Document:

Stock Repurchase Agreement

 Exhibit 10.1 
  
 STOCK REPURCHASE AGREEMENT 
  
 This Stock Repurchase Agreement (this “Agreement”) is entered into as of November 18, 2003 (the
“Effective Date”) by and between DOCUMENT SCIENCES CORPORATION, a Delaware corporation (the “Company”) and XEROX CORPORATION, a New York corporation (“Seller”). 
  
 RECITALS 
 A. Seller is the owner of 740,024 shares (the “Shares”) of the Company’s common stock, par value $.001 per share (the
“Common Stock”). 
  
 B. Seller desires to sell
and the Company desires to purchase the Shares from Seller in accordance with the terms and conditions set forth in this Agreement. 
  
 AGREEMENT 
  
 In consideration of the mutual covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and Seller agree as follows: 
  
 1. Repurchase
of Shares 
  
 1.1 Purchase Price. As consideration for the Shares, the
Company: 
  
 (a) concurrent herewith is paying to Seller, in cash,
an aggregate purchase price of $2,688,566.39 (the “Purchase Price”), which equals the product of (i) ninety-two percent (92%) of the simple average of the closing prices per share of Common Stock on the Nasdaq SmallCap Market as
reported by Nasdaq for the ten trading day period prior to the Effective Date, or $3.63308 per share (the “Purchase Price Per Share”), multiplied by (ii) the number of Shares; and 
  
 (b) shall pay to Seller any Contingent Payment (as defined in Section
1.3 below) pursuant to the provisions of Section 1.3. 
  
 1.2 Seller
Deliveries. Seller hereby sells, transfers and assigns the Shares to the Company, and concurrent herewith is delivering to the Company the stock certificate(s), duly endorsed in blank or accompanied by duly executed stock powers, representing
the Shares. 
  
 1.3 Contingent Payment. 
  
 (a) Upon the consummation of a Qualifying Acquisition (as defined below), the
Company shall pay to Seller in cash, an amount equal to (A) fifty percent (50%) of the amount by which the consideration received by the stockholders of the Company for each share of common stock in the Qualifying Acquisition exceeds the Purchase
Price per Share, multiplied by (B) the number of Shares (the “Contingent Payment”). Notwithstanding the foregoing, any amount payable to Seller hereunder shall be limited to the maximum amount permitted under applicable law.

  
 (b) If the consideration paid to the stockholders of the
Company in a Qualifying Acquisition is other than cash, for purposes of determining the value of any Contingent Payment, the value of the consideration received by the stockholders of the Company shall be determined by the Company’s board of
directors, in its reasonable judgment. 

 (c) “Qualifying Acquisition” shall mean any of the following transactions, the
consummation of which occurs within nine (9) months after the Effective Date: 
  
 (A) the acquisition by any person, entity or “group”, within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of the voting power of the then outstanding shares of voting securities of the Company; or 
  
 (B) a reorganization, merger or consolidation with any other
person, entity or corporation, other than a merger or consolidation which would result in the Common Stock outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of
another entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such other entity outstanding immediately after such merger or consolidation, or 
  
 (C) the sale or other disposition by the Company of all or
substantially all of the Company’s assets. 
  
 2. Representations and
Warranties of the Company 
  
 The Company represents and warrants to Seller
as follows: 
  
 2.1 Corporate Approvals. The execution and delivery
of this Agreement by the Company and the performance of its obligations hereunder have been duly authorized by all necessary corporate action on the part of the Company. 
  
 2.2 No Current Negotiations. Neither the Company nor any of its representatives is currently engaged in any negotiations or
discussions with any third party relating to the acquisition of the Company, by stock purchase, merger or otherwise. 
  
 2.3 No Violation. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated
hereby do not and will not violate the Securities Act of 1933, as amended or the rules or regulations promulgated thereunder, assuming there is nothing unique about Seller that implicates such representation. 
  
 3. Representations and Warranties of Seller 
  
 Seller represents and warrants to the Company as follows: 
  
 3.1 Good Title. Seller is the beneficial owner of all right, title and interest in,
and to, the Shares and upon payment of the Purchase Price, the Company will receive good and marketable title to the Shares, free and clear of all liens, pledges, security interests, restrictions, prior assignments, options, charges, agreements or
other claims or encumbrances of any kind. The Shares comprise all the capital stock of the Company owned directly, indirectly, beneficially or otherwise by Seller, and Seller does not own nor has any other rights to purchase or otherwise acquire any
other capital stock or other securities of the Company. 
  
 3.2 Corporate
Approvals. The execution and delivery of this Agreement by Seller and the performance of its obligations hereunder have been duly authorized by all necessary corporate action on the part of Seller. 
  
 3.3 No Solicitation by the Company. The transactions contemplated by this Agreement
arose from Seller approaching the Company with respect to a sale of the Shares. 
  
 3.4 Information on the Company. Seller and its advisers, if any, have had sufficient opportunity to investigate the operations, results of operations and financial condition of the Company and have had opportunity to ask questions
and receive answers about the Company’s operations, results of operations, financial condition and prospects and such other information as Seller and its advisors deem appropriate. Seller or its advisors have received all information requested
by Seller and its advisors from the Company. 

 3.5 No Hedging. Seller has not engaged in any “short sale” or other hedging transactions involving
securities of the Company within the ninety (90) days prior to the Effective Date. 
  
 4. Additional Agreements 
  
 4.1 Termination
of Stockholder Rights Agreement and Tax Sharing Agreement. The parties hereby terminate that certain Stockholder Rights Agreement, dated as of September __, 1996, between the Company and Seller and that certain Tax Sharing Agreement, dated as of
August 23, 1996, between the Company and Seller. All rights and obligations of the parties under such agreements are hereby terminated, and such agreements shall be of no further force or effect provided, however, that in the event the transaction
contemplated by this Agreement is unwound, then such agreements will be reinstated as if they had never been terminated. 
  
 4.2 Tax Cooperation. The parties hereto agree to cooperate with each other in respect of all tax audits for periods ending on or including the
Effective Date of this Agreement. Such cooperation shall include (but not be limited to) providing pertinent documentation; access to employees and responding to questions requested by tax auditors. 
  
 4.3 Further Assurances. At any time or from time to time upon the request of a party,
the other party will execute and deliver such further documents and do such other acts as the requesting party may reasonably request in order to effect fully the purposes of this Agreement. 
  
 4.4 Fees, Costs and Expenses. All legal, accounting and other fees, costs and expenses
incurred in connection with this Agreement will be paid by the party incurring such fees, costs and expenses. 
  
 5. Miscellaneous 
  
 5.1 Amendment and
Modification. This Agreement may be amended, modified, or supplemented only by written agreement of Seller and the Company. 
  
 5.2 Waiver of Compliance. Any failure of Seller on the one hand, or the Company on the other hand, to comply with any obligation, covenant, agreement, or condition
herein may be waived by the Company or Seller, respectively, only by a written instrument signed by the party granting such waiver, but such waiver shall not operate as a waiver of, or estoppel with respect to, any subsequent, continuing or other
failure. 
  
 5.3 Notices. All notices and other communications hereunder
must be in writing and will be deemed given (i) when delivered personally by commercial courier service, (ii) three (3) days after being deposited in the United States mail, certified, postage prepaid, return receipt requested, (iii) the next day
when sent by reputable overnight delivery service, overnight delivery requested or (iv) upon receipt if given by facsimile, to the parties at the following addresses (or at such other address for a party as may be specified by like notice):

  

	 If to the Company, to:
	 	Document Sciences Corporation	 	 
	 	 	6339 Paseo Del Lago	 	 	 	 
	 	 	Carlsbad, California 92009	 	 	 	 
	 	 	Attn: John L. McGannon	 	 	 	 
	 	 	Facsimile: (760) 602-1596	 	 	 	 
			
	 with a copy to:
	 	Gibson, Dunn & Crutcher LLP	 	 
	 	 	4 Park Plaza	 	 	 	 
	 	 	Irvine, California 92614	 	 	 	 
	 	 	Attn.: John M. Williams	 	 	 	 
	 	 	Facsimile: (949) 451-4220	 	 	 	 

	 If to Seller, to:
	 	XEROX Corporation
	 	 	800 Long Ridge Road
	 	 	Stamford, Ct 06904
	 	 	Attn: Corporate Controller
	 	 	Facsimile: 203-968-4443
		
	 with a copy to:
	 	Xerox Corporation
	 	 	800 Long Ridge Road
	 	 	Stamford, Ct 06904
	 	 	Attn: General Counsel
	 	 	Facsimile: 203-968-3446

  
 5.4 Binding Effect;
Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Neither Seller nor the Company may assign any of its respective rights, interests, or obligations hereunder without the
prior written consent of the other party. This Agreement is not intended to confer upon any other person except the parties hereto any rights or remedies hereunder. Any purported assignment by a party in violation of this Section 5.4 will be
null, void and without legal effect. 
  
 5.5 Severability.
If any provision of this Agreement is found invalid, illegal, or unenforceable in any jurisdiction, provided that an essential purpose of this Agreement would not be defeated, such provision shall be deemed amended to the extent required to make it
valid, legal and enforceable, and the remaining provisions shall remain in full force and effect in such jurisdiction and shall not render that or any other provision of this Agreement invalid, illegal, or unenforceable in any other jurisdiction.

  
 5.6 Governing Law. This Agreement will be governed by,
construed and enforced in accordance with the internal laws of the State of Delaware without regard to its conflicts of law provisions. 
  
 5.7 Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated
hereby (the “Related Proceedings”) shall be instituted in the state or federal courts of the United States of America located in the State of Delaware (collectively, the “Specified Courts”), and each party
irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any Specified Court as to which jurisdiction is non-exclusive) of the Specified Courts in any Related Proceeding.
Service of any process, summons, notice or document by mail to such party’s address set forth above will be effective service of process for any Related Proceeding brought in any Specified Court. The parties irrevocably and unconditionally
waive any objection to the laying of venue of any Related Proceeding in a Specified Court and shall not plead or claim that any Related Proceeding brought in a Specified Court has been brought in an inconvenient forum. 
  
 5.8 Construction. The captions and titles of the sections of this
Agreement are for convenience of reference only and are not to be considered in construing this Agreement. This Agreement will be construed without regard to any presumption, or other rule requiring the resolution of any ambiguity regarding the
interpretation or construction hereof, against the party causing this Agreement to be drafted. 
  
 5.9 Entire Agreement. This Agreement embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior 

 agreements and understandings and all contemporaneous oral agreements and understandings between the parties with respect
to such subject matter. No discussions regarding or exchange of drafts or comments in connection with the transactions contemplated herein will constitute an agreement among the parties hereto. Each of the parties acknowledges that neither the other
party nor any agent, representative or attorney of such other party has made any promises, agreements, covenants, representations, warranties or other inducements whatsoever, either express or implied, written or oral, concerning the subject matter
of this Agreement that is not contained in this Agreement. 
  
 5.10 Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one instrument. Signatures transmitted by facsimile will be deemed original
signatures. 
  
 5.11 Survival. The representations and
warranties of the parties contained in this Agreement shall survive the consummation of the transactions contemplated hereby. 
  
 [The remainder of this page has been intentionally left blank; signature page follows.] 

 IN WITNESS WHEREOF, the parties have caused this Agreement to become effective as of the Effective Date.

  
  

	DOCUMENT SCIENCES CORPORATION, a Delaware corporation
		
	By:	 	/s/    John L. McGannon         
	 	

	 	 	 John L. McGannon
 Chief Executive Officer

  

	XEROX CORPORATION, a New York corporation
		
	By:	 	/s/    Harry R. Beeth      
	 	

	 	 	 Harry R. Beeth
 Vice President & ControllerEXHIBIT 4.2

            CERTIFICATE TO PROVIDE FOR THE DESIGNATION, PREFERENCES,
          RIGHTS, QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS THEREOF,
                        OF THE SERIES A PREFERRED STOCK,

                          -----------------------------

The first series of Preferred Stock shall be comprised of eleven thousand
(11,000) shares and shall be designated "Series A Preferred Stock."

The relative rights, preferences, privileges and restrictions granted to or
imposed upon the Series A Preferred Stock are as follows:

1.       Definitions: For purposes of this certificate:

         (a) "Additional Shares of Common Stock" shall have the meaning set
forth in Section 6(c)(i)(A)(3).

         (b) "Conversion Rights" shall have the meaning set forth in Section 6.

         (c) "Convertible Securities" shall have the meaning set forth in
Section 6(c)(i)(A)(2).

         (d) "Corporate Sale" shall have the meaning set forth in Section 3(c).

         (e) "Dilution Price" shall have the meaning set forth in Section
6(c)(i)(D).

         (f) "Holder's Pro Rata Share" shall have the meaning set forth in
Section 7(a).

         (g) "New Series A Conversion Price" shall have the meaning set forth in
Section 6(c)(i)(D)(1).

         (h) "Notice" shall have the meaning set forth in Section 7(b)(i)(A).

         (i) "Offered Shares" shall have the meaning set forth in Section
7(b)(i).

         (j) "Options" shall have the meaning set forth in Section
6(c)(i)(A)(1).

         (k) "Original Series A Conversion Ratio" shall have the meaning set
forth in Section 6(a).

         (l) "Preemptive Rights" shall have the meaning set forth in Section
7(a).

         (m) "Recapitalization Event" shall have the meaning set forth in
Section 3(a).

         (n) "Series A Conversion Price" shall have the meaning set forth in
Section 6(c)(i)(B).

         (o) "Series A Conversion Ratio" shall have the meaning set forth in
Section 6(a).
<PAGE>
         (p) "Series A Original Issue Date" shall have the meaning set forth in
Section 6(c)(i)(A)(4).

         (q) "Series A Original Issue Price" shall have the meaning set forth in
Section 3(a).

2.       Dividends. The holders of shares of Series A Preferred Stock shall be
entitled to receive dividends, out of assets legally available therefor, prior
and in preference to any declaration or payment of any dividend (payable other
than in Common Stock or other securities and rights convertible into or
entitling the holder thereof to receive, directly or indirectly, additional
shares of Common Stock of the Corporation) on the Common Stock of the
Corporation, at a rate of $25.00 per share per annum out of surplus funds
determined by the board of directors to be available for payment thereof,
provided, that, if in any year a dividend (payable other than in Common Stock or
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of the
Corporation) is declared and paid on any shares of Common Stock, the holders of
Series A Preferred Stock shall be entitled to receive, in lieu of the foregoing,
the greater of (i) $25.00 per share or (ii) an amount equal to the dividend(s)
that would have been paid to the holder of a share of Series A Preferred Stock
had the Series A Preferred Stock been converted into Common Stock immediately
prior to the record date(s) for such dividend(s) on the Common Stock. Such
dividends shall accrue on each share from the date of issuance of such share and
shall accrue from day to day, whether or not earned or declared. Such dividend
shall be paid when declared by the board of directors. Such dividends shall not
be cumulative. Unpaid dividends shall not represent a contingent claim against
the Corporation.

3.       Liquidation Preference. In the event of the liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, distributions to
the shareholders of the Corporation shall be made in the following manner:

         (a) Preference. The holders of Series A Preferred Stock shall be
entitled to receive prior and in preference to any distribution of any assets or
property of the Corporation to the holders of Common Stock by reason of their
ownership hereof, an amount equal to $875.00 per share (the "Series A Original
Issue Price") (as adjusted for any consolidations, combinations, stock
distributions, stock dividends, stock splits or similar events, each a
"Recapitalization Event"), plus an amount equal to all accrued but unpaid
dividends. If, upon the occurrence of such event, the assets and funds available
for distribution are insufficient to permit the payment to the holders of Series
A Preferred Stock of the full preferential amount, then the entire assets and
funds of the Corporation legally available for distribution to shareholders
shall be distributed among the holders of the Series A Preferred Stock ratably
in proportion to the relative preferential amounts which they would be entitled
to receive pursuant to the preceding sentence of this Section 3(a).

         (b) Remaining Assets. After payment has been made to the holders of
Series A Preferred Stock pursuant to Section 3(a), if any remaining assets of
the Corporation are available for distribution to shareholders, the holders of
the Common Stock of the Corporation shall receive all of the remaining assets of
the Corporation, and the holder of the Series A Preferred Stock shall not
further participate therein.

         (c) Reorganization or Merger. A reorganization or merger of the
Corporation with or into any other corporation or corporations, in which the
shareholders of the Corporation immediately prior to the transaction hold less
than a majority of the voting stock immediately after the transaction, or any
transaction or series of transactions resulting in the sale, transfer, lease or
other disposition (but not including a transfer by pledge or mortgage to a bona
fide lender) of all or substantially all of the assets of the Corporation (other
than to a wholly-owned subsidiary) or any transaction or series of related
transactions to which the Corporation is a party in which the shareholders of
the Corporation immediately

                                      -2-
<PAGE>
prior to the transaction hold less than a majority of the voting stock
immediately after the transaction (any such transaction or series of
transactions, a "Corporate Sale") shall be deemed to be a liquidation within the
meaning of this Section 3. Any securities to be delivered to the holders of the
Preferred Stock and Common Stock upon a Corporate Sale or any merger or
reorganization of the Corporation shall be valued as determined in good faith by
the Board of Directors of the Corporation.

4.       Voting Rights. The Series A Preferred Stock shall be nonvoting in all
matters other than those matters where voting is specifically required by the
Oregon Business Corporation Act and as otherwise provided in this Section 4.
Each share of Series A Preferred Stock shall be entitled to a number of votes
equal to the number of shares of Common Stock into which such share of Series A
Preferred Stock could be converted on the record date for the vote or written
consent of shareholders on all matters on which the holders of Series A
Preferred Stock must be permitted to vote under the Oregon Business Corporation
Act and shall vote with the holders of the Common Stock and not as a separate
class on (i) on any merger or consolidation of the Corporation with one or more
other corporations in which the shareholders of the Corporation immediately
after such merger or consolidation hold stock representing less than a majority
of the voting power of the outstanding stock of the surviving corporation; and
(ii) the sale of all or substantially all the Corporation's assets. The holders
of Series A Preferred Stock shall be entitled to vote as required under the
Oregon Business Corporation Act on the following matters: (i) any increase or
decrease in the aggregate number of authorized shares of Series A Preferred
Stock; (ii) any action that effects an exchange or reclassification of all or a
part of the Series A Preferred Stock into shares of another class of stock;
(iii) any action that effects an exchange or reclassification or creates the
right of exchange of all or part of the shares of another class of stock into
the Series A Preferred Stock; (iv) any action that changes the designation,
rights, preferences or limitations of the Series A Preferred Stock; (v) any
stock split, stock dividend or other recapitalization of the Series A Preferred
Stock; (vi) any action that authorizes, creates or issues shares of any class of
stock having preferences superior to or on parity with the Series A Preferred
Stock; (vii) any action that reclassifies any outstanding shares into shares
having preferences or priority as to dividends or assets senior to or on parity
with the preference of the Series A Preferred Stock; (viii) any action that
limits or denies the preemptive rights of the Series A Preferred Stock; (ix) any
action that cancels or otherwise affects the rights of the Series A Preferred
Stock to dividends that have accumulated but not yet been declared; and (x) the
liquidation or dissolution of the Corporation. The holder of each share of
Series A Preferred Stock shall be entitled to notice of any shareholders'
meeting in accordance with the bylaws of the Corporation and shall vote with
holders of the Common Stock at any annual or special meeting of shareholders of
the Corporation, or by written consent, upon those matters required by law or by
this paragraph to be submitted to a separate class vote. Fractional votes shall
not, however, be permitted and any fractional voting rights resulting from the
above formula (after aggregating all shares of Common Stock into which shares of
Series A Preferred Stock held by each holder could be converted) shall be
rounded down to the nearest whole number.

5.       Redemption. The Series A Preferred Stock is not redeemable.

6.       Conversion. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):

         (a) Optional Conversion. Each share of Series A Preferred Stock shall
be convertible, at the option of the holder thereof, at (i) any time beginning
three (3) years after the Series A Original Issue Date (as defined in Section
6(c)(i)(A)(4)), or (ii) upon the occurrence of a Corporate Sale as defined in
Section 3(c), conversion shall be effected at the office of the Corporation or
any transfer agent of the Corporation for the Series A Preferred Stock, into
such number of fully paid and nonassessable shares of Common Stock as shall be
determined by multiplying the number of shares of Series A Preferred held by
such holder by the Series A Conversion Ratio (determined as provided herein) in
effect at the time of conversion. The "Original Series A Conversion Ratio" shall
be 87.50 shares of Common Stock for each

                                      -3-
<PAGE>
share of Series A Preferred Stock. The number of shares of Common Stock into
which each share of Series A Preferred Stock may be converted at any given time
is hereinafter referred to as the "Series A Conversion Ratio." The Series A
Conversion Ratio then in effect shall be subject to adjustment as set forth in
Section 6(c) below.

         (b) Automatic Conversion. Each share of Series A Preferred Stock shall
automatically be converted into fully paid and nonassessable shares of Common
Stock at the then effective Series A Conversion Rate, immediately and without
action by any person, five (5) years after the Series A Original Issue Date (as
defined in Section 6(c)(i)(A)(4)).

         (c) Adjustments to Series A Conversion Ratio.

                  (i)      Dilutive Issuances

                           (A) Special Definitions. For purposes of this Section
6(c)(i), the following definitions shall apply:

                                    (1) "Options" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities (as defined below) not otherwise excluded from the
definition of Additional Shares of Common Stock (as defined below).

                                    (2) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities convertible into or
exchangeable for Common Stock not otherwise excluded from the definition of
Additional Shares of Common Stock (as defined below).

                                    (3) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Section 6(c)(i)(C)
below, deemed to be issued) by the Corporation after the Series A Original Issue
Date (as defined below), other than shares of Common Stock issued or issuable:

                                (aa)  upon conversion of shares of Series A
                                      Preferred Stock;

                                (bb)  shares to officers, directors or employees
                                      of, or consultants to, the Corporation
                                      pursuant to any equity based or
                                      incentive-based compensation plan that
                                      existed as of the Series A Original Issue
                                      Date;

                                (cc)  in connection with the acquisition by the
                                      Corporation of another business entity or
                                      majority ownership thereof, the assets of
                                      another business entity, or any other
                                      business combination approved by the Board
                                      of Directors;

                                (dd)  in connection with a transaction described
                                      in Section 6(c)(ii);

                                (ee)  by way of dividend or other distribution
                                      on shares of Common Stock excluded from
                                      the definition of Additional Shares of
                                      Common Stock by the foregoing clauses (aa)
                                      through (dd).

                                    (4) "Series A Original Issue Date" shall
mean the date on which the Series A Preferred Stock is first issued by the
Corporation.

                                      -4-
<PAGE>
                           (B) No Adjustment of Series A Conversion Price. No
adjustment in the Series A Conversion Price shall be made with respect to the
issuance of Additional Shares of Common Stock unless the consideration per share
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Series A Conversion Price, as defined below, in
effect on the date of, and immediately prior to, such issue. The "Series A
Conversion Price" at any time shall be the quotient of the Series A Original
Issue Price, as adjusted for any Recapitalization Event, divided by the Series A
Conversion Ratio then in effect.

                           (C) Deemed Issue of Additional Shares of Common
Stock. In the event the Corporation at any time or from time to time after the
Series A Original Issue Date shall issue any Options or Convertible Securities
or shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities, then
the maximum number of shares of Common Stock issuable upon the exercise of such
Options or, in the case of Convertible Securities, the conversion or exchange of
the Convertible Securities (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent adjustment
of such number) shall be deemed to be Additional Shares of Common Stock issued
as of the time of the issuance of such Option or Convertible Security or, in
case such a record date shall have been fixed, as of the close of business on
such record date:

                                    (1) except as provided in Section
6(c)(i)(C)(2) and 6(c)(i)(C)(3) below, no further adjustment in the Series A
Conversion Ratio shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;

                                    (2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any change in the consideration payable to the Corporation, or change in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof (other than under or by reason of provisions designed to
protect against dilution), a Series A Conversion Ratio computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto) and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities;

                                    (3) upon the expiration or other termination
of any unexercised Options or Convertible Securities, the Series A Conversion
Ratio, to the extent in any way affected by or computed using such Options or
Convertible Securities, shall be recomputed to reflect the issuance of only the
number of shares of Common Stock actually issued upon the exercise of such
Options or Convertible Securities; and

                                    (4) no readjustment pursuant to Section
6(c)(i)(C) clauses (2) and (3) above shall have the effect of reducing the
Series A Conversion Ratio to a ratio less than the greater of (1) the Series A
Conversion Ratio on the Series A Original Issue Date or (2) the Series A
Conversion Ratio that would have resulted from any issuance of Additional Shares
of Common Stock between the Series A Original Issue Date and such readjustment
date.

                           (D) Adjustment of Series A Conversion Ratio Upon
Issuance of Additional Shares of Common Stock Below Purchase Price. In the event
this Corporation shall issue Additional Shares of Common Stock after the Series
A Original Issue Date, without consideration or for a consideration per share
less than the Series A Conversion Price in effect on the date of and immediately
prior to such issue (such issuance price being referred to herein as the
"Dilution Price"), then and in each

                                      -5-
<PAGE>
such event the Series A Conversion Ratio shall automatically be adjusted as set
forth in this Section 6(c)(i)(D).

                                    (1) Adjustment Formula. Whenever the Series
A Conversion Ratio is adjusted by Section 6(c)(i)(D), the new Series A
Conversion Ratio shall be determined by dividing the Series A Original Purchase
Price by the "New Series A Conversion Price", which shall be determined by
multiplying the Series A Conversion Price then in effect by a fraction, (x) the
numerator of which shall be the sum of (i) the number of shares of Common Stock
outstanding immediately prior to such issue plus (ii) the number of shares of
Common Stock which the aggregate consideration received by the Corporation for
the total number of Additional Shares of Common Stock so issued would purchase
at such Series A Conversion Price in effect immediately prior to such issuance,
and (y) the denominator of which shall be the sum of (i) the number of shares of
Common Stock outstanding immediately prior to such issues plus (ii) the number
of such additional shares of Common Stock so issued. For the purposes of this
paragraph, the number of outstanding shares of Common Stock shall be deemed to
include the Common Stock issuable on conversion of all other outstanding
Preferred Stock, upon conversion or exercise of any other outstanding
Convertible Securities and upon exercise of all reserved Options (and assuming
conversion of Convertible Securities issuable upon exercise of Options).

                           (E) Determination of Consideration. For purposes of
this Section 6(c)(i)(E), the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as follows:

                                    (1) Cash and Property: Such consideration
shall:

                                            (aa) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation after
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by the Corporation for any underwriting, commission, finder's fee or
otherwise in connection with the issuance and sale thereof;

                                            (bb) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined by the Board of Directors in the good faith exercise
of its reasonable business judgment; and

                                            (cc) in the event Additional Shares
of Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the proportion
of such consideration so received, computed as provided in clauses (aa) and (bb)
above, as determined in good faith by the Board.

                                    (2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 6(c)(i)(C), relating
to Options and Convertible Securities, shall be determined by dividing:

                                            (aa) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such Options
or the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by

                                      -6-
<PAGE>
                                            (bb) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities

                  (ii) Other Adjustments to Series A Conversion Ratio.

                           (A) Subdivisions, Combinations, or Consolidations of
Common Stock. In the event the outstanding shares of any class of Common Stock
shall be subdivided, combined or consolidated, by stock split, stock dividend,
combination or like event, into a greater or lesser number of shares of Common
Stock after the Series A Original Issue Date, the Series A Conversion Ratio in
effect immediately prior to such subdivision, combination, consolidation or
stock dividend shall, concurrently with the effectiveness of such subdivision,
combination or consolidation, be proportionately adjusted.

                           (B) Distributions Other than Cash Dividends Out of
Retained Earnings. In case the Corporation shall declare a cash dividend upon
any class of its Common Stock payable otherwise than out of retained earnings or
shall distribute to holders of any class of its Common Stock shares of its
capital stock (other than shares of any class of Common Stock and other than as
otherwise adjusted in this Section 6(c)), stock or other securities of other
persons, evidences of indebtedness issued by the Corporation or other persons,
assets (excluding cash dividends) or options or rights (excluding options to
purchase and rights to subscribe for any class of Common Stock or other
securities of the Corporation convertible into or exchangeable for any class of
Common Stock), then, in each such case, provision shall be made so that the
holders of Series A Preferred Stock shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable thereupon, the
amount of cash or securities of the Corporation which they would have received
had their Series A Preferred Stock been converted into Common Stock on the date
of such event and had they thereafter, during the period from the date of such
event to and including the date of conversion, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 5 with respect to
the rights of the holders of the Series A Preferred Stock.

                           (C) Adjustment for Common Stock Dividends and
Distributions. If, after the Series A Original Issue Date, the Corporation at
any time or from time to time makes, or fixes a record date for determination of
holders of any class of Common Stock entitled to receive, a dividend or other
distribution payable in additional shares of any class of Common Stock, in each
such event the Series A Conversion Ratio that is then in effect shall be
increased as of the time of such issuance or, in the event such record date is
fixed, as of the close of business on such record date, by multiplying the
Series A Conversion Ratio then in effect by a fraction of (A) the numerator of
which is the total number of shares of all classes of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of any class of Common
Stock issuable in payment of such dividend or distribution; and (B) the
denominator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date, provided, however, that if such record date is
fixed and such dividend is not fully paid or if such distribution is not fully
made on the date fixed therefor, the Series A Conversion Ratio shall be
recomputed accordingly as of the close of business on such record date and
thereafter the Series A Conversion Ratio shall be adjusted pursuant to Section
6(c)(ii)(C) to reflect the actual payment of such dividend or distribution.

                           (D) Reclassifications and Reorganizations. In the
case, at any time after the date hereof, of any capital reorganization (except
as provided in Section 3(c)) or any reclassification of the stock of the
Corporation (other than as a result of a stock dividend or subdivision, split-up
or combination of shares), the Series A Conversion Ratio then in effect shall,
concurrently with the

                                      -7-
<PAGE>
effectiveness of such reorganization or reclassification, be proportionately
adjusted such that the shares of the Series A Preferred Stock shall, after such
reorganization or reclassification, be convertible into the kind and number of
shares of stock or other securities or property of the Corporation or otherwise
to which such holder would have been entitled if immediately prior to such
reorganization or reclassification, the holder had converted the holder's shares
of the Series A Preferred Stock into Common Stock. The provisions of this
Section 6(c)(ii)(D) shall similarly apply to successive reorganizations,
reclassifications, consolidations or Corporate Sales.

         (d) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Series A Conversion Ratio pursuant to this
Section 6, the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and shall furnish to each
holder of the Series A Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of the Series A Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Series A Conversion Ratio then in effect
and (iii) the number of shares of Common Stock and the type and amount, if any,
of other property which then would be received upon the conversion of the Series
A Preferred Stock.

         (e) Mechanics of Conversion. Before any holder of Series A Preferred
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the headquarters of the Corporation or of any transfer agent for the
Corporation and shall give written notice to the Corporation at such office that
the holder elects to convert the same and shall state therein the name or names
in which the certificate or certificates for shares of Common Stock are to be
issued (except that no such written notice of election to convert shall be
necessary in the event of an automatic conversion pursuant to Section 6(b)
hereof). The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which he or she shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A Preferred
Stock to be converted (except that in the case of an automatic conversion
pursuant to Section 6(b) hereof such conversion shall be deemed to have been
made as of 12:01 a.m., Pacific time, on the date referred to in Section 6(b))
and the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on such date. On the date
specified in Section 6(b) above, the outstanding shares of Series A Preferred
Stock shall be converted automatically without any further action by the holders
of such shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided, however, that
the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless the certificates
evidencing such shares of Series A Preferred Stock are either delivered to the
Corporation or its transfer agent as provided above, or the holder notifies the
Corporation or its transfer agent that such certificates have been lost, stolen
or destroyed and executes an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with such
certificates.

         (f) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of shares of Series A Preferred Stock. In lieu of any
fractional shares to which the holder of Series A Preferred Stock would
otherwise be entitled, the Corporation shall pay cash equal to such fraction
multiplied by the fair market value of one share of Common Stock determined on
the basis of the closing sale price of the Corporation's Common Stock on the day
before such conversion, or if none, then as determined in good faith by the
Board of Directors of the Corporation. The number of whole shares

                                      -8-
<PAGE>
issuable to each holder upon such conversion shall be determined on the basis of
the number of shares of Common Stock issuable upon conversion of the total
number of shares of Series A Preferred Stock of each holder at the time
converting into Common Stock.

         (g) No Dilution or Impairment. Without the consent of the Series A
Preferred Stock in accordance with Section 4, the Corporation will not amend its
Articles of Incorporation or participate in any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, for the purpose of avoiding
or seeking to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation, but will at all times in
good faith assist in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series A Preferred Stock against dilution or other impairment.

         (h) Status of Converted Shares. Following any optional or automatic
conversion of the Series A Preferred Stock to Common Stock, the transfer records
respecting the Series A Preferred Stock shall be closed and no subsequent
transfers thereof shall be recognized. No shares of Series A Preferred Stock
which have been converted into Common Stock shall ever again be reissued and all
such shares so converted shall upon such conversion be appropriately canceled on
the books of the Corporation and shall be restored to the status of authorized
but unissued Preferred Stock of the Corporation, undesignated as to series.

         (i) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series A Preferred Stock such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series A Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred Stock, the
Corporation shall take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.

7.       Preemptive Rights. The holders of Series A Preferred Stock shall have
such preemptive rights as follows:

         (a) Rights to Purchase Additional Common Stock. If the Corporation
issues any shares of Common Stock subsequent to the Series A Original Issue
Date, each holder of the Series A Preferred Stock shall have the right to
purchase up to such holder's pro rata share of such shares of Common Stock being
issued on the same terms and conditions as the Corporation is willing to sell
such shares to any other person (the "Preemptive Rights"). Each holder's pro
rata share of the Common Stock being issued equals the proportion that (x) the
number of shares of Common Stock that are then issuable to such holder upon
conversion of the Series A Preferred Stock bears to (y) the total number of
shares of Common Stock of the Corporation then outstanding (assuming full
conversion and exercise of all convertible and exercisable securities then
outstanding) (the "Holder's Pro Rata Share"). Notwithstanding the foregoing, a
holder of Series A Preferred Stock shall have no preemptive rights with respect
to shares of Common Stock issued for the following purposes:

                  (i) upon conversion of shares of Series A Preferred Stock;

                  (ii) shares to officers, directors or employees of, or
consultants to, the Corporation pursuant to a warrant, stock grant, option
agreement or plan, purchase plan or other employee stock incentive program or
agreement that is in effect as of the Series A Original Issue Date or is
approved by the

                                      -9-
<PAGE>
holders of the Common Stock of the Corporation in accordance with
then-applicable rules of the Nasdaq Stock Market;

                  (iii) upon conversion of any warrant, stock grant, option
agreement or other security outstanding at the Series A Original Issue Date that
is convertible into or exchangeable for Common Stock;

                  (iv) in connection with a merger, acquisition of assets or
other business combination of another business entity approved by the Board of
Directors of the Corporation;

                  (v) by way of dividend or other distribution on shares of the
Corporation's capital stock.

         (b) Notice. The exercise of the Preemptive Rights is subject to the
following provisions:

                  (i) Each time the Corporation proposes to offer any shares of
Common Stock subsequent to the Series A Original Issue Date as set forth in
Section 7(a) above (the "Offered Shares"), the Corporation shall first make an
offering of such Offered Shares to each holder of Series A Preferred Stock in
accordance with the following provisions:

                           (A) The Corporation shall deliver a notice ("Notice")
to the holder of Series A Preferred Stock stating (i) its bona fide intention to
offer such Offered Shares, (ii) the number of such Offered Shares to be offered
and (iii) the terms upon which it proposes to offer such Offered Shares.

                           (B) By written notification received by the
Corporation within fifteen (15) calendar days after the giving of Notice, each
holder of Series A Preferred Stock may elect to purchase, at the price and on
the terms specified in the Notice, up to that portion of such Offered Shares
that equals such Holder's Pro Rata Share.

                  (ii) If all Offered Shares that such holders of Series A
Preferred Stock are entitled to obtain pursuant to subsection 6(a) are not
elected to be obtained as provided in subsection 6(b)(ii) hereof, the
Corporation may, during the ninety (90) day period following the expiration of
the period provided in subsection 6(b)(ii) hereof, offer the remaining
unsubscribed portion of such Offered Shares to any person or persons at a price
not less than that, and upon terms no more favorable to the offeree than those,
specified in the Notice. If the Corporation does not enter into an agreement for
the sale of the Offered Shares within such period, or if such agreement is not
consummated within sixty (60) days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such Offered Shares shall not be
offered unless first reoffered to the holders of Series A Preferred Stock in
accordance herewith.

                                      -10-

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