regarding inspections of Landlord's records, and shall execute a commercially reasonable confidentiality agreement regarding such inspection. Tenant's failure to dispute the amount of Additional Rent set forth in any Statement within one (1) year of Tenant's receipt of such Statement shall be deemed to be Tenant's approval of such Statement and Tenant, - 20 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 27 thereafter, waives the right or ability to dispute the amounts set forth in such Statement. If after such inspection, Tenant still disputes such Additional Rent, a determination as to the proper amount shall be made by an independent certified public accountant (the "ACCOUNTANT") selected by Landlord and subject to Tenant's reasonable approval. If the Accountant's decision reveals an error in the calculation of Tenant's Share of Direct Expenses to be paid for such Expense Year, the parties' sole remedy shall be for the parties to make appropriate payments or reimbursements, as the case may be, to each other as are determined to be owing. Any such payments shall be made within thirty (30) days following the resolution of such dispute, along with interest at the interest rate set forth in Section 25, below from the date such amounts were originally due, until the date of such payment. At Tenant's election, the parties shall treat any overpayments (plus the interest described above) resulting from the foregoing resolution of such parties' dispute as a credit against Rent next due and owing. Tenant shall be responsible for all costs and expenses associated with any audit, provided that if the final resolution of the dispute establishes an overstatement by Landlord of Direct Expenses for such Expense Year in excess of five percent (5%) or more, then Landlord shall be responsible for all reasonable costs and expenses associated with Tenant's audit. ARTICLE 5 USE OF PREMISES 5.1 PERMITTED USE. Tenant shall use the Premises solely for the Permitted Use set forth in Section 7 of the Summary and Tenant shall not use or permit the Premises or the Project to be used for any other purpose or purposes whatsoever without the prior written consent of Landlord, which may be withheld in Landlord's sole discretion. 5.2 PROHIBITED USES. Tenant further covenants and agrees that Tenant shall not use, or suffer or permit any person or persons to use, the Premises or any part thereof for any use or purpose contrary to the provisions of the Rules and Regulations set forth in EXHIBIT D, attached hereto, or in violation of the laws of the United States of America, the State of California, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Project) including, without limitation, any such laws, ordinances, regulations or requirements relating to hazardous materials or substances, as those terms are defined by applicable laws now or hereafter in effect. Tenant shall not do or permit anything to be done in or about the Premises which will in any way damage the reputation of the Project or obstruct or interfere with the rights of other tenants or occupants of the Building, or injure or annoy them or use or allow the Premises to be used for any improper, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall comply with all recorded covenants, conditions, and restrictions now or hereafter affecting the Project. - 21 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 28 ARTICLE 6 SERVICES AND UTILITIES 6.1 STANDARD TENANT SERVICES. Landlord shall provide the following services on all days (unless otherwise stated below) during the Lease Term. 6.1.1 Landlord shall provide adequate electrical wiring and facilities for connection to Tenant's lighting fixtures and incidental use equipment, which electrical usage shall be subject to applicable laws and regulations, including Title 24, and provided further that Tenant's use of electricity shall never exceed the capacity of the feeders to the Project or Building or the risers or wiring installation related thereto. Tenant shall bear the cost of replacement of lamps, starters and ballasts for lighting fixtures within the Premises. 6.1.2 Landlord shall provide city water from the regular Building outlets for drinking, lavatory and toilet purposes in the Building Common Areas. 6.1.3 Landlord shall provide exterior window washing services in a manner consistent with other comparable buildings in the vicinity of the Building. 6.1.4 Landlord shall not provide janitorial services for the Premises. Tenant shall be solely responsible maintaining the Premises in a manner consistent with a first-class office building, including, without limitation, the following. 6.1.4.1 Tenant shall cause the carpets or other floor coverings in the Premises to be professionally cleaned at least once every year during the Lease Term. 6.1.4.2 Tenant shall cause to be provided interior window washing in the Premises at least once every year, and (ii) sweeping and cleaning of the Premises, as needed. 6.1.4.3 In the event Tenant fails to maintain the Premises as provide herein, Landlord shall have the option to cause such janitorial services to be provided by a service company designated by Landlord, in which case Tenant shall pay the cost of such services directly to Landlord. Any other janitorial service provider shall be approved in advance by Landlord in Landlord's sole discretion. Tenant shall cooperate fully with Landlord at all times and abide by all regulations and requirements that Landlord may reasonably prescribe for the proper functioning and protection of the HVAC, electrical, mechanical and plumbing systems. 6.2 INTERRUPTION OF USE. Except as provided in Section 19.5 below, Tenant agrees that Landlord shall not be liable for damages, by abatement of Rent or otherwise, for failure to furnish or delay in furnishing any service (including telephone and telecommunication services), or for any diminution in the quality or quantity thereof, when such failure or delay or diminution is occasioned, in whole or in part, by breakage, repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, or other fuel at - 22 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 29 the Building or Project after reasonable effort to do so, by any riot or other dangerous condition, emergency, accident or casualty whatsoever, by act or default of Tenant or other parties, or by any other cause beyond Landlord's reasonable control; and such failures or delays or diminution shall never be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease. Furthermore, Landlord shall not be liable under any circumstances for a loss of, or injury to, property or for injury to, or interference with, Tenant's business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any of the services or utilities as set forth in this Article 6. 6.3 SUBMETERING UTILITIES. The Premises shall be separately metered for electricity, water, or any other utility service provided, however, Landlord shall have the right (i) to bill Tenant directly the cost of such utility, and Tenant shall pay such costs directly to Landlord at the rates charged by the public utility company furnishing the same, or (ii) to require Tenant to contract directly with the applicable public utility for such service. Any such costs paid by Tenant shall not be included in Operating Expenses. ARTICLE 7 REPAIRS 7.1 DUTIES TO REPAIR. Landlord shall maintain and repair the "BASE BUILDING," as that term is defined in Section 8.4 below, except to the extent that such repairs are required due to the negligence or willful misconduct of Tenant, and provided that if such repairs are due to the negligence or willful misconduct of Tenant, Landlord shall nevertheless make such repairs at Tenant's sole cost and expense, except that, if covered by Landlord's insurance, Tenant shall only be obligated to pay any deductible in connection therewith. Tenant shall, at Tenant's own expense, keep the Premises, including all improvements, fixtures and furnishings therein, and the floor or floors of the Building on which the Premises are located, in good order, repair and condition at all times during the Lease Term. In addition, Tenant shall, at Tenant's own expense, but under the supervision and subject to the prior approval of Landlord, and within any reasonable period of time specified by Landlord, promptly and adequately repair all damage to the Premises and replace or repair all damaged, broken, or worn fixtures and appurtenances, except for damage caused by ordinary wear and tear or beyond the reasonable control of Tenant; provided however, that, at Landlord's option, or if Tenant fails to make such repairs, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof, including a percentage of the cost thereof (to be uniformly established for the Building and/or the Project) sufficient to reimburse Landlord for all overhead, general conditions, fees and other costs or expenses arising from Landlord's involvement with such repairs and replacements forthwith upon being billed for same. Landlord may, but shall not be required to, enter the Premises at all reasonable times to make such repairs, alterations, improvements or additions to the Premises or to the Project or to any equipment located in the Project as Landlord shall desire or deem necessary or as Landlord may be required to do by governmental or quasi-governmental authority or court order or decree. Tenant hereby waives any and all rights under and benefits of - 23 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 30 subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or hereafter in effect. 7.2 TENANT'S RIGHT TO MAKE REPAIRS. Notwithstanding the provisions of Section 7.1, above, if Tenant provides notice to Landlord of an event or circumstance which requires the action of Landlord with respect to repair and/or maintenance as set forth in Section 7.1, above, and such repair and/or maintenance relates solely to the Building (specifically excluding any right of Tenant to repair any Building core systems and equipment, including the Building elevators or any other portions of the Project), and Landlord fails to provide such action within a reasonable period of time, given the circumstances, after the giving of such notice, but in any event not later than thirty (30) days after giving of such notice, then Tenant may proceed to take the required action upon delivery of an additional ten (10) business days notice to Landlord specifying that Tenant is taking such required action. In the event Tenant takes such action, Tenant shall use only those contractors used by Landlord in the Building for similar work unless such contractors are unwilling or unable to perform such work, in which event Tenant may utilize the services of any other qualified contractor which normally and regularly performs similar work in Comparable Buildings. Further, if Landlord does not deliver a detailed written objection to Tenant within thirty (30) days after receipt of an invoice from Tenant of its costs of taking action which Tenant claims should have been taken by Landlord, and if such invoice from Tenant sets forth a reasonably particularized breakdown of its costs and expenses in connection with taking such action on behalf of Landlord, and such action was required under the terms of this Lease to be taken by Landlord, then Tenant shall be entitled to deduct the amount set forth in such invoice from Rent payable by Tenant under this Lease. If, however, Landlord delivers to Tenant within thirty (30) days after receipt of Tenant's invoice, a written objection to the payment of such invoice, setting forth with reasonable particularity Landlord's reasons for its claim that such action did not have to be taken by Landlord pursuant to the terms of this Lease or that the charges are excessive (in which case Landlord shall pay the amount it contends would not have been excessive), then Tenant shall not be entitled to such deduction from Rent. If Tenant receives a final, non-appealable judgment from a court of competent jurisdiction that the costs set forth in the invoice are due and payable, Tenant shall either (i) immediately have the right to deduct such costs from Rent next due under this Lease or (ii) if the Lease Expiration Date has occurred, be entitled to immediate cash reimbursement from Landlord, in either event such amount shall include interest on such costs from the date such costs should have been paid by Landlord. ARTICLE 8 ADDITIONS AND ALTERATIONS 8.1 LANDLORD'S CONSENT TO ALTERATIONS. Tenant shall have the right, without Landlord's consent, but upon five (5) business days prior notice to Landlord, to make strictly cosmetic, non-structural additions and alterations ("COSMETIC ALTERATIONS") to the Premises that do not (i) involve the expenditure of more than Twenty-Five Thousand and No/100 Dollars ($25,000.00) in the aggregate, (ii) affect the exterior appearance of the Building, (iii) affect the Building Systems or the Building Structure, or (iv) violate law. Except in connection with Cosmetic Alterations, Tenant may make improvements, alterations, additions or changes to the - 24 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 31 Premises or the Base Building (collectively, the "ALTERATIONS") only upon first procuring the prior written consent of Landlord to such Alterations, which consent shall be requested by Tenant not less than thirty (30) days prior to the commencement thereof, and which consent shall not be unreasonably withheld by Landlord, provided it shall be deemed reasonable for Landlord to withhold its consent to any Alteration which adversely affects the structural portions or the systems or equipment of the Building or is visible from the exterior of the Building. The construction of the initial improvements to the Premises shall be governed by the terms of the Tenant Work Letter and not the terms of this Article 8. 8.2 MANNER OF CONSTRUCTION. Landlord may impose, as a condition of its consent to any and all Alterations or repairs of the Premises or about the Premises, such reasonable requirements as Landlord in its reasonable discretion may deem desirable (except in the event such Alterations or Repairs will affect the exterior appearance of the Building, the Systems of the Building or the structure of the Building, in which event any requirement shall be at Landlord's sole discretion). Such requirements may include, but are not limited to, the requirement that Tenant utilize for such purposes only contractors, subcontractors, materials, mechanics and materialmen selected by Tenant from a list provided and approved by Landlord, in Landlord's reasonable discretion, provided that in the event that such Alterations or Repairs will affect the exterior appearance of the Building, the systems of the Building or the structure of the Building, such contractors and subcontractors shall be selected from a list provided and approved by Landlord in its sole discretion. Upon Landlord's request, which request must be made at the time Landlord grants its consent, if at all, to any proposed Alterations or Repairs, Tenant shall, at Tenant's expense, remove such Alterations upon the expiration or any early termination of the Lease Term. Tenant shall construct such Alterations and perform such repairs in a good and workmanlike manner, in conformance with any and all applicable federal, state, county or municipal laws, rules and regulations and pursuant to a valid building permit, issued by the City of Irvine, all in conformance with Landlord's construction rules and regulations. In the event Tenant performs any Alterations in the Premises which require or give rise to governmentally required changes to the "Base Building," as that term is defined below, then Landlord shall, at Tenant's expense, make such changes to the Base Building. The "BASE BUILDING" shall include the structural portions of the Building, and the public restrooms and the systems and equipment located in the internal core of the Building on the floor or floors on which the Premises are located. In performing the work of any such Alterations, Tenant shall have the work performed in such manner so as not to obstruct access to the Project or any portion thereof, by any other tenant of the Project, and so as not to obstruct the business of Landlord or other tenants in the Project. Tenant shall not use (and upon notice from Landlord shall cease using) contractors, services, workmen, labor, materials or equipment that, in Landlord's reasonable judgment, would disturb labor harmony with the workforce or trades engaged in performing other work, labor or services in or about the Building or the Common Areas. In addition to Tenant's obligations under Article 9 of this Lease, upon completion of any Alterations, Tenant agrees to cause a Notice of Completion to be recorded in the office of the Recorder of the County of Orange in accordance with Section 3093 of the Civil Code of the State of California or any successor statute, and Tenant shall deliver to the Project management office a reproducible copy of the "as built" drawings of the Alterations as well as all permits, approvals and other documents issued by any governmental agency in connection with the Alterations. - 25 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 32 8.3 PAYMENT FOR IMPROVEMENTS. If payment is made directly to contractors, Tenant shall comply with Landlord's requirements for final lien releases and waivers in connection with Tenant's payment for work to contractors. Whether or not Tenant orders any work directly from Landlord, Tenant shall pay to Landlord a percentage of the cost of such work sufficient to compensate Landlord for all overhead, general conditions, fees and other costs and expenses arising from Landlord's involvement with such work. 8.4 CONSTRUCTION INSURANCE. In connection with the construction of any Alterations, Tenant shall comply with the terms of Section 10.3.4 regarding Tenant's and its agents' insurance obligations. 8.5 LANDLORD'S PROPERTY. All Alterations, improvements, fixtures, equipment and/or appurtenances which may be installed or placed in or about the Premises, from time to time, shall be at the sole cost of Tenant and shall be and become the property of Landlord, except that Tenant may remove any Alterations, improvements, fixtures and/or equipment which Tenant can substantiate to Landlord have not been paid for with any Tenant improvement allowance funds provided to Tenant by Landlord, provided Tenant repairs any damage to the Premises and Building caused by such removal and returns the affected portion of the Premises to a building standard tenant improved condition as reasonably determined by Landlord. Tenant shall not be required to remove the initial Tenant Improvements installed pursuant to the Tenant Work Letter. Furthermore, if Landlord, as a condition to Landlord's consent to any Alteration, requires that Tenant remove any Alteration upon the expiration or early termination of the Lease Term, Landlord may, by written notice to Tenant prior to the end of the Lease Term, or given following any earlier termination of this Lease, require Tenant, at Tenant's expense, to remove such Alterations and to repair any damage to the Premises and Building caused by such removal and returns the affected portion of the Premises to a building standard tenant improved condition as reasonably determined by Landlord. If Tenant fails to complete such removal and/or to repair any damage caused by the removal of any Alterations and returns the affected portion of the Premises to a building standard tenant improved condition as reasonably determined by Landlord, Landlord may do so and may charge the cost thereof to Tenant. Tenant hereby protects, defends, indemnifies and holds Landlord harmless from any liability, cost, obligation, expense or claim of lien in any manner relating to the installation, placement, removal or financing of any such Alterations, improvements, fixtures and/or equipment in, on or about the Premises, which obligations of Tenant shall survive the expiration or earlier termination of this Lease. ARTICLE 9 COVENANT AGAINST LIENS Tenant shall keep the Project and Premises free from any liens or encumbrances arising out of the work performed, materials furnished or obligations incurred by or on behalf of Tenant, and shall protect, defend, indemnify and hold Landlord harmless from and against any claims, liabilities, judgments or costs (including, without limitation, reasonable attorneys' fees and costs) arising out of same or in connection therewith. Tenant shall give Landlord notice at least twenty (20) days prior to the commencement of any such work on the Premises (or such additional time - 26 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 33 as may be necessary under applicable laws) to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. Tenant shall remove any such lien or encumbrance by bond or otherwise within five (5) days after notice by Landlord, and if Tenant shall fail to do so, Landlord may pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid shall be deemed Additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlord's title to the Building or Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract. Any claim to a lien or encumbrance upon the Building or Premises arising in connection with any such work or respecting the Premises not performed by or at the request of Landlord shall be null and void, or at Landlord's option shall attach only against Tenant's interest in the Premises and shall in all respects be subordinate to Landlord's title to the Project, Building and Premises. ARTICLE 10 INSURANCE 10.1 INDEMNIFICATION AND WAIVER. Tenant hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises from any cause whatsoever and agrees that Landlord, its partners, subpartners and their respective officers, agents, employees, and independent contractors (collectively, "LANDLORD PARTIES") shall not be liable for, and are hereby released from any responsibility for, any damage either to person or property or resulting from the loss of use thereof, which damage is sustained by Tenant or by other persons claiming through Tenant. Tenant shall indemnify, defend, protect, and hold harmless the Landlord Parties from any and all loss, cost, damage, expense and liability (including without limitation court costs and reasonable attorneys' fees) incurred in connection with or arising from any cause in, on or about the Premises, any intentional acts, or omissions or negligence of Tenant or Tenant's contractors, agents, employees or licensees or any such person (collectively, "TENANT PARTIES"), in, on or about the Project, or any breach of the terms of this Lease, during Tenant's occupancy of the Premises, provided that the terms of the foregoing indemnity shall not apply to the intentional acts, or omissions or negligence of Landlord or Landlord Parties. Landlord shall indemnify, defend, protect, and hold harmless Tenant and the Tenant Parties from any and all loss, cost, damage, expense and liability (including without limitation reasonable attorneys' fees) arising from the intentional acts, or omissions or negligence of the Landlord or Landlord Parties in, on or about the Project, except to the extent caused by the intentional acts, omissions or negligence of the Tenant Parties. Notwithstanding anything to the contrary set forth in this Lease, either party's agreement to indemnify the other party as set forth in this Article 10, above, shall be ineffective to the extent the matters for which such party agreed to indemnify the other party are covered by insurance. Further, Tenant's agreement to indemnify Landlord and Landlord's agreement to indemnify Tenant pursuant to this Article 10 are not intended and shall not relieve any insurance carrier of its obligations under policies required to be carried pursuant to the provision of this Lease, to the extent such policies cover subject to the parties' respective indemnification obligations; nor shall they supersede any inconsistent agreement of the parties set forth in any other provision of this Lease. Should Landlord be named as a defendant in any suit brought - 27 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 34 against Tenant in connection with or arising out of Tenant's occupancy of the Premises, to the extent Landlord is not found liable, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including without limitation, its actual professional fees such as appraisers', accountants' and attorneys' fees. In addition, Tenant shall pay to Landlord any costs and expenses, including without limitation, its actual attorney's fees, incurred by Landlord in successfully enforcing Tenant's indemnity obligations set forth in this Section 10.1. Should Tenant be named as a defendant in any suit brought against Landlord in connection with or arising out of Landlord's operation of the Project, to the extent Tenant is not found liable, Landlord shall pay to Tenant its costs and expenses incurred in such suit, including without limitation, its actual professional fees such as appraisers', accountants' and attorneys' fees. In addition, Landlord shall pay to Tenant any costs and expenses, including without limitation, its actual attorney's fees, incurred by Tenant in successfully enforcing Landlord's indemnity obligations set forth in this Section 10.1. The provisions of this Section 10.1 shall survive the expiration or sooner termination of this Lease with respect to any claims or liability arising in connection with any event occurring prior to such expiration or termination. 10.2 LANDLORD'S FIRE AND CASUALTY INSURANCE. Landlord shall insure the Project during the Lease Term against loss or damage due to fire and other casualties covered within the classification of fire and extended coverage, vandalism coverage and malicious mischief, sprinkler leakage, water damage and special extended coverage on the Project. Such coverage shall be in such amounts, from such companies, and on such terms and conditions, as Landlord may from time to time determine. Additionally, at the option of Landlord, such insurance coverage may include the risks of earthquakes and/or flood damage and additional hazards, a rental loss endorsement and one or more loss payee endorsements in favor of the holders of any mortgages or deeds of trust encumbering the interest of Landlord in the Project or the ground or underlying lessors of the Project, or any portion thereof. Notwithstanding the foregoing provisions of this Section 10.2, the coverage and amounts of insurance carried by Landlord in connection with the Project shall at a minimum be comparable to the coverage and amounts of insurance which are carried by reasonably prudent landlords of Comparable Buildings. Tenant shall, at Tenant's expense, comply with all insurance company requirements pertaining to the use of the Premises. If Tenant's conduct or use of the Premises causes any increase in the premium for such insurance policies then Tenant shall reimburse Landlord for any such increase. 10.3 TENANT'S INSURANCE. Tenant shall maintain the following coverages in the following amounts. 10.3.1 Commercial General Liability Insurance covering the insured against claims of bodily injury, personal injury and property damage (including loss of use thereof) arising out of Tenant's operations, actions, and contractual liabilities (covering the performance by Tenant of its indemnity agreements) including a Broad Form endorsement covering the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements set forth in Section 10.1 of this Lease, for limits of liability (with a commercially reasonable deductible) not less than: Bodily Injury and $3,000,000 each occurrence Property Damage Liability $3,000,000 annual aggregate Personal Injury Liability $3,000,000 each occurrence $3,000,000 annual aggregate - 28 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 35 10.3.2 All Risk Property Insurance covering (i) all office furniture, business and trade fixtures, office equipment, free-standing cabinet work, movable partitions, merchandise and all other items of Tenant's property on the Premises installed by, for, or at the expense of Tenant, (ii) the "Tenant Improvements", as that term is defined in Section 2.1 of the Tenant Work Letter and any other improvements which exist in the Premises as of the Lease Commencement Date (excluding the Base Building) (the "ORIGINAL IMPROVEMENTS"), (iii) the Tenant's business interruption and extra expense in an amount equal to one (1) year of Rent due under this Lease and (iv) all other improvements, alterations and additions to the Premises. Such insurance shall be written on an "all risks" of physical loss or damage basis, for the full replacement cost value (subject to reasonable deductible amounts) and with an agreed amount endorsement, and shall include coverage for damage or other loss caused by fire or other peril including, but not limited to, vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, earthquake sprinkler leakage, bursting or stoppage of pipes, and explosion. 10.3.3 Worker's Compensation and Employer's Liability in an amount no less than $1,000,000.00 or other similar insurance pursuant to all applicable state and local statutes and regulations. 10.3.4 Prior to commencing any construction in the Premises, either in connection with the initial construction of the Tenant Improvements, or in connection with any Alterations, Tenant shall provide Landlord with evidence that any contractors, subcontractors, architects or engineers engaged in such construction carry insurance of the type and in the amount required to be carried by Tenant pursuant to Sections 10.3.1 and 10.3.2, above. In addition, any general contractor's policy of insurance shall contain an owner's contractor protective endorsement, and coverage for work performed by others, and any contractors or subcontractors insurance shall contain products and completed operations coverage and said contractor shall warrant that it shall continue to carry such coverage for a period of not less than ten (10) years. Any architects or engineers engaged by Tenant in connection with any such construction shall additionally carry errors and omissions insurance coverage. In addition, Landlord may, in its discretion, require that Tenant obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of such Alterations and naming Landlord as a co-obligee. 10.4 FORM OF POLICIES. The minimum limits of policies of insurance required of Tenant or its contractors, subcontractors, architects or engineers under this Lease shall in no event limit the liability of Tenant under this Lease. Such insurance shall (i) as appropriate name Landlord, and any other party the Landlord so specifies, as an additional insured, including Landlord's managing agent, if any; (ii) specifically cover the liability assumed by Tenant under this Lease, - 29 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 36 including, but not limited to, Tenant's obligations under Section 10.1 of this Lease; (iii) be issued by an insurance company having a rating of not less than A-X in Best's Insurance Guide or which is otherwise acceptable to Landlord and licensed to do business in the State of California; (iv) be primary insurance as to all claims thereunder and provide that any insurance carried by Landlord is excess and is non-contributing with any insurance requirement of Tenant; (v) be in form and content reasonably acceptable to Landlord; and (vi) provide that said insurance shall not be canceled or coverage materially changed unless thirty (30) days' prior written notice shall have been given to Landlord and any mortgagee of Landlord by the insurer or the Tenant. Tenant shall deliver said policy or policies or certificates thereof to Landlord on or before the Lease Commencement Date and at least thirty (30) days before the expiration dates thereof. In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificate, Landlord may, at its option, procure such policies for the account of Tenant, and the cost thereof shall be paid to Landlord within fifteen (15) days after delivery to Tenant of bills therefor. Landlord shall, in good faith, attempt to provide Tenant with notice of Landlord's exercise of the foregoing right, if any, within thirty (30) days following such exercise, provided, Landlord's failure to deliver such notice shall not affect Landlord's rights hereunder. 10.5 SUBROGATION. Landlord and Tenant intend that their respective property loss risks shall be borne by insurance carriers to the extent above provided, and Landlord and Tenant hereby agree to look solely to, and seek recovery only from, their respective insurance carriers in the event of a property loss. The parties each hereby waive all rights and claims against each other for such losses, and waive all rights of subrogation of their respective insurers, provided such waiver of subrogation shall not affect the right to the insured to recover thereunder. The parties agree that their respective insurance policies are now, or shall be, endorsed such that the waiver of subrogation shall not affect the right of the insured to recover thereunder, so long as no material additional premium is charged therefor. 10.6 ADDITIONAL INSURANCE OBLIGATIONS. Tenant shall carry and maintain during the entire Lease Term, at Tenant's sole cost and expense, increased amounts of the insurance required to be carried by Tenant pursuant to this Article 10 and such other reasonable types of insurance coverage and in such reasonable amounts covering the Premises and Tenant's operations therein, as may be reasonably requested by Landlord. ARTICLE 11 DAMAGE AND DESTRUCTION 11.1 REPAIR OF DAMAGE TO PREMISES BY LANDLORD. Tenant shall promptly notify Landlord of any damage to the Premises resulting from fire or any other loss. If the Premises or any Common Areas serving or providing access to the Premises shall be damaged by fire or other casualty, Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlord's reasonable control, and subject to all other terms of this Article 11, restore the Base Building and such Common Areas. Such restoration shall be to substantially the same condition of the Base Building and the Common Areas prior to the casualty, except for modifications required by zoning and building codes and other laws or by the - 30 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 37 holder of a mortgage on the Building or Project or any other modifications to the Common Areas deemed desirable by Landlord, provided that access to the Premises and any common restrooms serving the Premises shall not be materially impaired. Upon the occurrence of any damage to the Premises, if the Lease is not terminated as provided in Section 11.2 below, Tenant shall assign to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant under Tenant's insurance required under Sections 10.3.2(ii) and (iv) of this Lease, and Landlord shall repair any injury or damage to the Tenant Improvements and the Original Improvements installed in the Premises and shall return such Tenant Improvements and Original Improvements to their original condition; provided that if the cost of such repair by Landlord exceeds the amount of insurance proceeds received by Landlord from Tenant's insurance carrier, as assigned by Tenant, the cost of such repairs shall be paid by Tenant to Landlord prior to Landlord's commencement of repair of the damage. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's business resulting in any way from such damage or the repair thereof; provided however, that if such fire or other casualty shall have damaged the Premises or Common Areas necessary to Tenant's occupancy, Landlord shall allow Tenant a proportionate abatement of Rent to the extent Landlord is reimbursed from the proceeds of rental interruption insurance purchased by Landlord as part of Operating Expenses, during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied by Tenant as a result thereof; provided, further, however, that if the damage or destruction is due to the negligence or willful misconduct of Tenant or any of its agents, employees, contractors, invitees or guests, Tenant shall be responsible for any reasonable, applicable insurance deductible (which shall be payable to Landlord upon demand) and there shall be no rent abatement. 11.2 LANDLORD'S OPTION TO REPAIR. Notwithstanding the terms of Section 11.1 of this Lease, Landlord may elect not to rebuild and/or restore the Premises, Building and/or Project, and instead terminate this Lease, by notifying Tenant in writing of such termination within sixty (60) days after the date of the discovery of damage, such notice to include a termination date giving Tenant sixty (60) days to vacate the Premises, but Landlord may so elect only if the Building or Project shall be damaged by fire or other casualty or cause, whether or not the Premises are affected, and one or more of the following conditions is present: (i) in Landlord's reasonable judgment, repairs cannot reasonably be completed within ninety (90) days (or in the event of damage resulting from earthquake, one hundred eighty (180) days) after the date of damage (when such repairs are made without the payment of overtime or other premiums); (ii) the holder of any mortgage on the Building or Project or ground lessor with respect to the Building or Project shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt, or shall terminate the ground lease, as the case may be; (iii) the damage is not fully covered, except for deductible amounts, by Landlord's insurance policies; (iv) Landlord decides to rebuild the Building or Common Areas so that they will be substantially different structurally or architecturally; (v) the damage occurs during the last twelve (12) months of the Lease Term as the same may have been extended, if at all, pursuant to Tenant's exercise of any option right granted in Section 2.3 of this Lease; or (vi) any owner of any other portion of the Project, other than Landlord, does not intend to repair the damage to such portion of the Project; provided, however, that if Landlord does not elect to terminate this Lease pursuant to Landlord's termination right as provided above, and the repairs cannot, in the reasonable opinion of Landlord, be completed - 31 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 38 within one hundred eighty (180) days after being commenced, Tenant may elect, no earlier than sixty (60) days after the date of the damage and not later than ninety (90) days after the date of such damage, to terminate this Lease by written notice to Landlord effective as of the date specified in the notice, which date shall not be less than thirty (30) days nor more than sixty (60) days after the date such notice is given by Tenant. 11.3 WAIVER OF STATUTORY PROVISIONS. The provisions of this Lease, including this Article 11, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or the Project, and any statute or regulation of the State of California, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Building or the Project. ARTICLE 12 NONWAIVER No provision of this Lease shall be deemed waived by either party hereto unless expressly waived in a writing signed thereby. The waiver by either party hereto of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No acceptance of a lesser amount than the Rent herein stipulated shall be deemed a waiver of Landlord's right to receive the full amount due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the full amount due. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenant's right of possession hereunder, or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit, or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment. ARTICLE 13 CONDEMNATION If the whole or any part of the Premises, Building or Project shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or - 32 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 39 vacated by such authority in such manner as to require the use, reconstruction or remodeling of any part of the Premises, Building or Project, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the option to terminate this Lease effective as of the date possession is required to be surrendered to the authority. If more than twenty-five percent (25%) of the rentable square feet of the Premises is taken, or if access to the Premises is substantially impaired, in each case for a period in excess of one hundred eighty (180) days, Tenant shall have the option to terminate this Lease effective as of the date possession is required to be surrendered to the authority. Tenant shall not because of such taking assert any claim against Landlord or the authority for any compensation because of such taking and Landlord shall be entitled to the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant's personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Lease Term pursuant to the terms of this Lease, and for moving expenses, so long as such claims do not diminish the award available to Landlord, its ground lessor with respect to the Building or Project or its mortgagee, and such claim is payable separately to Tenant. All Rent shall be apportioned as of the date of such termination. If any part of the Premises shall be taken, and this Lease shall not be so terminated, the Rent shall be proportionately abated. Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of The California Code of Civil Procedure. Notwithstanding anything to the contrary contained in this Article 13, in the event of a temporary taking of all or any portion of the Premises for a period of one hundred and eighty (180) days or less, then this Lease shall not terminate but the Base Rent and the Additional Rent shall be abated for the period of such taking in proportion to the ratio that the amount of rentable square feet of the Premises taken bears to the total rentable square feet of the Premises. Landlord shall be entitled to receive the entire award made in connection with any such temporary taking. ARTICLE 14 ASSIGNMENT AND SUBLETTING 14.1 TRANSFERS. Tenant shall not, without the prior written consent of Landlord, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, permit any assignment, or other transfer of this Lease or any interest hereunder by operation of law, sublet the Premises or any part thereof, or enter into any license or concession agreements or otherwise permit the occupancy or use of the Premises or any part thereof by any persons other than Tenant and its employees and contractors (all of the foregoing are hereinafter sometimes referred to collectively as "TRANSFERS" and any person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a "TRANSFEREE"). If Tenant desires Landlord's consent to any Transfer, Tenant shall notify Landlord in writing, which notice (the "TRANSFER NOTICE") shall include (i) the proposed effective date of the Transfer, which shall not be less than thirty (30) days nor more than one hundred eighty (180) days after the date of delivery of the Transfer Notice, (ii) a description of the portion of the Premises to be transferred (the "SUBJECT SPACE"), (iii) all of the terms of the proposed Transfer and the consideration therefor, including calculation of the "Transfer Premium", as that term is defined in Section 14.3 below, in connection with such Transfer, the name and address of - 33 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 40 the proposed Transferee, and a copy of all existing executed and/or proposed documentation pertaining to the proposed Transfer, including all existing operative documents to be executed to evidence such Transfer or the agreements incidental or related to such Transfer, provided that Landlord shall have the right to require Tenant to utilize Landlord's standard consent documents in connection with the documentation of such Transfer and (iv) financial statements for the prior two (2) fiscal years of the proposed Transferee certified by an officer, partner or owner thereof, business credit and personal references and history of the proposed Transferee and any other information reasonably required by Landlord which will enable Landlord to determine the financial responsibility, character, and reputation of the proposed Transferee, nature of such Transferee's business and proposed use of the Subject Space. Any Transfer made without Landlord's prior written consent shall, at Landlord's option, be null, void and of no effect, and shall, at Landlord's option, constitute a default by Tenant under this Lease. Whether or not Landlord consents to any proposed Transfer, Tenant shall pay Landlord's review and processing fees, as well as any reasonable professional fees (including, without limitation, attorneys', accountants', architects', engineers' and consultants' fees) incurred by Landlord, within thirty (30) days after written request by Landlord. 14.2 LANDLORD'S CONSENT. Landlord shall not unreasonably withhold its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in the Transfer Notice. Without limitation as to other reasonable grounds for withholding consent, the parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply: 14.2.1 The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building or the Project, or would be a significantly less prestigious occupant of the Building than Tenant; 14.2.2 The Transferee intends to use the Subject Space for purposes which are not permitted under this Lease; 14.2.3 The Transferee is either a governmental agency or instrumentality thereof; 14.2.4 The Transferee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities to be undertaken in connection with the Transfer on the date consent is requested; 14.2.5 The proposed Transfer would cause a violation of another lease for space in the Project, or would give an occupant of the Project a right to cancel its lease; 14.2.6 The terms of the proposed Transfer will allow the Transferee to exercise a right of renewal, right of expansion, right of first offer, or other similar right held by Tenant (or will allow the Transferee to occupy space leased by Tenant pursuant to any such right); or 14.2.7 Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, - 34 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 41 (i) occupies space in the Project at the time of the request for consent, or (ii) is negotiating or has negotiated with Landlord to lease space in the Project. If Landlord consents to any Transfer pursuant to the terms of this Section 14.2 (and does not exercise any recapture rights Landlord may have under Section 14.4 of this Lease), Tenant may within six (6) months after Landlord's consent, but not later than the expiration of said six-month period, enter into such Transfer of the Premises or portion thereof, upon substantially the same terms and conditions as are set forth in the Transfer Notice furnished by Tenant to Landlord pursuant to Section 14.1 of this Lease, provided that if there are any changes in the terms and conditions from those specified in the Transfer Notice (i) such that Landlord would initially have been entitled to refuse its consent to such Transfer under this Section 14.2, or (ii) which would cause the proposed Transfer to be more favorable to the Transferee than the terms set forth in Tenant's original Transfer Notice, Tenant shall again submit the Transfer to Landlord for its approval and other action under this Article 14 (including Landlord's right of recapture, if any, under Section 14.4 of this Lease). Notwithstanding anything to the contrary in this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent under Section 14.2 or otherwise has breached or acted unreasonably under this Article 14, their sole remedies shall be a declaratory judgment and an injunction for the relief sought without any monetary damages, and Tenant hereby waives all other remedies, including, without limitation, any right at law or equity to terminate this Lease, on its own behalf and, to the extent permitted under all applicable laws, on behalf of the proposed Transferee. 14.3 TRANSFER PREMIUM. If Landlord consents to a Transfer, as a condition thereto which the parties hereby agree is reasonable, Tenant shall pay to Landlord fifty percent (50%) of any "Transfer Premium," as that term is defined in this Section 14.3, received by Tenant from such Transferee. "TRANSFER PREMIUM" shall mean all rent, additional rent or other consideration payable by such Transferee in connection with the Transfer in excess of the Rent and Additional Rent payable by Tenant under this Lease during the term of the Transfer on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant for (i) any changes, alterations and improvements to the Premises in connection with the Transfer, (ii) any free base rent reasonably provided to the Transferee, and (iii) any brokerage commissions in connection with the Transfer (collectively, "TENANT'S SUBLEASING COSTS"). "Transfer Premium" shall also include, but not be limited to, key money, bonus money or other cash consideration paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee in connection with such Transfer. The determination of the amount of Landlord's applicable share of the Transfer Premium shall be made on a monthly basis as rent or other consideration is received by Tenant under the Transfer. For purposes of calculating the Transfer Premium on a monthly basis, (i) Tenant's Subleasing Costs shall be deemed to be expended by Tenant in equal monthly amounts over the entire term of the Transfer and (ii) the Rent paid for the Subject Space by Tenant shall be computed after adjusting such rent to the actual effective rent to be paid, taking into consideration any and all leasehold concessions granted in connection therewith, including, but not limited to, any rent credit and tenant improvement allowance. For - 35 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 42 purposes of calculating any such effective rent all such concessions shall be amortized on a straight-line basis over the relevant term. 14.4 LANDLORD'S OPTION AS TO SUBJECT SPACE. Notwithstanding anything to the contrary contained in this Article 14, Landlord shall have the option, by giving written notice (the "Transfer Response Notice") to Tenant within thirty (30) days after receipt of any Transfer Notice, to recapture the Subject Space. Such recapture notice shall cancel and terminate this Lease with respect to the Subject Space as of the date stated in the Transfer Notice as the effective date of the proposed Transfer until the last day of the term of the Transfer as set forth in the Transfer Notice (or at Landlord's option, shall cause the Transfer to be made to Landlord or its agent, in which case the parties shall execute the Transfer documentation promptly thereafter), provided, however, that Tenant shall have the right, upon written notice to Landlord within ten (10) days after receipt of the Transfer Response Notice to withdraw Tenant's Transfer Notice, in which event Landlord's rights to recapture or take an assignment or sublease of the Subject Space hereunder shall have no force and effect as to the subject Transfer only. In the event of a recapture by Landlord, if this Lease shall be canceled with respect to less than the entire Premises, the Rent reserved herein shall be prorated on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the Premises, and this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party, the parties shall execute written confirmation of the same. If Landlord declines, or fails to elect in a timely manner to recapture the Subject Space under this Section 14.4, then, provided Landlord has consented to the proposed Transfer, Tenant shall be entitled to proceed to transfer the Subject Space to the proposed Transferee, subject to provisions of this Article 14. 14.5 EFFECT OF TRANSFER. If Landlord consents to a Transfer, (i) the terms and conditions of this Lease shall in no way be deemed to have been waived or modified, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord, promptly after execution, an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord, (iv) Tenant shall furnish upon Landlord's request a complete statement, certified by an independent certified public accountant, or Tenant's chief financial officer, setting forth in detail the computation of any Transfer Premium Tenant has derived and shall derive from such Transfer, and (v) no Transfer relating to this Lease or agreement entered into with respect thereto, whether with or without Landlord's consent, shall relieve Tenant or any guarantor of the Lease from any liability under this Lease, including, without limitation, in connection with the Subject Space. Landlord or its authorized representatives shall have the right at all reasonable times to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found understated, Tenant shall, within thirty (30) days after demand, pay the deficiency, and if understated by more than five percent (5%), Tenant shall pay Landlord's costs of such audit. 14.6 ADDITIONAL TRANSFERS. For purposes of this Lease, the term "TRANSFER" shall also include (i) if Tenant is a partnership, the withdrawal or change, voluntary, involuntary or by operation of law, of fifty percent (50%) or more of the partners, or transfer of fifty percent (50%) or more of partnership interests, within a twelve (12)-month period, or the dissolution of the - 36 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 43 partnership without immediate reconstitution thereof, and (ii) if Tenant is a closely held corporation (i.e., whose stock is not publicly held and not traded through an exchange or over the counter), (A) the dissolution, merger, consolidation or other reorganization of Tenant or (B) the sale or other transfer of an aggregate of fifty percent (50%) or more of the voting shares of Tenant (other than to immediate family members by reason of gift or death), within a twelve (12)-month period, or (C) the sale, mortgage, hypothecation or pledge of an aggregate of fifty percent (50%) or more of the value of the unencumbered assets of Tenant within a twelve (12)-month period. 14.7 OCCURRENCE OF DEFAULT. Any Transfer hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any Transfer, Landlord shall have the right to: (i) treat such Transfer as cancelled and repossess the Subject Space by any lawful means, or (ii) require that such Transferee attorn to and recognize Landlord as its landlord under any such Transfer. If Tenant shall be in default under this Lease, Landlord is hereby irrevocably authorized, as Tenant's agent and attorney-in-fact, to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant's obligations under this Lease) until such default is cured. Such Transferee shall rely on any representation by Landlord that Tenant is in default hereunder, without any need for confirmation thereof by Tenant. Upon any assignment, the assignee shall assume in writing all obligations and covenants of Tenant thereafter to be performed or observed under this Lease. No collection or acceptance of rent by Landlord from any Transferee shall be deemed a waiver of any provision of this Article 14 or the approval of any Transferee or a release of Tenant from any obligation under this Lease, whether theretofore or thereafter accruing. In no event shall Landlord's enforcement of any provision of this Lease against any Transferee be deemed a waiver of Landlord's right to enforce any term of this Lease against Tenant or any other person. If Tenant's obligations hereunder have been guaranteed, Landlord's consent to any Transfer shall not be effective unless the guarantor also consents to such Transfer. 14.8 NON-TRANSFERS. Notwithstanding anything to the contrary contained in Article 14 of this Lease, provided that Tenant notifies Landlord of any such assignment or sublease and promptly supplies Landlord with any documents or information requested by Landlord regarding such assignment or sublease, and further provided that such assignment or sublease is not a subterfuge by Tenant to avoid its obligations under this Lease, Tenant may assign this Lease or sublet all or any portion of the Premises to (i) any entity formed by Tenant, provided that Tenant owns or beneficially controls a majority of the outstanding ownership interest in such entity, (ii) any parent or subsidiary entity of Tenant, (iii) any person or entity that acquires all or substantially all of Tenant's assets or capital stock, or (iv) any entity with which Tenant merges, regardless of whether Tenant is the surviving entity, and any such assignment or subletting shall not be deemed to be a Transfer under this Section 14. In addition, a Transfer shall not include, and Landlord's consent shall not be required for, (i) any initial or subsequent public offering by Tenant, (ii) if Tenant is a public company, any sale or transfer of capital stock of Tenant, or (iii) if Tenant is a public company, the sale or transfer of Tenant's stock to take Tenant private. - 37 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 44 ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF TRADE FIXTURES 15.1 SURRENDER OF PREMISES. No act or thing done by Landlord or any agent or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in writing by Landlord. The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord, and notwithstanding such delivery Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been properly terminated. The voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises or terminate any or all such sublessees or subtenancies. 15.2 REMOVAL OF TENANT PROPERTY BY TENANT. Upon the expiration of the Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject to the provisions of this Article 15, quit and surrender possession of the Premises to Landlord in as good order and condition as when Tenant took possession and as thereafter improved by Landlord and/or Tenant, reasonable wear and tear and repairs which are specifically made the responsibility of Landlord hereunder excepted. Upon such expiration or termination, Tenant shall, without expense to Landlord, remove or cause to be removed from the Premises (i) all debris and rubbish, (ii) such items of furniture, equipment, business and trade fixtures, free-standing cabinet work, movable partitions and other articles of personal property owned by Tenant or installed or placed by Tenant at its expense in the Premises, however, attached, installed or affixed, which shall remain Tenant's property, (iii) and such similar articles of any other persons claiming under Tenant, as Landlord may, in its sole discretion, require to be removed, and Tenant shall repair at its own expense all damage to the Premises and Building resulting from such removal. ARTICLE 16 HOLDING OVER If Tenant holds over after the expiration of the Lease Term or earlier termination thereof, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Rent shall be payable at a monthly rate equal to the product of (i) the Rent applicable during the last rental period of the Lease Term under this Lease, and (ii) a percentage equal to one hundred fifty percent (150%).. Such month-to-month tenancy shall be subject to every other applicable term, covenant and agreement contained herein. Nothing contained in this Article 16 shall be construed as consent by Landlord to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of - 38 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 45 this Article 16 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender and any lost profits to Landlord resulting therefrom. ARTICLE 17 ESTOPPEL CERTIFICATES Within ten (10) days following a request in writing by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an estoppel certificate, which, as submitted by Landlord, shall be substantially in the form of EXHIBIT E, attached hereto (or such other form as may be required by any prospective mortgagee or purchaser of the Project, or any portion thereof), indicating therein any exceptions thereto that may exist at that time, and shall also contain any other information reasonably requested by Landlord or Landlord's mortgagee or prospective mortgagee. Any such certificate may be relied upon by any prospective mortgagee or purchaser of all or any portion of the Project. Tenant shall execute and deliver whatever other instruments may be reasonably required for such purposes within ten (10) days after receipt of a request by Landlord. At any time during the Lease Term, Landlord may require Tenant to provide Landlord within ten (10) days after receipt of a request by Landlord with a current financial statement and financial statements of the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. Failure of Tenant to timely execute, acknowledge and deliver such estoppel certificate or other instruments shall constitute an acceptance of the Premises and an acknowledgment by Tenant that statements included in the estoppel certificate are true and correct, without exception. ARTICLE 18 SUBORDINATION This Lease shall be subject and subordinate to all present and future ground or underlying leases of the Building or Project and to the lien of any mortgage, trust deed or other encumbrances now or hereafter in force against the Building or Project or any part thereof, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds, unless the holders of such mortgages, trust deeds or other encumbrances, or the lessors under such ground lease or underlying leases (collectively, "MORTGAGEES"), require in writing that this Lease be superior thereto. Landlord shall provide Tenant with a non-disturbance agreement in a commercially reasonable form from Landlord's presently existing lender holding a first deed of trust on the Project upon the full execution of this Lease. Further, Landlord's delivery to Tenant - 39 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 46 of commercially reasonable non-disturbance agreement(s) in favor of Tenant from any ground lessors, mortgage holders or lien holders of Landlord who later come into existence at any time prior to the expiration of the Lease Term shall be in consideration of, and a condition precedent to, Tenant's agreement to be bound by the terms of this Article 18. Such commercially reasonable non-disturbance agreement(s) shall include the obligation of any such successor, ground lessor, mortgage holder or lien holder to recognize Tenant's rights specifically set forth in this Lease to offset certain amounts against Rent due hereunder, or to otherwise receive certain credits against Rent as set forth herein. Subject to the non-disturbance agreements(s) described above, Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage or deed in lieu thereof (or if any ground lease is terminated), to attorn, without any deductions or set-offs whatsoever, to the lienholder or purchaser or any successors thereto upon any such foreclosure sale or deed in lieu thereof (or to the ground lessor), if so requested to do so by such purchaser or lienholder or ground lessor, and to recognize such purchaser or lienholder or ground lessor as the lessor under this Lease, provided such lienholder or purchaser or ground lessor shall agree to accept this Lease and not disturb Tenant's occupancy, so long as Tenant timely pays the rent and observes and performs the terms, covenants and conditions of this Lease to be observed and performed by Tenant. Landlord's interest herein may be assigned as security at any time to any lienholder. Tenant shall, within five (5) days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm the subordination or superiority of this Lease to any such mortgages, trust deeds, ground leases or underlying leases. Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale. ARTICLE 19 DEFAULTS; REMEDIES 19.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute a default of this Lease by Tenant: 19.1.1 Any failure by Tenant to pay any Rent or any other charge required to be paid under this Lease, or any part thereof, when due unless such failure is cured within three (3) days after notice; or 19.1.2 Except where a specific time period is otherwise set forth for Tenant's performance in this Lease, in which event the failure to perform by Tenant within such time period shall be a default by Tenant under this Section 19.1.2, any failure by Tenant to observe or perform any other provision, covenant or condition of this Lease to be observed or performed by Tenant where such failure continues for ten (10) days after written notice thereof from Landlord to Tenant; provided that if the nature of such default is such that the same cannot reasonably be cured within a ten (10) day period, Tenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure - 40 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 47 such default, and cures such default within a reasonable period of time, considering the nature of the default; or 19.1.3 The failure by Tenant to observe or perform according to the provisions of Articles 5, 14, 17 or 18 of this Lease where such failure continues for more than five (5) business days after notice from Landlord; or 19.1.4 Tenant's failure to occupy the Premises within sixty (60) business days after the Lease Commencement Date. The notice periods provided herein are in lieu of, and not in addition to, any notice periods provided by law. 19.2 REMEDIES UPON DEFAULT. Upon the occurrence of any event of default by Tenant, Landlord shall have, in addition to any other remedies available to Landlord at law or in equity (all of which remedies shall be distinct, separate and cumulative), the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever. 19.2.1 Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following: (i) The worth at the time of any unpaid rent which has been earned at the time of such termination; plus (ii) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions and advertising expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use, and any special concessions made to obtain a new tenant; and - 41 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 48 (v) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. The term "rent" as used in this Section 19.2 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in Paragraphs 19.2.1(i) and (ii), above, the "worth at the time of award" shall be computed by allowing interest at the rate set forth in Article 25 of this Lease, but in no case greater than the maximum amount of such interest permitted by law. As used in Paragraph 19.2.1(iii) above, the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). If Landlord terminates this Lease or Tenant's right to possession, Landlord shall use reasonable efforts to mitigate Landlord's damages, and Tenant shall be entitled to submit proof of such failure to mitigate as a defense to Landlord's claims hereunder, if mitigation of damages by Landlord is required by applicable law. 19.2.2 Landlord shall have the remedy described in 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, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due. 19.2.3 Landlord shall at all times have the rights and remedies (which shall be cumulative with each other and cumulative and in addition to those rights and remedies available under Sections 19.2.1 and 19.2.2, above, or any law or other provision of this Lease), without prior demand or notice except as required by applicable law, to seek any declaratory, injunctive or other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof. 19.3 FORM OF PAYMENT AFTER DEFAULT. Following the second (2nd) occurrence of an event of default by Tenant, Landlord shall have the right to require that any or all subsequent amounts paid by Tenant to Landlord hereunder, whether to cure the default in question or otherwise, be paid in the form of cash, money order, cashier's or certified check drawn on an institution acceptable to Landlord, or by other means approved by Landlord, notwithstanding any prior practice of accepting payments in any different form. 19.4 EFFORTS TO RELET. No re-entry or repossession, repairs, maintenance, changes, alterations and additions, reletting, appointment of a receiver to protect Landlord's interests hereunder, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant's right to possession, or to accept a surrender of the Premises, nor shall same operate to release Tenant in whole or in part from any of Tenant's obligations hereunder, unless express written notice of such intention is sent by Landlord to Tenant. Tenant hereby irrevocably waives any right otherwise available under any law to redeem or reinstate this Lease. - 42 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 49 19.5. ABATEMENT OF RENT. In the event that Tenant is prevented from using, and does not use, the Premises or any portion thereof, as a result of (i) any alteration performed by Landlord after the Lease Commencement Date and required by the Lease, which substantially interferes with Tenant's use of the Premises, or (ii) any failure to provide services, utilities or access to the Premises as required of Landlord pursuant to the terms of hereof (either such set of circumstances as set forth in items (i) or (ii), above, to be known as an "Abatement Event"), then Tenant shall, immediately, and in no event later than two (2) business days after the occurrence of any Abatement Event, give Landlord notice (the "Abatement Notice") of such Abatement Event, which notice shall state the date the Abatement Event commenced, and the Rent shall be abated or reduced, as the case may be, for the period commencing on the date the Abatement Event commenced and continuing for such further time that Tenant continues to be so prevented from using, and does not use, the Premises or a portion thereof, in the proportion that the rentable area of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total rentable area of the Premises; provided, however, in the event that Tenant is prevented from using, and does not use, a portion of the Premises for a period of time and the remaining portion of the Premises is not sufficient to allow Tenant to effectively conduct its business therein, and if Tenant does not conduct its business from such remaining portion, then for such time during which Tenant is so prevented from effectively conducting its business therein, the Rent for the entire Premises shall be abated for such time as Tenant continues to be so prevented from using, and does not use, the Premises. If, however, Tenant reoccupies any portion of the Premises during such period, the rent allocable to such reoccupied portion, based on the proportion that the rentable area of such reoccupied portion of the Premises bears to the total rentable area of the Premises, shall be payable by Tenant from the date Tenant reoccupies such portion of the Premises. Such right to abate Rent shall be Tenant's sole and exclusive remedy at law or in equity for an Abatement Event. Except as provided in this Section 19.5, nothing contained herein shall be interpreted to mean that Tenant is excused from paying Rent due hereunder. Notwithstanding the foregoing, in the event Tenant fails to give Landlord the Abatement Notice within the time prescribed in this Section 19.5, Tenant shall not lose its rights to abate rent for an Abatement Event, provided any such abatement shall commence no sooner than the date that the Landlord actually receives Tenant's Abatement Notice. ARTICLE 20 COVENANT OF QUIET ENJOYMENT Landlord covenants that Tenant, on paying the Rent, charges for services and other payments herein reserved and on keeping, observing and performing all the other terms, covenants, conditions, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed, shall, during the Lease Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreements hereof without interference by any persons lawfully claiming by or through Landlord. The foregoing covenant is in lieu of any other covenant express or implied. - 43 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 50 ARTICLE 21 INTENTIONALLY DELETED ARTICLE 22 INTENTIONALLY DELETED ARTICLE 23 SIGNS 23.1 EXTERIOR SIGNAGE. Subject to Landlord's prior written approval, in its sole discretion, and provided that any sign is in keeping with the quality, design and style of the Building and Project and is in compliance with all covenants, conditions or restrictions affecting the Project, and all applicable law, Tenant, at its sole cost and expense, may install identification signage on the Building outside of the entrance to the Premises. In addition, Tenant shall have the right, at its sole cost and expense, to install and maintain a sign on the top of the Building, the design, specifications and location of which sign shall be subject to Landlord's approval, which approval shall not be unreasonably withheld so long as Tenant's signage complies with Landlord's signage program and with all requirements of the City of Irvine. Upon the expiration or earlier termination of this Lease, Tenant shall remove all such signage, at Tenant's sole cost and expense, and repair any and all damage caused by such removal. The rights contained in this Section 23.1 shall be personal to the Original Tenant and may only be exercised by the Original Tenant and not any assignee, sublessee or transferee of Tenant's interest in this Lease (so long as the Original Tenant occupies the entire Premises). 23.2 PROHIBITED SIGNAGE AND OTHER ITEMS. Any signs, notices, logos, pictures, names or advertisements which are installed and that have not been separately approved by Landlord may be removed without notice by Landlord at the sole expense of Tenant. Except as is set forth in Section 23.1, above, Tenant may not install any signs on the exterior or roof of the Building or the Common Areas. Any signs, window coverings, or blinds (even if the same are located behind the Landlord-approved window coverings for the Building), or other items visible from the exterior of the Premises or Building, shall be subject to the prior approval of Landlord, in its sole discretion. ARTICLE 24 COMPLIANCE WITH LAW Tenant shall not do anything or suffer anything to be done in or about the Premises or the Project which will in any way conflict with any law, statute, ordinance or other governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated. At its sole cost and expense, Tenant shall promptly comply with all such governmental measures relating to the Premises, other than the making of changes to the Base Building. Should any standard or regulation now or hereafter be imposed on Landlord or Tenant by a state, federal or local - 44 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 51 governmental body charged with the establishment, regulation and enforcement of occupational, health or safety standards for employers, employees, landlords or tenants, then Tenant agrees, at its sole cost and expense, to comply promptly with such standards or regulations. The judgment of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant. ARTICLE 25 LATE CHARGES If any installment of Rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within ten (10) days after said amount is due, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the overdue amount plus any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. In addition to the late charge described above, any Rent or other amounts owing hereunder which are not paid within ten (10) days after the date they are due shall bear interest from the date when due until paid at a rate per annum equal to the lesser of (i) the annual "Bank Prime Loan" rate cited in the Federal Reserve Statistical Release Publication G.13(415), published on the first Tuesday of each calendar month (or such other comparable index as Landlord and Tenant shall reasonably agree upon if such rate ceases to be published) plus four (4) percentage points, and (ii) the highest rate permitted by applicable law. ARTICLE 26 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT 26.1 LANDLORD'S CURE. All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any reduction of Rent, except to the extent, if any, otherwise expressly provided herein. If Tenant shall fail to perform any obligation under this Lease, and such failure shall continue in excess of the time allowed under Section 19.1.2, above, unless a specific time period is otherwise stated in this Lease, Landlord may, but shall not be obligated to, make any such payment or perform any such act on Tenant's part without waiving its rights based upon any default of Tenant and without releasing Tenant from any obligations hereunder. 26.2 TENANT'S REIMBURSEMENT. Except as may be specifically provided to the contrary in this Lease, Tenant shall pay to Landlord, upon delivery by Landlord to Tenant of statements therefor: (i) sums equal to expenditures reasonably made and obligations reasonably incurred by Landlord in connection with the remedying by Landlord of Tenant's defaults pursuant to the provisions of Section 26.1; (ii) sums equal to all losses, costs, liabilities, damages and expenses referred to in Article 10 of this Lease; and (iii) sums equal to all expenditures reasonably - 45 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 52 made and obligations reasonably incurred by Landlord in collecting or attempting to collect the Rent or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law, including, without limitation, all legal fees and other amounts so expended. Tenant's obligations under this Section 26.2 shall survive the expiration or sooner termination of the Lease Term. ARTICLE 27 ENTRY BY LANDLORD Landlord reserves the right at all reasonable times and upon reasonable notice to Tenant (except in the case of an emergency) to enter the Premises to (i) inspect them; (ii) show the Premises to prospective purchasers, mortgagees or tenants (but only within the last 9 months with respect to prospective tenants), or to current or prospective mortgagees, ground or underlying lessors or insurers; (iii) post notices of nonresponsibility; or (iv) alter, improve or repair the Premises or the Building, or for structural alterations, repairs or improvements to the Building or the Building's systems and equipment. Notwithstanding anything to the contrary contained in this Article 27, Landlord may enter the Premises at any time to (A) perform services required of Landlord, including janitorial service; (B) take possession due to any breach of this Lease in the manner provided herein; and (C) perform any covenants of Tenant which Tenant fails to perform. Except as otherwise provided in this Lease, Landlord may make any such entries without the abatement of Rent and may take such reasonable steps as required to accomplish the stated purposes. Except to the extent caused by the gross negligence or willful misconduct of any Landlord Parties, Tenant hereby waives any claims for damages or for any injuries or inconvenience to or interference with Tenant's business, lost profits, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the above purposes, Landlord shall at all times have a key with which to unlock all the doors in the Premises, excluding Tenant's vaults, safes and special security areas designated in advance by Tenant. In an emergency, Landlord shall have the right to use any means that Landlord may deem proper to open the doors in and to the Premises. Any entry into the Premises by Landlord in the manner hereinbefore described shall not be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an actual or constructive eviction of Tenant from any portion of the Premises. No provision of this Lease shall be construed as obligating Landlord to perform any repairs, alterations or decorations except as otherwise expressly agreed to be performed by Landlord herein. ARTICLE 28 TENANT PARKING Tenant shall have the right, during the Lease Term, to use up to the number of parking spaces in the Project parking areas as set forth in Section 9 of the Summary, of which spaces, Tenant may designate the location of up to six (6) visitor spaces and up to ten (10) reserved spaces, subject to Landlord's reasonable approval, provided, the number and location of the reserved spaces Tenant elects to lease and the location of the visitor spaces shall be established - 46 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 53 upon the execution of this Lease, as shown on EXHIBIT F attached hereto. Such use shall be free of charge during the initial Lease Term. Tenant's continued right to use the parking areas is conditioned upon Tenant abiding by all rules and regulations which are prescribed from time to time for the orderly operation and use of such areas, including any sticker or other identification system established by Landlord, Tenant's cooperation in seeing that Tenant's employees and visitors also comply with such rules and regulations and Tenant not being in default under this Lease. Landlord specifically reserves the right to change the size, configuration, design, layout and all other aspects of the Project parking areas at any time and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, except as provided in Section 19.5, from time to time, close-off or restrict access to the Project areas facility for purposes of permitting or facilitating any such construction, alteration or improvements. Landlord may delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control attributed hereby to the Landlord. ARTICLE 29 MISCELLANEOUS PROVISIONS 29.1 TERMS; CAPTIONS. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. The necessary grammatical changes required to make the provisions hereof apply either to corporations, partnerships, limited liability companies, or other similar entities or individuals, men or women, as the case may require, shall in all cases be assumed as though in each case fully expressed. The captions of Articles and Sections are for convenience only and shall not be deemed to limit, construe, affect or alter the meaning of such Articles and Sections. 29.2 BINDING EFFECT. Subject to all other provisions of this Lease, each of the covenants, conditions and provisions of this Lease shall extend to and shall, as the case may require, bind or inure to the benefit not only of Landlord and of Tenant, but also of their respective heirs, personal representatives, successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 of this Lease. 29.3 NO AIR RIGHTS. No rights to any view or to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. If at any time any windows of the Premises are temporarily darkened or the light or view therefrom is obstructed by reason of any repairs, improvements, maintenance or cleaning in or about the Project, the same shall be without liability to Landlord and without any reduction or diminution of Tenant's obligations under this Lease. 29.4 MODIFICATION OF LEASE. Should any current or prospective mortgagee or ground lessor for the Building or Project require a modification of this Lease, which modification will not cause an increased cost or expense to Tenant or in any other way materially and adversely change the rights and obligations of Tenant hereunder, then and in such event, Tenant agrees that this Lease may be so modified and agrees to execute whatever documents are reasonably required - 47 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 54 therefor and to deliver the same to Landlord within ten (10) days following a request therefor. At the request of Landlord or any mortgagee or ground lessor, Tenant agrees to execute a short form of Lease and deliver the same to Landlord within ten (10) days following the request therefor. 29.5 TRANSFER OF LANDLORD'S INTEREST. Tenant acknowledges that Landlord has the right to transfer all or any portion of its interest in the Project or Building and in this Lease, and Tenant agrees that in the event of any such transfer, Landlord shall automatically be released from all liability under this Lease arising after such transfer and Tenant agrees to look solely to such transferee for the performance of Landlord's obligations hereunder arising after the date of transfer and such transferee shall be deemed to have fully assumed and be liable for all obligations of this Lease to be performed by Landlord, including the return of any Security Deposit, and Tenant shall attorn to such transferee. 29.6 PROHIBITION AGAINST RECORDING. Except as provided in Section 29.4 of this Lease, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant. 29.7 LANDLORD'S TITLE. Landlord's title is and always shall be paramount to the title of Tenant. Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord. 29.8 RELATIONSHIP OF PARTIES. Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venturer or any association between Landlord and Tenant. 29.9 APPLICATION OF PAYMENTS. Landlord shall have the right to apply payments received from Tenant pursuant to this Lease, regardless of Tenant's designation of such payments, to satisfy any obligations of Tenant hereunder, in such order and amounts as Landlord, in its sole discretion, may elect. 29.10 TIME OF ESSENCE. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. 29.11 PARTIAL INVALIDITY. If any term, provision or condition contained in this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Lease shall be valid and enforceable to the fullest extent possible permitted by law. 29.12 NO WARRANTY. In executing and delivering this Lease, Tenant has not relied on any representations, including, but not limited to, any representation as to the amount of any item comprising Additional Rent or the amount of the Additional Rent in the aggregate or that Landlord is furnishing the same services to other tenants, at all, on the same level or on the same basis, or any warranty or any statement of Landlord which is not set forth herein or in one or more of the exhibits attached hereto. - 48 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 55 29.13 LANDLORD EXCULPATION. The liability of Landlord or the Landlord Parties to Tenant for any default by Landlord under this Lease or arising in connection herewith or with Landlord's operation, management, leasing, repair, renovation, alteration or any other matter relating to the Project or the Premises shall be limited solely and exclusively to an amount which is equal to the interest of Landlord in the Building, provided that in no event shall such liability extend to any sales proceeds received by Landlord or the Landlord Parties in connection with the Project, Building or Premises. Neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. The limitations of liability contained in this Section 29.13 shall inure to the benefit of Landlord's and the Landlord Parties' present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective partners, heirs, successors and assigns. Under no circumstances shall any present or future partner of Landlord (if Landlord is a partnership), or trustee or beneficiary (if Landlord or any partner of Landlord is a trust), have any liability for the performance of Landlord's obligations under this Lease. Notwithstanding any contrary provision herein, neither Landlord nor the Landlord Parties shall be liable under any circumstances for injury or damage to, or interference with, Tenant's business, including but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, in each case, however occurring. 29.14 ENTIRE AGREEMENT. It is understood and acknowledged that there are no oral agreements between the parties hereto affecting this Lease and this Lease constitutes the parties' entire agreement with respect to the leasing of the Premises and supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. None of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties hereto. 29.15 RIGHT TO LEASE. Landlord reserves the absolute right to effect such other tenancies in the Project as Landlord in the exercise of its sole business judgment shall determine to best promote the interests of the Building or Project. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the Lease Term, occupy any space in the Building or Project. 29.16 FORCE MAJEURE. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease (collectively, a "FORCE MAJEURE"), notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party's performance caused by a Force Majeure. - 49 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 56 29.17 WAIVER OF REDEMPTION BY TENANT. Tenant hereby waives, for Tenant and for all those claiming under Tenant, any and all rights now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant's right of occupancy of the Premises after any termination of this Lease. 29.18 NOTICES. All notices, demands, statements, designations, approvals or other communications (collectively, "NOTICES") given or required to be given by either party to the other hereunder or by law shall be in writing, shall be (A) sent by United States certified or registered mail, postage prepaid, return receipt requested ("MAIL"), (B) transmitted by telecopy, if such telecopy is promptly followed by a Notice sent by Mail, (C) delivered by a nationally recognized overnight courier, or (D) delivered personally. Any Notice shall be sent, transmitted, or delivered, as the case may be, to Tenant at the appropriate address set forth in Section 10 of the Summary, or to such other place as Tenant may from time to time designate in a Notice to Landlord, or to Landlord at the addresses set forth in Section 11 of the Summary, or to such other places as Landlord may from time to time designate in a Notice to Tenant. Any Notice will be deemed given (i) three (3) days after the date it is posted if sent by Mail, (ii) the date the telecopy is transmitted, (iii) the date the overnight courier delivery is made, or (iv) the date personal delivery is made 29.19 JOINT AND SEVERAL. If there is more than one Tenant, the obligations imposed upon Tenant under this Lease shall be joint and several. 29.20 AUTHORITY. If Tenant is a corporation, trust or partnership, each individual executing this Lease on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Lease and that each person signing on behalf of Tenant is authorized to do so. In such event, Tenant shall, within ten (10) days after execution of this Lease, deliver to Landlord satisfactory evidence of such authority and, if a corporation, upon demand by Landlord, also deliver to Landlord satisfactory evidence of (i) good standing in Tenant's state of incorporation and (ii) qualification to do business in California. 29.21 ATTORNEYS' FEES. In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease or for any other relief against the other, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. 29.22 GOVERNING LAW; WAIVER OF TRIAL BY JURY. This Lease shall be construed and enforced in accordance with the laws of the State of California. IN ANY ACTION OR PROCEEDING ARISING HEREFROM, LANDLORD AND TENANT HEREBY CONSENT TO (I) THE JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA, (II) SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW, AND (III) IN THE INTEREST OF SAVING TIME AND EXPENSE, - 50 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 57 TRIAL WITHOUT A JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR THEIR SUCCESSORS IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. IN THE EVENT LANDLORD COMMENCES ANY SUMMARY PROCEEDINGS OR ACTION FOR NONPAYMENT OF BASE RENT OR ADDITIONAL RENT, TENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM OF ANY NATURE OR DESCRIPTION (UNLESS SUCH COUNTERCLAIM SHALL BE MANDATORY) IN ANY SUCH PROCEEDING OR ACTION, BUT SHALL BE RELEGATED TO AN INDEPENDENT ACTION AT LAW. 29.23 SUBMISSION OF LEASE. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of, option for or option to lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. 29.24 BROKERS. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Section 12 of the Summary (the "BROKERS"), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent, other than the Brokers, occurring by, through, or under the indemnifying party. Landlord shall pay all commissions due to the Brokers related to the negotiation of this Lease. 29.25 INDEPENDENT COVENANTS. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord's expense or to any setoff of the Rent or other amounts owing hereunder against Landlord, except as provided in Section 7.2, above. 29.26 PROJECT OR BUILDING NAME AND SIGNAGE. Landlord shall have the right at any time to change the name of the Project or Building and to install, affix and maintain any and all signs on the exterior and on the interior of the Project or Building as Landlord may, in Landlord's sole discretion, desire. Tenant shall not use the words "Irvine Oaks" or the name of the Project or Building or use pictures or illustrations of the Project or Building in advertising or other publicity or for any purpose other than as the address of the business to be conducted by Tenant in the Premises, without the prior written consent of Landlord. - 51 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 58 29.27 COUNTERPARTS. This Lease may be executed in counterparts with the same effect as if both parties hereto had executed the same document. Both counterparts shall be construed together and shall constitute a single lease. 29.28 CONFIDENTIALITY. Tenant acknowledges that the content of this Lease and any related documents are confidential information. Tenant shall keep such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than Tenant's financial, legal, and space planning consultants. 29.29 DEVELOPMENT OF THE PROJECT. 29.29.1 SUBDIVISION. Landlord reserves the right to further subdivide all or a portion of the Project. Tenant agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents needed to conform this Lease to the circumstances resulting from such subdivision, so long as Tenant does not incur any additional cost or expense in relation thereto. 29.29.2 THE OTHER IMPROVEMENTS. If portions of the Project or property adjacent to the Project (collectively, the "OTHER IMPROVEMENTS") are owned by an entity other than Landlord, Landlord, at its option, may enter into an agreement with the owner or owners of any or all of the Other Improvements to provide (i) for reciprocal rights of access and/or use of the Project and the Other Improvements, (ii) for the common management, operation, maintenance, improvement and/or repair of all or any portion of the Project and the Other Improvements, (iii) for the allocation of a portion of the Direct Expenses to the Other Improvements and the operating expenses and taxes for the Other Improvements to the Project, and (iv) for the use or improvement of the Other Improvements and/or the Project in connection with the improvement, construction, and/or excavation of the Other Improvements and/or the Project. Nothing contained herein shall be deemed or construed to limit or otherwise affect Landlord's right to convey all or any portion of the Project or any other of Landlord's rights described in this Lease. 29.29.3 CONSTRUCTION OF PROJECT AND OTHER IMPROVEMENTS. Tenant acknowledges that portions of the Project and/or the Other Improvements may be under construction following Tenant's occupancy of the Premises, and that such construction may result in levels of noise, dust, obstruction of access, etc. which are in excess of that present in a fully constructed project, provided, Landlord shall use good faith efforts to minimize any such noise, dust, obstruction of access, etc., to the extent reasonably practicable. Tenant hereby waives any and all rent offsets or claims of constructive eviction which may arise in connection with such construction. 29.30 BUILDING RENOVATIONS. It is specifically understood and agreed that Landlord has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Premises, Building, or any part thereof and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant except as specifically set forth herein or in the Tenant Work Letter. However, Tenant hereby acknowledges that Landlord is currently renovating or may during the Lease Term renovate, improve, alter, or modify - 52 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 59 (collectively, the "RENOVATIONS") the Project, the Building and/or the Premises. Tenant hereby agrees that such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Landlord shall have no responsibility and shall not be liable to Tenant for any injury to or interference with Tenant's business arising from the Renovations, nor shall Tenant be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or of Tenant's personal property or improvements resulting from the Renovations, or for any inconvenience or annoyance occasioned by such Renovations; provided Landlord shall not unreasonably obstruct or interfere with the accessibility of the Premises, the Building or the parking areas or Tenant's use and enjoyment of the Premises, the Building or the parking areas during such renovations. 29.31 NO VIOLATION. Tenant hereby warrants and represents that neither its execution of nor performance under this Lease shall cause Tenant to be in violation of any agreement, instrument, contract, law, rule or regulation by which Tenant is bound, and Tenant shall protect, defend, indemnify and hold Landlord harmless against any claims, demands, losses, damages, liabilities, costs and expenses, including, without limitation, reasonable attorneys' fees and costs, arising from Tenant's breach of this warranty and representation. 29.32 LIMITATIONS ON TENANT'S LIABILITY. Tenant shall not have any responsibility or liability for (i) violations of any law, ordinance, rule or regulation relating to the Premises existing as of the Lease Commencement Date, including, but not limited to, violations of any building codes, laws relating to hazardous or toxic materials or substances ("HAZARDOUS MATERIALS"), and the Americans with Disabilities Act of 1990, 42 U.S.C. ss.ss. 12101 et seq. and 47 U.S.C. ss.ss. 225 et seq. as amended from time to time, and any similar or successor federal, state, or local laws (collectively, the "ADA") (all of the foregoing laws, ordinances, rules and regulations are collectively referred to herein as "APPLICABLE LAWS"), (ii) any Hazardous Materials present in, on, under or about any part of the Premises or Project as of the Lease Commencement Date or that were or are brought into, onto, about, or under any part of the Premises or Project after the Lease Commencement Date, except for Hazardous Materials brought onto the Premises or Project by Tenant or Tenant's agents, employees or contractors, or (iii) without limiting the generality of subparts (i) and (ii) above, the cleanup, remediation, or removal of any Hazardous Materials present in, on, under or about any part of the Premises or Project as of the Lease Commencement Date or that were or are brought into, onto, about, or under any part of the Premises or Project after the Lease Commencement Date, except for Hazardous Materials brought onto the Premises or Project by Tenant or Tenant's agents, employees or contractors. - 53 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 60 IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date first above written. "LANDLORD": MAGELLAN IRVINE OAKS LIMITED PARTNERSHIP, an Arizona limited partnership By: /s/ David C. Dewar ----------------------------------------- Its: Secretary/Treasurer ----------------------------------------- "TENANT": KOFAX IMAGE PRODUCTS, INC., a Delaware corporation By: /s/ [SIG] ----------------------------------------- Its: President/CEO ------------------------------------ By: /s/ [SIG] ----------------------------------------- Its: Secretary ------------------------------------ - 54 - IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 61 EXHIBIT A --------- IRVINE OAKS EXECUTIVE PARK -------------------------- OUTLINE OF PREMISES ------------------- ATTACHED -------- EXHIBIT A IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 62 [MAP] EXHIBIT A - Page 1 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 63 EXHIBIT B --------- IRVINE OAKS EXECUTIVE PARK -------------------------- TENANT WORK LETTER ------------------ This Tenant Work Letter shall set forth the terms and conditions relating to the construction of the tenant improvements in the Premises. This Tenant Work Letter is essentially organized chronologically and addresses the issues of the construction of the Premises, in sequence, as such issues will arise during the actual construction of the Premises. All references in this Tenant Work Letter to Articles or Sections of "this Lease" shall mean the relevant portion of Articles 1 through 29 of the Office Lease to which this Tenant Work Letter is attached as Exhibit B and of which this Tenant Work Letter forms a part, and all references in this Tenant Work Letter to Sections of "this Tenant Work Letter" shall mean the relevant portion of Sections 1 through 6 of this Tenant Work Letter. SECTION 1 --------- LANDLORD'S INITIAL CONSTRUCTION IN THE PREMISES ----------------------------------------------- Landlord shall construct, at its sole cost and expense, the base, shell, and core (i) of the Premises and (ii) of the Building (collectively, the "BASE, SHELL, AND CORE" or "Base Building") in accordance with the plans and specifications described on Schedule 2 attached hereto (the "DESIGN PLANS"), provided that Landlord may make changes to the Design Plans as reasonably deemed necessary or desirable by Landlord, or as required by law. Landlord agrees that, as of the date of substantial completion of the Base Building, the same shall be in material compliance with applicable building codes, and other governmental laws, ordinances and regulations, including handicap access and Title 24 (collectively, "CODE"), applicable to the Building as of such date on an unoccupied basis. SECTION 2 --------- TENANT IMPROVEMENTS ------------------- 2.1 Tenant Improvement Allowance. Tenant shall be entitled to a one-time tenant improvement allowance (the "TENANT IMPROVEMENT ALLOWANCE") in the amount of $1,416,175.00 based upon an estimated 56,647 usable square feet of the Premises, which amount is subject to adjustment based on verification of the useable square feet of the Premises as provided in Section 1.2 of the Lease, for the costs relating to the initial design and construction of Tenant's improvements which are permanently affixed to the Premises (the "TENANT IMPROVEMENTS"). In no event shall Landlord be obligated to make disbursements pursuant to this Tenant Work Letter in a total amount which exceeds the Tenant Improvement Allowance. All Tenant Improvements for which the Tenant Improvement Allowance has been made available shall be deemed Landlord's property under the terms of the Lease. 2.2 Disbursement of the Tenant Improvement Allowance. Except as otherwise set forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be disbursed by EXHIBIT B - Page 1 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 64 Landlord (each of which disbursements shall be made pursuant to Landlord's disbursement process) for costs related to the construction of the Tenant Improvements and for the following items and costs (collectively, the "TENANT IMPROVEMENT ALLOWANCE ITEMS"): (i) payment of the fees of the "Tenant's Architect", "Architect" and the "Engineers," as those terms are defined in Section 3.1 of this Tenant Work Letter, and payment of the fees incurred by, and the cost of documents and materials supplied by, Landlord and Landlord's consultants in connection with the preparation and review of the "CONSTRUCTION DRAWINGS," as that term is defined in Section 3.1 of this Tenant Work Letter; (ii) the cost of any changes in the Base, Shell and Core when such changes are required by the Construction Drawings; (iii) the cost of any changes to the Construction Drawings or Tenant Improvements required by Code; (iv) the cost of Tenant's relocation into the Premises, up to a maximum amount equal to $1.00 per rentable square foot of the Premises; and (v) the "LANDLORD SUPERVISION FEE", as that term is defined in Section 4.3.2 of this Tenant Work Letter. 2.3 Standard Tenant Improvement Package. Landlord has established specifications (the "SPECIFICATIONS") for the Building standard components to be used in the construction of the Tenant Improvements in the Premises (collectively, the "STANDARD IMPROVEMENT Package"), which Specifications are set forth on Schedule 3 attached hereto. The quality of Tenant Improvements shall be equal to or of greater quality than the quality of the Specifications, provided that Landlord may, at Landlord's option, require the Tenant Improvements to comply with certain Specifications. Landlord may make changes to the Specifications for the Standard Improvement Package from time to time. SECTION 3 --------- CONSTRUCTION DRAWINGS --------------------- 3.1 Selection of Architect/Construction Drawings. Tenant has retained RLB Associates ("TENANT'S ARCHITECT") to prepare the "Final Space Plan," as that term is defined in Section 3.2, below Landlord shall retain Datum Architects (the "ARCHITECT") to prepare the "CONSTRUCTION DRAWINGS," as that term is defined in this Section 3.1, and engineering consultants selected by Landlord (the "ENGINEERS") to prepare all plans and engineering working drawings relating to the structural, mechanical, electrical, plumbing, HVAC, lifesafety, and sprinkler work of the Tenant Improvements, based on the Final Space Plan. The plans and drawings to be prepared by Architect and the Engineers hereunder shall be known collectively as the "Construction Drawings." 3.2 Final Space Plan. On or before the date set forth in Schedule 1, attached hereto, Tenant and the Tenant's Architect shall prepare the final space plan for Tenant Improvements in the Premises (collectively, the "FINAL SPACE PLAN"), which Final Space Plan shall include a layout, in compliance with applicable Code, and designation of all offices, rooms and other partitioning, their intended use, and equipment to be contained therein, and shall deliver the Final Space Plan to Landlord for Landlord's approval. 3.3 Final Working Drawings. The Architect and the Engineers shall complete the architectural and engineering drawings for the Premises, and the final architectural working EXHIBIT B - Page 2 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 65 drawings in a form which is complete to allow subcontractors to bid on the work and to obtain all applicable permits (collectively, the "FINAL WORKING DRAWINGS") and shall submit the same to Tenant on or before the date specified in Schedule 1 to this Tenant Work Letter for Tenant's reasonable approval, which approval shall be given within five (5) business days after Landlord's delivery of the same to Tenant. Landlord agrees that the Tenant's Architect may be involved in such approval, and that any costs relating to such involvement may, at Tenant's option, be deducted from the Tenant Improvement Allowance. 3.4 Permits. Landlord shall submit the Final Working Drawing as approved by Tenant (the "APPROVED WORKING DRAWINGS") to the appropriate municipal authorities for all applicable building permits necessary to allow "Contractor," as that term is defined in Section 4.1, below, to commence and fully complete the construction of the Tenant Improvements (the "PERMITS"). 3.5 Time Deadlines. Tenant shall use good faith efforts and all due diligence to cooperate with the Architect, the Engineers, and Landlord to complete all phases of the Construction Drawings and the permitting process and to receive the permits, and with Contractor for approval of the "COST PROPOSAL," as that term is defined in Section 4.2 of this Tenant Work Letter, as soon as possible after the execution of the Lease, and, in that regard, shall meet with Landlord on a scheduled basis to be determined by Landlord and acceptable to Tenant, to discuss Tenant's progress in connection with the same. The applicable dates for approval of items, plans and drawings as described in this Section 3, Section 4, below, and in this Tenant Work Letter are set forth and further elaborated upon in Schedule 1 (the "TIME DEADLINES"), attached hereto. Tenant agrees to comply with the Time Deadlines. SECTION 4 --------- CONSTRUCTION OF THE TENANT IMPROVEMENTS --------------------------------------- 4.1 Contractor. A contractor selected by Landlord and reasonably acceptable to Tenant ("CONTRACTOR") shall construct the Tenant Improvements. Landlord and Tenant agree that one (1) contractor designated by Tenant will be considered for selection by Landlord as the Contractor, and that the Contractor may be an affiliate of Landlord provided the fees paid by Landlord to any such affiliated Contractor shall not be in excess of commercially competitive contractor fees paid by Landlords of Comparable Buildings. 4.2 Cost Proposal. After the Approved Working Drawings are signed by Landlord and Tenant, Tenant shall submit a list of subcontractors to be provided by Tenant within ten (10) business days following full execution of the Lease, which list shall be reasonably approved by Landlord, and which shall be included in the list of subcontractors to be considered by Landlord for construction of the Tenant Improvements. For those subcontractors which Landlord has approved, Landlord shall solicit bids from at least three (3) subcontractors (at least two (2) of which shall be from Tenant's list approved by Landlord) for each item in connection with the construction of the Tenant Improvements. Landlord shall select the lowest qualified (in Landlord's sole discretion) bid for purposes of the Cost Proposal (defined below). Within five (5) business days after Landlord receives such bids from said subcontractors, Landlord shall provide Tenant with a cost proposal in accordance with the Approved Working Drawings, which cost EXHIBIT B - Page 3 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 66 proposal shall include, as nearly as possible, the cost of all Tenant Improvement Allowance Items to be incurred by Tenant in connection with the design and construction of the Tenant Improvements (the "COST Proposal"). Tenant shall approve and deliver the Cost Proposal to Landlord within fifteen (15) days of the receipt of the same, and upon receipt of the same by Landlord, Landlord shall be released by Tenant to purchase the items set forth in the Cost Proposal and to commence the construction relating to such items. The date by which Tenant must approve and deliver the Cost Proposal to Landlord shall be known hereafter as the "Cost Proposal Delivery Date". 4.3 Construction of Tenant Improvements by Contractor under the Supervision of Landlord. 4.3.1 Over-Allowance Amount. If the Cost Proposal shows costs greater than the amount of the Tenant Improvement Allowance (the "OVER-ALLOWANCE AMOUNT"), then Tenant shall pay the Over-Allowance Amount as follows. Once the Cost Proposal is approved and the Over-Allowance Amount, if any, is determined, a construction budget shall be prepared which will allocate, on a monthly basis, over the entire completion schedule for the Tenant Improvements, the disbursement of the Tenant Improvement Allowance and the Over-Allowance Amount, on a pro-rata basis, based on the ratio of the total Cost Proposal to the total Over-Allowance Amount. Tenant shall pay the monthly allocation of the Over-Allowance Amount each month, over the completion schedule for the Tenant Improvements, until the Over-Allowance Amount is paid in full. Such payment by Tenant shall be a condition to Landlord's obligation to pay any amounts of Tenant Improvements Allowance hereunder. In the event that, after the Cost Proposal Delivery Date, any revisions, changes, or substitutions shall be made to the Construction Drawings or the Tenant Improvements, which are the result of changes or additions required by Tenant, any additional costs which arise in connection with such revisions, changes or substitutions or any other additional costs shall be added to the Over-Allowance Amount and paid by Tenant in accordance with the foregoing provision. 4.3.2 Landlord's Retention of Contractor. Landlord shall independently retain Contractor, on behalf of Tenant, to construct the Tenant Improvements in accordance with the Approved Working Drawings and the Cost Proposal and Landlord shall supervise the construction by Contractor, and Tenant shall pay a construction supervision and management fee (the "LANDLORD SUPERVISION FEE") to Landlord in an amount equal to the product of (i) three percent (3%) and (ii) an amount equal to the Tenant Improvement Allowance plus the Over-Allowance Amount (as such Over-Allowance Amount may increase pursuant to the terms of this Tenant Work Letter), but not including reimbursable amounts payable to the Architects or Engineers. 4.3.3 Contractor's Warranties and Guaranties. Landlord hereby assigns to Tenant all warranties and guaranties by Contractor relating to the Tenant Improvements, and Tenant hereby waives all claims against Landlord relating to, or arising out of the construction of, the Tenant Improvements. EXHIBIT B - Page 4 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 67 SECTION 5 --------- COMPLETION OF THE TENANT IMPROVEMENTS; -------------------------------------- LEASE COMMENCEMENT DATE ----------------------- 5.1 Ready for Occupancy. Subject to the terms of Section 6.1, below, the Premises shall be deemed "Ready for Occupancy" upon the Substantial Completion of the Premises and issuance of a certificate of occupancy or its legal equivalent. For purposes of this Lease, "Substantial Completion" of the Premises shall occur upon the completion of construction of the Tenant Improvements in the Premises pursuant to the Approved Working Drawings, with the exception of any punch list items identified by Tenant and any tenant fixtures, work-stations, built-in furniture, or equipment to be installed by Tenant. With respect to any punch list items identified by Tenant, Landlord shall complete or repair such items to the specifications required by this Tenant Work Letter within sixty (60) days, unless prevented by delays beyond control of Landlord. 5.2 Delay of the Substantial Completion of the Premises. Except as provided in this Section 5.2, the Lease Commencement Date shall occur as set forth in the Lease and Section 5.1, above. If there shall be a delay or there are delays in the Substantial Completion of the Premises or in the occurrence of any of the other conditions precedent to the Lease Commencement Date, as set forth in the Lease, as a direct, indirect, partial, or total result of: 5.2.1 Tenant's failure to comply with the Time Deadlines; 5.2.2 Tenant's failure to timely approve any matter requiring Tenant's approval; 5.2.3 A breach by Tenant of the terms of this Tenant Work Letter or the Lease; 5.2.4 Changes in any of the Construction Drawings after disapproval of the same by Landlord or because the same do not comply with Code or other applicable laws; 5.2.5 Tenant's request for changes in the Approved Working Drawings; 5.2.6 Tenant's requirement for materials, components, finishes or improvements which are not available in a commercially reasonable time given the anticipated date of Substantial Completion of the Premises, as set forth in the Lease, or which are different from, or not included in, the Standard Improvement Package; 5.2.7 Changes to the Base, Shell and Core required by the Approved Working Drawings as a result of changes requested by Tenant or required by any work requested by Tenant; or 5.2.8 Any other acts or omissions of Tenant, or its agents, or employees; EXHIBIT B - Page 5 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 68 then, notwithstanding anything to the contrary set forth in the Lease or this Tenant Work Letter and regardless of the actual date of the Substantial Completion of the Premises, the Lease Commencement Date shall be deemed to be the date the Lease Commencement Date would have occurred if no Tenant delay or delays, as set forth above, had occurred. SECTION 6 --------- MISCELLANEOUS ------------- 6.1 Tenant's Entry Into the Premises Prior to Substantial Completion. Provided that Tenant and its agents do not interfere with Contractor's work in the Building and the Premises, Contractor shall allow Tenant access to the Premises prior to the Substantial Completion of the Premises for the purpose of Tenant installing overstandard equipment or fixtures (including Tenant's data and telephone equipment) in the Premises, and, furthermore, Landlord agrees that in no event shall the Premises be deemed Ready for Occupancy prior to the date which is thirty (30) days after the date Tenant is granted such access. Prior to Tenant's entry into the Premises as permitted by the terms of this Section 6.1, Tenant shall submit a schedule to Landlord and Contractor, for their approval, which schedule shall detail the timing and purpose of Tenant's entry. Tenant shall hold Landlord harmless from and indemnify, protect and defend Landlord against any loss or damage to the Building or Premises, or damage to Tenant's furniture, fixtures or equipment, or personal property, and against injury to any persons caused by Tenant's actions pursuant to this Section 6.1. 6.2 Elevators. To the extent the same have been installed and completed by such date, Landlord shall make the freight elevator and building elevators, reasonably available to Tenant fourteen (14) days prior to the time the premises are ready for Occupancy, in connection with initial decorating, furnishing and moving into the Premises. 6.3 Tenant's Representative. Tenant has designated Ms. Pat Johnson as its sole representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Landlord, shall have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter. 6.4 Landlord's Representative. Landlord has designated Mr. Dave Welling as its sole representatives with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Tenant Work Letter. 6.5 Time of the Essence in This Tenant Work Letter. Unless otherwise indicated, all references herein to a "number of days" shall mean and refer to calendar days. In all instances where Tenant is required to approve or deliver an item, if no written notice of approval is given or the item is not delivered within the stated time period, at Landlord's sole option, at the end of such period the item shall automatically be deemed approved or delivered by Tenant and the next succeeding time period shall commence. EXHIBIT B - Page 6 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 69 6.6 Tenant's Lease Default. Notwithstanding any provision to the contrary contained in this Lease, if an event of default as described in the Lease, or a default by Tenant under this Tenant Work Letter, has occurred at any time on or before the Substantial Completion of the Premises, then (i) in addition to all other rights and remedies granted to Landlord pursuant to the Lease, Landlord shall have the right to withhold payment of all or any portion of the Tenant Improvement Allowance and/or Landlord may cause Contractor to cease the construction of the Premises (in which case, Tenant shall be responsible for any delay in the Substantial Completion of the Premises caused by such work stoppage as set forth in Section 5 of this Tenant Work Letter), and (ii) all other obligations of Landlord under the terms of this Tenant Work Letter shall be forgiven until such time as such default is cured pursuant to the terms of the Lease. EXHIBIT B - Page 7 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 70 SCHEDULE 1 TO EXHIBIT B ----------------------- TIME DEADLINES --------------
Dates Actions to be Performed ----- ----------------------- 1. June 1, 1998 Tenants retention of Architect and Engineers. 2. June 30, 1998 Preliminary space plan to be completed by tenant and delivered to landlord. 3. July 15, 1998 Contractor to submit cost proposal to tenant and delivered to landlord. 4. July 15, 1998 Architect and Engineers commence working drawings. 5. July 15, 1998 Information concerning structural or underground utilities which need to be installed during shell construction. 6. August 10, 1998 Submittal of final working drawings to landlord for approval. 7. August 14, 1998 Submittal of landlord approved working drawings to City for plan check. 8. October 30, 1998 Receipt of all required permits. 9. November 23, 1998 Approval of bids from all primary subcontractors. 10. November 30, 1998 Commencement of T. I. construction. 11. March 1, 1999 Delivery by contractor to landlord and tenant Certificate of Substantial Completion.
SCHEDULE 1 TO EXHIBIT B - Page 1 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 71 SCHEDULE 2 TO EXHIBIT B ----------------------- DESIGN PLANS ------------ ATTACHED -------- SCHEDULE 2 TO EXHIBIT B IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 72 [MAP] SCHEDULE 2 TO EXHIBIT B - Page 1 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 73 [MAP] SCHEDULE 2 TO EXHIBIT B - Page 2 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 74 [MAP] SCHEDULE 2 TO EXHIBIT B - Page 3 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 75 [MAP] SCHEDULE 2 TO EXHIBIT B - Page 4 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 76 SCHEDULE 3 TO EXHIBIT B ----------------------- SPECIFICATIONS -------------- ATTACHED -------- SCHEDULE 3 TO EXHIBIT B IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 77 SECTION 1 SITE WORK - -------------------------------------------------------------------------------- PAVING AND CURBS All parking areas are to be finished in asphaltic concrete paving installed in accordance with the recommendations of the soils investigation report. All exterior pedestrian walkways abutting the building are to be finished in concrete paving. All transitions between pedestrian walkways, landscaping and parking/ shipping and receiving areas are to be separated by concrete curbs. All pavement markings and signage required by all applicable codes and ordinances will be provided. UNDERGROUND UTILITIES The following underground utilities will be extended where necessary from the current location and brought to within 5 feet of the building limit: -- water; -- storm sewer; -- sanitary sewer; -- electrical; -- telephone. These services will then be connected to the building system by the relevant trade. LANDSCAPING AND IRRIGATION Exterior building perimeter and parking areas to be landscaped and lit in a manner consistent with the balance of the Executive Park. All exterior landscaping will be served by an automatic irrigation system. - -------------------------------------------------------------------------------- Page 1 Outline Specification Irvine Oaks Executive Park Irvine, California SCHEDULE 3 TO EXHIBIT B -- PAGE 1 78 SECTION 2 BUILDING INTERIORS - -------------------------------------------------------------------------------- The following areas will be built-out and equipped as set out below, as part of the shell building. WASHROOMS One (4) compartment men's and one (4) compartment women's washroom will be provided per floor. They will be lit, sprinklered, ventilated, provided with hot and cold water and finished as per the following: -- sound insulated gypsum board walls and ceilings; -- ceramic tile floors and base; -- ceramic tile walls, (4 ft. high on wet walls only); -- painted ceiling and balance of walls; -- pre-finished steel toilet partitions and urinal screens; -- chrome, stainless steel or aluminum washroom accessories; -- plastic laminate vanities; -- above vanity mirrors; china fixtures. ELECTRICAL/ TELEPHONE ROOMS One electrical/ telephone room will be provided per floor for the distribution of these services. It will be lit, sprinklered, ventilated and finished as per the following: -- painted gypsum board walls; -- painted concrete or vinyl composite tile floor; -- vinyl base. -- telephone equipment backboard JANITORIAL ROOM One janitorial room will be provided. It will be lit, sprinklered, ventilated, provided with a janitor's sink with hot and cold water and finished as per the electrical/ telephone rooms identified above. ELEVATOR MACHINE ROOM One elevator machine room will be provided. It will be lit, sprinklered, ventilated and finished as per the electrical/ telephone rooms identified above. - -------------------------------------------------------------------------------- Page 2 Outline Specification Irvine Oaks Executive Park Irvine, California SCHEDULE 3 TO EXHIBIT B -- PAGE 2 79 SECTION 2 BUILDING INTERIORS - -------------------------------------------------------------------------------- STAIRS AND SHELL BUILDING CORRIDORS Shell building stairs and corridors will be lit and sprinklered, however, ventilation of these areas will become part of the tenant improvement package. These areas will be enclosed with gypsum board or suspended lay-in tile. All gypsum board and railings will be painted. Floors and stairs will be wood and concrete, ready to receive tenant flooring. ELEVATOR One 2500 pound, 150 foot per minute, hydraulic elevator shall be provided serving two stops. Elevator doors, frames and front return panels shall be finished in baked enamel. The elevator walls shall be clad in plastic laminate covered panels and the floor finished in carpet. The ceiling will have an egg-crate louver with recessed lighting and a stainless steel wall rail will be provided in accordance with ADA requirements. DOORS AND FRAMES All shell building doors and frames will be plain sliced red oak doors with Timely hollow metal frames excluding those occurring in aluminum and glass storefronts, which will be provided as part of the storefront system. The balance of the interior of the building will be unfinished. - -------------------------------------------------------------------------------- Page 3 Outline Specification Irvine Oaks Executive Park Irvine, California SCHEDULE 3 TO EXHIBIT B -- PAGE 3 80 SECTION 3 BUILDING EXTERIOR - -------------------------------------------------------------------------------- CLADDING The exterior cladding of the building will be comprised of painted tilt-up concrete panels, in-filled with aluminum and glass windows and storefront sections. Glass will be single glazed blue reflective; to match the glass currently installed in the balance of the Executive Park. All aluminum will be finished in a high performance colored coating. ROOFING The roof will be finished in a 4 ply built-up system or equivalent with industry standard flashings and trims. SPECIALTIES All building finish hardware exposed to the exterior shall be stainless steel and all interior finish hardware shall generally be chrome plated or aluminum. The building roof shall be accessible from a roof hatch and ladder from the inside. - -------------------------------------------------------------------------------- Page 4 Outline Specification Irvine Oaks Executive Park Irvine, California SCHEDULE 3 TO EXHIBIT B -- PAGE 4 81 SECTION 4 BUILDING STRUCTURE - -------------------------------------------------------------------------------- FOUNDATION Building foundations and slab on grade are to be constructed of reinforced, cast-in-place concrete, on surfaces prepared in accordance with the recommendations of the soils investigation report. BUILDING FRAME The building will be constructed based on the tilt-up concrete approach with a steel and timber frame. The second floor structure is to consist of a steel and timber framed floor system covered with a plywood and lightweight concrete or gypsum topping. - -------------------------------------------------------------------------------- Page 5 Outline Specification Irvine Oaks Executive Park Irvine, California SCHEDULE 3 TO EXHIBIT B -- PAGE 5 82 SECTION 5 MECHANICAL - -------------------------------------------------------------------------------- PLUMBING A complete roof drainage system will be provided. Complete plumbing services will be provided to the washrooms and janitors closet as defined in Section 2 - Building Interiors. FIRE PROTECTION A complete automatic fire sprinkler system will be provided in accordance with local codes and ordinances. Sprinkler piping will be sized for one head per 168 square feet per N.F.P.A. 13 with 1" tees and plugs installed to accommodate future tenant improvement. HVAC The shell building will be provided with rooftop heat pump packaged A/C units sized to provide an average of (1) ton per 350 actual s.f. They will be provided complete with supply fans, cooling and heating sections, filters, and fresh air intakes. An electronic programmable thermostat will be provided for each A/C unit. The shell building will include the mechanical shafts and vertical members; the tenant improvement will be all the distribution and horizontal members. All roof top equipment shall be installed within the limits of the shell buildings' mechanical screen. - -------------------------------------------------------------------------------- Page 6 Outline Specification Irvine Oaks Executive Park Irvine, California SCHEDULE 3 TO EXHIBIT B -- PAGE 6 83 SECTION 6 ELECTRICAL - -------------------------------------------------------------------------------- MAIN SERVICE A 1200 amp. 277/ 480-volt service will be installed in the 40,000 s.f. buildings and a 1600 amp. 277/ 480-volt service will be installed in the 60,000 s.f. building. Power will then be distributed to the two electrical/ telephone rooms. Complete lighting and power services will be provided to the building areas defined in Section 2 - Building Interiors. TELEPHONE The conduit system from the local telephone utility will be brought to the building and distributed to the main electrical/ telephone room via a system of conduits and floor sleeves. 2- 4" diameter conduits/ sleeves will be provided to each of the electrical/ telephone rooms. - -------------------------------------------------------------------------------- Page 7 Outline Specification Irvine Oaks Executive Park Irvine, California SCHEDULE 3 TO EXHIBIT B -- PAGE 7 84 EXHIBIT C --------- IRVINE OAKS EXECUTIVE PARK -------------------------- NOTICE OF LEASE TERM DATES -------------------------- To: ___________________________ ___________________________ ___________________________ ___________________________ Re: Office Lease dated ____________, 19__ between ____________________, a _____________________ ("Landlord"), and _______________________, a _______________________ ("Tenant") concerning Suite ______ on floor(s) __________ of the office building located at ____________________________, Los Angeles, California. Gentlemen: In accordance with the Office Lease (the "Lease"), we wish to advise you and/or confirm as follows: 1. The Lease Term shall commence on or has commenced on ______________ for a term of __________________ ending on __________________. 2. Rent commenced to accrue on __________________, in the amount of __________________. 3. If the Lease Commencement Date is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in the Lease. 4. Your rent checks should be made payable to __________________ at __________________. 5. The exact number of rentable/usable square feet within the Premises is ____________ square feet. EXHIBIT C - Page 1 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 85 6. Tenant's Share as adjusted based upon the exact number of usable square feet within the Premises is ________%. "Landlord": ---------------------------------------, a ------------------------------------- By: ------------------------------------- Its: --------------------------------- Agreed to and Accepted as of ____________, 19___. "Tenant": - --------------------------------------- a ------------------------------------- By: ------------------------------------ Its: -------------------------------- EXHIBIT C - Page 2 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 86 EXHIBIT D --------- IRVINE OAKS EXECUTIVE PARK -------------------------- RULES AND REGULATIONS --------------------- Tenant shall faithfully observe and comply with the following Rules and Regulations. Landlord shall not be responsible to Tenant for the nonperformance of any of said Rules and Regulations by or otherwise with respect to the acts or omissions of any other tenants or occupants of the Project. In the event of any conflict between the Rules and Regulations and the other provisions of this Lease, the latter shall control. 1. Tenant shall not alter any lock or install any new or additional locks or bolts on any doors or windows of the Premises without obtaining Landlord's prior written consent. Tenant shall bear the cost of any lock changes or repairs required by Tenant. Two keys will be furnished by Landlord for the Premises, and any additional keys required by Tenant may be obtained by Tenant at its sole cost, provided in the event any keys or locks obtained by Tenant differ from those initially provided by Landlord, Tenant shall provide, at its sole costs, duplicate keys to Landlord. Upon the termination of this Lease, Tenant shall restore to Landlord all keys of stores, offices, and toilet rooms, either furnished to, or otherwise procured by, Tenant and in the event of the loss of keys so furnished, Tenant shall pay to Landlord the cost of replacing same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such changes. 2. All doors opening to public corridors shall be kept closed at all times except for normal ingress and egress to the Premises. 3. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Building or the Project during the continuance thereof by any means it deems appropriate for the safety and protection of life and property. 4. The requirements of Tenant will be attended to only upon application at the management office for the Project or at such office location designated by Landlord. Employees of Landlord shall not perform any work or do anything outside their regular duties unless under special instructions from Landlord. 5. No sign, advertisement, notice or handbill shall be exhibited, distributed, painted or affixed by Tenant on any part of the Premises or the Building without the prior written consent of the Landlord. Tenant shall not disturb, solicit, peddle, or canvass any occupant of the Project and shall cooperate with Landlord and its agents of Landlord to prevent same. 6. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees shall have caused same. EXHIBIT D - Page 1 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 87 7. Except for vending machines intended for the sole use of Tenant's employees and invitees, no vending machine or machines other than fractional horsepower office machines shall be installed, maintained or operated upon the Premises without the written consent of Landlord. 8. Subject to Section 5.3 of this Lease, Tenant shall not use or keep in or on the Premises, the Building, or the Project any kerosene, gasoline or other inflammable or combustible fluid, chemical, substance or material. 9. Tenant shall not without the prior written consent of Landlord use any method of heating or air conditioning other than that supplied by Landlord. 10. Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in or on the Premises, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors, or vibrations, or interfere with other tenants or those having business therein, whether by the use of any musical instrument, radio, phonograph, or in any other way. Tenant shall not throw anything out of doors, windows or skylights or down passageways. 11. Tenant shall not bring into or keep within the Project, the Building or the Premises any animals, birds, aquariums, or, except in areas designated by Landlord, bicycles or other vehicles. 12. No cooking shall be done or permitted on the Premises, nor shall the Premises be used for the storage of merchandise, for lodging or for any improper, objectionable or immoral purposes. Notwithstanding the foregoing, Underwriters' laboratory-approved equipment and microwave ovens may be used in the Premises for heating food and brewing coffee, tea, hot chocolate and similar beverages for employees and visitors, provided that such use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 13. The Premises shall not be used for manufacturing or for the storage of merchandise except as permitted in the Summary. 14. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules and Regulations. 15. Tenant, its employees and agents shall not loiter in or on the entrances, corridors, sidewalks, lobbies, courts, halls, stairways, elevators, vestibules or any Common Areas for the purpose of smoking tobacco products or for any other purpose, nor in any way obstruct such areas, and shall use them only as a means of ingress and egress for the Premises. 16. Tenant shall store all its trash and garbage within the interior of the Premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in Irvine, California without violation of any law or ordinance governing such EXHIBIT D - Page 2 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 88 disposal. All trash, garbage and refuse disposal shall be made only through entry-ways and elevators provided for such purposes at such times as Landlord shall designate. 17. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 18. Any persons employed by Tenant to do janitorial work shall be subject to the prior written approval of Landlord, and while in the Building and outside of the Premises, shall be subject to and under the control and direction of the Building manager (but not as an agent or servant of such manager or of Landlord), and Tenant shall be responsible for all acts of such persons. 19. No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord, and no curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises other than Landlord standard drapes. All electrical ceiling fixtures hung in the Premises or spaces along the perimeter of the Building must be fluorescent and/or of a quality, type, design and a warm white bulb color approved in advance in writing by Landlord. Neither the interior nor exterior of any windows shall be coated or otherwise sunscreened without the prior written consent of Landlord. Tenant shall abide by Landlord's regulations concerning the opening and closing of window coverings which are attached to the windows in the Premises, if any, which have a view of any interior portion of the Building or Building Common Areas. 20. The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other articles be placed on the windowsills. 21. Tenant must comply with requests by the Landlord concerning the informing of their employees of items of importance to the Landlord. 22. Tenant hereby acknowledges that Landlord shall have no obligation to provide guard service or other security measures for the benefit of the Premises, the Building or the Project. Tenant hereby assumes all responsibility for the protection of Tenant and its agents, employees, contractors, invitees and guests, and the property thereof, from acts of third parties, including keeping doors locked and other means of entry to the Premises closed, whether or not Landlord, at its option, elects to provide security protection for the Project or any portion thereof. Tenant further assumes the risk that any safety and security devices, services and programs which Landlord elects, in its sole discretion, to provide may not be effective, or may malfunction or be circumvented by an unauthorized third party, and Tenant shall, in addition to its other insurance obligations under this Lease, obtain its own insurance coverage to the extent Tenant desires protection against losses related to such occurrences. Tenant shall cooperate in any reasonable safety or security program developed by Landlord or required by law. 23. All office equipment of any electrical or mechanical nature shall be placed by Tenant in the Premises in settings approved by Landlord, to absorb or prevent any vibration, noise and annoyance. EXHIBIT D - Page 3 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 89 24. No auction, liquidation, fire sale, going-out-of-business or bankruptcy sale shall be conducted in the Premises without the prior written consent of Landlord. 25. No tenant shall use or permit the use of any portion of the Premises for living quarters, sleeping apartments or lodging rooms. Landlord reserves the right at any time to change or rescind any one or more of these Rules and Regulations, or to make such other and further reasonable Rules and Regulations as in Landlord's judgment may from time to time be necessary for the management, safety, care and cleanliness of the Premises, Building, the Common Areas and the Project, and for the preservation of good order therein, as well as for the convenience of other occupants and tenants therein. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant, nor prevent Landlord from thereafter enforcing any such Rules or Regulations against any or all tenants of the Project. Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises. EXHIBIT D - Page 4 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 90 EXHIBIT E --------- IRVINE OAKS EXECUTIVE PARK -------------------------- FORM OF TENANT'S ESTOPPEL CERTIFICATE ------------------------------------- The undersigned as Tenant under that certain Office Lease (the "Lease") made and entered into as of ___________, 199 by and between _______________ as Landlord, and the undersigned as Tenant, for Premises on the ______________ floor(s) of the office building located at ______________, Irvine, California ____________, certifies as follows: 1. Attached hereto as Exhibit A is a true and correct copy of the Lease and all amendments and modifications thereto. The documents contained in Exhibit A represent the entire agreement between the parties as to the Premises. 2. The undersigned currently occupies the Premises described in the Lease, the Lease Term commenced on __________, and the Lease Term expires on ___________. 3. Base Rent became payable on ____________. 4. The Lease is in full force and effect and has not been modified, supplemented or amended in any way except as provided in Exhibit A. 5. Tenant has not transferred, assigned, or sublet any portion of the Premises nor entered into any license or concession agreements with respect thereto except as follows: 6. Tenant shall not modify the documents contained in Exhibit A without the prior written consent of Landlord's mortgagee. 7. All monthly installments of Base Rent, all Additional Rent and all monthly installments of estimated Additional Rent have been paid when due through ___________. The current monthly installment of Base Rent is $_____________________. 8. To Tenant's actual knowledge, All conditions of the Lease to be performed by Landlord necessary to the enforceability of the Lease have been satisfied and Landlord is not in default thereunder. 9. No rental has been paid more than thirty (30) days in advance and no security has been deposited with Landlord except as provided in the Lease. EXHIBIT E - Page 1 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 91 10. To Tenant's actual knowledge, As of the date hereof, there are no existing defenses or offsets that the undersigned has against Landlord. 11. If Tenant is a corporation or partnership, each individual executing this Estoppel Certificate on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Estoppel Certificate and that each person signing on behalf of Tenant is authorized to do so. The undersigned acknowledges that this Estoppel Certificate may be delivered to Landlord or to a prospective mortgagee or prospective purchaser, and acknowledges that said prospective mortgagee or prospective purchaser will be relying upon the statements contained herein in making the loan or acquiring the property of which the Premises are a part and that receipt by it of this certificate is a condition of making such loan or acquiring such property. Executed at on the day of , 19 . -------------- ---- ----------- -- "Tenant": ---------------------------------------, a -------------------------------------- By: -------------------------------------- Its: ---------------------------------- By: -------------------------------------- Its: ---------------------------------- EXHIBIT E - Page 2 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] 92 EXHIBIT F --------- RESERVED AND VISITORS PARKING SPACES ------------------------------------ [MAP] EXHIBIT F - Page 1 IRVINE OAKS EXECUTIVE PARK [Kofax Image Products, Inc.] EX-11.1 5 COMPUTATION OF DILUTED NET INCOME 1 EXHIBIT 11.1 COMPUTATION OF DILUTED NET INCOME AND DILUTED NET INCOME PER SHARE
TWELVE MONTHS ENDED JUNE 30, 1998 --------------------------------- CALCULATION OF DILUTED NET INCOME PER SHARE AT JUNE 30, 1998 Weighted average common shares 4,197,088 Conversion of Preferred Stock to Common Stock 745,299 Common stock options outstanding using the treasury stock method 130,187 ---------- Total weighted average shares outstanding 5,072,574 ========== Net income $3,143,186 ========== Diluted net income per share 0.62 ========== Common stock options 343,800 Weighted average exercise price $ 4.02 ---------- Gross proceeds 1,382,076 Repurchase price $ 6.47 ---------- Shares repurchased 213,613 ---------- Net shares 130,187 ==========
Twelve Months Ended June 30, 1997 --------------------------------- CALCULATION OF DILUTED NET INCOME PER SHARE AT JUNE 30, 1997 Weighted average common shares 1,319,126 Conversion of Preferred Stock to Common Stock 2,667,002 Common stock options outstanding using the treasury stock method 139,708 ---------- Total weighted average shares outstanding 4,125,836 ========== Net income $2,135,297 ========== Diluted net income per share 0.52 ========== Common stock options 383,813 Weighted average exercise price $ 3.18 ---------- Gross proceeds 1,220,525 Repurchase price $ 5.00 ---------- Shares repurchased 244,105 ---------- Net shares 139,708 ==========
EX-23.1 6 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE To the Board of Directors and Stockholders of Kofax Image Products, Inc. Irvine, California We consent to the incorporation by reference in Registration Statement No. 333-40325 on Form S-8 of our report dated July 31, 1998 appearing in this Annual Report on Form 10-K of Kofax Image Products, Inc. for year ended June 30, 1998. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of Kofax Image Products, Inc., listed in Item 14(a). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Costa Mesa, California September 28, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 16,522 4,343 5,719 459 1,565 28,639 6,629 4,889 32,115 4,490 0 0 0 17,126 10,500 32,115 0 33,375 0 7,819 21,204 99 0 5,111 1,968 3,143 0 0 0 3,143 0.75 0.62
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