-----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, VpVCBOctUbxIG/vnC20Dw9/BddUo4LasOtOuq5rOrNv8iwxdptcPVuQF3MDR7PWb 1yoX2JsyAkxdpsOn/gJ5xA== 0001012870-97-000561.txt : 19970327 0001012870-97-000561.hdr.sgml : 19970327 ACCESSION NUMBER: 0001012870-97-000561 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOCUMENTUM INC CENTRAL INDEX KEY: 0000930885 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 954261421 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27358 FILM NUMBER: 97563636 BUSINESS ADDRESS: STREET 1: 5671 GIBRALTER DR CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5104636800 MAIL ADDRESS: STREET 1: 5671 GRIBRALTAN DR CITY: PLEASANTON STATE: CA ZIP: 94588-8547 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-27358 DOCUMENTUM, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4261421 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 5671 GIBRALTAR DRIVE, PLEASANTON, CALIFORNIA 94588-8547 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (Registrant's telephone number, including area code): (510) 463-6800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Nasdaq National Market Common Stock, $0.001 par value (TITLE OF CLASS) Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of Common Stock on March 10, 1997 as reported on the Nasdaq National market, was approximately $160,105,000. Shares of common Stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the registrant's Common Stock, par value $.001 per share, was 14,169,816 on March 10, 1997 DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for Registrant's 1997 Annual Meeting of Stockholders to be held May 8, 1997 are incorporated by reference in Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FORM 10-K INDEX PART I............................................................... Page 3 Item 1. Business.................................................. Page 3 Item 2. Properties................................................ Page 17 Item 3. Legal Proceedings......................................... Page 18 Item 4. Submission of Matters to a Vote of Security Holders....... Page 18 PART II.............................................................. Page 18 Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters...................................... Page 18 Item 6. Selected Financial Data................................... Page 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... Page 20 Item 8. Consolidated Financial Statements and Supplementary Data.. Page 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... Page 25 PART III............................................................. Page 25 Item 10. Directors and Executive Officers of the Registrant........ Page 25 Item 11. Executive Compensation.................................... Page 25 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... Page 25 Item 13. Certain Relationships and Related Transactions............ Page 25 PART IV.............................................................. Page 26 Item 14. Exhibits, Consolidated Financial Statements, Financial Statement Schedules, and Reports on Form 8-K............. Page 26 SIGNATURES........................................................... Page 27
2 PART I ITEM 1. BUSINESS The following discussion contains forward-looking statements regarding the Company, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein as well as those discussed under the caption "Risk Factors." Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. GENERAL Documentum, Inc. ("Documentum" or the "Company") develops, markets and supports a family of client/server and intranet software products that address the specific challenges of managing business-critical documents effectively across large enterprises. The Documentum Enterprise Document Management System ("EDMS") automates and accelerates the creation, modification and reuse of business-critical documents and other unstructured data and the collaborative efforts involved in these activities. The Documentum EDMS provides several key business advantages. Companies can effectively manage all of the processes involved in making business-critical documents available, keeping them relevant and current, and tailoring them to make them useful for all individuals. The Documentum EDMS extends the value of business-critical documents through not only re-use, but re-purposing--the ability to assemble and apply documents again and again for different purposes as the needs arise. The Documentum EDMS is designed for enterprise-wide deployments, with a family of client products that deliver appropriate information to different classes of users in the appropriate format. Through Documentum's enterprise scalability, companies can deploy solutions that not only meet the needs of individual departments, but can scale to the entire enterprise--from hundreds to thousands of users. The Company was incorporated in Delaware in January 1990. The Company's principal executive offices are located at 5671 Gibraltar Drive, Pleasanton, California 94588. Its telephone number is (510) 463-6800. The Company's home page can be located on the World Wide Web at http://www.documentum.com. As used in this document, the "Company" and "Documentum" refer to Documentum, Inc. and its subsidiaries. INDUSTRY BACKGROUND In today's highly competitive marketplace, a key component of corporate success is the ability to leverage business-critical documents to help shorten time to market, improve quality and enhance overall organizational effectiveness. Business-critical documents contain corporate information, employee knowledge and business processes. Global companies are increasingly seeking innovative solutions to make optimal use of these documents. According to some industry reports, up to 80 percent of corporate data is unstructured--existing in the form of business-critical documents ranging from text files, word processing documents and spreadsheets to CAD drawings, graphics and images, Web pages, and even video or audio clips. In a typical corporate environment, documents are created, modified, distributed and stored using multiple software systems. These software applications run on a variety of computing platforms that may be geographically dispersed, with little compatibility or data sharing capability between systems. Whatever their format and wherever their location, business-critical documents such as product specifications, standard operating procedures, technical manuals, regulatory submissions and project proposals 3 represent the physical output of professionals and are essential to the key processes of a company. However, today's information complexities have created inefficiencies in document-related processes that hamper the productivity of professionals both at the individual and team levels. Without an effective means of searching for and reusing enterprise information, workers are often forced to re-create documents from scratch, duplicating effort and increasing the margin for error. The existence of multiple document versions creates information integrity and accuracy problems. As a result, professionals are spending a disproportionate amount of their time locating, processing, sharing and assembling documents rather than engaging in higher-value activities. Additional complexity is added by the document processes, which often require group collaboration by teams of workers who are geographically dispersed and use different client platforms. Historically, companies have tried to address these document management challenges either with costly and labor-intensive manual processes, or with internally-developed systems based on proprietary technologies that are difficult to implement, manage and maintain. The proliferation of productivity tools such as word processors and spreadsheets has streamlined individual document creation. However, these tools do not address productivity in processes that require a number of individuals to collaborate and contribute information across organizational and geographic barriers. A number of "point" solutions have emerged that address certain aspects of document management, such as imaging or text retrieval, but they do not provide a comprehensive solution for the document management needs of the enterprise. Similarly, LAN- based products that deliver simple library services are not engineered to scale to the enterprise, and do not address the needs of business processes because they overlook the issues of workflow and complex documents. Groupware products enhance group productivity through ad hoc communications and project discussions, but are not optimized to support collaboration on documents that require formal version control and more robust enterprise security capabilities. Likewise, many users are turning to new information delivery vehicles such as World Wide Web browsers, but may require additional capabilities such as collaboration on document creation and the ability to control access to and ensure integrity and versioning of business-critical documents. Large organizations need enterprise-wide solutions to optimize the value of their business-critical documents by automating all of the associated procedures that take place between a document's creation and its use, re-use, or re-purposing. These procedures range over the document's entire lifecycle-- from information capture to managing and controlling updates to the document, automating its release and distribution, assembling document components, and making the document easy for users to find and access. Business-critical documents must easily integrate with the organization's existing business processes and procedures, and the solution must scale effectively in a heterogeneous computing environment. In addition, as companies make a stronger commitment to the Web as a corporate computing infrastructure, they are demanding technologies that improve the quality and usability of Web content while at the same time reducing the costs of controlling and maintaining the information. DOCUMENTUM'S SOLUTION Documentum was founded in 1990 to deliver document management software that addresses the specific challenges of managing business-critical documents effectively across the enterprise. The Company's solution is the Documentum Enterprise Document Management System ("EDMS"), a family of object-oriented, client/server and Web software products. The Documentum EDMS is based on the idea that corporate customers need to manage ongoing changes in information to stay effective. As a result, the EDMS provides an enterprise-scaleable architecture that supports multiple networking configurations and user environments. With the Documentum EDMS, companies can securely manage changes to documents and document components at the object level, and they can dynamically assemble documents based on their business procedures. In addition, Documentum's family of client products enables all individuals in the enterprise to access the documents they need, whether they're using Web browsers, custom clients, or their own desktop applications. Core Functionality At the heart of the Documentum EDMS is the DocPage Server(TM), providing a rich set of document and Web content management services for controlling and managing business-critical information and processes 4 throughout the enterprise. The DocPage Server supports capture, updating, distribution, assembly, and access for all document types ranging from traditional rich text and images to HTML, SGML, and multimedia objects. The DocPage Server creates a dynamic document and Web page repository called a Docbase(TM). Driven by business rules, the Docbase stores a document or Web page as a Docobject(TM) that encapsulates the document's content together with its attributes, including information about the document's relationships, associated versions, renditions, formats, workflow, and security. Docobjects can be infinitely combined and re-combined on demand to form Virtual Documents--dynamic configurations of Docobjects that can come from any source in the enterprise. An extension of the DocPage Server, called Documentum RightSite(TM), delivers powerful Web content management services for delivering high-quality, business-critical information on an intranet. RightSite solves the complex challenges of capturing, managing, and assembling frequently changing information on corporate Web sites. RightSite makes Web applications cost- effective by eliminating the laborious, manual tasks involved in tailoring information and keeping it current. With RightSite, companies can ensure that only the information relevant to a user's job function is delivered to the desktop. Unlike first-generation, static Web solutions, RightSite dynamically assembles Web pages "on the fly" according to business processes, enabling companies to tailor Web content to users' unique needs. The Documentum EDMS delivers the following key business benefits: Heterogeneous Information Access. Users can access all the information they need using their existing platforms, applications, and Web browsers, without having to know where the information exists in the enterprise, how and when it was created, or the information's type and format. Support of Multiple Formats. Documentum enables users to work with multiple formats or information types from text and data to complex formats such as multi-file CAD drawings or multi-page fax images. Workflow/Process Automation. Documentum's workflow effectively links business-critical information with the processes involved in its capture, creation and reuse. This enables companies to manage their information in the context of best business practices, accelerating time to market and improving professional productivity. Reusability/Integrity. With Documentum, companies can re-use and re-purpose documents and components of documents, eliminating duplication of effort and reinforcing the accuracy and integrity of information. For instance, when a business rule triggers a change in a component to reflect a new stage in a business process, the change can instantly apply to all documents which utilize that component. Users can then re-use that component and be assured that it contains the correct information. Tailorability. The Documentum EDMS is designed to be easily tailored by both users and application developers, enabling customers to effectively develop and deploy document management applications based on their unique business processes. Developers can combine Documentum's embedded application programming interfaces ("APIs") with a choice of languages to customize applications and integrate them with the existing information infrastructure. Enterprise Scalability. Companies can deploy solutions that not only meet the needs of individual departments, but can scale to the entire enterprise-- from hundreds to thousands of users. PRODUCTS Within the enterprise, Documentum has identified three classes of document management users: document coordinators, document contributors, and information consumers. The Documentum EDMS is delivered via a range of client products, each designed to deliver the appropriate DocPage Server and RightSite functionality to a different class of user. Customers purchase different combinations of seats of the products depending on the level of functionality they choose to deliver to each user population. 5 Documentum products include: Documentum WorkSpace(TM) Through its own robust client environment or integration with familiar desktop applications, WorkSpace gives document coordinators access to the full power and features of the DocPage Server. Documentum SmartSpace(TM) SmartSpace provides an easy-to-use client environment for document contributors to perform basic document management tasks. SmartSpace also supports integration with familiar desktop applications. The Company also offers SmartSpace(TM) Intranet, an extension of the Smartspace product to the Web platform which enables users to contribute content and perform a range of document management tasks over the Web. Documentum ViewSpace(TM) Intranet and Documentum SiteSpace(TM) Designed for information consumers, ViewSpace Intranet and SiteSpace extend the services of the Documentum EDMS to the Web. ViewSpace Intranet enables Web browser users to access and view documents in a Docbase. SiteSpace is an anonymous, unnamed user license of ViewSpace Intranet which enables companies to deliver public content to any user without requiring a login or password. Documentum UnaLink(TM) UnaLink integrates the Documentum EDMS with the groupware capabilities of Lotus Notes, enabling Notes users to participate in the full document lifecycle. Documentum LeafConnect(TM) LeafConnect enables users of the Interleaf publishing system to take full advantage of the flexibility and power of the Documentum EDMS from within the familiar Interleaf environment. Documentum DocPage Builder(TM). The DocPage Builder is a set of tools for integrating desktop systems and building tailored document management applications. Documentum DocLink for SAP(TM) DocLink for SAP is an interface that provides seamless integration between the Documentum EDMS and SAP's R/3 product. DocLink for SAP enables corporations to use intranet and client/server technology to link their knowledge chain with the SAP supply chain in a paperless, electronic environment. PROFESSIONAL SERVICES In addition to the EDMS product family, Documentum offers a range of technical support, training, and consulting services through its Professional Services organization. The Company operates two Technical Support Centers, one located at its U.S. headquarters in Pleasanton and one located at its European headquarters in the United Kingdom. Both centers offer hotline technical support, remote dial-in services for problem identification and access to maintenance and patch releases for supported and purchased products. The Documentum Education Center offers a curriculum of training courses on the Documentum EDMS for end users, developers and system administrators. Training is available at the Company's training centers in Pleasanton, Philadelphia, and abroad in London, and can also be given at the customer's site. Finally, Documentum's consulting group offers a range of services designed to accelerate deployment and user acceptance of Documentum applications across the enterprise, and to reduce the time and cost of deploying applications. Documentum consultants become an integral part of a customer's implementation team, assisting with design, implementation, and deployment of the application. 6 STRATEGY The Company's objective is to be the leading worldwide supplier of enterprise document management software solutions. To achieve this objective, the Company's strategy includes extending its technology leadership, penetrating global industries vertically, leveraging its technology partnerships, focusing on enterprise deployments and utilizing multiple distribution channels. Extend Technology Leadership. The Company's strategy is to continue to enhance its existing server and client technologies, to add functionality to its EDMS product family and to provide greater flexibility in terms of information delivery, document repositories, and the number and variety of supported client, server and relational database management system (RDBMS) platforms. Documentum expects to enhance the features of its products by making them compatible with new technologies as well as existing applications and by responding to the unique needs of large organizations. The Company has enhanced the architecture of its open, extensible server to support distributed, heterogeneous document repositories across the enterprise. Besides expanding the functionality of its own easy-to-use WorkSpace client environment for document coordinators, Documentum has delivered new client products for document contributors and consumers working in both Web and client/server environments. Documentum has also provided support for other information delivery vehicles such as SAP, Lotus Notes and the Interleaf publishing product. Penetrate Global Industries Vertically. Documentum has identified strategic vertical markets with compelling business-critical needs for the Company's EDMS, namely, industries where more efficient management of unstructured information and intellectual capital results in an immediate and substantial payback. Recently, the Company formed an internal Industry Solutions organization to focus the Company's efforts on developing complete, whole- product solutions for these targeted industries. Through its early focus on research and development and regulatory processes within the pharmaceutical industry, the Company has sold its EDMS products to many of the largest pharmaceutical companies worldwide. The Company has leveraged this leadership position by penetrating the manufacturing operations of pharmaceutical companies and subsequently extending its customer base to include additional process manufacturing companies in chemicals, petrochemicals and consumer products. The Company has also replicated its vertical market strategy to address key segments in discrete manufacturing, obtaining major customers in the construction engineering, electronics and computer industries. In the future, the Company intends to expand its customer base in additional markets, such as financial services, telecommunications and government. Leverage Technology Partnerships. The Company intends to accelerate the development, introduction and acceptance of its EDMS solutions through selected strategic technology partnerships. For example, the Company has embedded in its software certain industry-standard features and functionality licensed from Adobe, Microsoft and Verity. In addition, the Company integrates its EDMS solutions with other business-critical applications from vendors including Autodesk, Lotus and SAP. Finally, the Company conducts joint marketing and sales activities with complementary strategic hardware and RDBMS vendors, including Hewlett-Packard, IBM, Sun, Informix, Oracle and Sybase. Focus on Enterprise Deployments. The Company has designed its products to scale from focused business-critical applications consisting of hundreds of user seats to enterprise-wide use consisting of multiple applications for thousands of user seats at multiple sites. The Company believes that initial customer success in capturing business-critical information by utilizing the Company's EDMS family of products is an essential factor in the customer's decision to deploy the Company's products throughout the enterprise. The Company has a two-pronged strategy to drive towards enterprise deployment. First, the Company provides targeted consulting and training services to its customers and systems integrators. Second, the Company has established strategic partnerships with major, or vertically focused, systems integrators, including Andersen Consulting, Cap Gemini, Computer Sciences Corporation and IBM/ISSC, which provide customization of the Company's EDMS products for individual customer needs and integration with third-party applications. The Company believes that migrating its customers from initial application usage to enterprise-wide deployment provides a substantial growth opportunity. 7 Utilize Multiple Distribution Channels. The Company's strategy is to expand its multiple distribution channels to reach the broadest customer base in its targeted industries. The Company has historically generated the majority of its revenues from its direct sales force. More recently, the Company has focused on complementing its direct sales channel with indirect channels, primarily consisting of systems integrators and distributors. The Company has a strong channel relationship with Xerox and certain Xerox affiliates, who have served as systems integrators, resellers, and distributors for the Company's products. Documentum intends to focus increased efforts on growing its indirect sales channels to include value-added resellers, and to expand both direct and indirect distribution channels on a worldwide basis by hiring additional sales persons and recruiting additional integrators, particularly in vertical industries. CUSTOMERS The Company has directly or indirectly licensed its products to more than 200 end user customers in a broad range of industries worldwide, including pharmaceutical, chemical, manufacturing, and engineering companies, as well as governmental agencies. Examples of customers who are using the Documentum EDMS to accelerate their business-critical processes include: Pharmaceutical: Glaxo-Wellcome, a worldwide pharmaceutical manufacturer with operations in 120 countries, is using the Documentum EDMS to accelerate its time to market for new drugs. The new drug submission process takes many years and involves people throughout the organization to document each drug's development and testing. In addition, the submission must be customized for each country in which the drug is to be marketed. At Glaxo-Wellcome, the Documentum EDMS replaces manual processes and paper distribution lists by providing an accurate, easily accessible repository of drug information that can be used and reused for simultaneous submissions in multiple markets, as well as consistent, rapid responses to government agency inquiries. Engineering: Black & Veatch, a worldwide engineering firm providing engineering, procurement, and construction services to clients in a wide variety of industries including power generation and waste water treatment, is using the Documentum EDMS to cut turnaround time on procurement specifications from two weeks to two days. At Black & Veatch, a single power plant project procurement specification can run 500 to 600 pages, consisting of design drawings as well as text. The Documentum-based system replaces a largely manual process that scattered procurement documents on hundreds of computer disks throughout the company. Now, engineers and architects can use their desktop computers to access, modify and circulate the latest version of a specification. Any changes they make to a specification are automatically reflected in all versions, wherever they reside on the network. Manufacturing: Ericsson Telecom AB, a worldwide manufacturer of sophisticated, build-to-order switches and other telephony products, is using the Documentum EDMS to help speed products to market by eliminating redundancy and accelerating production cycles. Many of Ericsson's products are built to individual customers' specifications--each requiring its own custom set of manuals. Documenting a switch's parts, assembly and repair is a complex, ongoing process involving engineers, technicians, designers, writers, editors and administrators across the organization. Once the manual has been created, managing and reusing the information throughout the entire product lifecycle presents a major document management challenge. Ericsson was able to take advantage of the Documentum EDMS's client/server architecture and development tools to build a document management system which automates these complex processes, replacing Ericsson's existing mainframe and paper-based systems. MARKETING AND SALES The Company sells its products through its own direct sales force as well as complementary indirect channels primarily consisting of systems integrators and distributors. The Company has 12 sales offices in the United States and four in Europe, five distributors in Europe, Canada, Japan, and Australia, and strategic relationships with more than 30 systems integrators worldwide. 8 The Company targets global customers in key vertical markets. The Company's field sales force conducts multiple presentations and demonstrations of the Company's family of EDMS products to management and users at the customer site as part of the direct sales effort. Sales cycles generally last from six to twelve months. The direct sales force is responsible for local partner support, joint sales efforts and management of multiple channels. The Company's sales and marketing organization consisted of 109 employees as of December 31, 1996. The sales staff is based at the Company's corporate headquarters in Pleasanton, California and at field sales offices in the U.S. metropolitan areas of Atlanta, Boston, Chicago, Dallas, Denver, Detroit, Houston, Los Angeles, New York, Philadelphia, San Francisco, and Seattle and abroad in Frankfurt, Munich, London and Paris. To support its sales force, the Company conducts comprehensive marketing programs, which include public relations, telemarketing, seminars, trade shows, education and user group conferences. STRATEGIC PARTNERSHIPS Through its technology partners, Documentum is offering comprehensive document management solutions that integrate with industry-standard hardware platforms, RDBMSs, and enterprise applications--particularly those targeted to key vertical markets such as process manufacturing. These partnerships ensure that customers will have a document management solution that supports their existing computing infrastructure and that is tailored to the specific requirements of their industry. PRODUCT DEVELOPMENT The Company has committed, and expects to commit, substantial resources to product development. The Company's existing products were designed after extensive work with potential customers to assess their needs. The Company supplements its product development efforts by reviewing customer feedback on existing products and working with customers and potential customers to anticipate future functionality requirements. The Company expects to continue to enhance its existing products, develop new products and augment its product base through acquisitions. As of December 31, 1996, the Company's research and development organization consisted of 74 full-time employees. During 1996, 1995 and 1994, research and development expenses were $7.9 million, $4.5 million, and $2.5 million respectively. Historically, the Company has expensed its software development costs as incurred. The Company anticipates that it will continue to commit substantial resources to research and development in the future. The Company's future success will depend on its ability to continue to enhance its current product line and to continue to develop and introduce new products that keep pace with competitive product introductions and technological developments, satisfy diverse and evolving customer requirements and otherwise achieve market acceptance. There can be no assurance that the Company will be successful in continuing to develop and market on a timely and cost-effective basis fully functional product enhancements or new products that respond to technological advances by others, or that its enhanced and new products will achieve market acceptance. In addition, the Company has in the past experienced delays in the development, introduction and marketing of new or enhanced products, and there can be no assurance that the Company will not experience similar delays in the future. Any failure by the Company to anticipate or respond adequately to changes in technology and customer preferences, or any significant delays in product development or introduction, would have a material adverse effect on the Company's business, operating results and financial condition. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company's success is heavily dependent upon proprietary technology. The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company presently has no patents or patent applications pending. Despite the Company's efforts to protect its proprietary 9 rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. The Company is not aware that any of its products infringes the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. In addition, the Company also relies on certain software that it licenses from third parties, including software that is integrated with internally developed software and used in the Company's products to perform key functions. There can be no assurances that such firms will remain in business, that they will continue to support their products or that their products will otherwise continue to be available to the Company on commercially reasonable terms. The loss or inability to maintain any of these software licenses could result in delays or reductions in product shipments until equivalent software can be developed, identified, licensed and integrated, which would adversely affect the Company's business, operating results and financial condition. INDUSTRY STANDARDS Documentum is committed to providing comprehensive, open document management solutions targeted to customers' unique business requirements. This is evident in the Company's support of industry standards as well as its strategic relationships with select technology partners. Documentum participates actively in the two leading organizations which have taken the initiative to define standards specifically for the document management arena. These include the Open Document Management API ("ODMA") and the Document Management Alliance ("DMA"). ODMA is developing an API which will enable document management capabilities to be integrated into a wide range of desktop applications. DMA is proposing a specification for broader interoperability and connectivity between heterogeneous document management services, repositories and applications. In 1996, ODMA formally accepted Documentum's query extension enabling desktop application users to simultaneously search document repositories from different vendors. RISK FACTORS In evaluating the Company's business, prospective investors should carefully consider the following factors in addition to the other information presented in this report. Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating Results. Prior growth rates in the Company's revenue and operating results should not be considered indicative of future growth, if any, or of future operating results. Future operating results will depend upon many factors, including the demand for the Company's products, the level of product and price competition, the length of the Company's sales cycle, the size and timing of individual license transactions, the delay or deferral of customer implementations, the budget cycles of the Company's customers, the Company's success in expanding its direct sales force and indirect distribution channels, the timing of new product introductions and product enhancements by the Company and its competitors, the mix of products and services sold, levels of international sales, activities of and acquisitions by competitors, the timing of new hires, changes in foreign currency exchange rates, the ability of the Company 10 to develop and market new products and control costs and general domestic and international economic and political conditions. In addition, the operating results of many software companies reflect seasonal trends, and the Company's business, operating results and financial condition may be affected by such trends in the future. The Company's sales generally reflect a relatively high amount of revenues per order. The loss or delay of individual orders, therefore, could have a significant impact on the revenues and quarterly results of the Company. Moreover, the timing of license revenue is difficult to predict because of the length of the Company's sales cycle, which is typically six to twelve months from the initial contact. Because the Company's operating expenses are based on anticipated revenue trends and because a high percentage of the Company's expenses are relatively fixed, a delay in the recognition of revenue from a limited number of license transactions could cause significant variations in operating results from quarter to quarter and could result in losses. To the extent such expenses precede increased revenues, the Company's operating results would be materially adversely affected. As a result of these factors, operating results for any quarter are subject to significant variation, and the Company believes that period-to- period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Furthermore, due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's common stock would likely be materially adversely affected. Lengthy Sales and Implementation Cycles. The license of the Company's software products is often an enterprise-wide decision by prospective customers and generally requires the Company to engage in a lengthy sales cycle (typically between six and twelve months) to provide a significant level of education to prospective customers regarding the use and benefits of the Company's products. Additionally, the size of the transaction and the complexity of the arrangement can also cause delays in the sales cycle. The implementation by customers of the Company's products involves a significant commitment of resources by such customers over an extended period of time and is commonly associated with substantial reengineering efforts. For these and other reasons, the sales and customer implementation cycles are subject to a number of significant delays over which the Company has little or no control. Delay in the sale or customer implementation of a limited number of license transactions could have a material adverse effect on the Company's business and operations and cause the Company's operating results to vary significantly from quarter to quarter. Therefore, the Company believes that its quarterly operating results are likely to vary in the future. Product Defects. Due to the complexity and sophistication of the Company's software products, the Company's products from time to time contain defects or "bugs" which can be difficult to correct. Furthermore, as the Company continues to develop and enhance its products, there can be no assurance that the Company will be able to identify and correct defects in such a manner as will permit the timely introduction of such products. Moreover, despite extensive testing, the Company has from time to time discovered defects only after its systems have been used by many customers. There can be no assurance that software defects will not cause delays in product introductions and shipments, result in increased costs, require design modifications, or impair customer satisfaction with the Company's products. Any such event could materially adversely affect the Company's business, operating results and financial condition. Product Concentration. To date, substantially all of the Company's revenues have been attributable to sales of licenses of the Documentum EDMS family of products and related services. The Company currently expects the Documentum EDMS family of products, and related services, to account for substantially all of its future revenues. As a result, factors adversely affecting the pricing of or demand for the Documentum EDMS products such as competition or technological change could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future financial performance will depend, in significant part, on the successful development, introduction and customer acceptance of new and enhanced versions of the Documentum EDMS family of products. There can be no assurance that the Company will continue to be successful in developing and marketing the Documentum EDMS products. End User Customer and Industry Concentration. A relatively small number of end user customers account for a significant percentage of the Company's revenues. In 1994, Glaxo-Wellcome accounted for approximately 11 34% of license revenues. In addition, licenses to end users in the pharmaceutical industry for 1996, 1995,and 1994, including Glaxo-Wellcome, accounted for 21%, 31% and 71%, respectively, of license revenues. Certain of these revenues were the result of sales by the Company's indirect channel partners, including Xerox and certain Xerox affiliates. The Company expects that sales of its products to a limited number of customers and industry segments will continue to account for a high percentage of revenue for the foreseeable future. In addition, the future success of the Company will depend on its ability to obtain orders from new customers and its ability to successfully market its products in industries other than the pharmaceutical industry. The loss of a major customer or any reduction or delay in orders by such customers, or the failure of the Company to successfully market its products outside existing targeted industry segments would have a material adverse effect on the Company's business, financial condition and results of operations. Reliance on Certain Relationships. The Company has established strategic relationships with a number of organizations that it believes are important to its worldwide sales, marketing and support activities. The Company's relationships with indirect channel partners and other consultants provide marketing and sales opportunities for the Company's direct sales force, expand the distribution of its products and broaden its product offerings through product bundling. These relationships also assist the Company in keeping pace with the technological and marketing developments of major vendors, and in certain instances, provide the Company with technical assistance for the Company's product development efforts. In particular, the Company has strategic relationships with Xerox and certain Xerox affiliates, including various distribution arrangements. In 1996, 1995 and 1994, license revenues associated with these relationships accounted for approximately $5.3 million, $6.1 million and $0.7 million, respectively, representing 15%, 30% and 8% of the Company's license revenues, respectively. There can be no assurance that any customer, systems integrator or distributor will continue to market or to purchase the Company's products. The failure by the Company to maintain these relationships, particularly with Xerox and its affiliates, or to establish new relationships in the future, could have a material adverse effect on the Company's business, results of operations and financial condition. New Products and Rapid Technological Change. The document management software market is characterized by rapid technological change, changes in customer requirements, frequent new product introductions and enhancements and emerging industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Accordingly, the life cycles of the Company's products are difficult to estimate. The Company's future success will depend in part upon its ability to enhance current products and to develop and introduce new products that respond to evolving customer requirements and keep pace with technological developments and emerging industry standards, such as new operating systems, hardware platforms, user interfaces and relational database management system ("RDBMS") software. The Company's future success will also depend in part on its ability to execute on its strategy to develop whole- product solutions in certain target vertical industries. In addition, the Company's future success will depend in part upon its ability to maintain and enhance relationships with its technology partners, such as RDBMS vendors, in order to provide its customers with integrated product solutions. There can be no assurance that the Company will be successful in maintaining these relationships or in developing and marketing product enhancements or new products that respond to technological change, updates and enhancements to third party products used in conjunction with the Company's products, changes in customer requirements or emerging industry standards; that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products and enhancements; or that any new products or enhancements that the Company may introduce will adequately meet the requirements of the marketplace and achieve market acceptance. Moreover, the Company has in the past experienced delays in the release dates of enhancements to its EDMS products. If release dates of any future EDMS enhancements are delayed or, if when released, fail to achieve market acceptance, the Company's business, financial condition and results of operations could be materially adversely affected. To date, the delays the Company has experienced have been minor in nature and are often the result of adding enhancements or functionality based upon customer feedback during beta product versions. These delays have generally not exceeded three months in duration from the Company's scheduled internal release dates, however, there can be no assurance that the Company may not experience future delays in product introduction. The inability of the 12 Company, for technological or other reasons, to develop and introduce new products or enhancements in a timely manner in response to changing customer requirements, technological change or emerging industry standards, would have a material adverse effect on the Company's business, results of operations and financial condition. Emerging Markets. The client/server application software market is a relatively new market and is intensely competitive, highly fragmented and subject to rapid change. The Company markets its products solely to customers who have migrated their enterprise computing systems to client/server computing environments. The Company's future financial performance will depend in large part on continued growth in the number of organizations adopting client/server computing environments. There can be no assurance that the client/server market will maintain its current level of growth or continue at all. If the client/server market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially adversely affected. Similarly, the market for document management software is intensely competitive, highly fragmented and subject to rapid change. The Company's future financial performance will depend primarily on growth in the number of document management applications developed for use in client/server environments. There can be no assurance that the market for document management software will continue to grow or that, if it does grow, organizations will adopt the Company's products. The Company has spent, and intends to continue to spend, significant resources educating potential customers about the benefits of its products. However, there can be no assurance that such expenditures will enable the Company's products to achieve any additional degree of market acceptance, and if the document management software market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially adversely affected. In addition, the commercial market for products and services designed for use with the Internet and the World Wide Web has only recently begun to develop, and the success of the Company's products may depend, in part, on their continued compatibility with the Internet and the Web. It is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace or whether the demand for Internet-related products and services will increase or decrease in the future. The increased commercial use of the Internet could require substantial modification and customization of the Company's products and services and the continued introduction of new products and services. Intense Competition. The market for the Company's products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The Company's products are targeted at the emerging market for open, client/server software solutions, and the Company's competitors offer a variety of products and services to address this market. The Company currently encounters direct competition from a number of public and private companies such as Saros, a FileNet Company, PC DOCS, Novasoft, OpenText, and Metaphase. Several of these competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than the Company. In addition, RDBMS vendors, such as Oracle, may compete with the Company in the future. For example, Oracle has recently announced products that may compete with the Company's products. Like the Company's current competitors, many of these companies have longer operating histories, significantly greater resources and name recognition and a larger installed base of customers than the Company. Oracle and other potential competitors have well-established relationships with current and potential customers and strategic partners of the Company, have extensive knowledge of the relational database industry and have the resources to enable them to more easily offer a single vendor solution. As a result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products, than can the Company. The Company also faces indirect competition from systems integrators. The Company relies on a number of systems consulting and systems integration firms for implementation and other customer support services, as 13 well as recommendations of its products during the evaluation stage of the purchase process. Although the Company seeks to maintain close relationships with these service providers, many of these third parties have similar, and often more established, relationships with the Company's principal competitors. If the Company is unable to develop and retain effective, long- term relationships with these third parties, the Company's competitive position would be materially adversely affected. Further, there can be no assurance that these third parties, many of which have significantly greater resources than the Company, will not market software products in competition with the Company in the future or will not otherwise reduce or discontinue their relationships with or support of the Company and its products. It is also possible that new competitors such as Microsoft, or alliances among competitors may emerge and rapidly acquire significant market share. The Company also expects that competition will increase as a result of software industry consolidations. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, operating results and financial condition. Management of Growth; Dependence Upon Key Personnel. The Company's ability to compete effectively and to manage future anticipated growth, will require the Company to expand, train and manage its employee work force. The Company's plans include hiring a significant number of highly-qualified technical, sales and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to attract assimilate or retain such key employees. Dependence on Proprietary Technology; Risks of Infringement. The Company's success is heavily dependent upon proprietary technology. The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company presently has no patents or patent applications pending. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. The Company is not aware that any of its products infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. In addition, the Company also relies on certain software that it licenses from third parties, including software that is integrated with internally developed software and used in the Company's products to perform key functions. There can be no assurances that such firms will remain in business, that they will continue to support their products or that their products will otherwise continue to be available to the Company on commercially reasonable terms. The loss or inability to maintain any of these software licenses could result in delays or 14 reductions in product shipments until equivalent software can be developed, identified, licensed and integrated, which would adversely affect the Company's business, operating results and financial condition. International Operations. The Company's sales are primarily to large multinational companies. To service the needs of such companies, both domestically and internationally, the Company and its support partners must provide worldwide product support services. As a result, the Company intends to continue expanding its existing international operations and enter additional international markets, which will require significant management attention and financial resources and could adversely affect the Company's operating margins and earnings, if any. The Company opened an office in London in April 1994, in Frankfurt in December 1994, in Paris in November 1994 and in Munich in October 1996. Certain Xerox affiliates were responsible for substantially all of the Company's product support in Europe during 1994 and 1995. In 1996, the Company established its own European technical support operation, located in the London office. For 1996, 1995 and 1994, international license revenues amounted to $10.0 million, $5.2 million, and $0.7 million, respectively, representing 29%, 26% and 8% of the Company's license revenues, respectively. In order to successfully expand international sales, the Company must establish additional foreign operations, hire additional personnel and develop relationships with additional international vendors. To the extent that the Company is unable to do so in a timely manner, the Company's growth, if any, in international sales will be limited, and the Company's business, operating results and financial condition could be materially adversely affected. In addition, there can be no assurance that the Company will be able to maintain or increase international market demand for its products. Additional risks inherent in the Company's international business activities generally include currency fluctuations, unexpected changes in regulatory requirements, tariffs and other trade barriers, costs of and the Company's limited experience in localizing products for foreign countries, lack of acceptance of localized products in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences including restrictions on the repatriation of earnings, and the burdens of complying with a wide variety of foreign laws. To date, substantially all of the Company's international revenues have been denominated in U.S. dollars. Although exposure to currency fluctuations to date has been insignificant, there can be no assurance that fluctuations in the currency exchange rates in the future will not have a material adverse impact on revenues from direct international sales and thus the Company's business, operating results or financial condition. There can be no assurance that such factors will not have a material adverse effect on the Company's future international operations and, consequently, the Company's results of operations. Product Liability. The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. However, it is possible that the limitation of liability provisions contained in the Company's license agreements may not be effective under the laws of certain jurisdictions. Although the Company has not experienced any product liability claims to date, the sale and support of products by the Company may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. Risk of Product Defects. Software products as complex as those offered by the Company frequently contain errors or failures, especially when first introduced or when new versions are released. Although the Company conducts extensive product testing, the Company has in the past released products that contain defects, and has discovered software errors in certain of its new products and enhancements after their introduction. For example, the Company experienced certain technical problems in the December 1994 release of its product that were corrected in its June 1995 release. The Company could in the future lose or delay recognition of revenues as a result of software errors or defects. The Company's products are typically intended for use in applications that may be critical to a customer's business. As a result, the Company expects that its customers and potential customers have a greater sensitivity to product defects than the market for software products generally. Although the Company's business has not been adversely affected by any such errors to date, there can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new 15 products or releases after commencement of commercial shipments, resulting in loss of revenue or delay in market acceptance, diversion of development resources, damage to the Company's reputation, or increased service and warranty costs, any of which could have a material adverse effect upon the Company's business, operating results and financial condition. Control By Existing Stockholders. The Company's executive officers, directors and affiliated entities together beneficially own approximately 39.8% of the outstanding shares of Common Stock. In particular, Xerox owns approximately 26% of the outstanding shares of Common Stock. As a result, these stockholders are effectively able to exercise control over matters requiring stockholder approval, including the election of directors, and mergers, consolidations and sales of all or substantially all of the assets of the Company. This may prevent or discourage tender offers for the Company's Common Stock or changes in the control of the Company unless the terms are approved by such stockholders. Possible Volatility of Stock Price. The trading price of the Company's Common Stock is subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant orders, changes in earning estimates by analysts, announcements of technological innovations or new products by the Company or its competitors, general conditions in the software and computer industries and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations which have affected the market price for many companies in industries similar or related to that of the Company and which have been unrelated to the operating performance of these companies. These market fluctuations may adversely affect the market price of the Company's Common Stock. Effect of Certain Charter Provisions: Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law. The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of the Common Stock. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no current plans to issue any shares of Preferred Stock. Further, certain provisions of the Company's Amended and Restated Certificate of Incorporation, including provisions that create a classified board of directors, and certain provisions of the Company's Amended and Restated Bylaws and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. EXECUTIVE OFFICERS The following is a list of the Company's executive officers as of February 28, 1997:
NAME AGE POSITION ---- --- -------- Jeffrey A. Miller.... 45 President, Chief Executive Officer, and Director Mark S. Garrett...... 39 Vice President, Chief Financial Officer and Secretary Robert K. Reid....... 46 Vice President, Industry Solutions Howard I. Shao....... 41 Vice President, Product Development Paul J. Hoffman...... 46 Vice President, Worldwide Sales
Jeffrey A. Miller has served as the Company's President, Chief Executive Officer and member of the Board of Directors since July 1993. From April 1991 to March 1993, Mr. Miller was a division president at Cadence Design Systems, Inc., a supplier of electronic design automation software ("Cadence"). From February 1983 to April 1991, Mr. Miller was Vice President and General Manager and Vice President of Marketing of Adaptec, Inc., a supplier of computer input/output controllers. From 1976 to 1983, Mr. Miller held various positions at Intel Corporation, a manufacturer of semiconductor components. Mr. Miller received his M.B.A. and B.S. in Electrical Engineering and Computer Science from the University of Santa Clara. 16 Mark A. Garrett has served the Company's Vice President, Chief Financial Officer and Secretary since January 1997. From February 1995 through December 1996, Mr. Garrett was Vice President of Worldwide Corporate Financial Planning and Analysis at Cadence Design Systems, Inc., a supplier of electronic design automation software ("Cadence"). From August 1994 to February 1995, Mr. Garrett served as Finance Group Director for the Spectrum Services division at Cadence. From January 1993 to July 1994, Mr. Garrett was Finance Group Director for Technology Development at Cadence. From June 1991 to December 1992, Mr. Garrett was Division Controller and Finance Director for the Systems and CAE Divisions of Cadence. From June 1979 to May 1991, Mr. Garrett held various financial positions at IBM Corporation. Mr. Garrett received his M.B.A. from Marist College and his B.S. and B.A. from Boston University. Robert K. Reid has served the Company as Vice President of Industry Solutions since January 1997. Prior to that, Mr. Reid was the Company's Vice President of Marketing since August 1993. From 1988 to August 1993, Mr. Reid was Vice President of Marketing for Octel Communications Corp., a voicemail company. From 1983 to 1988, Mr. Reid was Vice President of Marketing for NBI, Inc., an office systems company. From 1980 to 1983, Mr. Reid was Vice President of Marketing for Zenith Data Systems Corp., a personal computer company. Mr. Reid received his B.S. in Communications from the University of Tennessee. Howard I. Shao, a founder of the Company, has served as Vice President, Engineering of the Company since June 1990. From 1984 to June 1990, Mr. Shao held a variety of management positions at Ingres Corporation, a relational database company ("Ingres"), including Director Product Development. From 1981 to 1984, Mr. Shao was the Manager of Department Database Processor at TTI/Citicorp, a software division of Citicorp. Mr. Shao was a co-founder of Transtech International, a software company. Mr. Shao received his M.B.A. from Pepperdine University and a B.S. in Computer Science from the Massachusetts Institute of Technology. Paul J. Hoffman has served as the Company's Vice President, Worldwide Sales since September of 1996. From September 1994 to September 1996, Mr. Hoffman was Vice President, Worldwide Operations for Oracle Corporation ("Oracle"), a relational database software company. From June 1992 until September 1994 he served as Vice President, Direct Marketing Division, USA for Oracle and from June 1990 until June 1992 he served as Area Vice President, West for Oracle. Mr. Hoffman received his B.S. in Finance from Fairfield University. EMPLOYEES As of December 31, 1996, the Company employed 281 persons, including 109 in sales and marketing, 37 in its consulting and training services organization, 23 in customer support, 74 in research and development and 38 in finance and administration. Of these, 46 are located in Europe and the remainder are located in North America. None of the Company's employees is represented by a labor union. The Company has experienced no work stoppages and believes its relationship with its employees is good. Competition for qualified personnel in the Company's industry is intense. The Company believes that its future success will depend in part on its continued ability to attract, hire and retain qualified personnel. ITEM 2. PROPERTIES As of December 31, 1996 the Company leased all of its facilities and its principal locations are in or near the following cities:
LEASE LOCATION SQUARE FEET EXPIRATION DATE PRINCIPAL ACTIVITIES -------- ----------- --------------- -------------------- Pleasanton, CA.......... 61,200 October, 2001 Corporate HQ, Development, Sales, Marketing, Services and support Chicago, IL............. 9,624 July, 2001 Sales, Marketing, Services Munich, Germany......... 7,000 October, 2001 Sales, Services Stockley Park, England.. 5,073 December, 1999 Sales, Marketing, Services
17 The Company's principal administrative, engineering, manufacturing, marketing and sales facilities total approximately 61,200 square feet and are located in two buildings in Pleasanton, California under a lease which expires in October, 2001. In addition, the Company leases offices for sales, marketing and customer service activities in or near Atlanta, Georgia; Burlington, Massachusetts; Southfield, Michigan; Saddlebrook, New Jersey; Chicago, Illinois; Willow Grove, Pennsylvania; Irvine, California; Denver, Colorado; Dallas, Texas; Houston, Texas; Bellevue, Washington; and outside of the United States in Stockley Park, England; Paris, France and Munich, Germany. In December of 1996, the Company signed a lease for approximately an additional 30,000 square feet in Pleasanton, California beginning in March of 1997 and expiring in February, 2006. In 1997, the Company anticipates expanding existing facilities depending upon the availability of suitable additional space. Recently, commercial building vacancy rates have significantly dropped in many of the markets where the Company has significant operations. As a result, the Company could experience difficulty in obtaining additional space for expansion. Failure to obtain space or to obtain it on reasonably attractive commercial terms may inhibit the Company's ability to grow, or otherwise adversely effect the Company's operations and financial results. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1996. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded over-the-counter on the Nasdaq National market under the symbol DCTM. In February 1996, the Company completed its initial public offering of 2,058,000 shares of its common stock at an initial offering price of $24.00 per share. The following table lists the high and low sales price for each quarter of 1996 as reported by Nasdaq.
HIGH LOW ------- ------- 1996 Fourth quarter................................................. $41.500 $30.500 Third quarter.................................................. $33.000 $22.250 Second quarter................................................. $46.500 $29.875 First quarter (Subsequent to February 5)....................... $40.000 $28.000
The trading price of the Company's Common Stock is subject to wide fluctuations in response to quarterly variations in operating results, announcements of new products by the Company or its competitors, announcements of technological innovations, as well as other events or factors. In addition, the stock market has from time to time experienced extreme price and volume fluctuations which have particularly affected the market price of many high technology companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely effect the market price of the Company's Common Stock. As of December 31, 1996, the approximate number of common stockholders of record was 386. The Company has never paid any cash dividends on its capital stock and does not expect to pay any such dividends in the foreseeable future. In addition, an existing bank credit agreement currently restricts the Company's ability to pay cash dividends without the bank's consent. 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (IN THOUSANDS EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Licenses....................... $34,630 $20,377 $ 8,919 $ 1,557 $ 364 Services....................... 10,672 5,079 1,454 507 142 ------- ------- ------- ------- ------- Total revenues............... 45,302 25,456 10,373 2,064 506 ------- ------- ------- ------- ------- Cost of revenues: Licenses....................... 1,923 1,188 518 134 3 Services....................... 6,845 3,324 1,304 283 67 ------- ------- ------- ------- ------- Total cost of revenues....... 8,768 4,512 1,822 417 70 ------- ------- ------- ------- ------- Gross profit..................... 36,534 20,944 8,551 1,647 436 ------- ------- ------- ------- ------- Operating expenses: Sales and marketing............ 19,909 12,513 6,254 1,595 179 Research and development....... 7,880 4,512 2,523 1,750 1,661 General and administrative..... 4,114 2,430 1,738 1,134 226 ------- ------- ------- ------- ------- Total operating expenses..... 31,903 19,455 10,515 4,479 2,066 ------- ------- ------- ------- ------- Income (loss) from operations.... 4,631 1,489 (1,964) (2,832) (1,630) ------- ------- ------- ------- ------- Interest and other income (expense), net.................. 2,268 239 75 9 (31) ------- ------- ------- ------- ------- Income (loss) before income tax provision....................... 6,899 1,728 (1,889) (2,823) (1,661) Provision for income taxes....... (2,415) (468) -- -- -- ------- ------- ------- ------- ------- Net income(loss)................. $ 4,484 $ 1,260 $(1,889) $(2,823) $(1,661) ======= ======= ======= ======= ======= Net income per common share(1)... $ 0.30 $ 0.10 ======= ======= Shares used in per share computation(1).................. 14,747 12,934 ======= ======= CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........ $ 5,369 $ 5,978 $ 6,289 $ 3,658 $ -- Short-term investments........... 46,803 -- -- -- -- Working capital (deficit)........ 51,821 4,624 5,256 3,630 (141) Total assets..................... 74,944 16,501 10,916 5,368 182 Long-term obligations............ 211 691 544 542 911 Mandatorily redeemable convertible preferred stock..... -- 13,391 13,391 8,940 -- Stockholders' equity (deficit)... 59,332 (5,746) (7,286) (5,479) (948)
- -------- (1) See Note 2 of Notes to Consolidated Financial Statements for an explanation of shares used in computing net income per share. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The following discussion contains forward-looking statements regarding the Company, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein as well as those discussed under the caption "Risk Factors". Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. See "Risk Factors" in Item I, "Business", of this document. OVERVIEW Documentum, which was formed in 1990, provides object-oriented, client/server software solutions that enable large organizations to effectively manage and optimize the use of their unstructured business- critical information. From its inception through December 1992, the Company's activities consisted primarily of developing its products, establishing its infrastructure and conducting market research. The Company shipped the first commercial version of its Documentum Server product in late 1992, and since then substantially all of the Company's revenues have been from licenses of its family of enterprise document management system ("EDMS") products and related services, which include maintenance and support, training and consulting services. The Company continues to invest in research and development in order to update its family of products. During 1996, the Company introduced and shipped (i) Release 3.0 of Documentum EDMS, an update to the Company's core product with a range of new features; (ii) products for delivering document management functionality to the World Wide Web, as well as for Microsoft NT; (iii) and new intergration for users of Lotus Notes, Interleaf users and SAP users. The Company expects that EDMS-related revenue will continue to account for substantially all of the Company's revenues for the foreseeable future. As a result, the Company's future operating results are dependent upon continued market acceptance of EDMS and enhancements thereto. Since inception, the Company has invested significant resources in developing its EDMS software, as well as building its sales, marketing and general administrative organizations. As a result, since inception the Company's operating expenses have increased in absolute dollar amounts and are expected to continue to increase. Although the Company has experienced significant revenue growth in recent years, the Company does not believe that such growth rates are sustainable. Accordingly, the rate at which the Company has grown in the past should not be considered to be indicative of future revenue growth, if any, or future operating results. There can be no assurance that the Company will remain profitable on a quarterly basis. The Company's limited operating history makes the prediction of future operating results difficult, if not impossible. 20 RESULTS OF OPERATIONS The following table sets forth certain items from the Company's consolidated statement of operations as a percentage of total revenues for the periods indicated:
YEAR ENDED DECEMBER 31, --------------------------- 1996 1995 1994 ------- ------- ------- Revenues: Licenses........................................ 76.4% 80.0% 86.0% Services........................................ 23.6% 20.0% 14.0% ------- ------- ------- Total revenues................................ 100.0% 100.0% 100.0% ------- ------- ------- Cost of revenues: Licenses........................................ 4.3% 4.7% 5.0% Services........................................ 15.1% 13.0% 12.6% ------- ------- ------- Total cost of revenues........................ 19.4% 17.7% 17.6% ------- ------- ------- Gross profit...................................... 80.6% 82.3% 82.4% ------- ------- ------- Operating expenses: Sales and marketing............................. 43.9% 49.2% 60.3% Research and development........................ 17.4% 17.7% 24.2% General and administrative...................... 9.1% 9.6% 16.8% ------- ------- ------- Total operating expenses...................... 70.4% 76.5% 101.3% ------- ------- ------- Income (loss) from operations..................... 10.2% 5.8% (18.9%) ------- ------- ------- Interest and other income (expense), net.......... 5.0% 1.0% 0.7% ------- ------- ------- Income (loss)before income tax provision.......... 15.2% 6.8% (18.2%) Provision for income taxes........................ (5.3%) (1.8%) 0.0% ------- ------- ------- Net income (loss)................................. 9.9% 5.0% (18.2%) ======= ======= =======
Revenues The Company's revenues are derived from perpetual licenses for its document management software and related services, which include maintenance and support, training and consulting services. License revenues are recognized upon shipment of the product if no significant vendor obligations remain and collection of the resulting receivable is probable. In instances where a significant vendor obligation exists, revenue recognition is deferred until the obligation has been satisfied. Allowances for estimated future returns are provided upon shipment. Annual maintenance and support revenues are recognized for providing ongoing support and product updates and are recognized ratably over the term of the contract. Renewals of maintenance contracts are recorded when collectibility is deemed probable. Revenues from training and consulting are recognized when the services are performed and collectibility is deemed probable. License revenues increased by 70% to $34.6 million in 1996, by 128% to $20.4 in 1995 and by 473% to $8.9 million in 1994, representing 76%, 80% and 86% of total revenues in the respective periods. The growth in license revenues was due primarily to an increase in the number of licenses sold, reflecting increased acceptance of the Company's EDMS family of products, new products released during the year, and the expansion of the Company's sales organization. Although the Company's customer base has grown as revenues have increased, a relatively small number of end user customers have historically accounted for a significant percentage of the Company's revenues. In 1996, 1995 and 1994 license revenues from Xerox and certain Xerox affiliates, as systems integrators, a VAR and a distributor for the Company's products, accounted for 15%, 30% and 8% of total license revenues respectively. In 1994, license revenues from Glaxo-Wellcome accounted for 34% of total license revenues. The loss of a major customer or any reduction or delay in orders by such customers would have a material adverse effect on the Company's business, operating results and financial condition. 21 Service revenues increased by 110% to $10.7 million in 1996, by 249% to $5.1 million in 1995, and by 187% to $1.5 million in 1994, representing 24%, 20% and 14% of total revenues in the respective periods. The increase in both service revenue dollars and in service revenues as a percent of total revenues was attributable to an increased demand for services as well as a larger installed base of customers receiving ongoing maintenance, training and support services and increases in the Company's professional services consulting staff. The Company markets its products through its direct sales force and its indirect channel partners. Historically, the Company has generated the majority of its revenues from its direct sales force. However, the Company has also focused on complementing its direct sales channel with indirect channels, consisting of systems integrators and distributors. Revenues from all indirect channel partners comprised 32%, 36% and 18% of license revenues in 1996, 1995 and 1994 respectively. The increase in indirect channel revenues as a percent of total license revenues in 1995 is due to two large transactions from Xerox and certain Xerox affiliates which each exceeded 10% of total Company license revenues for the year. License revenues from indirect channels include revenues from Xerox and certain Xerox affiliates, who have acted as systems integrators, a VAR and a distributor for the Company's products. In 1996, 1995 and 1994, revenues from Xerox and certain Xerox affiliates accounted for 47%, 84% and 43% of the indirect channel partner revenues, respectively. Xerox owned approximately 26% of the Company's outstanding common shares as of December 31, 1996. Management believes that the revenues, gross profit and costs and expenses relating to transactions with Xerox are indicative of amounts which would have been incurred or realized from nonrelated parties. Revenues for any period from indirect partners including Xerox and affiliates are subject to significant variations. As a result, the Company believes that period to period comparisons of indirect revenues are not necessarily meaningful and should not be relied upon as indications of future performance. There can be no assurance that Xerox or the Company's other indirect channel partners will elect or be able to continue to market or support EDMS effectively, or that economic conditions or industry demand will not adversely affect these partners. International revenues represented 29%, 26% and 8% of license revenues in 1996, 1995 and 1994 respectively. The increase in international revenues as a percent of license revenues for the year ended December 31, 1996 is due to the expansion of the Company's sales force in Europe. A significant portion of the international revenues are derived from the Company's indirect channel partners, which include Xerox and certain Xerox affiliates. International revenues are subject to significant variations. The Company classifies license revenue as domestic or international based upon the billing location of the customer. In many instances, especially with large purchases from multinational companies, the customer has the right to deploy the licenses anywhere in the world. Thus, the percentages discussed herein represent where licenses were sold, and may or may not represent where the products are used. As a result, the Company believes that period to period comparisons of international revenues are not necessarily meaningful and should not be relied upon as indications of future performance. While the Company believes that large multinational organizations represent a significant opportunity for revenue growth and the Company intends to continue expansion of its international sales operations, there can be no assurance that the Company will be successful in meeting the requirements of these large organizations or that the Company will be able to effectively support this international expansion. Both the Company's direct and indirect international sales are primarily denominated in United States dollars and the Company does not currently engage in hedging activities. Although exposure to currency fluctuations to date has been insignificant, there can be no assurance that fluctuations in the currency exchange rates in the future will not have a material adverse impact on revenues from direct international sales and thus the Company's business, operating results and financial condition. Cost of revenues Cost of license revenues consists primarily of the royalties paid to third- party vendors. It also includes product costs such as packaging, documentation, production and freight. Cost of license revenues increased by 62% to $1.9 million in 1996, by 129% to $1.2 million in 1995 and by 287% to $518,000 in 1994, representing approximately 6% of the related license revenues in 1996, 1995 and 1994. The increase in cost of license 22 revenues was principally related to the increase in the number of software licenses sold. The Company expects that the cost of license revenues will continue to increase in dollar amount. Cost of services revenues consists primarily of personnel-related costs incurred in providing telephone support, consulting services and training to customers. Cost of services revenues increased by 106% to $6.8 million in 1996, by 155% to $3.3 million in 1995 and by 361% to $1.3 in 1994, representing 64%, 65% and 90% of the related services revenues in 1996, 1995 and 1994 respectively. The increase in cost of services revenues was a result of increased personnel-related costs as the Company expanded its customer support and training operations to support its increased installed customer base in both the US and Europe, as well as payments to third parties for support. Operating Expenses Sales and marketing. Sales and marketing expenses consist primarily of salaries, benefits, sales commissions and other expenses related to the direct sales force, various marketing expenses and costs of other market development programs. Sales and marketing expenses increased by 59% to $19.9 million in 1996, by 100% to $12.5 million in 1995 and by 292% to $6.3 million in 1994 representing 44%, 49% and 60% of total revenues for 1996, 1995 and 1994, respectively. The increase in dollar amount was primarily due to the expansion of the Company's sales force, related equipment and facility expenditures, investment in building a European direct sales force and increased marketing activities including public relations and promotional expenses. The decrease as a percentage of revenues is primarily due to economies of scale realized as certain expenses, such as management compensation and facilities, grew proportionately less than revenues. The Company is in the process of increasing its direct sales and marketing expenditures to address certain international and vertical markets and expects that sales and marketing expenses will increase in dollar amount to support the Company's anticipated revenue growth. Research and development. Research and development expenses consist primarily of salaries and benefits for software developers, contracted development efforts and related facilities costs. Research and development expenses increased by 75% to $7.9 million in 1996, by 79% to $4.5 million in 1995 and by 44% to $2.5 million in 1994, representing 17%, 18%, and 24% of total revenues in 1996, 1995 and 1994 respectively. The increase in dollar amount reflects the expansion of the Company's engineering staff and related costs required to support the development of new products and the enhancement of existing products. Based on the Company's research and development process, costs incurred between the establishment of technological feasibility and general release have not been material and therefore have not been capitalized in accordance with Financial Accounting Standards No. 86. The Company expects research and development costs will continue to increase in dollar amount in order to support increased development efforts to both existing products and new products. General and administrative. General and administrative expenses consist primarily of personnel costs for finance, management information systems, legal, human resources and general management and outside professional services. General and administrative expenses increased by 69% to $4.1 million in 1996, by 40% to $2.4 million in 1995 and by 53% to $1.7 million in 1994, representing 9%, 10% and 17% of total revenues in 1996, 1995 and 1994 respectively. The increase in dollar amount is primarily due to increased staffing and professional fees necessary to manage and support the Company's growth. The Company expects general and administrative expenses to increase in order to support the growing needs of the Company. Interest and other income (expense), net Interest and other income (expense), net consists primarily of interest income earned on the Company's cash and cash equivalents and short term investments, and other items including foreign exchange gains and losses and interest expense. Interest and other income (expense), net increased by 849% to $2.3 million in 1996, by 219% to $239,000 in 1995 and by 733% to $75,000 in 1994. The increase in dollar amount is primarily due to higher cash balances resulting from the completion of the Company's initial public offering of common stock completed in February 1996. To date, the Company's international sales have been generally denominated in US 23 dollars and the Company has not engaged in hedging activities as the exposure to currency fluctuations has been insignificant. In the future, as the Company expands its international operations, the Company expects to have an increased amount of non-US dollar denominated contracts. Unexpected changes in the exchange rates for these foreign currencies could result in significant fluctuation in the foreign currency translation gains and losses in future periods. Provision for income taxes The Company's effective tax rates for 1996 and 1995 were 35% and 27%, respectively. The Company incurred a loss in 1994 and consequently recorded no provision for income taxes. These rates differ from the statutory rate primarily due to state and foreign taxes, as well as the utilization of tax loss and credit carryforwards and the impact of releasing the previously established valuation allowance. In accordance with Financial Accounting Standards No. 109, "Accounting for Income Taxes", the Company provides a valuation allowance for deferred tax assets when it is more likely than not, based on available evidence, that some portion or all of the deferred assets will not be realized. Based on a revaluation of the realizability of future tax benefits based on income earned in 1996, creating available tax carrybacks, the Company released the previously established valuation allowance during 1996. Accordingly, the Company valued its deferred tax asset at $1.3 million at December 31, 1996. The Company anticipates that its effective tax rate will not increase significantly in 1997. LIQUIDITY AND CAPITAL RESOURCES Since 1993, the Company has financed its operations primarily through the sale of stock and through cash generated from operations. In February 1996, the Company completed its initial public offering, and its common stock began trading on the Nasdaq National Market under the symbol DCTM. Through the offering, the Company sold 2,058,000 shares of its common stock, and received net proceeds of approximately $45 million cash, which has been invested in investment grade securities. The Company's cash and investments totaled $52.2 million at December 31, 1996 representing 70% of total assets. The Company has invested the Company's cash in excess of current operating requirements in investment grade securities. The investments have variable and fixed interest rates and short term and long term maturities. In accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities" such investments are classified as "available for sale". Net cash provided by operating activities was $4.6 million and $1.5 million in 1996 and 1995, respectively. Cash used in operating activities in 1994 was $759,000. For the year ended December 31, 1996, the cash generated by operations was primarily attributable to net income of $4.5 million, growth in accrued liabilities of $3.4 million and deferred revenue of $2.8 million, offset by the increase in accounts receivable of $8.1 million. In 1996, capital expenditures of $5.2 million were primarily for computer equipment, fixed assets and leasehold improvements acquired in conjunction with the Company's expansion to new facilities. The Company has a current line of credit facility which allows for borrowings of up to $5.0 million at the bank's prime rate. This facility expires in November, 1997 and the Company presently anticipates that it will be able to renew the line of credit. At December 31, 1996, the Company had no outstanding borrowings under its line of credit. At December 31, 1996, the Company had $406,000 outstanding under a term note payable to a bank. The balance of the term note is repayable in 10 equal monthly payments of approximately $41,000 together with interest at the Bank's prime rate plus 0.75%. The Company also had $371,000 outstanding under a second term note payable to a bank. The balance of the term note is repayable in 23 equal monthly payments of approximately $16,000 together with interest at the Bank's prime rate plus 0.50%. In addition, the Company may borrow up to an additional $1.5 million through November 1997. Interest only is payable on such additional borrowings at the Bank's prime rate plus 0.25% through November 1997 after 24 which any outstanding balance is due in 24 equal installments. All obligations shall bear interest, from and after the occurrence of an event of default, at a rate equal to 5% points above the interest rate applicable immediately prior to the occurrence of the event of default. Borrowings under the loan agreement are secured by substantially all of the assets of the Company. The Company currently has no significant capital spending or purchase commitments other than normal purchase commitments and commitments under facilities and capital leases. The Company believes that its existing cash balances, its available bank financing and the cash flows generated from operations, if any, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 12 months. A portion of the Company's cash could be used to acquire or invest in complementary businesses or products or obtain the right to use complementary technologies. The Company is currently evaluating, in the ordinary course of business, potential investments such as businesses, products or technologies. The Company has no current understandings, commitments or agreements with respect to any material acquisition of other businesses, products or technologies. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is included in Part IV Item 14. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III Certain information required by Part III is omitted from this Report and will be included in the Registrant's definitive Proxy Statement which will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Executive Officers--See the section titled "Executive Officers" in Part I, Item 1 hereof. (b) Directors--The information required by this Item is incorporated by reference to the section entitled "Election of Directors" in the Proxy Statement. The disclosure required by Item 405 of Regulation S-K is incorporated by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Certain Transactions." 25 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT'S, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form:
PAGE NUMBER ----------- 1. Consolidated Financial Statements Report of Independent Accountants........................ F-1 Consolidated Balance Sheets as of December 31, 1996 and 1995..................................................... F-2 Consolidated Statement of Operations For the three years ended December 31, 1996.................................. F-3 Consolidated Statement of Cash Flows For the three years ended December 31, 1996.................................. F-4 Consolidated Statement of Changes in Stockholders' Equity(Deficit) For the three years ended December 31, 1996..................................................... F-5 Notes to Consolidated Financial Statements............... F-6 2. Financial Statement Schedules For the three years ended December 31, 1996 Schedule II--Valuation and Qualifying Accounts........... S-1 Schedules not listed above have been omitted because they are either not applicable or the required information is shown in the financial statements or the notes thereto. 3. Exhibits: See accompanying Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Form.
(b) Reports on Form 8-K None. 26 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THIS 21ST DAY OF MARCH, 1997. Documentum, Inc. /s/ Mark S. Garrett By: _________________________________ MARK S. GARRETT VICE PRESIDENT AND CHIEF FINANCIAL OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints jointly and severally, Jeffrey A. Miller and Mark S. Garrett, and each one of them, his or her attorneys-in-fact, each with the power of substitution, for him or her in any way and all capacities, to sign any and all amendments to this Annual Report (Form 10-K) and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 21st day of March, 1997. SIGNATURE TITLE /s/ Jeffrey A. Miller President, Chief Executive Officer - ------------------------------------- and Direct (Principal Executive JEFFREY A. MILLER Officer) /s/ Mark S. Garrett Vice President and Chief Financial - ------------------------------------- Officer (Principal Financial and MARK S. GARRETT Accounting Officer) /s/ Robert V. Adams Chairman - ------------------------------------- ROBERT V. ADAMS /s/ Kathryn C. Gould Director - ------------------------------------- KATHRYN C. GOULD /s/ Colin J. O'Brien Director - ------------------------------------- COLIN J. O'BRIEN /s/ John L. Walecka Director - ------------------------------------- JOHN L. WALECKA /s/ Edward J. Zander Director - ------------------------------------- EDWARD J. ZANDER 27 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Documentum, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 26 present fairly, in all material respects, the financial position of Documentum, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California January 24, 1997 F-1 DOCUMENTUM, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ---------------- 1996 1995 ------- ------- ASSETS Current assets: Cash....................................................... $ 5,369 $ 5,978 Short-term investments..................................... 46,803 -- Accounts receivable, net of allowances of $1,069 and $647.. 13,531 6,073 Other current assets....................................... 1,519 738 ------- ------- Total current assets..................................... 67,222 12,789 Property and equipment, net.................................. 6,339 3,201 Other assets................................................. 1,383 511 ------- ------- $74,944 $16,501 ======= ======= LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable........................................... $ 1,488 $ 564 Accrued liabilities........................................ 8,124 4,693 Deferred revenue........................................... 4,956 2,164 Current portion of capital lease obligations............... 234 257 Current portion of term loans payable...................... 599 487 ------- ------- Total current liabilities................................ 15,401 8,165 ------- ------- Long term obligations: Capital lease obligations, less current portion............ 33 286 Term loans payable, less current portion................... 178 405 ------- ------- Total long-term obligations.............................. 211 691 ------- ------- Mandatorily redeemable convertible preferred stock........... -- 13,391 ------- ------- Commitments (Note 8) Stockholders' equity (deficit): Preferred stock, $0.001 par value; 5,000 and 60,000 shares authorized, none issued and outstanding Common stock, $0.001 par value; 35,000 and 100,000 shares authorized; 14,187 and 1,880 shares issued and outstanding .......................................................... 14 2 Additional paid-in capital................................. 61,450 966 Cumulative translation adjustment.......................... 43 (55) Accumulated deficit........................................ (2,175) (6,659) ------- ------- Total stockholders' equity (deficit)..................... 59,332 (5,746) ------- ------- $74,944 $16,501 ======= =======
See accompanying notes to consolidated financial statements. F-2 DOCUMENTUM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Revenues: License (including $5,323, $6,104 and $698 from a stockholder and its affiliates)............. $ 34,630 $ 20,377 $ 8,919 Services....................................... 10,672 5,079 1,454 -------- -------- -------- Total revenues............................... 45,302 25,456 10,373 -------- -------- -------- Cost of revenues: License........................................ 1,923 1,188 518 Services....................................... 6,845 3,324 1,304 -------- -------- -------- Total cost of revenues....................... 8,768 4,512 1,822 -------- -------- -------- Gross profit..................................... 36,534 20,944 8,551 -------- -------- -------- Operating expenses: Sales and marketing............................ 19,909 12,513 6,254 Research and development....................... 7,880 4,512 2,523 General and administrative..................... 4,114 2,430 1,738 -------- -------- -------- Total operating expenses..................... 31,903 19,455 10,515 -------- -------- -------- Income (loss) from operations.................... 4,631 1,489 (1,964) Interest and other income (expense), net......... 2,268 239 75 -------- -------- -------- Income (loss) before income tax provision........ 6,899 1,728 (1,889) Provision for income taxes....................... (2,415) (468) -- -------- -------- -------- Net income (loss)................................ $ 4,484 $ 1,260 $ (1,889) ======== ======== ======== Net income per share............................. $ .30 $ .10 ======== ======== Shares used to compute net income per share(Note 2).............................................. 14,747 12,934 ======== ========
See accompanying notes to consolidated financial statements. F-3 DOCUMENTUM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 ------- ------- -------- Cash flows from operating activities: Net income (loss)................................ $ 4,484 $ 1,260 $ (1,889) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.................. 2,064 921 336 Provision for doubtful accounts................ 672 243 337 Deferred tax asset............................. (1,273) -- -- Changes in assets and liabilities: Accounts receivable.......................... (8,130) (3,501) (1,820) Other current assets and other assets........ (379) (809) (420) Accounts payable............................. 924 110 297 Accrued liabilities.......................... 3,431 2,217 1,940 Deferred revenue............................. 2,792 1,063 460 ------- ------- -------- Net cash provided by (used in) operating activities................................ 4,585 1,504 (759) ------- ------- -------- Cash flows from investing activities: Purchases of investments......................... (92,303) -- -- Sales of investments............................. 45,500 Purchases of property and equipment.............. (5,202) (2,750) (463) ------- ------- -------- Net cash used by investing activities...... (52,005) (2,750) (463) ------- ------- -------- Cash flows from financing activities: Issuance of common stock......................... 47,105 335 82 Proceeds from term loan.......................... 387 973 -- Repayments on capital lease obligations.......... (276) (237) (107) Repayment on term loan........................... (503) (81) -- Issuance of Series C preferred stock............. -- -- 3,878 ------- ------- -------- Net cash provided by financing activities.. 46,713 990 3,853 ------- ------- -------- Effect of exchange rate on changes in cash......... 98 (55) -- ------- ------- -------- Net increase (decrease) in cash and cash equiva- lents............................................. (609) (311) 2,631 Cash and cash equivalents at beginning of period... 5,978 6,289 3,658 ------- ------- -------- Cash and cash equivalents at end of period......... $ 5,369 $ 5,978 $ 6,289 ======= ======= ======== Supplemental schedule of noncash transactions: Bridge financing, notes payable and accrued in- terest exchanged for mandatorily redeemable con- vertible preferred stock........................ $ -- $ -- $ 573 Capital lease obligations incurred............... $ -- $ -- $ 887 Common stock issued for notes receivable......... $ -- $ 116 $ 114 Supplemental schedule of cash flow information: Interest paid.................................... $ 127 $ 101 $ 67 Income taxes paid................................ $ 2,776 $ 181 $ --
See accompanying notes to consolidated financial statements. F-4 DOCUMENTUM, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL -------------- PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY (DEFICIT) ------ ------ ---------- ----------- ----------- ---------------- Balance as of December 31, 1993............... -- $-- $ 551 $-- $ (6,030) $ (5,479) Common stock options exercised.............. 880 1 81 -- -- 82 Net loss................ -- -- -- -- (1,889) (1,889) ------ ---- -------- ---- -------- -------- Balance as of December 31, 1994............... 880 1 632 -- (7,919) (7,286) Common stock options exercised.............. 1,000 1 303 -- -- 304 Stock compensation...... -- -- 31 -- -- 31 Foreign currency translation adjustment............. -- -- -- (55) -- (55) Net income.............. -- -- -- -- 1,260 1,260 ------ ---- -------- ---- -------- -------- Balance as of December 31, 1995............... 1,880 2 966 (55) (6,659) (5,746) Common stock options exercised.............. 324 -- 647 -- -- 647 Employee stock purchase plan................... 60 -- 1,252 -- -- 1,252 Warrants exercised...... 73 -- -- -- -- -- Stock repurchases....... (12) -- (5) -- -- (5) Mandatorily preferred conversion............. 9,804 10 13,381 -- -- 13,391 Issuance of common stock in public offering net of issuance costs...... 2,058 2 45,038 -- -- 45,040 Stock compensation...... -- -- 72 -- -- 72 Payments on shareholder notes.................. -- -- 99 -- -- 99 Foreign currency translation adjustment............. -- -- -- 98 -- 98 Net income.............. -- -- -- -- 4,484 4,484 ------ ---- -------- ---- -------- -------- Balance as of December 31, 1996............... 14,187 $ 14 $ 61,450 $ 43 $ (2,175) $ 59,332 ====== ==== ======== ==== ======== ========
See accompanying notes to consolidated financial statements. F-5 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--DESCRIPTION OF THE COMPANY: Description of business Documentum, Inc. (the "Company") was incorporated in the state of Delaware in January 1990 to develop, market and support a family of client/server and worldwide Web software products that specifically address the challenges of managing business-critical documents effectively across large enterprises. The Documentum Enterprise Document Management System ("EDMS") automates and accelerates the creation, modification and reuse of business-critical documents and other unstructured data and the collaborative efforts involved in these activities. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Documentum International, Inc., in the United States, and Documentum Software Europe Ltd., in the United Kingdom. All significant inter-company accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Foreign currency The functional currency of the Company's United Kingdom subsidiary is the local currency. Balance sheet accounts are translated into United States dollars at exchange rates prevailing at balance sheet dates. Revenues, costs and expenses are translated into United States dollars at average rates for the period. Gains and losses resulting from translation are accumulated as a component of stockholders' equity (deficit). Net gains and losses resulting from foreign exchange transactions are included in the consolidated statement of operations and were not significant during any of the periods presented. To date, the company does not engage in hedging activities. Revenue recognition The Company's revenues are derived from perpetual licenses for its document management software and related services, which include maintenance and support, training and consulting services. License revenues are recognized upon shipment of the product if no significant vendor obligations remain and collection of the resulting receivable is probable. In instances where a significant vendor obligation exists, revenue recognition is delayed until the obligation has been satisfied. Allowances for estimated future returns, which to date have been immaterial, are provided upon shipment. Annual maintenance and support revenues consist of ongoing support and product updates and are recognized ratably over the term of the contract. Revenues from training and consulting are recognized when the services are performed. Payments received in advance of revenue recognition are recorded as deferred revenue. The Company has recognized revenues, for all periods presented, in accordance with Statement of Position 91-1, "Software Revenue Recognition." Cash and cash equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. F-6 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Financial investments The company has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") which requires investment securities to be classified as either held to maturity, trading or available-for-sale. The adoption of SFAS 115 did not have a material impact on the Company's financial condition or results of operations. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, short-term investments and accounts receivable. The Company deposits substantially all of its cash with a single financial institution. The Company's short-term investments, all of which are classified as available-for-sale, are managed by a single financial institution. At December 31, 1996, the fair value of these short-term investments approximated amortized cost with contractual maturities ranging from December 15, 1997 to December 1, 2029. The following table details the Company's short- term investments at December 31, 1996:
COST ------- Cash............................................................. $ 5,369 Certificates of deposit.......................................... 6,000 Medium term notes................................................ 15,088 U.S. Government agencies......................................... 6,914 Municipal bonds and notes........................................ 7,274 Corporate bonds and notes........................................ 4,655 Foreign debt securities.......................................... 2,042 Market auction preferred stock................................... 4,000 ------- $51,342 =======
The carrying value of all other financial instruments approximated their respective fair value at December 31, 1996. Securities with a maturity date of one year or less, and securities in which management intends to sell in 1997, are classified as short-term investments. Concentration of credit risk The Company generally does not require collateral for its accounts receivable and maintains reserves for potential credit losses. Sales to Xerox and affiliated entities accounted for 15% and 30% of 1996 and 1995 license revenues, respectively. Sales to a single customer accounted for 34% of 1994 license revenues. At December 31, 1996, two customers comprised 26% of accounts receivable. At December 31, 1995, two customers, including Xerox and affiliated entities comprised 21% of accounts receivable. Revenues from export sales, primarily to Europe, were approximately 29%, 26% and 8% of license revenues for the years ended December 31, 1996, 1995 and 1994, respectively. Included in export sales in 1996 (as a percentage of license revenues) are export sales to customers in Europe for approximately 94%. Included in export sales in 1995 (as a percentage of license revenues) are export sales to customers in Europe for approximately 22%. Property and equipment Property and equipment, including leasehold improvements, are recorded at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, three to six years, or the life of the lease, whichever is shorter. F-7 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Software development costs Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86 ("SFAS 86") requires the capitalization of certain software development costs once technological feasibility is established. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility, which the Company has defined as the establishment of a working model, and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. Income taxes Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Under SFAS No. 109, deferred income tax liabilities and assets are determined based on the difference between the financial reporting amounts and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates in effect for the years in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Equity-Based Compensation Plans Effective for transactions entered into in fiscal years beginning after December 15, 1995, SFAS No. 123, Accounting for Stock-Based Compensation under a fair value based method is required. The Company, as allowed by SFAS No. 123, has elected to continue to measure compensation costs for its plans using the intrinsic value base method of accounting for stock issued to employees. However, as required by SFAS No. 123, pro forma disclosures of net income and earnings per share are reflected in the notes to the financial statements as if the fair value based method of accounting was adopted. Net income per share Net income per share is computed using the weighted average number of common stock and common equivalent shares outstanding during the period. Common equivalent shares consist of convertible preferred stock (using the if converted method) and stock options and warrants (using the treasury stock method). Common equivalent shares are excluded from the computation if their effect is antidilutive. Pursuant to Securities and Exchange Commission Staff Accounting Bulletins, common and common equivalents shares, options and warrants issued by the Company during the 12-month period prior to the Company's initial public offering have been included in the calculation as if they were outstanding for all periods prior to and including February 5, 1996. Earnings per share prior to fiscal 1995 have not been presented since such amounts are not deemed meaningful due to the significant change in the Company's capital structure that will occur in connection with the initial public offering. Stockholders Equity Common Stock as of December 31, 1996 reflects the sale of 2,058,000 shares of common stock issued in the Company's initial public offering completed on February 5, 1996. Aggregate net proceeds to the Company were $45,000,000. In addition, Common Stock also reflects the conversion of all the Mandatorily Redeemable Convertible Preferred Stock outstanding into an aggregate of 9,803,975 shares of common stock based on the shares of Mandatorily Redeemable Convertible Preferred Stock outstanding as of December 31, 1995. F-8 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Upon the closing of the Offering, the Company amended and restated its Certificate of Incorporation reducing the authorized number of shares of Common Stock to 35,000,000 and the authorized number of shares of Preferred Stock to 5,000,000. NOTE 3--RELATED PARTY TRANSACTIONS: Xerox and affiliated entities The Company has distribution agreements with Xerox and affiliated entities which provide Xerox or its affiliates with the non-exclusive rights to sell the Company's products in specified territories. The agreements have initial terms of 18 to 24 months; however certain agreements may be renewed. In addition, the Company has an agreement with Rank Xerox (UK) Limited; for Rank Xerox (UK) Limited to provide support services to specified customers. This agreement was terminated in July 1996. For the years ended December 31, 1996, 1995 and 1994, the Company recognized license revenues from Xerox and affiliated entities of $5,323,000, $6,104,000 and $698,000, respectively, and incurred expenses primarily for support services provided by Xerox and affiliated entities of $410,000, $283,000, and $144,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The net amount due from Xerox and affiliated entities was $737,000 and $622,000 at December 31, 1996 and 1995, respectively. Management believes that the revenues, gross profit and costs and expenses relating to these transactions are indicative of amounts which would have been incurred or realized from nonrelated parties. At December 31, 1996, Xerox owned approximately 26% of the Company's outstanding common shares. Notes receivable from stockholders The Company has allowed certain employees to exercise stock options in exchange for promissory notes. These notes generally bear interest at between 6.76% and 7.92% per annum payable annually in arrears, are secured by the shares issued and are due five years after issuance; however, all amounts are due and payable upon the employee's termination from the Company. At December 31, 1996 and 1995 the Company had $109,000 and $240,000 in note receivables, respectively, due from stockholders which were included in additional paid in capital. NOTE 4--BALANCE SHEET COMPONENTS:
DECEMBER 31, ---------------- 1996 1995 ------- ------- (IN THOUSANDS) Property and equipment: Computer equipment....................................... $ 5,466 $ 3,003 Office equipment......................................... 989 448 Furniture and fixtures................................... 1,396 561 Leasehold improvements and other......................... 2,004 641 ------- ------- 9,855 4,653 Accumulated depreciation and amortization................ (3,516) (1,452) ------- ------- $ 6,339 $ 3,201 ======= =======
At December 31, 1996 the Company had $882,000 of equipment under capital leases, net of accumulated amortization of $794,000. At December 31, 1995 the Company had $887,000 of equipment under capital leases, net of accumulated amortization of $588,000. F-9 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, --------------- 1996 1995 ------- ------- (IN THOUSANDS) Accrued liabilities: Compensation and related benefits.......................... $3,617 $1,975 Taxes...................................................... 1,103 461 Other...................................................... 3,404 2,257 ------- ------- $8,124 $4,693 ======= =======
NOTE 5--LINE OF CREDIT AND TERM LOAN: At December 31, 1996, the Company has an unused bank line of credit (the "Line of Credit") which provides for maximum borrowings up to $5,000,000, bears interest at the bank's prime rate (8.25% at December 31, 1996) and is secured by substantially all of the Company's assets. The Line of Credit, which expires in November 1997, is subject to certain financial covenants. At December 31, 1996, the Company has $406,000 outstanding under a term note payable to a bank. The balance of the Term Loan is repayable in 10 equal monthly payments of approximately $41,000 together with interest at the Bank's prime rate plus 0.75%. At December 31, 1996, the Company has $371,000 outstanding under a term note payable to a bank. The balance of the Term Loan is repayable in 23 equal monthly payments of approximately $16,000 together with interest at the Bank's prime rate plus 0.5%. In addition, the Company may borrow up to an additional $1,500,000 through November 1997. Interest only is payable on such additional borrowings at the Bank's prime rate plus 0.25% through November 1997 after which any outstanding balance is due in 24 equal installments. All obligations shall bear interest, from and after the occurrence of an event of default, at a rate equal to 5% points above the interest rate applicable immediately prior to the occurrence of the event of default. Borrowings under the Term Loan are secured by substantially all of the assets of the Company. NOTE 6--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK WARRANTS: Preferred stock At December 31, 1994 and 1995, the Company had 49,020,000 shares or $13,391,000 of Mandatorily Redeemable Convertible Preferred Stock (the "Preferred Stock") outstanding which was comprised of: 15,999,000 shares designated, issued, and outstanding of Series A for $2,002,000; 27,396,000 shares designated, issued, and outstanding of Series B for $6,938,000; and 5,625,000 shares designated, issued, and outstanding of Series C for $4,451,000. On February 5, 1996, upon the closing of the offering, all of the Mandatorily Redeemable Convertible Preferred Stock outstanding was automatically converted into an aggregate of 9,803,975 shares of common stock based on the Mandatorily Redeemable Convertible Preferred Stock that was outstanding as of December 31, 1995: Preferred stock warrants In connection with a lease line of credit in March 1994, the Company granted the lessor warrants to purchase 295,636 shares of the Company's Series B Mandatorily Redeemable Convertible Preferred Stock. These warrants were fully exercised on a net basis on December 18, 1996 and converted into 57,158 common shares. F-10 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On October 31, 1994, the Company granted the bank warrants to purchase 87,500 shares of the Company's Series C Mandatorily Redeemable Convertible Preferred Stock, in connection with a line of credit and term note. These warrants were fully exercised on a net basis on October 25, 1996 and converted into 15,425 common shares. NOTE 7--STOCK OPTION AND BENEFIT PLANS: 1993 Equity Incentive Plan In March 1993, the Board of Directors adopted the 1993 Equity Incentive Plan (the "Plan") providing for the issuance of nonstatutory common stock options to employees and consultants of the Company. The Board of Directors has amended the Plan providing for the grant of incentive stock options ("ISOs"), stock bonuses and stock appreciation rights and allowing for the sale of restricted stock. Under the Plan a total of 3,800,000 shares have been authorized for issuance. Options may be granted at an exercise price at the date of grant of not less than the fair market value per share for ISOs and not less than 85% of the fair market value per share for nonstatutory stock options, except for options granted to a person owning greater than 10% of the total combined voting power of all classes of stock of the Company, for which the exercise price of the option must be not less than 110% of the fair market value. The fair market value of the Company's common stock is determined by the Board of Directors or a committee thereof. Options granted under the Plan are exercisable at the date of grant and are subject to repurchase by the Company at the option exercise price paid per share with such repurchase right generally lapsing with respect to 25% after the first year and ratably each month over the remaining thirty-six month period. In 1996, 1995 and 1994 the Company issued 571,900, 701,300, and 692,400 options under the Plan, respectively. At December 31, 1996, 360,000 shares were subject to repurchase by the Company. Non-employee Directors' Stock Option Plan In November 1995, the Board of Directors adopted the 1995 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan provides for the issuance of up to 150,000 nonstatutory stock options to non- employee directors of the Company. Each non-employee director of the Company will automatically be granted a nonstatutory option to purchase 15,000 shares of Common Stock upon the later of the effective date of the initial public offering or upon the date on which such person first becomes a director. Thereafter, beginning June 30, 1997 each non-employee director of the Company will be granted an annual option to purchase 5,000 shares of common stock provided such person, on June 30th of each year, has served continuously as a non-employee director for at least six months prior to such date. Options under the Directors' Plan will be granted at the fair value of the stock and will vest one-third at date of grant and the remaining options will vest in two equal annual installments. In 1996, the Company issued 75,000 options under the Directors' Plan. 1996 Non-officer Equity Incentive Plan In October 1996, the Board of Directors adopted the 1996 Non-Officer Equity Incentive Plan (the "Incentive Plan") providing for the issuance of either nonstatutory common stock options, stock bonuses, or rights to purchase restricted stock to employees and consultants of the Company. This plan explicitly excludes directors and employees serving as officers of the company. Under the Incentive Plan, a total of 600,000 shares have been authorized for issuance. F-11 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Options may be granted at an exercise price at the date of grant of not less than 85% of the fair market value per share for nonstatutory stock options, stock bonuses and restricted stock purchases as determined by the Board of Directors. Options granted under the Incentive Plan are exercisable only upon vesting. In 1996, the Company issued 142,301 options under the Incentive Plan. A summary of activity under all the plans is as follows:
OPTIONS OUTSTANDING ----------------------- SHARES PRICE --------- ------------ Outstanding as of December 31,1993.................. 1,694,913 $0.16-$ 0.31 ========= Granted........................................... 692,400 $0.16-$ 0.31 Exercised......................................... (879,562) $0.16-$ 0.31 Canceled.......................................... (20,057) $ 0.31 --------- Outstanding as of December 31, 1994................. 1,487,694 $0.16-$ 0.31 ========= Granted........................................... 701,300 $1.00-$ 9.00 Exercised......................................... (999,899) $0.16-$ 6.20 Canceled.......................................... (29,834) $0.31-$ 3.70 --------- Outstanding as of December 31, 1995................. 1,159,261 $0.16-$ 9.00 ========= Granted........................................... 789,201 $9.00-$46.00 Exercised......................................... (324,591) $0.31-$ 9.00 Canceled.......................................... (119,845) $0.31-$42.25 --------- Outstanding as of December 31, 1996................. 1,504,026 $0.16-$46.00 =========
At December 31, 1996 options to purchase 270,226 shares were vested and 842,065 shares were available for future grant under all the plans. During the year ended December 31, 1996, the Company had granted certain options for the purchase of common stock on which the Company will amortize approximately $73,000 annually of compensation expense over the four-year vesting period of the options. The following table summarizes information regarding stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------- --------------------------- WEIGHTED- NUMBER AVERAGE NUMBER OUTSTANDING REMAINING WEIGHTED EXERCISABLE AT CONTRACTUAL AVERAGE AT WEIGHTED- DECEMBER 31, LIFE EXERCISE DECEMBER 31, AVERAGE RANGE OF EXERCISES PRICES 1996 (YEARS) PRICE 1996 EXERCISE PRICE - ------------------------- ------------ ----------- -------- ------------ -------------- $ 0.3121-$ 1.0000....... 311,463 7.39 $ 0.4762 311,463 $ 0.4762 $ 1.5000-$ 3.7500....... 317,155 8.51 2.3962 317,155 2.3962 $ 4.2500-$24.3125....... 409,258 8.65 17.5289 359,258 16.6283 $24.5000-$36.7500....... 340,800 9.55 32.3086 274,900 32.2263 $37.0000-$46.0000....... 125,350 9.68 40.0116 50,450 41.5946 --------- --------- $ 0.3121-$46.0000....... 1,504,026 8.65 $16.0292 1,313,226 $13.5846 ========= =========
Options outstanding and options exercisable above do not include shares subject to repurchase by the company at December 31, 1996. F-12 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Employee Stock Purchase Plan In November 1995, the Board of Directors adopted the Employee Stock Purchase Plan (the "Purchase Plan"), which provides for the issuance of a maximum of 350,000 shares of common stock. Eligible employees can have up to 10% of their earnings withheld, up to a maximum of $15,000 per calendar year, to be used to purchase shares of the common stock on specified dates determined by the Board of Directors. The price of common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the specified purchase date. During 1996, approximately 60,000 common shares were purchased under the Employee Stock Purchase Plan. Pro Forma Stock Compensation Disclosure The Company applies the intrinsic value method prescribed by APB No. 25, Accounting for Stock Issued to Employees, in accounting for its stock-based compensation plans. Had compensation cost for the Company's stock-based compensation plans been determined consistent with the fair value approach set forth in SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 ------ ------ Net income (in thousands): As reported................................................ $4,484 $1,260 Pro forma.................................................. $2,015 $1,159 Earnings Per Share: As reported................................................ $ 0.30 $ 0.10 Pro forma.................................................. $ 0.14 $ 0.09
Earnings per share was computed using the method describe in note 2. The fair value of each stock option grant on the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
1996 1995 ------ ----- Volatility.................................................... 62.90% 62.90% Risk-free interest rate....................................... 6.0% 5.96% Dividend yield................................................ -- -- Expected lives................................................ 4 4 Weighted Average fair value................................... $31.57 $2.87
The fair value of the shares granted under the Purchase Plan was estimated using the Black-Scholes model with the following assumptions:
1996 ------ Volatility........................................................ 62.90% Risk-free interest rate........................................... 6.0% Dividend yield.................................................... -- Expected lives.................................................... 2 Weighted Average fair value....................................... $31.57
The pro forma effect on net income for 1996 and 1995 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to January 1, 1995. F-13 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 401(k) Plan In November 1993, the Board of Directors adopted an employee savings and retirement plan (the "401(k) Plan") covering substantially all of the Company's employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the statutory prescribed limit and have the amount of such reduction contributed to the 401(k) Plan. The Company may make contributions to the 401(k) Plan on behalf of eligible employees. Employees become 25 percent vested in the Company contributions after one year of service, and increase their vested percentages by an additional 25 percent for each year of service thereafter. The Company has not made any contributions to the 401(k) Plan. NOTE 8--COMMITMENTS: Leases The Company is obligated under non-cancelable operating leases for office space and non-cancelable capital leases for equipment which expire at various times through 1999. Certain leases for office space provide for scheduled rent increases and contain options for additional space. Rent expense is recognized ratably over the lease term. Future minimum lease commitments under these leases at December 31, 1996 are as follows (in thousands):
LEASES ------ Year ending December 31, 1997............................................................. $1,956 1998............................................................. 1,812 1999............................................................. 1,698 2000............................................................. 1,418 2001............................................................. 1,212 Thereafter....................................................... 1,806 ------ $9,902 ======
Included in the above table for 1997 and 1998 are $247,000 and $34,000, respectively, for future minimum lease commitments under capital lease obligations which include $14,000 for interest. Total rent expense was approximately $1,278,000, $696,000, $316,000 for the years ended December 31, 1996, 1995 and 1994, respectively. F-14 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9--INCOME TAXES: For the year ended December 31, 1994, the Company incurred losses and consequently had no provision for income taxes. The provision for income taxes for the year ended December 31, 1996 and December 31, 1995 is as follows (in thousands):
YEARS ENDED DECEMBER 31, -------------- 1996 1995 ------- ----- Current: Federal..................................................... $ 2,262 $ 217 State....................................................... 531 92 Foreign..................................................... 895 159 ------- ----- 3,688 468 ------- ----- Deferred: Federal..................................................... (1,144) -- State....................................................... (129) -- ------- ----- (1,273) -- ------- ----- $ 2,415 $ 468 ======= =====
The components of income (loss) before income tax provision are as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ------------------------ Domestic income (loss)............................ $5,190 $1,281 $(1,924) Foreign income.................................... 1,709 447 35 ------- ------- -------- Income (loss) before provision for income taxes... $6,899 $1,728 $(1,889) ======= ======= ========
The tax provision is reconciled to the amount computed using the federal statutory rate is as follows (in thousands):
DECEMBER 31, --------------------- 1996 1995 1994 ------- ----- ----- Federal statutory tax provision (benefit)............. $ 2,345 $ 588 $(642) State taxes, net of federal benefit................... 397 60 -- Future benefits not currently recognized.............. (1,100) 491 642 Utilization of tax loss and credit carryforward....... (130) (710) -- Foreign taxes......................................... 596 -- -- Other................................................. 307 39 -- ------- ----- ----- $ 2,415 $ 468 $ -- ======= ===== =====
F-15 DOCUMENTUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company provides a valuation allowance for deferred tax assets when it is more likely than not, based on available evidence, that some portion or all of the deferred assets will not be realized. Based on a revaluation of the realizability of future tax benefits based on income earned in 1996, creating available tax carrybacks, the Company released $944,000 of the previously established valuation allowance during 1996. The significant components of the Company's deferred tax assets, that were included in current other assets and other assets on the Balance Sheet, are as follows (in thousands):
DECEMBER 31, ------------ 1996 1995 ------ ----- Deferred tax assets: Reserves and accruals........................................ $1,067 $ 944 Tax credit carryforwards..................................... 206 -- ------ ----- 1,273 944 Less deferred tax asset valuation allowance.................... -- (944) ------ ----- $1,273 $ -- ====== =====
F-16 DOCUMENTUM, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED DECEMBER 31, 1996 Allowance for Doubtful Accounts (in thousands):
BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ----------- ---------- ---------- -------------- --------- Year Ended December 31, 1994.... $180 $337 $ 6 $ 511 Year Ended December 31, 1995.... $511 $243 $107 $ 647 Year Ended December 31, 1996.... $647 $672 $250 $1,069
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION --------- ----------- (1)3.1 Registrant's Amended and Restated Certificate of Incorporation (2)3.2 Registrant's Amended and Restated Bylaws. 4.1 Reference is made to Exhibits 3.1 and 3.2 (2)4.2 Specimen stock certificate (2)4.3 Amended and Restated Investor Rights Agreement, dated September 20, 1994, between the Registrant and certain investors. (2)10.1 Registrant's 1993 Equity Incentive Plan, as amended. (2)10.2 Form of Incentive Stock Option under the Equity Incentive Plan. (2)10.3 Form of Nonstatutory stock Option under the Equity Incentive Plan. (2)10.4 Form of Early Exercise Stock Purchase Agreement. (1)10.5 Registrant's Employee Stock Purchase Plan, as amended. (2)10.6 Registrant's 1995 Non-Employee Directors' Stock Option Plan. (2)10.7 Form of Indemnity Agreement between the Registrant and its officers and directors. (2)10.8 Industrial Real Estate Lease, dated June 9, 1995, between the Registrant and Sunol Center Associates. (2)10.9 Letter Agreement, dated July 27, 1993, between the Registrant and Jeffrey A. Miller. (2)10.10 Business Loan Agreement, dated December 23, 1993, between the Registrant and Silicon Valley Bank. (2)10.11 Promissory Note and Loan modification Agreement, dated October 21, 1994 between the Registrant and Silicon Valley Bank. (2)10.12 Loan Modification Agreement, dated July 27, 1995, between the Registrant and Silicon Valley Bank. Y(2)10.13 International Distributor Agreement, dated December 8, 1993, between the Registrant and Xerox Canada Ltd. Y(2)10.14 Agreement for the Supply of Services, dated April 5, 1995, between the Registrant and Rank Xerox Limited. (2)10.15 Series C Stock Purchase Agreement, dated September 20, 1994, between the Registrant and certain other parties named therein. (2)10.16 Promissory Note and Loan Modification Agreement, dated November 10, 1995, between the Registrant and Silicon Valley Bank. Y(3)10.17 Services Partner Agreement, dated April 1, 1996, between the Registrant and Xerox Corporation. (4)10.18 Registrant's 1996 Non-Officer Equity Incentive Plan. 10.19 Letter of Agreement, dated December 9, 1996 between the Registrant and Mark S. Garrett. 10.20 Lease agreement between Registrant and Britannia Hacienda IV Limited Partnership. 11.1 Statement Regarding computation of Earnings Per Share. (2)22.1 List of Subsidiaries of Registrant. 23.1 Consent of Independent Accountants. 24.1 Power of Attorney. Reference is made to the Signature page. 27.1 Financial Data Schedule.
- -------- Y Confidential treatment requested and granted for portions of this exhibit. (1) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No. 333-01832) and incorporated herein by reference. (2) Filed as an exhibit to the Registrant's Registration Statement on Form S- 1, as amended (No. 33-80047) and incorporated herein by reference. (3) Filed as an exhibit to the Registrant's Form 10-Q for the quarterly period ended March 31, 1996 and incorporated herein by reference. (4) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No. 333-15239) and incorporated herein by reference. EX-10.19 2 LETTER OF AGREEMENT EXHIBIT 10.19 December 9, 1996 Mr. Mark Garrett 19664 Charters Avenue Saratoga, CA 95070 Dear Mark, It is our pleasure to offer you employment with Documentum, Inc. as Vice President and Chief Financial Officer of Documentum, Inc., reporting to me. Your start date will be no later than Monday, December 30, 1997. You will be located in our Pleasanton office. Your compensation program will be as follows: Your base salary will be $14,166.67 per month. In addition, you will be eligible for a $40,000 annual Executive Bonus per the terms and conditions of our board-approved Executive Bonus Plan. As an added incentive you will receive an option to purchase 100,000 shares of Documentum common stock subject to board approval. Your options will vest 18,750 shares at the end of the first full, continuous year of employment, and monthly for the next three years at a rate of 1,562 shares per month. In addition, you will be eligible to vest the remaining 25,000 shares of stock options at the end of your fifth full year of employment, or earlier upon achieving the following company financial milestones: . Vesting of 6,250 shares when the company has achieved its first $25M revenue quarter, assuming you and the company are achieving our overall business objectives at that time. . Vesting of an additional 6,250 shares when the company has achieved its first $50M revenue quarter, assuming you and the company are achieving our overall business objectives at that time. . Vesting of an additional 6,250 shares when the company has achieved its first $75M revenue quarter, assuming you and the company are achieving our overall business objectives at that time. . Vesting of an additional 6,250 shares when the company has achieved its first $100M revenue quarter, assuming you and the company are achieving our overall business objectives at that time. Also, you will receive a $25,000 sign-on bonus. Should you voluntarily leave Documentum during your first year of employment, you will be required to reimburse the company for the sign-on bonus as described in the following schedule: 0 - 90 days = 100% 180 - 270 days = 50% 90 - 180 days = 75% 270 - 365 days = 25% Additionally, should your position be eliminated within the first 12 months of employment due to the acquisition or merger of another company, you will be provided with a severance package, including as a minimum, vesting of your stock options through the initial 12 month period according to the schedule outlined above. You will be eligible to receive standard Documentum benefits as described in our Benefits Handbook which will be provided to you on your date of hire. Documentum may modify, revoke, suspend or terminate any of the terms, plans, policies and/or procedures described in our Benefits Handbook or otherwise communicated to you, in whole or in part, at any time, with or without notice. In order to comply with the Immigration Reform and Control Act of 1986, you must be an American citizen or have the authorization to work in the United States. In either case, verification is required within 3 days of your date of hire. Please bring the appropriate documentation with you on your first day of employment. We hope that this will be the beginning of a long and rewarding employment relationship. However, you are not being promised any particular term of employment. You are an employee at will and as such, you or Documentum may terminate your employment at any time, with or without notice and with or without cause. Neither this letter nor any of Documentum's plans or policies constitute an employment contract or a contractual commitment. Throughout your employment, you will be expected to abide by all of the Company's policies and procedures, including those related to your officer role with the company. By accepting this offer, you represent that your employment with the Company will not violate any agreement or obligations that you may have with any third party, including prior employers. You agree not to make any unauthorized disclosure to the Company of, or use on behalf of the Company, any confidential information belonging to any third party, including your former employers. You represent that you do not possess any property containing a third party's confidential and proprietary information. Of course, during your employment with the Company, you may make use of information generally known and used by persons with training and experience comparable to your own, and information which is common knowledge in the industry or is otherwise legally available in the public domain. In accordance with standard Documentum policy, this offer is contingent upon you: (a) completing and executing the enclosed employee confidential information agreement. (b) and returning this letter to Documentum. This offer is in effect through Monday, December 16, 1996. Please indicate your acceptance in all respects by signing the attached employee confidential information agreement and returning this letter to me on or prior to December 16, 1996. I am looking forward to your accepting this offer and joining us in this exciting business venture. If you have any questions, please call. Sincerely, Jeffrey A. Miller President and CEO By my execution of this letter, I accept the offer of employment (and all of the terms and conditions) above. Please retain one copy for your records and return a fax copy to (510) 463-6850, attention Kristine Blagden, Human Resources Department. Signature: ------------------------------------------- Print Name: ------------------------------------------ Date: ------------------------------------------------ Start Date: ------------------------------------------ Internal e-mail address - ----------------------- What log-in would you like? ( Our standard is first initial, last name -- "psmith" but not to exceed 8 letters) Choice 1 ----------------- Choice 2 ----------------- Actual name on business card - ---------------------------- Please print below how you would like your name to appear on your business card. ----- _________________________ ================================================================================ Please complete this page and fax it to (510) 463-6850, attention Kristine Blagden, Human Resources Department. ================================================================================ EX-10.20 3 LEASE AGREEMENT EXHIBIT 10.20 LEASE BETWEEN BRITANNIA HACIENDA IV LIMITED PARTNERSHIP ("Landlord") and DOCUMENTUM, INC. ("Tenant") TABLE OF CONTENTS
1. PREMISES............................................. 1 1.1. Premises........................................ 1 1.2. Landlord's Reserved Rights...................... 1 2. TERM ................................................ 2 2.1. Term............................................ 2 2.2. Early Possession................................ 3 2.3. Delay in Possession............................. 3 2.4. Construction.................................... 3 2.5. Acknowledgement of Lease Commencement........... 4 2.6. Holding Over.................................... 4 2.7. Option to Extend Term........................... 4 3. RENTAL................................................ 5 3.1. Minimum Rental................................... 5 3.2. Late Charge...................................... 7 4. TAXES................................................. 7 4.1. Personal Property................................ 7 4.2. Real Property.................................... 7 5. OPERATING EXPENSES.................................... 8 5.1. Payment Of Operating Expenses.................... 8 5.2. Definition Of Operating Expenses................. 8 5.3. Determination Of Operating Expenses.............. 9 5.4. Final Accounting For Lease Year.................. 10 5.5. Proration........................................ 11 6. UTILITIES............................................. 11 6.1. Payment.......................................... 11 6.2. Interruption..................................... 11 7. ALTERATIONS........................................... 11 7.1. Right To Make Alterations........................ 11 7.2. Title To Alterations............................. 12 7.3. Tenant Fixtures.................................. 12 7.4. No Liens......................................... 12 8. MAINTENANCE AND REPAIRS............................... 12 8.1. Landlord's Work.................................. 12 8.2. Tenant's Obligation For Maintenance.............. 13 (a) Good Order, Condition And Repair............. 13 (b) Landlord's Remedy............................ 13 (c) Condition Upon Surrender..................... 13 9. USE OF PREMISES....................................... 14 9.1. Permitted Use................................... 14 9.2. No Nuisance..................................... 14 9.3. Compliance With Laws............................ 14 9.4. Liquidation Sales............................... 15 9.5. Environmental Matters........................... 15 10. INSURANCE AND INDEMNITY............................... 16 10.1. Insurance....................................... 16 10.2. Quality Of Policies And Certificates............ 17 10.3. Workers' Compensation........................... 17 10.4. Waiver Of Subrogation........................... 17 10.5. Increase in Premiums............................ 17 10.6. Indemnification................................. 17 10.7. Blanket Policy.................................. 17
1
11. SUBLEASE AND ASSIGNMENT.............................. 18 11.1. Assignnment And Sublease Of Premises........... 18 11.2. Rights Of Landlord............................. 19 12. RIGHT OF ENTRY AND QUIET ENJOYMENT.................... 19 12.1. Right to Entry................................. 19 12.2. Quiet Enjoyment................................ 19 13. CASUALTY AND TAKING................................... 19 13.1. Termination Or Reconstruction.................. 20 13.2. Tenant's Rights................................ 20 13.3. Lease To Remain In Effect...................... 20 13.4. Reservation Of Compensation.................... 21 13.5. Restoration Of Fixtures........................ 21 14. DEFAULT............................................... 21 14.1. Events Of Default.............................. 21 (a) Abandonment................................ 21 (b) Nonpayment................................. 21 (c) Other Obligations.......................... 21 (d) General Assignment......................... 22 (e) Bankruptcy................................. 22 (f) Receivership............................... 22 (g) Attachment................................. 22 (h) Insolvency................................. 22 14.2. Remedies Upon Tenant's Default................. 22 14.3. Remedies Cumulative............................ 23 15. SUBORDINATION, ATTORNMENT AND SALE.................... 23 15.1. Subordination To Mortgage...................... 23 15.2. Sale Of Landlord's Interest.................... 24 15.3. Estoppel Certificates.......................... 24 15.4. Subordination To CC&R's........................ 24 16. SECURITY.............................................. 25 16.1. Deposit........................................ 25 17. MISCELLANEOUS......................................... 25 17.1. Notices........................................ 25 17.2. Successors And Assigns......................... 26 17.3. No Waiver...................................... 26 17.4. Severability................................... 26 17.5. Litigation Between Parties.. .................. 27 17.6 Surrender...................................... 27 17.7. Construction................................... 27 17.8. Entire Agreement............................... 27 17.9. Governing Law.................................. 27 17.10. No Partnership................................. 27 17.11. Financial Information.......................... 27 17.12. Costs.......................................... 28 17.13. Time........................................... 28 17.14. Rules And Regulations.......................... 28 17.15. Brokers........................................ 28 17.16. Memorandum Of Lease............................ 28 17.17. Corporate Authority............................ 28 17.18. Landlord Defaults.............................. 28
EXHIBITS - -------- A Location Of Premises B Real Property Description C Construction D Acknowledgement Of Lease Commencement 2 LEASE THIS LEASE is made and entered into as of the 6th day of December, 1996, by and between BRITANNIA HACIENDA IV LIMITED PARTNERSHIP, a Delaware limited partnership, hereinafter called "Landlord", and DOCUMENTUM, INC., a Delaware corporation, hereinafter called "Tenant." THE PARTIES AGREE AS FOLLOWS: 1. PREMISES -------- 1.1 Premises. Landlord leases to Tenant and Tenant hires and leases from -------- Landlord, on the terms, covenants and conditions hereinafter set forth, the premises (the "Premises") designated in Exhibit A attached hereto and --------- incorporated herein by this reference, consisting of approximately 27,738 square feet of space located within Building F (the "Building") in the BRITANNIA BUSINESS CENTER AT HACIENDA, PHASES III AND IV (the "Center") in the CITY OF PLEASANTON, County of Alameda, State of California, commonly known as 5700 Stoneridge Drive, Suite __, (to be determined) Pleasanton, CA 94588 and located on the real property (the "Property" described in Exhibit B attached --------- hereto and incorporated herein by this reference, together with the nonexclusive right to use any common areas improved and made available from time to time for use by tenants of completed buildings in the Center, including (but not limited to) any such common areas designated from time to time in any Declaration of Covenants, Conditions and Restrictions or similar document affecting the Center. 1.2. Landlord's Reserved Rights. Landlord reserves the right from time -------------------------- to time to (i) install, use, maintain, repair and replace pipes, ducts, conduits, wires and appurtenant meters and equipment for service to other parts of the Building above the ceiling surfaces, below the floor surfaces, within the walls or leading through the Premises in locations which will not materially interfere with Tenant's use thereof, (ii) relocate any pipes, ducts, conduits, wires and appurtenant meters and equipment included in the Premises which are so located or located elsewhere outside the Premises, (iii) make alterations or additions to the Building, (iv) construct, alter or add to other buildings or improvements on the Property, (v) build adjoining to the Property, and (vi) lease any part of the Property for the construction of improvements or buildings. Landlord may modify or enlarge the common area, alter or relocate accesses to the Premises, or alter or relocate any common facility. Landlord shall not exercise rights reserved to it pursuant to this Section 1.2 in such a manner as to materially impair Tenant's ability to conduct its activities in the normal manner; provided, however, that the foregoing shall not limit or restrict Landlord's right to undertake reasonable construction activity and Tenant's use of the Premises shall be subject to reasonable temporary disruption incidental to such activity diligently prosecuted. Nothwithstanding anything herein to the contrary except with Tenant's prior written consent (which shall not be unreasonably withheld or delayed), Landlord shall not exercise its rights under this Section 1.2 in a manner which will result in a material change in the original site plan for the Property, materially and adversely affect Tenant's use of the Premises, reduce 1 the number of parking spaces available to Tenant, or materially decrease the parking ratio for the Center or the proximity of parking to the Premises. 2. TERM ---- 2.1. Term. (a) The term of this occur of (i) the date which is five (5) ---- days after the date Landlord notifies Tenant that Landlord's work pursuant to Section 2.4 and Exhibit C is substantially complete (but in no event before --------- March 1, 1997), or (ii) the date Tenant takes occupancy of the Premises (except as otherwise provided in Section 2.2), or (iii) March 1, 1997 (subject to adjustment as hereinafter set forth), the earliest of such dates being herein called the "Commencement Date," and shall end on the day immediately preceding the date 120 Months thereafter, unless sooner terminated or extended (if applicable) as hereinafter provided. For purposes of clause (i) of the first sentence of this Section 2.1 (a), Landlord's work shall be deemed to be "substantially complete" when all of the following have occurred: (A) all improvements to be constructed by Landlord have been completed, except for "punch list" items which do not materially interfere with Tenant's ability to use the Premises for their intended purpose; (B) the City of Pleasanton has issued a certificate of occupancy for the Premises; (C) all utilities reasonably necessary for Tenant's use of the Premises for their intended purpose are connected and available for use at the Premises; and (D) all improvements to be constructed by Landlord as part of the common areas contemplated for, and reasonably necessary for the use and enjoyment of, the Property have been completed, except for "punch list" items which do not materially interfere with Tenant's ability to use the Premises for their intended purpose, available for use by Tenant. For purposes of clause (iii) of the first sentence of this Section 2.1 (a), the specified date of March 1, 1997 shall be adjusted as follows: The parties intend that Landlord shall have three (3) months to substantially complete Landlord's work, beginning on the date on which Tenant has delivered to Landlord, and Landlord and Tenant have mutually approved, (x) a complete and final space plan for the interior improvements in the Premises and (y) complete and final electrical, mechanical and other necessary specifications for such improvements and for Tenant's proposed use of the Premises (the "Plan Completion Date"). To the extent the time required to reach substantial completion of Landlord's work exceeds three (3) months after the Plan Completion Date, the March 1, 1997 date in clause (iii) of the first sentence of this Section 2.1 (a) shall be extended by a number of days equal to the number of days of such excess time; provided, however, that to the extent substantial -------- completion of Landlord's work is delayed by (xx) any change requested by Tenant in the final space plan and/or final specifications following the Plan Completion Date and/or (yy) any negligence or willful misconduct of Tenant or its agents, employees or contractors, the three (3) month period allowed for substantial completion of Landlord's work shall be extended by a number of days equal to the number of days of such delay (thus resulting in a reduction, by a like number of days, of the extension of the March 1, 1997 date in clause (iii) of the first sentence of this Section 2.1 (a)). (b) Notwithstanding the provisions of Section 2.1 (a), Tenant shall have a one-time right to terminate this Lease as of the fifth (5th) anniversary of the Commencement Date, conditional only upon (i) Tenant giving written notice of its exercise of such right to Landlord no later than the fourth (4th) anniversary of the Commencement Date and (ii) Tenant paying to Landlord in cash, on or before the fifth (5th) anniversary of the Commencement Date, a termination payment in an amount equal to the sum of (A) the unamortized portion of Landlord's total direct costs (as described in Section 3.1 (c) below) of construction of tenant improvements in the Premises under Section 2.4 and Exhibit C, assuming amortization on a "level payment" basis over the ten (10) year base term of this 2 Lease with interest imputed at the rate of ten percent (10%) per annum, plus (B) an amount equal to three (3) months' minimum rent at the rate applicable in the sixtieth (60th) month of the term of this Lease under Sections 3.1 (a) and (c) hereof; provided, however, that if, in connection with any such exercise of -------- Tenant's early termination right and prior to the fifth (5th) anniversary of the Commencement Date, Landlord (or any affiliate of Landlord) and Tenant enter into a mutually acceptable "new lease" for a larger space in the Britannia Business Center at Hacienda (whether on Willow Road, Stoneridge Drive or Hopyard Road) or in any other Britannia development owned by Landlord or by an affiliate of Landlord in the San Francisco Bay Area, then Tenant shall be released from any obligation to make the termination payment described in clause (ii) of this sentence. 2.2. Early Possession. Tenant shall have the right to occupy or use the ---------------- Premises for the purpose of installing fixtures, equipment, furniture and furnishings and other similar work preparatory to the commencement of business in the Premises, prior to the Commencement Date set forth in Section 2.1, which occupancy or use shall be subject to and upon all of the terms and conditions of this Lease, excluding the obligation to pay rent and other charges; provided, however, that such early possession shall not advance or otherwise affect the termination date set forth in Section 2.1; and provided further, that Tenant shall not interfere with or delay Landlord's contractors by such early possession and shall indemnify, defend and hold harmless Landlord and its agents and employees from and against any and all claims, demands, liabilities, actions, losses, costs and expenses, including (but not limited to) reasonable attorneys' fees, arising out of or in connection with Tenant's early entry upon the Premises hereunder. 2.3. Delay In Possession. Landlord agrees to use its best reasonable ------------------- efforts to complete prior to the Commencement Date the work described in Section 2.4 and Exhibit C; provided, however, Landlord shall not be liable for any --------- damages caused by any delay in the completion of such work, nor shall any such delay affect the validity of this Lease or the obligations of Tenant hereunder, except as otherwise expressly provided in Section 2.1 (a) hereof with respect to the determination of the Commencement Date. 2.4. Construction. The obligation of Landlord to perform work to improve ------------ the Premises for occupancy is set forth in Exhibit C attached hereto and --------- incorporated herein by this reference. Except as set forth in this Section 2.4 and in Exhibit C, Landlord shall have no responsibilities or obligations with --------- respect to preparation of the Premises for Tenant's occupancy. Acceptance by Tenant of possession of the Premises after performance of such work, if any, by Landlord shall constitute acceptance by Tenant of such work in its then completed condition and Landlord shall have no further responsibility of any kind or character for improvement of the Premises or in connection with such work; provided, however, that within thirty (30) days after the Commencement -------- Date, Tenant may furnish to Landlord a "punch list" identifying any items or matters in the Premises which are not constructed in accordance with the plans and specifications approved under Exhibit C hereto and Landlord shall promptly --------- and diligently correct all such matters at its sole cost and expense; and provided further, however, that notwithstanding anything to the contrary - ---------------- contained herein, Landlord warrants to Tenant, effective as of the Commencement Date, that (i) the Building, the interior improvements in the Premises and all common areas necessary to serve the Building are substantially completed and are free from material defects in design and construction, (ii) the electrical, mechanical, plumbing, lighting, air conditioning and heating systems, and the loading doors, if any, on the Building are in good operating condition (to the extent necessary to serve the Premises) and are free of material defects in design, equipment and/or 3 installation, and (iii) the interior improvements in the Premises have been constructed in compliance in all material respects with the plans and specifications developed and approved pursuant to Exhibit C. If it is --------- determined that the warranty set forth in the preceding sentence has been violated in any respect, then it shall be the responsibility of Landlord, after receipt of written notice from Tenant setting forth with specificity the nature of the violation, to promptly, at Landlord's sole cost, correct the condition(s) constituting such violation. Tenant's failure to give such written notice to Landlord within one (1) year after the Commencement Date shall give rise to a conclusive presumption that Landlord has complied with all Landlord's obligations under this Section 2.4 and Exhibit C except with respect to latent --------- defects. TENANT ACKNOWLEDGES THAT THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PHYSICAL CONDITION OF THE BUILDING AND IMPROVEMENTS TO BE CONSTRUCTED BY LANDLORD AND THAT LANDLORD MAKES NO OTHER WARRANTIES EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE. 2.5. Acknowledgement Of Lease Commencement. Upon commencement of the ------------------------------------- term of this Lease, Landlord and Tenant shall execute a written acknowledgement of the Commencement Date, date of termination and related matters, substantially in the form attached hereto as Exhibit D (with appropriate insertions), which --------- acknowledgement shall be deemed to be incorporated herein by this reference. 2.6. Holding Over. If Tenant holds possession of the Premises after the ------------ term of this Lease, with Landlord's written consent, then except as otherwise specified in such consent, Tenant shall become a tenant from month to month at 125% of the rental and otherwise upon the terms herein specified for the period immediately prior to such holding over and shall continue in such status until the tenancy is terminated by either party upon not less than thirty (30) days prior written notice. If Tenant holds possession of the Premises after the term of this Lease without Landlord's written consent, then Landlord in its sole discretion may elect (by written notice to Tenant) to have Tenant become a tenant either from month to month or at will, at 150% of the rental (prorated ---- on a daily basis for an at-will tenancy, if applicable) and otherwise upon the terms herein specified for the period immediately prior to such holding over, or may elect to pursue any and all legal remedies available to Landlord under applicable law with respect to such unconsented holding over by Tenant. Tenant shall indemnify and hold Landlord harmless from any loss, damage, claim, liability, cost or expense (including reasonable attorney's fees) resulting from any delay by Tenant in surrendering the Premises (except with Landlord's prior written consent), including but not limited to any claims made by a succeeding tenant by reason of such delay. Acceptance of rent by Landlord following expiration or termination of this Lease shall not constitute a renewal of this Lease. 2.7. Option To Extend Term. Tenant shall have the option to extend the --------------------- term of this Lease, at the minimum rental set forth in Section 3.1(d) and otherwise upon all the terms and provisions set forth herein with respect to the initial term of this Lease, for one additional period of five years, commencing upon expiration of the initial term hereof. Exercise of such option with respect to such extended term shall be by written notice to Landlord at least six (6) months and not more than eight (8) months prior to the expiration of the initial term hereof. If Tenant is in default of any material obligation hereunder on the date of such notice or on the date any extended term is to commence, which default is continuing beyond notice and the expiration of any applicable cure period, then the option shall be of no force or effect, the extended term shall not commence and this Lease shall expire at the end of the initial term hereof (or at such earlier time as Landlord may elect pursuant to the default provisions of this Lease). If 4 Tenant properly exercises its extension option under this Section, then all references in this Lease (other than in this Section 2.7) to the "term" of this Lease shall be construed to include the extension term thus elected by Tenant. Except as expressly set forth in this Section 2.7, Tenant shall have no right to extend the term of this Lease beyond its prescribed term. 3. RENTAL ------ 3.1. Minimum Rental. -------------- (a) Tenant shall pay to Landlord as minimum rental for the Premises, in advance, without deduction, offset, notice or demand, except as otherwise provided herein, on or before the Commencement Date and on or before the first day of each subsequent calendar month of the term of this Lease, the following amounts per month: Months Minimum Rental ------ -------------- 0 - 4 $22,623.30 5 - 120 $29,124.90 In addition to the above, effective as of each anniversary of the Commencement Date during the term of this Lease, minimum rental as per Section 3.1 (a) (and Section 3.1 (c), if applicable) will be increased by a factor of four per cent (4%) per annum over the rental rates in effect immediately prior to such anniversary. If the obligation to pay minimum rental hereunder commences on other than the first day of a calendar month or if the term of this Lease terminates on other than the last day of a calendar month, the minimum rental for such first or last month of the term of this Lease, as the case may be, shall be prorated based on the number of days the term of this Lease is in effect during such month. If an increase in minimum rental becomes effective on a day other than the first day of a calendar month, the minimum rental for that month shall be the sum of the two applicable rates, each prorated for the portion of the month during which such rate is in effect. (b) The minimum rental amounts specified in this Section 3.1 are based upon an area of 27,738 square feet for the Premises. If the actual area of the Premises, when completed, is greater or less than 27,738 square feet, the minimum rental specified in this Section 3.1 shall be adjusted proportionately to the change in the area of the Premises, as determined in good faith by Landlord's architect on the basis of measurement from the exterior faces of exterior walls, from the centerline of interior demising walls, and from the drip line of any exterior overhangs. (c) The minimum rental amounts specified in this Section 3.1 are based upon an estimated tenant improvement allowance of Twenty Five Dollars ($25.00) per square foot for the work to be performed by Landlord on the Premises under Section 2.4 and Exhibit C. If Landlord's total direct costs of such work --------- (including, but not limited to, construction costs, permit fees and charges, architects', engineers' and other consulting and professional fees and all other 5 related costs incurred in connection with the design and construction of the work) exceed the product of Twenty Five Dollars ($25.00) times the area of the Premises (in square feet) as determined in good faith by Landlord's architect on the basis of measurement described in Section 3.1 (b), then Tenant's minimum monthly rental hereunder, beginning on the Commencement Date and continuing throughout the term hereof, shall be increased by an amount equal to one percent (1%) of the amount by which such total costs exceed the product of Twenty Five Dollars ($25.00) times such area. Notwithstanding the above, Landlord is not committed to spend more than Thirty Dollars ($30.00) per sq. ft. on these improvements. (d) If Tenant properly exercises its right to extend the term of this Lease pursuant to Section 2.7 hereof, the minimum rental during the first extended term shall be equal to the fair market rental value of the Premises (as theretofore improved under Section 2.4 and Exhibit C) (including any cost of --------- living adjustments or other rental increase provisions then customary in the relevant market for comparable commercial leases, determined as of the commencement of such extended term in accordance with this paragraph). Upon Landlord's receipt of a proper notice of Tenant's exercise of its option to extend the term of this Lease, the parties shall have sixty (60) days in which to agree on the fair market rental (including any applicable rental increase provisions) for the Premises (as theretofore improved under Section 2.4 and Exhibit C but specifically excluding any improvements which were installed by - --------- Tenant at its own cost) at the commencement of the extended term for the uses permitted hereunder. If the parties agree on such fair market rental and rental increase provisions (if any), they shall execute an amendment to this Lease stating the amount of the applicable minimum monthly rental and any applicable rental increase provisions. If the parties are unable to agree on such rental (including any applicable rental increase provisions) within such sixty (60) day period, then within fifteen (15) days after the expiration of such period each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years experience appraising similar commercial properties in the city in which the Property is located or neighboring areas to appraise and set the fair market rental and any applicable rental increase provisions for the Premises at the commencement of the extended term. If either party fails to appoint an appraiser within the allotted time, and such failure continues for five (5) business days after written notice from the other party that the party to which notice is given has failed to make a timely appointment of an appraiser, then the single appraiser appointed by the other party shall be the sole appraiser. If an appraiser is appointed by each party and the two appraisers so appointed are unable to agree upon a fair market rental (and any appropriate rental increase provisions) within thirty (30) days after the appointment of the second, they shall appoint a third qualified appraiser within ten (10) days after expiration of such thirty (30) day period; if they are unable to agree upon a third appraiser, either party may, upon not less than five (5) days notice to the other party, apply to the Presiding Judge of the Superior Court for the county in which the Property is located for the appointment of a third qualified appraiser. Each party shall bear its own legal fees in connection with appointment of the third appraiser and shall bear one- half of any other costs of appointment of the third appraiser and of such third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted for either party in any capacity. Within thirty (30) days after the appointment of the third appraiser, a majority of the three appraisers shall set the fair market rental and any applicable rental increase provisions for the extended term and shall so notify the parties. If a majority are unable to agree within the allotted time, (i) the three appraised fair market rentals shall be added together and divided by three and the resulting quotient shall be the fair market rental for the extended term, 6 and (ii) the mathematical average (or the nearest reasonable approximation thereto) of the two rental increase provisions that are most closely comparable, which determinations shall be binding on the parties and shall be enforceable in any further proceedings relating to this Lease. 3.2. Late Charge. If Tenant fails to pay when due rental or other ----------- amounts due Landlord hereunder, such unpaid amounts shall bear interest for the benefit of Landlord at a rate equal to the lesser of eight percent (8%) per annum or the maximum rate permitted by law, from the date due to the date of payment. In addition to such interest, Tenant shall pay to Landlord a late charge in an amount equal to five percent (5%) of any installment of minimum rental and any other amounts due Landlord if not paid in full on or before the fifth (5th) day following notice from Landlord that such rental or other amount is due; provided however, that if any payment of rent or other amounts by -------- Tenant is more than five (5) days late and Landlord gave written notice of delinquency to Tenant prior to such payment, then for the next twelve (12) calendar months after such written notice was given, Tenant shall be liable for late charges on any further payment of rental or other amounts that is not paid on or before the fifth (5th) day after such rental or other amount is due, without any requirement of prior notice from Landlord to Tenant that such rental - ------- or other amount is due. Tenant acknowledges that late payment by Tenant to Landlord of rental or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, including, without limitation, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any loan relating to the Property. Tenant further acknowledges that is extremely difficult and impractical to fix the exact amount of such costs and that the late charge set forth in this Section 3.2 represents a fair and reasonable estimate thereof. Acceptance of any late charge by Landlord shall not constitute a waiver of Tenant's default with respect to overdue rental or other amounts, nor shall such acceptance prevent Landlord from exercising any other rights and remedies available to it. Acceptance of rent or other payments by Landlord shall not constitute a waiver of late charges or interest accrued with respect to such rent or other payments or any prior installments thereof, nor of any other defaults by Tenant, whether monetary or nonmonetary in nature, remaining uncured at the time of such acceptance of rent or other payments. 4. TAXES ----- 4.1. Personal Property. Tenant shall be responsible for and shall pay ----------------- prior to delinquency all taxes and assessments levied against or by reason of all alterations and additions and all other items installed or paid for by Tenant under this Lease, and the personal property, trade fixtures and all of the property placed by Tenant in or about the Premises. Upon request by Landlord, Tenant shall furnish at any time during the term of this Lease any of said alterations, additions or personal property, whether or not belonging to Tenant, shall be taxed or assessed as part of the Property, then such tax or assessment shall be paid by Tenant to Landlord immediately upon presentation by Landlord of copies of the tax bills in which such taxes and assessments are included and shall, for the purposes of this Lease, be deemed to be personal property taxes or assessments under this Section 4.1. 4.2. Real Property. To the extent the real property taxes and ------------- assessments on the Premises are assessed separately from the remainder of the Property, Tenant shall be responsible for and shall pay prior to delinquency all such taxes and assessments levied against the Premises. Upon request by 7 Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment thereof. To the extent the Premises are taxed or assessed as part of the Property, such real property taxes and assessments shall constitute Operating Expenses (as that term is defined in Section 5.2 of this Lease) and shall be paid in accordance with the provisions of Article 5 of this Lease. 5. OPERATING EXPENSES ------------------ 5.1. Payment Of Operating Expenses ----------------------------- (a) Tenant shall pay to Landlord, at the time and in the manner hereinafter set forth, as additional rental, an amount equal to forty three point one nine percent (43.19%) (Tenant's Operating Cost Share) of the Operating Expenses defined in Section 5.2; provided however, that during the -------- first four (4) months after the Commencement Date, Tenant's Operating Cost Share shall be thirty-three point five percent (33.5%). (b) Tenant's Operating Cost Share as specified in paragraph (a) of this Section is based upon an area of 27,738 square feet for the Premises and an aggregate area of 64,227 square feet for the buildings owned by Landlord on the Property. If the actual area of the Premises (when completed) or of the buildings owned by Landlord, as determined in good faith by Landlord's architect on the basis of measurement described in Section 3.1 (b), differs from the assumed numbers set forth above, Tenant's Operating Cost Share shall be adjusted to reflect the actual areas so determined. (c) If Landlord constructs additional buildings on the Property (or on any adjacent property owned by Landlord and operated, for common area purposes, on an integrated basis with the Property) from time to time, Tenant's Operating Cost share shall be adjusted to be equal to the percentage determined by dividing the gross square footage of the Premises (including any additional space occupied by Tenant from time to time) by the gross square footage of all buildings located on portions of the Property owned by Landlord (or any applicable adjacent property owned by Landlord as described above). In determining said percentage, a building shall be taken into account from and after the date on which a tenant first enters into possession of the building or a portion thereof. 5.2. Definition Of Operating Expenses. Subject to the exclusions and -------------------------------- provisions hereinafter contained, the term "Operating Expenses" shall mean the total costs and expenses incurred by or allocable to Landlord for management, operation and maintenance of the Building and the Property (and any applicable adjacent property owned by Landlord as described above), including, without limitation, (i) insurance, property management, building maintenance, landscaping and common area maintenance; (ii) all utilities and services; (iii) real and personal property taxes and assessments or substitutes therefor and new taxes on landlords in addition to taxes now in effect, but excluding (aa) fees, exactions and taxes imposed as a condition to the issuance of any entitlements or building permits related to the Property, and (bb) gift taxes, inheritance taxes, transfer taxes and net income taxes of Landlord; (iv) supplies, equipment, utilities and tools used in management, operation and maintenance: (v) capital improvements to the Property or the buildings and other improvements thereon, amortized over the reasonable useful life of the applicable improvement, (aa) which reduce or will cause future reduction of other items of Operating Expenses for which Tenant is otherwise required to contribute (provided that the amortizable costs for this category of -------- improvement shall be limited to the amount 8 of the reasonably estimated savings to be produced thereby), or (bb) which are required by any law, ordinance, regulation or order of any governmental authority that becomes applicable to the Property after the Commencement Date, or (cc) of which Tenant has use or which benefit Tenant (provided that amortizable improvements under this category shall be limited to those which are approved in writing by Tenant or which are merely a reasonably necessary repair or replacement of an existing improvement with one of like kind and quality, in which event no such approval by Tenant shall be required); and (vi) any other costs allocable to or paid by Landlord, as owner of the Building, pursuant to the terms of any declarations of covenants, conditions and restrictions affecting the Property (or any applicable adjacent property owned by Landlord as described above). Capital improvements shall not include any costs attributable to increasing the size of or otherwise expanding the Building or the cost of the work for which Landlord is required to pay under Section 2.4. The distinction between items of ordinary operating maintenance and repair and items of a capital nature shall be made in accordance with generally accepted accounting principles applied on a consistent basis. Notwithstanding any other provisions of this Section 5.2, Operating Expenses shall not include any of the following: (A) property management fees in excess of three percent of gross rents from the Property; (B) the cost to repair damage caused by (i) fire, earthquake or other peril, or (ii) the negligence of Landlord, its agents, employees or contractors, or the other tenants of the Property or their respective agents, employees, contractors or invitees; (C) costs associated with procurement of new tenants, preparation of their spaces and enforcement of their leases, including (but not limited to) brokerage commissions, tenant improvement costs and attorneys' fees; (D) the cost of maintenance and repair of structural elements of the buildings located on the Property from time to time; (E) the cost to repair any defects in design, construction or equipment for any building located on the Property from time to time, to the extent resulting from or attributable to work undertaken by Landlord or by its contractors on Landlord's behalf (including, but not limited to, costs to correct any building code violations caused by or attributable to Landlord's work); (F) the cost to investigate and/or remediate any contamination by hazardous or toxic substances or wastes, except to the extent caused by Tenant or its agents, employees, contractors or invitees; or (G) the cost to correct any violation of any declaration of covenants, conditions and restrictions applicable to the Property, except to the extent such violation is caused by Tenant or its agents, employees, contractors or invitees. 5.3 Determination Of Operating Expenses. On or before the Commencement ----------------------------------- Date and during the last month of each calendar year of the term of this Lease ("Lease Year"), or as soon thereafter as practical, Landlord shall provide Tenant notice of Landlord's estimate of the Operating Expenses for the ensuing Lease Year or applicable portion thereof. On or before the first day of each month during the ensuing Lease Year or applicable portion thereof, beginning on the Commencement Date, Tenant shall pay to Landlord Tenant's 9 Operating Cost Share of the portion of such estimated Operating Expenses allocable (on a prorate basis) to such month; provided, however, that if such notice is not given in the last month of a Lease year, Tenant shall continue to pay on the basis of the prior year's estimate, if any, until the month after such notice is given. If at any time or times it appears to Landlord that the actual Operating Expenses will vary from Landlord's estimate by more than five percent (5%), Landlord may, by notice to Tenant, revise its estimate for such year and subsequent payments by Tenant for such year shall be based upon such revised estimate. 5.4 Final Accounting For Lease Year. Within ninety (90) days after the ------------------------------- close of each Lease Year, or as soon after such 90-day period as practicable, Landlord shall deliver to Tenant a statement of Tenant's Operating Cost Share of the Operating Expenses for such Lease Year prepared by Landlord from Landlord's books and records, which statement shall be final and binding on Landlord and Tenant except as otherwise specifically provided herein. Failure or inability of Landlord to deliver the annual statement within such ninety (90) day period shall not impair or constitute a waiver of Tenant's obligation to pay Operating Expenses, or cause Landlord to incur any liability for damages. Notwithstanding any other provisions of this Section 5.4, within sixty (60) days after receipt of any statement from Landlord setting forth actual Operating Expenses and Tenant's Operating Cost Share for any period (a "Statement"), Tenant shall have the right to audit or review, directly or through its designated representative, Landlord's books and records relating to Operating Expenses for the period covered by the Statement, provided that such audit shall be exercisable only during normal business hours, on not less than ten (10) days prior written notice to Landlord, and at Tenant's sole cost and expense, except as hereinafter provided. To the extent that Tenant, on the basis of such audit, disputes any item in the applicable Statement or in the calculation of Tenant's obligations thereunder, Tenant shall give Landlord written notice of the disputed items, in reasonable detail and with reasonable supporting information, within thirty (30) days after the expiration of Tenant's 60-day audit period, and Landlord and Tenant shall negotiate diligently and in good faith to try to resolve the dispute. If Landlord and Tenant are unable to resolve the dispute within thirty (30) days after Landlord's receipt of Tenant's written notice specifying the disputed items, then either party may elect, by written notice to the other, to have the dispute resolved through an audit by an independent Certified Public Accountant who has not previously rendered professional services to either party. Such review and determination by an independent CPA shall be based on generally accepted accounting principles and tax accounting principles, consistently applied. The independent CPA shall be selected by mutual agreement of Landlord and Tenant; if they are unable to agree on such selection within twenty (20) days after a party's notice of desire to submit the dispute to a CPA review, then the independent CPA shall be appointed by the Presiding Judge of the Alameda County Superior Court upon application by either party (with notice to the other party). If it is determined, on the basis of Landlord's Statement or by mutual agreement of Landlord and Tenant or by independent CPA review, that Tenant owes an amount that is more or less than the estimated payments previously made by Tenant for the applicable period, then Tenant or Landlord, as the case may be, shall pay the deficiency or overpayment to the other party within thirty (30) days after final determination of such underpayment or overpayment. The expenses of the independent CPA, if any, shall be borne by Tenant unless the CPA's determination is that the Statement reflects an overstatement of five percent (5%) or more in Tenant's obligation for Operating Expenses for the applicable period, in which event the expenses of the independent CPA shall be borne by Landlord. Each party agrees to maintain the confidentiality of the findings of any audit in accordance with the provisions of this Section 5.4. 10 5.5 Proration. If the Commencement Date falls on a day other than the --------- first day of a Lease Year or if this Lease terminates on a day other than the last day of Lease Year, the amount of Tenant's Operating Cost Share payable by Tenant applicable to such first and last partial Lease Year shall be prorated on the basis which the numbers of days during such Lease Year in which this Lease is in effect bears to 365. The termination of this Lease shall not affect the obligations of Landlord and Tenant pursuant to Section 5.4 to be performed after such termination. 6. UTILITIES --------- 6.1 Payment. Commencing with the Commencement Date and thereafter ------- throughout the term of this Lease, Tenant shall pay, before delinquency, all charges for water, gas, heat, light, electricity, power, sewer, telephone, alarm system, janitorial and other services or utilities applied to or consumed in or upon the Premises, including ant taxes on such services and utilities. It is the intention of the parties that all such services shall be separately metered to the Premises. In the event that any of such services supplied to the Premises are not separately metered, then the amount thereof shall be an item of Operating Expenses and shall be paid as provided in Article 5. 6.2 Interruption. There shall be no abatement of rent or other charges ------------ required to be paid hereunder and Landlord shall not be liable in damages or otherwise for interruption of failure of any service or utility furnished to or used in the Premises because of accident, making of repairs, alterations or improvements, severe weather, difficulty or inability in obtaining services or supplies, labor difficulties or any other cause. Notwithstanding the foregoing provisions of this Section 6.2, however, in the event of any interruption or failure of any services or utility to the Premises which is caused in whole or in part by the negligence or willful misconduct of Landlord or its agents or employees, which continues for more than 48 hours and which materially impairs Tenant's ability to use the Premises for the intended purpose hereunder, then Tenant's rental obligations under this Lease shall be abated in proportion to the degree of impairment of Tenant's use of the Premises, and such abatement shall be retroactive to the commencement of the interruption or failure and shall continue until Tenant's use of the premises is no longer materially impaired thereby. 7. ALTERATIONS ----------- 7.1. Right to Make Alterations. Tenant shall make no alterations, ------------------------- additions or improvements to the Premises, other than interior non-structural alterations not affecting any Building systems and costing less than Twenty-Five Thousand Dollars ($25,000.00) in each instances, without the prior written consent of Landlord. Tenant shall give prior written notice to Landlord of any alterations, additions or improvements that do not require Landlord's prior written consent under the preceding sentence, including copies of any plans and specifications relating to such proposed alterations, additions or improvements. All such alterations, additions or improvements shall be completed with due diligence in a first-class workmanlike manner and in compliance with plans and specifications approved in writing by Landlord (as to alterations, additions or improvements for which Landlord's prior written consent is required) and all applicable laws, ordinances, rules and regulations. If Tenant wishes to know in advance whether it will be required to remove any specific alteration, addition, or 11 improvement upon termination of this Lease, as contemplated in Section 7.2 hereof, then Tenant shall make an express request for such a determination by Landlord at the time Tenant requests Landlord's approval of, or gives Landlord prior notice of, the applicable alteration, addition or improvement; if Tenant makes such a written request and Landlord does not, in response thereto, advise Tenant that Landlord intends to require (or at least to reserve the right to require) removal of the applicable alteration, addition or improvement upon termination of this Lease, then Landlord shall not be entitled to later request such removal, notwithstanding any contrary provisions in Section 7.2 hereof. 7.2. Title To Alterations. All alterations, additions and improvements -------------------- installed pursuant to this Lease shall be part of the Building and the property of Landlord, unless Landlord elects to require Tenant to remove the same upon the termination of this Lease; provided, however, that the foregoing shall not apply to Tenant's movable furniture and trade fixtures not affixed to the Property. 7.3. Tenant Fixtures. Notwithstanding the foregoing, Tenant may install, --------------- remove and reinstall trade fixtures without Landlord's prior written consent, except that any fixtures which are affixed to the Premises or which affect the exterior or structural portions of the Building shall require Landlord's written approval (which approval shall not be unreasonably withheld). The foregoing shall apply to Tenant's signs, logos and insignia, all of which Tenant shall have the right to place and remove and replace solely with Landlord's prior written consent as to location, size and composition (which consent shall not be unreasonably withheld). Tenant shall immediately repair any damage caused by installation and removal of fixtures under this Section 7.3. 7.4. No Liens. Tenant shall at all times keep the Premises free from all -------- liens and claims of any contractors, subcontractors, materialmen, suppliers or any other parties employed either directly or indirectly by Tenant in construction work on the Premises. Tenant may contest any claim of lien, but only if, prior to such contest, Tenant either (i) posts security in the amount of the claim, plus estimated costs and interest, or (ii) records a bond of a responsible corporate surety in such amount as may be required to release the lien from the Premises. Tenant shall indemnify, defend and hold Landlord harmless against liability, loss, damage, cost and all other expenses, including, without limitation, reasonable attorneys' fees, arising out of claims of any lien for work performed or materials or supplies furnished at the request of Tenant or persons claiming under Tenant. 8. MAINTENANCE AND REPAIRS ----------------------- 12 8.1. Landlord's Work. --------------- (a) Landlord shall repair and maintain or cause to be repaired and maintained those portions of the Building outside of the Premises, the common areas of the Property, and the roof, exterior walls and other structural portions of the Building. The cost of all work performed by Landlord under this Section 8.1 (a) shall be an Operating Expense hereunder, except as otherwise expressly provided in Section 5.2 hereof and/or to the extent such work (i) is required due to the negligence of Landlord or any other tenant of the Building, (ii) is a service to a specific tenant or tenants, other than Tenant, for which Landlord has received or has the right to receive full reimbursement, (iii) is a capital expense not includible as an Operating Expense under Section 5.2 hereof, or (iv) is required due to the negligence or willful misconduct of Tenant or its agents, employees or invitees (in which event Tenant shall bear the full cost of such work pursuant to the indemnification provided in Section 10.6 hereof). Tenant 13 knowingly and voluntarily waives the right to make repairs at Landlord's expense, or to offset the cost thereof against rent, under any law, statute, regulation or ordinance now or hereafter in effect. (b) Notwithstanding any contrary provisions of Section 8.1 (a) hereof or of any other provision of this Lease, to the extent a substantially complete replacement (as opposed to ordinary or routine maintenance or repair) is required from time to time with respect to the roof or major building systems (HVAC, plumbing, electrical and mechanical systems) of the Building, Landlord shall perform such replacement when and as reasonably required. To the extent such replacement is required as a result of defective design, construction, installation or materials, or as a result of the negligence or willful misconduct of Landlord or its agents or employees, or as a result of the negligence or willful misconduct of any other tenant of the Property other than Tenant or of any such other tenant's agents, employees or invitees, such replacement shall be at Landlord's sole cost and expense, subject to any rights of reimbursement Landlord may have against contractors, suppliers, other tenants or other third parties. To the extent such replacement is required as a result of the negligence or willful misconduct or Tenant or its agents, employees or invitees, Tenant shall bear the full cost of such work pursuant to the indemnification provided in Section 10.6, but subject to the waiver of liability set forth in Section 10.4 hereof. To the extent such replacement is required as a result of casualty or condemnation, the provisions of Article 13 hereof shall be controlling. To the extent such replacement is required due to ordinary wear and tear or obsolescence, the cost of such replacement shall be amortized by Landlord over the useful life of the replacement improvement or system and Tenant shall reimburse to Landlord, as additional rent and not as an Operating Expense, on a monthly basis or at other regular intervals as reasonably requested by Landlord, Tenant's pro rata share (calculated on the same basis as Tenant's Operating Cost Share) of the amortized cost of such replacement allocable to the period of time from the date of replacement until the expiration of the term of this Lease. 8.2. Tenant's Obligation for Maintenance. ----------------------------------- (a) Good Order. Condition and Repair. Subject to the provisions of -------------------------------- Section 2.4 hereof, by accepting possession of the Premises, Tenant acknowledges that the Premises are in good and sanitary order, condition and repair. Except as provided in Section 8.1 hereof, Tenant at its sole cost and expense shall keep and maintain in good and sanitary order, condition and repair the Premises and every part thereof, wherever located, including but not limited to the signs, interior, the face of the ceiling over Tenant's floor space, HVAC equipment and related mechanical systems serving the Premises (for which equipment and systems Tenant shall enter into a service contract with a person or entity designated or approved by Landlord), all doors, door checks, windows, plate glass, door fronts, exposed plumbing and sewage and other utility facilities, fixtures, lighting, wall surfaces, floor surfaces and ceiling surfaces and all other interior repairs, foreseen and unforeseen, as required. (b) Landlord's Remedy. If Tenant, after notice from Landlord, fails to ----------------- make or perform promptly any repairs or maintenance which are the obligation of Tenant hereunder, Landlord shall have the right, but shall not be required, to enter the Premises and make the repairs or perform the maintenance necessary to restore the Premises to good and sanitary order, condition and repair. Immediately on demand from Landlord, the cost of such repairs shall be due and payable by Tenant to Landlord. (c) Condition Upon Surrender. At the expiration or sooner termination of ------------------------ this Lease, Tenant shall surrender the Premises, including any 14 additions, alterations and improvements thereto, broom clean, in good and sanitary order, condition and repair, ordinary wear and tear and damage due to casualty and condemnation excepted, first, however, removing all goods and effects of Tenant and all and fixtures and items required to be removed or specified to be removed at Landlord's election pursuant to this Lease, and repairing any damage caused by such removal. Tenant expressly waives any and all interest in any personal property and trade fixtures not removed from the Premises by Tenant at the expiration or termination of this Lease, agrees that any such personal property and trade fixtures may, at Landlord's election, be deemed to have been abandoned by Tenant, and authorizes Landlord (at its election and without prejudice to any other remedies under this Lease or under applicable law) to remove and either retain, store or dispose of such property at Tenant's cost and expense, and Tenant waives all claims against Landlord for any damages resulting from any such removal, storage, retention or disposal. 9. USE OF PREMISES --------------- 9.1. Permitted Use. Tenant shall use the Premises solely for general ------------- office and administrative purposes, non-retail marketing and sales demonstrations and training classes, and for no other purpose without the prior written consent of Landlord (which consent shall not be unreasonably withheld). 9.2. No Nuisance. Tenant shall not use the Premises for or carry on or ----------- permit upon the Premises or any part thereof any offensive, noisy or dangerous trade, business, manufacture, occupation, odor or fumes, or any nuisance or anything against public policy, nor interfere with the rights or business of any other tenants or of Landlord in the Building, nor make any other unreasonable use of the Premises. Tenant shall not do or permit anything to be done in or about the Premises, nor bring nor keep anything therein, which will in any way cause the Premises to be uninsurable with respect to the insurance required by this Lease or with respect to standard fire and extended coverage insurance with vandalism, malicious mischief and riot endorsements. 9.3. Compliance With Laws. Tenant shall not use the Premises or permit -------------------- the Premises to be used in whole or in part for any purpose or use that is in violation of any applicable laws, ordinances, regulations or rules of any governmental agency or public authority. Tenant shall keep the Premises equipped with all safety appliances required by law, ordinance or insurance on the Premises, or any order or regulation of any public authority because of Tenant's particular use of the Premises (excluding any certificate of occupancy to be obtained by Landlord under Sections 2.1 and 2.4). Tenant shall procure all licenses and permits required for use of the Premises. Tenant shall use the Premises in strict accordance with all applicable ordinances, rules, laws and regulations and shall comply with all requirements of all governmental authorities now in force or which may hereafter be in force pertaining to the use of the Premises by Tenant, including, without limitation, regulations applicable to noise, water, soil and air pollution, and making such nonstructural alterations and additions thereto as may be required from time to time by such laws, ordinances, rules, regulations and requirements of governmental authorities or insurers of the Premises (collectively, "Requirements" because of Tenant's construction of improvements in or other particular use of the Premises. Any structural alterations or additions required from time to time by applicable Requirements because of Tenant's construction of improvements in or other particular use of the Premises shall, at Landlord's election, either (i) be made by Tenant, at Tenant's sole cost and expense, in accordance with the procedures and standards set forth in Section 7.1 for alterations by Tenant, or (ii) be made 15 by Landlord at Tenant's sole cost and pay to Landlord as additional rent, within ten (10) days after demand by Landlord, an amount equal to all costs incurred by landlord in connection with such alterations or additions. The judgment of any court, or the admission by Tenant in any proceeding against Tenant, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement shall be conclusive of such violation as between Landlord and Tenant. Notwithstanding any other provisions of this Section 9.3, in no event shall Tenant be liable or obligated (A) to make any seismic upgrades or improvements, unless (and then only to the extent) required as a result of any alterations, additions or improvements made by Tenant in or about the Premises; (B) to remove or encapsulate any asbestos, unless (and then only to the extent) such asbestos was brought onto the Property by Tenant or its agents, employees, contractors or invitees; or (C) to undertake any action to comply with the Americans with Disabilities Act, unless (and then only to the extent) such action is required as a result of Tenant's particular use of the Premises, the conduct of Tenant's business or the making of any alterations, additions or improvements by Tenant in or about the Premises. 9.4. Liquidation Sales. Tenant shall not conduct or permit to be ----------------- conducted any bankruptcy sale, liquidation sale, or going out of business sale, in, upon or about the Premises, whether said auction or sale be voluntary, involuntary or pursuant to any assignment for the benefit of creditors, or pursuant to any bankruptcy or other insolvency proceeding. 9.5. Environmental Matters. Without limiting the generality of Tenant's --------------------- obligations set forth in Section 9.3 of this Lease: (a) Tenant shall not cause or permit any hazardous or toxic substance or hazardous waste (as defined in any federal, state or local law, ordinance or regulation applicable to such substances or wastes) to be brought upon, kept, stored or used on or about the Property without the prior written consent of Landlord. Nothing in this Section 9.5 (a) shall, however, prohibit Tenant from using ordinary office and cleaning products and other materials reasonably necessary for the conduct of Tenant's business for the permitted uses described in Section 9.1 hereof, regardless of whether such materials constitute hazardous or toxic substances or hazardous wastes, so long as Tenant provides Landlord with prior or concurrent written notice of such use (other than with respect to ordinary office and cleaning products, for which no such notice is required) and complies with the requirements of Sections 9.5 (b) and (c) with respect to such use. (b) Tenant shall comply with all applicable laws, rules, regulations, orders, permits, licenses and operating plans of any governmental authority with respect to the receipt, use, handling, generation, transportation, storage, treatment, release and/or disposal of hazardous or toxic substances or wastes in the course of or in connection with the conduct of Tenant's business on the Property, and shall provide Landlord with copies of any and all permits, licenses, registrations and other similar documents that authorize Tenant to conduct any such activities in connection with Tenant's use of the Property. (c) Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, losses, damages, liabilities, costs, legal fees and expenses of any sort arising out of or relating to (i) any failure by Tenant to comply with any provisions of subparagraph (a) or (b) above, or (ii) any receipt, use, handling, generation, transportation, storage, treatment, release and/or disposal of any hazardous or toxic substances or wastes on or about the Property by Tenant in connection with Tenant's use or occupancy of the Property 16 or as a result of any intentional or negligent acts or omissions of Tenant or of any agent or employee of Tenant. (d) Landlord represents and warrants to Tenant that the Building and Premises are free of asbestos, lead paint and, to the best of Landlord's knowledge, any other hazardous or toxic substances or wastes. Landlord shall indemnify, defend and hold Tenant harmless from and against any and all claims, losses, damages, liabilities, costs, legal fees and expenses of any sort arising out of or relating to (i) the presence on the Property of any hazardous or toxic substances or wastes present on the Property as of the Commencement Date, and/or (ii) any unauthorized release into the environment of hazardous or toxic substances or wastes to the extent they result from the negligence of or willful misconduct or omission by landlord or its agents or employees. (e) The provisions of this Section 9.5 shall survive the termination of this Lease. 10. INSURANCE AND INDEMNITY ----------------------- 10.1. Insurance. --------- (a) Tenant shall procure and maintain in full force and effect at all times during the term of this Lease, at Tenant's cost and expense comprehensive public liability and property damage insurance to protect against any liability to the public, or to any invitee of Tenant or Landlord, arising out of or related to the use of or resulting from any accident occurring in, upon or about the Premises, with limits of liability of not less than (i) One Million dollars ($1,000,000.00) for injury to or death of one person, (ii) Three Million Dollars ($3,000,000.00) for personal injury or death, per occurrence, and (iii) Five Hundred Thousand Dollars ($500,000.00) for property damage, or a combined single limit of public liability and property damage insurance of not less than Five Million Dollars ($5,000,000.00). Such insurance shall name Landlord and its general partners and Managing Agent as additional insureds thereunder. The amount of such insurance shall not be construed to limit any liability or obligations of Tenant under this Lease. (b) Landlord shall procure and maintain in full force and effect at all times during the term of this Lease, at Landlord's cost and expense (but reimbursable as an Operating Expense under Section 5.2 hereof), fire and "all risk" extended coverage property damage insurance for the Building and interior improvements that are the property of Landlord and for the improvements in the Common Areas of the Property, on a full replacement cost basis, with rental loss insurance. Such insurance may include earthquake and/or flood coverage to the extent Landlord in its discretion elects to carry such coverage, and shall have such commercially reasonable deductibles and other terms as Landlord in its discretion determines to be appropriate. Landlord shall have no obligation to carry property damage insurance for any alterations, additions or improvements installed by Tenant on or about the Premises. 10.2. Quality Of Policies and Certificates. All policies of insurance ------------------------------------ required to be maintained by Tenant hereunder shall be issued by responsible insurers and shall be written as primary policies not contributing with and not in excess of any coverage that Landlord may carry. Tenant shall deliver to Landlord copies of policies or certificates of insurance showing that said policies are in effect. The coverage provided by such policies shall include the clause or endorsement referred to in Section 10.4. If Tenant fails to acquire, maintain or renew any insurance required to be maintained by it under this Article 10 or to 17 pay the premium therefor, then Landlord, after prior notice to Tenant, at Landlord's option and in addition to its other remedies, but without obligation so to do, may procure such insurance, and any sums expended by it to procure any such insurance shall be repaid upon demand, with interest as provided in Section 3.2 hereof. Tenant shall obtain written undertakings from each insurer under policies required to be maintained by it to notify all insureds thereunder at least thirty (30) days prior to cancellation, amendment or revision of coverage. 10.3. Workers' Compensation. Tenant shall maintain in full force and --------------------- effect during the term of this Lease workers' compensation insurance covering all of Tenant's employees working on the Premises. 10.4. Waiver of Subrogation. To the extent permitted by law and without --------------------- affecting the coverage provided by insurance required to be maintained hereunder, Landlord and Tenant each waive any right to recover against the other for (i) damages for injury to or death of persons, (ii) damage to property, (iii) damage to the Premises or any part thereof, or (iv) claims arising by reason of any of the foregoing, but only to the extent that any of the foregoing damages and claims under subparts (i)-(iv) hereof are covered, and only to the extent of such coverage, by insurance actually carried or required to be carried hereunder by either Landlord or Tenant. This provision is intended to waive fully, and for the benefit of each party, any rights and claims which might give rise to a right of subrogation in any insurance carrier. Each party shall procure a clause or endorsement on any policy required under this Article 10 denying to the insurer rights of subrogation against the other party to the extent rights have been waived by the insured prior to the occurrence of injury or loss. Coverage provided by insurance maintained by Tenant under this Article 10 shall not be limited, reduced or diminished by virtue of the subrogation waiver herein contained. 10.5. Increase In Premiums. Tenant shall do all acts and pay all -------------------- expenses necessary to insure that the Premises are not used for purposes prohibited by any applicable fire insurance, and that Tenant's use of the Premises complies with all requirements necessary to obtain any such insurance. If Tenant uses or permits the Premises to be used in a manner which increases the existing rate of any insurance on the Premises carried by Landlord, Tenant shall pay the amount of the increase in premium caused thereby, and Landlord's cost of obtaining other replacement insurance policies, including any increase in premium, within ten (10) days after demand therefor by Landlord. 10.6. Indemnification. --------------- (a) Tenant shall indemnify, defend and hold Landlord, its partners, shareholders, officers, directors, affiliates, agents, employees and contractors, harmless from any and all liability for injury to or death of any person, or loss of or damage to the property of any person and all actions, claims, demands, costs (including, without limitation, reasonable attorneys' fees), damages or expenses of any kind arising therefrom which may be brought or made against Landlord or which Landlord may pay or incur by reason of the use, occupancy and enjoyment of the Premises by Tenant or any invitees, sublessees, licensees, assignees, employees, agents or contractors of Tenant or holding under Tenant from any cause whatsoever other than negligence or willful misconduct or omission by Landlord, its agents, employees or contractors, or breach by Landlord of its obligations hereunder. Landlord, its partners, shareholders, officers, directors, affiliates, agents, employees and contractors shall not be liable for, and Tenant hereby waives all claims against such persons for, damages to goods, wares and merchandise in or upon the Premises, or for 18 injuries to Tenant, its agents or third persons in or upon the Premises, from any cause whatsoever other than negligence or willful misconduct or omission by Landlord, its agents, employees or contractors. Tenant shall give prompt notice to Landlord of any casualty or accident in, on or about the Premises. (b) Landlord shall indemnify, defend and hold Tenant, its partners, shareholders, officers, directors, affiliates, agents, employees and contractors, harmless from any and all liability for injury to or death of any person or loss of or damage to the property of any person, and all actions, claims, demands, costs (including, without limitation, reasonable attorneys' fees), damages or expenses of any kind arising therefrom which may be brought or made against Tenant or which Tenant may pay or incur, to the extent such liabilities or other matters arise by reason of any negligence or willful misconduct or omission by Landlord, its agents, employees or contractors. 10.7. Blanket Policy. Any policy required to be maintained hereunder may -------------- be maintained under a so-called "blanket-policy" insuring other parties and other locations so long as the amount of insurance required to be provided hereunder is not thereby diminished. 11. SUBLEASE AND ASSIGNMENT ----------------------- 11.1. Assignment And Sublease Of Premises. Tenant shall not have the ----------------------------------- right or power to assign its interest in this Lease, or make any sublease, nor shall any interest of Tenant under this Lease be assignable involuntarily or by operation of law, without on each occasion obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Any purported sublease or assignment of Tenant's interest in this Lease requiring but not having received Landlord's consent thereto shall be void. Without limiting the generality of the foregoing, Landlord may withhold consent to any proposed subletting or assignment solely on the ground that the use by the proposed subtenant or assignee is reasonably likely to be incompatible with Landlord's use of the balance of the Building or Property. Any dissolution, consolidation, merger or other reorganization of Tenant, or any sale or transfer of the stock of or other interest in Tenant, or any series of one or more of such events, involving in the aggregate a change of fifty percent (50%) or more in the beneficial ownership of Tenant or its assets shall be deemed to be an assignment hereunder and shall be void without the prior written consent of Landlord as required above. Notwithstanding the foregoing or anything in this Section 11.1 to the contrary, Tenant may assign this Lease or sublet the Premises, in whole or in part, without Landlord's consent (but with prior or concurrent written notice to Landlord), to (a) any entity controlled by, controlling or under common control with Tenant, including any entity resulting from a reincorporation of Tenant in another state, or (b) any entity or person which acquires by merger, consolidation or otherwise substantially all of the assets of Tenant, provided that any such assignee assumes in full, in writing and for the benefit of Landlord, the obligations of Tenant under this Lease and that the net worth of the assignee is equal to or greater than that of Tenant immediately prior to the applicable transfer. In addition, Landlord's consent shall not be required for a sale or transfer of the capital stock of Tenant (x) if such sale or transfer occurs in connection with a bona fide financing or capitalization for the benefit of Tenant and does not constitute part of a dissolution, consolidation, merger or reorganization of Tenant as specifically described above, or (y) during any period in which Tenant has a class of publicly traded stock. 19 11.2 Rights Of Landlord. Consent by Landlord to one or more assignments ------------------ of this Lease or to one or more sublettings of the Premises, or collection of rent by Landlord from any assignee or sublessee, shall not operate to exhaust Landlord's rights under this Article 11, nor constitute consent to any subsequent assignment or subletting. No assignment of Tenant's interest in this Lease and no sublease shall relieve Tenant of its obligations hereunder, notwithstanding any waiver or extension of time granted by Landlord to any assignee or sublessee, or the failure of Landlord to assert its rights against any assignee or sublessee, and regardless of whether Landlord's consent thereto is given or required to be given hereunder. In the event of a default by any assignee, sublessee or other successor of Tenant in the performance of any of the terms or obligations of Tenant under this Lease, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against any such assignee, sublessee or other successor. In addition, Tenant immediately and irrevocably assigns to Landlord, as security for Tenant's obligations under this Lease, all rent from any subletting of all or a part of the Premises as permitted under this Lease, and Landlord, as Tenant's assignee and as attorney- in-fact for Tenant, or any receiver for Tenant appointed on Landlord's application, may collect such rent and apply it toward Tenant's obligations under this Lease; except that, until the occurrence of an act of default by Tenant, Tenant shall have the right to collect such rent. 12. RIGHT OF ENTRY AND QUIET ENJOYMENT ---------------------------------- 12.1. Right Of Entry. Landlord and its authorized representatives shall -------------- have the right to enter the Premises at any time during the term of this Lease during normal business hours and upon not less than twenty-four (24) hours prior notice, except in the case of emergency, for the purpose of inspecting and determining the condition of the Premises or for any other proper purpose including, without limitation, to make repairs, replacements or improvements which Landlord may deem necessary, to show the Premises to prospective purchasers, to show the premises to prospective tenants, and to post notices of nonresponsibility. Landlord shall not be liable for inconvenience, annoyance, disturbance, loss of business, quiet enjoyment or other damage or loss to Tenant by reason of making any repairs or performing any work upon the Premises and the obligations of Tenant under this Lease shall not thereby be affected in any manner whatsoever, provided, however, Landlord shall use reasonable efforts to minimize the inconvenience to Tenant's normal business operations caused thereby. 12.2. Quiet Enjoyment. Landlord covenants that Tenant, upon paying the --------------- rent and performing its obligations hereunder and subject to all the terms and conditions of this Lease, shall peacefully and quietly have, hold and enjoy the Premises throughout the term of this Lease, or until this Lease is terminated as provided by this Lease. 13. CASUALTY AND TAKING ------------------- 13.1. Termination Or Reconstruction. If during the term of this Lease ----------------------------- the Premises or Building, or any substantial part of either, (i) is damaged materially by fire or other casualty or by action of public or other authority in consequence thereof, (ii) is taken by eminent domain or by reason of any public improvement or condemnation proceeding, or in any manner by exercise of the right of eminent domain (including any transfer in avoidance of an exercise of the power of eminent domain), or (iii) receives irreparable damage by reason of anything lawfully done under color of public or other authority, this Lease shall terminate 20 as to the entire Premises at either Landlord's or Tenant's election, by written notice given to the other party within sixty (60) days after the damage or taking has occurred, subject to the following limitations (and, to the extent applicable, the limitations set forth in Section 13.2): (a) in the case of damage or destruction prior to the final year of the term of this Lease, (i) Tenant's termination right shall be exercisable only if the time reasonably estimated by Landlord's architect or contractor to be required for the repair or restoration of the Building to the extent necessary to permit Tenant to resume substantially all of its normal business activities therein (the "Estimated Rebuilding Period"), which time estimate shall be given by Landlord to Tenant in writing within forty-five (45) days after the date of the damage or destruction, exceeds one hundred eighty (180) days from the date of the damage or destruction, and (ii) Landlord's termination right shall be exercisable only if either the Estimated Rebuilding Period exceeds one hundred twenty (120) days from the date of the damage or destruction or the reasonably estimated cost of such repair or restoration is not covered by insurance proceeds reasonably available for such repair or restoration under the insurance required to be maintained by Landlord under Section 10.1 (b) hereof; (b) in the case of damage or destruction during the final year of the term of this Lease, (i) Tenant's termination right shall be exercisable only if the Estimated Rebuilding Period, which estimate shall be given by Landlord to Tenant in writing within thirty (30) days after the date of the damage or destruction, exceeds ninety (90) days from the date of the damage or destruction, and (ii) Landlord's termination right shall be exercisable only if either the Estimated Rebuilding Period exceeds ninety (90) days from the date of the damage or destruction or the reasonably estimated cost of such repair or restoration is not covered by insurance proceeds reasonably available for such repair or restoration under the insurance required to be maintained by Landlord under Section 10.1 (b) hereof; and (c) in the case of damage or destruction during the final year of the initial term of this Lease, if Tenant's extension option under Section 2.7 hereof has not been exercised and has not yet expired under the terms of Section 2.7 hereof, and if Tenant thereafter exercises such extension option within thirty (30) days after the date of such damage or destruction, then the limitations applicable to the respective termination rights of the parties shall be those set forth in Section 13.1(a) rather than Section 13.1(b). If neither party elects to terminate this Lease pursuant to the foregoing termination rights (if any) and/or Section 13.2 (if applicable), then Landlord shall promptly and diligently repair any such damage and restore the Premises (to the extent of Landlord's work therein under Section 2.4 and Exhibit C) and --------- the Building as nearly as reasonably possible to the condition existing before the damage or taking. 13.2. Tenant's Rights. If any portion of the Premises is so taken by --------------- condemnation, Tenant may elect to terminate this Lease if the portion of the Premises taken is of such extent and nature as substantially to handicap, impede or permanently impair Tenant's use of the balance of the Premises. Tenant must exercise its right to terminate by giving notice to Landlord within thirty (30) days after the nature and extent of the taking have been finally determined. If Tenant elects to terminate this Lease, Tenant shall also notify Landlord of the date of termination, which date shall not be earlier than thirty (30) days nor later than ninety (90) days after Tenant has notified Landlord of its election to terminate, except that this Lease shall terminate on the date of taking 21 if the date of taking falls on any date before the date of termination designated by Tenant. 13.3. Lease To Remain In Effect. It neither Landlord nor Tenant ------------------------- terminates this Lease as hereinabove provided, this Lease shall continue in full force and effect, except that minimum monthly rental and Tenant's Operating Cost Share shall abate to the extent Tenant's use of the Premises is impaired during the period from the date of the casualty or taking until the repair or restoration of the Premises is completed. Each party waives the provisions of Code of Civil Procedure Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial condemnation of the Premises. 13.4. Reservation Of Compensation. Landlord reserves, and Tenant waives --------------------------- and assigns to Landlord, all rights to any award or compensation for damage to the Premises, Building, Property and the leasehold estate created hereby, accruing by reason of any taking in any public improvement, condemnation or eminent domain proceeding or in any other manner by exercise of the right of eminent domain or of anything lawfully done by public authority, except that Tenant shall be entitled to any and all compensation or damages paid for or on account of Tenant's moving expenses, trade fixtures, equipment and any leasehold improvements in the Premises, the cost of which was borne by Tenant, but only to the extent of the then remaining unamortized value of such improvements computed on a straight-line basis over the term of this Lease. Tenant covenants to deliver such further assignments of the foregoing as Landlord may from time to time request. 13.5. Restoration of Fixtures. If Landlord repairs or causes repair of ----------------------- the Premises after such damage or taking, Tenant at its sole expense shall repair and replace promptly all fixtures, equipment and other property of Tenant located at, in or upon the Premises and all additions, alterations and improvements and all other items installed or paid for by Tenant under this Lease that were damaged or taken, so as to restore the same to a condition substantially equal to that which existed immediately prior to the damage or taking. Tenant shall have the right to make modifications to the Premises, fixtures and improvements, subject to the prior written approval of Landlord. In its review of Tenant's plans and specifications, Landlord may take into consideration the effect of the proposed modifications on the exterior appearance, the structural integrity and the mechanical and other operating systems of the Building. 14. DEFAULT ------- 14.1. Events Of Default. The occurrence of any of the following shall ----------------- constitute an event of default on the part of Tenant: (a) Abandonment. Abandonment of the Premises. For purposes of this ----------- Section 14.1 (a), "abandonment" shall be defined as the absence of Tenant from the Premises for fifteen (15) consecutive days or more while there exists an event of default on the part of Tenant under any other provision of this Section 14.1, which default has not been cured on or before the expiration of such 15 day period; (b) Nonpayment. Failure to pay, when due, any amount payable to Landlord ---------- hereunder, such failure continuing for a period of five (5) days after written notice of such failure; 22 (c) Other Obligations. Failure to perform any obligation, agreement or ----------------- covenant under this Lease other than those matters specified in subsection (b) hereof, such failure continuing for fifteen (15) days after written notice of such failure. If it is not possible to cure such default within fifteen (15) days, Tenant shall commence cure within said fifteen (15) day period and shall proceed diligently to complete cure; (d) General Assignment. A general assignment by Tenant for the benefit ------------------ ot creditors; (e) Bankruptcy. The filing of any voluntary petition in bankruptcy by ---------- Tenant, or the filing of an involuntary petition by Tenant's creditors, which involuntary petition remains undischarged for a period of thirty (30) days. In the event that under applicable law the trustee in bankruptcy or Tenant has the right to affirm this Lease and continue to perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant's obligations under this Lease. Specifically, but without limiting the generality of the foregoing, such adequate assurances must include assurances that the Premises continue to be operated only for the use permitted hereunder. The provisions hereof are to assure that the basic understandings between Landlord and Tenant with respect to Tenant's use of the Premises and the benefits to Landlord therefrom are preserved, consistent with the purpose and intent of applicable bankruptcy laws; (f) Receivership. The employment of a receiver appointed by court order ------------ to take possession of substantially all of Tenant's assets or the Premises, if such receivership remains undissolved for a period of thirty (30) days; (g) Attachment. The attachment, execution or other judicial seizure of ---------- all or substantially all of Tenant's assets or the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of thirty (30) days after the levy thereof; or (h) Insolvency. The admission by Tenant in writing of its inability to ---------- pay its debts as they become due, the filing by Tenant of a petition seeking any reorganization or arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, the filing by Tenant of an answer admitting or failing timely to contest a material allegation of a petition filed against Tenant in any such proceeding or, if within thirty (30) days after the commencement of any proceeding against Tenant seeking any reorganization or arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed. 14.2. Remedies Upon Tenant's Default. ------------------------------ (a) Upon the occurrence of any event of default described in Section 14.1 hereof, Landlord, in addition to and without prejudice to any other rights or remedies it may have, shall have the immediate right to re-enter the Premises or any part thereof and repossess the same, expelling and removing therefrom all persons and property (which property may be stored in a public warehouse or elsewhere at the cost and risk of and for the account of Tenant), using such force as may be necessary to do so (as to which Tenant hereby waives any claim for loss or damage that may thereby occur). In addition to or in 23 lieu of such re-entry, and without prejudice to any other rights or remedies it may have, Landlord shall have the right either (i) to terminate this Lease and recover from Tenant all damages incurred by Landlord as a result of Tenant's default, as hereinafter provided, or (ii) to continue this Lease in effect and recover rent and other charges and amounts as they become due. (b) Even if Tenant has breached this Lease or abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession under subsection (a) hereof and Landlord may enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, and Landlord, without terminating this Lease, may exercise all of the rights and remedies of a lessor under California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, it lessee has right to sublet or assign, subject only to reasonable limitations), or any successor Code section. Acts of maintenance, preservation or efforts to relet the Premises or the appointment of a receiver upon application of Landlord to protect Landlord's interests under this Lease shall not constitute a termination of Tenant's right to possession. (c) If Landlord terminates this Lease pursuant to this Section 14.2, Landlord shall have all of the rights and remedies of a landlord provided by Section 1951.2 of the Civil Code of the State of California, or any successor Code section. 14.3. Remedies Cumulative. All rights, privileges and elections or ------------------- remedies of Landlord contained in this Article 14 are cumulative and not alternative to the extent permitted by law and except as otherwise provided herein. 15. SUBORDINATION, ATTORNMENT AND SALE ---------------------------------- 15.1. Subordination To Mortgage. This Lease, and any sublease entered ------------------------- into by Tenant under the provisions of this Lease, shall be subject and subordinate to any ground lease, mortgage, deed of trust, sale/leaseback transaction or any other hypothecation for security now or hereafter placed upon the Building, the Property, or both, and the rights of any assignee of Landlord or mortgagee, trustee, beneficiary, landlord or leaseback lessor under any of the foregoing, and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof; provided however, that such subordination in the case of any future -------- ground lease, mortgage, deed of trust, sale/leaseback transaction or any other hypothecation for security placed upon the Building, the Property, or both shall be conditioned on Tenant's receipt from the ground lessor, mortgagee, trustee, beneficiary or leaseback lessor of a nondisturbance agreement in a form reasonably acceptable to Tenant, confirming that so long as Tenant is not in default hereunder, Tenant's right hereunder shall not be disturbed by such person or entity following any foreclosure or other acquisition of the Property; and provided further, that Tenant's obligations under this Lease shall be ---------------- conditioned on Tenant's receipt, within thirty (30) days after mutual execution of this Lease, from SDK Incorporated and from any other ground lessor, mortgagee, trustee, beneficiary or leaseback lessor currently owning or holding a security interest in the Property, of a nondisturbance agreement in a form reasonably acceptable to Tenant, confirming that so long as Tenant is not in default hereunder, Tenant's rights hereunder shall not be disturbed by such person or entity following any foreclosure or other acquisition of the Property. If Landlord fails to deliver such signed nondisturbance agreement to Tenant within 24 such 30 day period, then Tenant may terminate this Lease by written notice to Landlord at any time prior to Landlord's delivery of such signed nondisturbance agreement, in which event Landlord shall refund any security deposit and other amounts prepaid by Tenant and neither party shall have any further liability under this Lease. If any mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or assignee elects to have this Lease be an encumbrance upon the Property prior to the lien of its mortgage, deed of trust, ground lease or leaseback lease or other security arrangement and gives notice thereof to Tenant, this Lease shall be deemed prior thereto, whether this Lease is dated prior or subsequent to the date thereof or the date of recording thereof. Tenant, and any sublessee, shall execute such documents as may reasonably be requested by any mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or assignee to evidence the subordination herein set forth or to make this Lease prior to the lien of any mortgage, deed of trust, ground lease, leaseback lease or other security arrangement, as the case may be. Upon any default by Landlord in the performance of its obligations under any mortgage, deed of trust, ground lease, leaseback lease or assignment, Tenant (and any sublessee) shall attorn to the mortgagee, trustee, beneficiary, ground lessor, leaseback lessor or assignee thereunder upon demand and shall execute and deliver any instrument or instruments confirming the attornment herein provided for. 15.2. Sale of Landlord's Interest. Upon Landlord's entire interest in --------------------------- the Building and Property, Landlord shall be relieved of its obligations hereunder with respect to liabilities accruing from and after the date of such sale, transfer or assignment; provided, however, that such relief from liabilities (i) shall be effective only if and to the extent that the transferee expressly assumes in writing, for the benefit of Tenant, Landlord's obligations under this Lease, (ii) shall not apply to Landlord's environmental indemnification under Section 9.5 (d) hereof unless the transferee has, immediately after the transfer, a net worth equal to or greater than that of Landlord immediately prior to the transfer, and (iii) shall not in any event apply to Landlord's obligations with respect to the initial improvement of the Premises under Section 2.4 and Exhibit C. --------- 15.3. Estoppel Certificates. Either party shall at any time and from --------------------- time to time, within ten (10) days after written request by the other party, execute, acknowledge and deliver to the requesting party a certificate in writing, stating: (i) that this Lease is unmodified and in full force and effect, or if there have been any modifications, that this Lease is in full force and effect as modified and stating the date and the nature of each modification; (ii) the date to which rental and all other sums payable hereunder have been paid; (iii) that the requesting party is not in default in the performance of any of its obligations under this Lease, that the responding party has given no notice of default to the requesting party and that no event has occurred which, but for the expiration of the applicable time period, would constitute an event of default hereunder (or, if any such defaults or events exist, specifying the same); and (iv) such other matters as may reasonably be requested by the requesting party or any institutional lender, mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or prospective purchaser of the Property. Any such certificate provided under this Section 15.3 may be relied upon by any lender, mortgagee, trustee, beneficiary, assignee or successor in interest to the requesting party, by any prospective purchaser, by any purchaser on foreclosure or sale, or upon any grant of a deed in lieu of foreclosure of any mortgage or deed of trust on the Property or Premises, or by any other third party. Failure to execute and return within the required time any estoppel certificate requested hereunder shall be deemed to be an admission of the truth of the matters set forth in the form of certificate submitted to Tenant for execution. 25 15.4. Subordination To CC&R'S. This Lease, and any permitted sublease ----------------------- entered into by Tenant under the provisions of this Lease, shall be subject and subordinate (a) to any declarations of covenants, conditions and restrictions recorded by Landlord with respect to the Property from time to time, provided that the terms of such declarations are reasonable and do not discriminate against Tenant relative to other tenants occupying portions of the Property, and (b) to the Declaration of Covenants, Conditions and Restrictions for Hacienda Business Park (No. 2), as amended from time to time (the "Master Declaration"), the provisions of which Master Declaration are an integral part of this Lease. Tenant expressly agrees to comply in all applicable respects with the provisions of the Master Declaration, as provided under Section 12.3 thereof. Tenant agrees to execute, upon request by Landlord, any documents reasonably required from time to time to evidence the subordination provided in this Section 15.4. 16. SECURITY -------- 16.1. Deposit. Concurrently with Tenant's execution of this Lease, ------- Tenant shall deposit with Landlord the sum of Twenty Nine Thousand One Hundred Twenty Four Dollars and 90/100 ($29,124.90), which sum (the "Security Deposit") shall be held by Landlord as security for the faithful performance of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, without limitation, the provisions relating to the payment of rental and other sums due hereunder, Landlord shall have the right, but shall not be required, to use, apply or retain all or or any part of the Security Deposit for the payment of rental or any other amount which Landlord may spend or may become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an sufficient amount to restore the Security Deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep any deposit under this Section separate from Landlord's general funds, and Tenant shall not be entitled to interest thereon. Subject to Landlord's right to use, apply or retain the Security Deposit as described above and subject to applicable law, the Security Deposit, or any balance thereof, shall be returned to Tenant or, at Landlord's option, to the last assignee of Tenant's interest hereunder, at the expiration or earlier termination of the term of this Lease and after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer all deposits then held by Landlord under this Section to Landlord's successor in interest, whereupon Tenant agrees to release Landlord from all liability for the return of such deposit or the accounting thereof. 17. MISCELLANEOUS ------------- 17.1. Notices. All notices, consents, waivers and other communications ------- which this Lease requires or permits either party to give to the other shall be in writing and shall be deemed given when delivered personally (including delivery by private courier or express delivery service) or four (4) days after deposit in the United States mail, registered or certified mail, postage prepaid, addressed to the parties at their respective addresses as follows: 26 To Tenant: (until Commencement Date) Documentum, Inc. 5671 Gibraltar Drive Pleasanton, CA 94588 Attn: Director of Legal Affairs (after Commencement Date) Documentum, Inc. 5700 Stoneridge Drive, Suite (to be determined) Pleasanton, CA 94588 Attn: Director of Legal Affairs with copy to: Cooley Godward, LLP 3000 Sand Hill Road, Building 3, Suite 230 Menlo Park, CA 94025 Attn: Mark Tanoury To Landlord: BRITANNIA HACIENDA IV LIMITED PARTNERSHIP c/o Britannia Stoneridge, LLC 1939 Harrison Street, Suite 412 Park Plaza Building Oakland, CA 94612 Attn: T.J. Bristow with copy to: Folger, Levin and Kahn, LLP Embarcadero Center West 275 Battery Street, 23rd Floor San Francisco, CA 94111 Attn: Donald E. Kelley, Jr. or to such other address as may be contained in a notice at least fifteen (15) days prior to the address change from either party to the other given pursuant to this Section. Rental payments and other sums required by this Lease to be paid by Tenant shall be delivered to Landlord at Landlord's address provided in this Section, or to such other address as Landlord may from time to time specify in writing to Tenant, and shall be deemed to be paid only upon actual receipt. 17.2. Successors And Assigns. The obligations of this Lease shall run ---------------------- with the land, and this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the original Landlord named herein and each successive Landlord under this Lease shall be liable only for obligations accruing during the period of its ownership of the Property, said liability terminating upon termination of such ownership and passing to the successor lessor. 17.3. No Waiver. The failure of Landlord to seek redress for violation, --------- or to insist upon the strict performance, of any covenant or condition of this Lease shall not be deemed a waiver of such violation, or prevent a subsequent act which would originally have constituted a violation from having all the force and effect of an original violation. 27 17.4. Severability. If any provision of this Lease or the application ------------ thereof is held to be invalid or unenforceable, the remainder of this Lease or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable shall not be affected thereby, and each of the provisions of this Lease shall be valid and enforceable, unless enforcement of this Lease as so invalidated would be unreasonable or grossly inequitable under all the circumstances or would materially frustrate the purposes of this Lease. 17.5. Litigation Between Parties. In the event of any litigation -------------------------- between the parties hereto growing out of this Lease, the prevailing party shall be reimbursed for all reasonable costs, including, but not limited to, reasonable accountants' fees and attorneys' fees. "Prevailing Party" within the meaning of this Section shall include, without limitation, a party who dismisses an action for recovery hereunder in exchange for payment of the sums allegedly due, performance of covenants allegedly breached or consideration substantially equal to the relief sought in the action. 17.6. Surrender. A voluntary or other surrender of this Lease by Tenant, --------- or a mutual termination thereof between Landlord and Tenant, shall not result in a merger but shall, at the option of Landlord, operate either as an assignment to Landlord of any and all existing subleases and subtenancies, or a termination of all or any existing subleases and subtenancies. This provision shall be contained in any and all assignments or subleases made pursuant to this Lease. 17.7. Construction. The provisions of this Lease shall be construed as a ------------ whole according to their common meaning and not strictly for or against Landlord or Tenant. The captions preceding the text of each Section and subsection hereof are included only for convenience of reference and shall be disregarded in the construction or interpretation of this Lease. 17.8. Entire Agreement. This written Lease, together with the exhibits ---------------- hereto, contains all the representations and the entire understandings between the parties hereto with respect to the subject matter hereof. Any prior correspondence, memoranda or agreements are replaced in total by this Lease and the exhibits hereto. This Lease may be modified only by an agreement in writing signed by each of the parties. 17.9. Governing Law. This Lease and all exhibits hereto shall be ------------- construed and interpreted in accordance with and be governed by all the provisions of the laws of the State of California. 17.10. No Partnership. Nothing contained in this Lease shall be -------------- construed as creating any type or manner of partnership, joint venture or Joint enterprise with or between Landlord and Tenant. 17.11. Financial Information. From time to time Tenant shall promptly --------------------- provide directly to prospective lenders and purchasers of the Premises designated by Landlord such financial information pertaining to the financial status of Tenant as Landlord may reasonably request; provided, Tenant shall be permitted to provide such financial information in a manner which Tenant deems reasonably necessary to protect the confidentiality of such information. In addition, from time to time, Tenant shall provide Landlord with such financial information pertaining to the financial status of Tenant as Landlord may reasonably request. Landlord agrees that all financial information supplied to Landlord by Tenant shall be treated as confidential material, and shall not be disseminated to any party or entity (including any entity affiliated with Landlord) 28 without Tenant's prior written consent. For purposes of this Section, without limiting the generality of the obligations provided herein, it shall be deemed reasonable for Landlord to request copies of Tenant's most recent audited annual financial statements, or, if audited statements have not been prepared, unaudited financial statements for Tenant's most recent fiscal year, accompanied by a certificate of Tenant's chief finandal officer that such financial statements fairly present Tenant's financial condition as of the date(s) indicated. Landlord and Tenant recognize the need of Tenant to maintain the confidentiality of information regarding its financial status and the need of Landlord to be informed of, and to provide to prospective lenders and purchasers of the Premises, financial information pertaining to Tenant's financial status. Landlord and Tenant agree to cooperate with each other in achieving these needs within the context of the obligations set forth in this Section. 17.12. Costs. If Tenant requests the consent of Landlord under any ----- provisions of this Lease for any act that Tenant proposes to do hereunder, including, without limitation, assignment or subletting of the Premises, Tenant shall, as a condition to doing any such act and the receipt of such consent, reimburse Landlord promptly for any and all reasonable costs and expenses incurred by Landlord in connection therewith, including, without limitation, reasonable attomeys' fees. 17.13. Time. Time is of the essence of this Lease, and of every term and ---- condition hereof. 17.14. Rules And Regulations. Tenant shall observe and obey such rules --------------------- and regulations as Landlord may promulgate from time to time for the safety, care, cleanliness, order and use of the Premises and the Building. 17.15. Brokers. Landlord agrees to pay a brokerage commission to Cornish ------- & Carey and Colliers and Parrish in connection with the consummation of this Lease in accordance with a separate agreement. Tenant represents and warrants that no other broker participated in the consummation of this Lease and agrees to indemnify, defend and hold Landlord harmless against any liability, cost or expense, including, without limitation, reasonable attorneys' fees, arising out of any claims for brokerage commissions or other similar compensation in connection with any conversations, prior negotiations or other dealings by Tenant with any other broker. 17.16. Memorandum Of Lease. At any time during the term of this Lease, ------------------- either party, at its sole expense, shall be entitled to record a memorandum of this Lease and, if either party so elects, both parties agree to cooperate in the preparation, execution, acknowledgment and recordation of such document in reasonable form. 17.17. Corporate Authority. The person signing this Lease on behalf of ------------------- Tenant warrants that he or she is fully authorized to do so and, by so doing to bind Tenant. As evidence of such authority, Tenant shall deliver to Landlord, upon or prior to execution of this Lease, a certified copy of a resolution of Tenant's board of directors authorizing the execution of this Lease and naming the officer that is authorized to execute this Lease on behalf of Tenant. 17.18. Landlord Defaults. If Landlord fails to perform any obligation, ----------------- agreement or covenant under this Lease which relates specifically to the Premises and does not materially affect other tenants of the Property (such as, by way of example and not limitation, Landlord's obligation to maintain the roof, exterior walls and other structural portions of the Building to the extent such 29 portions are part of or relate directly to the Premises), and If such failure continues for fifteen (15) days after written notice of such failure is given by Tenant to Landlord or, if such default is curable in nature but it is not reasonably possible to cure such default within fifteen (15) days, Landlord fails to commence cure within such fifteen (15) day period or thereafter fails to proceed diligently to complete cure, then Tenant shall have the right to perform such obligation or cure such default of Landlord, and Landlord shall reimburse Tenant for the reasonable cost thereof, together with interest at the rate specified in the first sentence of Section 3.2 hereof from the date of payment by Tenant to the date of reimbursement by Landlord, within fifteen (15) days after written notice from Tenant of the completion and cost of such cure, accompanied by copies of invoices or other supporting documentation. Under no circumstances, however, shall Tenant have any right to offset the cost of any such cure against rent or other charges failing due from time to time under this Lease. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first set forth above. "Landlord" "Tenant" BRITANNIA HACIENDA IV DOCUMENTUM, INC. LIMITED PARTNERSHIP, a Delaware corporation a Delaware Limited Partnership By: BRITANNIA STONERIDGE, By: LLC, General Partner, Its: By: _________________ T. J. Bristow Manager 30 EXHIBITS EXHIBIT A Location of Premises EXHIBIT B Real Property Description EXHIBIT C Construction EXHIBIT D Acknowledgement of Lease Commencement LOCATION OF PREMISES -------------------- Map of Premises. (Not Included) Exhibit A --------- REAL PROPERTY DESCRIPTION ------------------------- Parcel One (on which Building is located): - ---------- Improved real property located in the City of Pleasanton, County of Alameda, State of California, more particularly described as follows: Parcel B of Parcel Map No. 6874, Filed September 20, 1995, In Book 221 of Parcel Maps, at Pages 25 - 26, Alameda County Records. Subject to easements, restrictions and other matters of record affecting title. Parcel Two (balance of Center, on which adjacent building is located): - ---------- Improved real property located in the City of Pleasanton, County of Alameda, State of California, more particularly described as follows: Parcel A of Parcel Map No. 6874, filed September 20, 1995 in Book 221 of Parcel Maps at Pages 25-26, Alameda County Records. Subject to easements, restrictions and other matters of record affecting title. EXHIBIT B --------- CONSTRUCTION ------------- Landlord, at its sole cost and expense (subject to the rental adjustment provisions hereafter set forth), using architects and contractors selected by Landlord in its sole discretion, shall undertake and diligently complete, subject to delays for causes beyond its reasonable control (excluding financial inability), interior tenant improvements in accordance with the Approved Plans and Specifications as hereinafter defined. The plans and specifications that will be necessary for construction of the Interior improvements shall be prepared by Landlord and its architect on the basis of a space plan and preliminary specifications to be provided by Tenant, and shall be subject to mutual approval by Landlord and Tenant, such approval not to be unreasonably withheld or delayed (whereupon such plans and specifications shall become the "Approved Plans and Specifications"). Detailed working drawings shall then be prepared by Landlord's architect on the basis of the Approved Plans and Specifications, with any material changes from the Approved Plans and Specifications to be subject to mutual approval by Landlord and Tenant, such approval not to be unreasonably withheld or delayed; provided. however, that any changes required from time to time in the Approved Plans and Specifications, in the working drawings and/or in the final plans and specifications as a result of applicable law or governmental requirements, or at the insistence of any other third party whose approval may be required with respect to such improvements, or as a result of unanticipated conditions encountered in the course of construction, may be implemented by Landlord after prior written notice to Tenant, but shall not require Tenant's approval or consent (although Landlord agrees to give reasonable consideration to Tenant's views regarding functional characteristics of any such required changes). Landlord's work shall be performed in a good and workmanlike manner and shall conform to the Approved Plans and Specifications (as modified from time to time), all applicable governmental codes, laws and regulations in force at the time such work is completed (including but not limited to the Americans with Disabilities Act) and otherwise in accordance with Section 2.4 of the Lease. Landlord shall obtain all permits, licenses and approvals required in connection with the construction of such improvements. Landlord shall use its best reasonable efforts to complete such work prior to the Commencement Date, subject to the effects of any delays caused by or attributable to Tenant or any other circumstances beyond Landlord's reasonable control (excluding financial inability). Landlord and Tenant shall use their respective best reasonable efforts to develop, review and approve (to the extent required under this Exhibit C), as promptly as reasonably possible, all drawings, plans and/or specifications necessary to create and implement the Approved Plans and Specifications. The cost of construction of Landlord's work under Section 2.4 and this Exhibit C shall generally be borne by Landlord at its sole cost and expense, up to a maximum expenditure by Landlord of Twenty-Five Dollars ($25.00) per square foot as contemplated in Section 3.1 (c) of the Lease. To the extent such cost of construction exceeds $25.00 per square foot, the excess shall result in a rental adjustment in accordance with Section 3.1 (c) of the Lease. Notwithstanding such rental adjustment provisions, Landlord is not required under any circumstances to spend more than Thirty Dollars (30.00) per square foot for its work under Section 2.4 and this Exhibit C, and Landlord shall be entitled to take such limitation into account in determining whether to approve any features proposed by Tenant as part of the process of developing, modifying (if necessary) and implementing the Approved Plans and Specifications. 31 EXHIBIT C --------- ACKNOWLEDGEMENT OF LEASE COMMENCEMENT ------------------------------------- This Acknowledgement is executed as of , 19 . by BRITANNIA HACIENDA IV LIMITED PARTNERSHIP, a Delaware limited partnership ("Landlord"), and Documentum, Inc., a Delaware corporation ("Tenant"), pursuant to Section 2.5 of the Lease dated . 19_ between Landlord and Tenant (the "Lease") covering premises located at Pleasanton, CA 94588 (the "Premises"). Landlord and Tenant hereby acknowledge and agree as follows: 1. The Commencement Date under the Lease is 19_. 2. The termination date under the Lease shall be 19 . subject to any applicable provisions of the Lease for extension or early termination thereof. 3. The final cost of the tenant improvements for the Premises is . Based on that cost, the applicable rental adjustment (if any) and/or payment (if any) required under the Lease is as follows (if none, so state): . 4. Tenant accepts the Premises and acknowledges the satisfactory completion of all improvements therein (if any) required to be made by Landlord, subject only to any applicable "punch list" or similar procedures specifically provided under the Lease and to the other provisions of Section 2.4 and Exhibit of the Lease. EXECUTED as of the date first set forth above. "Landlord" "Tenant" BRITANNIA HACIENDA IV DOCUMENTUM, INC., a LIMITED PARTNERSHIP, a Delaware corporation Delaware limited partnership By : BRITANNIA STONERIDGE, LLC, General Partner By: ________________________ By: ________________________ Its: _______________________ T.J. Bristow Manager EXHIBIT D --------- 32 EX-11.1 4 COMPUTATION OF EARNINGS PER SHARE DOCUMENTUM, INC. EXHIBIT 11.1 COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, ------------------- 1996 1995 --------- --------- Net Income............................................. $ 4,484 $ 1,260 Primary Shares outstanding: Weighted average shares outstanding during the period.............................................. 13,788 1,574 Common stock equivalent shares....................... 959 11,360(1) --------- --------- 14,747 12,934 ========= ========= Fully diluted shares outstanding: Weighted average shares outstanding during the period.............................................. 13,788 1,574 Common stock equivalent shares....................... 967 11,360(1) --------- --------- 14,755 12,934 ========= ========= Primary net income per common stock and common stock equivalent share...................................... $ .30 $ .10 ========= ========= Fully diluted net income per common stock and common stock equivalent share................................ $ .30 $ .10 ========= =========
- -------- (1) Pursuant to Securities and Exchange Commission staff accounting bulletins, common and common equivalent shares, options and warrants issued by the company during the twelve month period prior to the initial public offering have been included as if they were outstanding for all periods presented. EX-23.1 5 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-08709 and No. 333-15239) of Documentum, Inc. of our report dated January 24, 1997 appearing on page F-1 of this Form 10-K. PRICE WATERHOUSE San Jose, California March 24, 1997 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 5,369 46,803 14,600 1,069 0 67,222 9,855 3,515 74,944 15,401 0 0 0 14 59,318 74,944 34,630 45,302 1,923 8,768 31,903 65,158 129 6,899 2,415 4,484 0 0 0 4,484 .30 .30
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