UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number 0-15997
FILENET CORPORATION
(Exact name of registrant as specified in its charter)
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Delaware 95-3757924
FILENET CORPORATION
3565 Harbor Boulevard
Costa Mesa, CA 92626
(714) 966-3400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Title Outstanding
Common Stock 15,202,354 as of May 9, 1997
<PAGE>
FILENET CORPORATION
Index
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
as of March 31, 1997 and December 31, 1996...................... 1
Consolidated Statements of Operations
for the quarters ended March 31, 1997 and 1996.................. 2
Consolidated Statements of Cash Flows
for the quarters ended March 31, 1997 and 1996.................. 3
Notes to Consolidated Financial Statements...................... 4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition......................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 11
Item 5. Certain Considerations.......................................... 12
Item 6. Exhibits and Reports on Form 8-K................................ 15
SIGNATURE....................................................... 16
INDEX TO EXHIBITS............................................... 17
<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
FILENET CORPORATION
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 29,308 $ 28,530
Short-term marketable securities.............. 28,610 22,037
------ ------
Total cash and short-term marketable
securities............................... 57,918 50,567
------ ------
Accounts receivable, net...................... 43,941 75,469
Inventories................................... 7,819 8,794
Prepaid expenses and other.................... 7,409 8,336
Deferred income taxes......................... 6,016 5,641
----- -----
Total current assets............................... 123,103 148,807
------- -------
Net property and equipment......................... 28,583 28,329
Long-term marketable securities.................... 13,057 16,705
Other.............................................. 2,103 1,838
----- -----
Total assets....................................... $166,846 $195,679
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 11,442 $ 16,752
Accrued liabilities:
Compensation.............................. 8,796 10,728
Unearned maintenance revenue.............. 4,585 5,554
Royalties................................. 3,343 4,531
Other..................................... 13,315 21,903
------ ------
Total current liabilities.......................... 41,481 59,468
------ ------
Deferred income taxes.............................. 3,373 3,405
Stockholders' equity:
Common stock - $.01 par value; authorized,
100,000,000 shares; issued and outstanding
15,330,306 and 15,230,566 shares at
March 31, 1997 and December 31, 1996,
respectively................................ 128,735 127,813
Retained earnings (accumulated deficit)....... (1,546) 7,874
Other......................................... (629) 1,687
---- -----
126,560 137,374
Less 200,000 Treasury shares at cost 4,568 4,568
----- -----
Total stockholders' equity......................... 121,992 132,806
------- -------
Total liabilities and stockholders' equity......... $166,846 $195,679
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
FILENET CORPORATION
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Revenue:
Software revenue.......................... $ 22,082 $ 37,118
Service revenue........................... 18,237 17,215
Hardware revenue.......................... 7,243 12,411
----- ------
Total revenue.................................. 47,562 66,744
------ ------
Costs and expenses:
Cost of software revenue.................. 2,999 3,863
Cost of service revenue................... 13,131 11,450
Cost of hardware revenue.................. 5,329 8,219
Research and development.................. 10,140 8,422
Selling, general and administrative....... 29,766 30,027
Merger, restructuring and write-off of
purchased in-process research and
development costs........................ - 16,011
------ ------
Total costs and expenses....................... 61,365 77,992
------ ------
Operating loss................................. (13,803) (11,248)
Other income, net.............................. 721 831
--- ---
Loss before income taxes....................... (13,082) (10,417)
Provision (benefit) for income taxes........... (3,662) 1,403
------ -----
Net loss....................................... $ (9,420) $(11,820)
======== ========
Net loss per share............................. $ (0.63) $ (0.79)
======== ========
Weighted average common shares outstanding..... 15,045 14,882
====== ======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
FILENET CORPORATION
Consolidated Statements Of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................. $ (9,420) $(11,820)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Write-off of purchased in-process
research and development costs....... - 10,011
Depreciation and amortization.......... 3,353 2,872
Provision for losses on accounts
receivable........................... 23 110
Changes in operating assets and
liabilities, net of acquisition:
Accounts receivable.............. 30,090 (11,831)
Inventories...................... 1,090 (843)
Prepaid expenses................. 617 (1,079)
Accounts payable................. (5,108) 184
Accrued liabilities:
Compensation................. (1,863) (1,302)
Unearned maintenance revenue. (954) 2,155
Royalties.................... (1,188) 24
Other............................ (8,436) 6,560
------ -----
Net cash provided (used) by operating
activities................................... 8,204 (4,959)
----- ------
Cash flows from investing activities:
Proceeds from sale of equipment........... 70 2,848
Capital expenditures...................... (4,059) (4,856)
Payment for purchase of IFSL.............. - (11,711)
Purchase of marketable securities......... (14,215) (6,029)
Proceeds from sales and maturity of
marketable securities................... 11,260 12,317
------ ------
Net cash used by investing activities.......... (6,944) (7,431)
------ ------
Cash flows from financing activities:
Proceeds from issuance of common stock.... 922 2,456
Effect of exchange rate changes on cash and
cash equivalents............................. (1,404) (92)
------ --
Net increase (decrease) in cash and cash
equivalents.................................. 778 (10,026)
Cash and cash equivalents, beginning of year... 28,530 43,378
------ ------
Cash and cash equivalents, end of period....... $ 29,308 $ 33,352
======== ========
Supplemental cash flow information:
Interest paid............................. $ 38 $ 108
Income taxes paid......................... $ 718 $ 625
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
FILENET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the management of FileNet Corporation ("the Company"),
the accompanying unaudited consolidated financial statements reflect
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position of the Company at March 31, 1997 and
the results of its operations and cash flows for the fiscal quarters ended
March 31, 1997 and 1996. Certain information and footnote disclosures
normally included in financial statements have been condensed or omitted
pursuant to rules and regulations of the Securities and Exchange Commission
("SEC"), although the Company believes that the disclosures in the
consolidated financial statements are adequate to ensure the information
presented is not misleading. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto, and Management's Discussion and Analysis of Results of Operations
and Financial Condition contained in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, and with the Company's
Current Report on Form 8-K, dated April 1, 1997, and filed by the Company
with the SEC on April 1, 1997. The results of operations for the interim
periods are not necessarily indicative of the operating results for the
year.
2. Certain reclassifications have been made to the prior year's consolidated
financial statements to conform with the current year's presentation.
3. Net loss per share was based upon the weighted average number of actual
shares of common stock outstanding.
4. The $16.0 million merger, restructuring and write-off of purchased
in-process research and development costs for the three months ended March
31, 1996, consisted of $10.0 million for the write-off of purchased
in-process research and development costs related to the acquisition of
International Financial Systems, Ltd. ("IFSL"), $4.2 million in merger
costs related to the acquisition of Saros Corporation ("Saros"), and $1.8
million in restructuring costs related to the acquisitions of Saros and
Watermark Software, Inc. ("Watermark").
5. During April 1997 the Company announced a restructuring plan to reduce
operating expenses by consolidating the Watermark business unit's
Burlington, Massachusetts engineering and marketing functions with those at
FileNet's Costa Mesa, California location as well as reduce headcount in
certain other areas of the Company. In connection with this plan, the
Company plans to record an estimated $6.0 million of restructuring and
other charges during the second quarter ended June 30, 1997. The
restructuring charge will consist primarily of severance costs, write-off
of impaired assets, and facility closing costs.
6. During 1997, the Financial Accounting Standards Board issued Statement No.
128 (SFAS 128), "Earnings Per Share." Under SFAS 128, the Company will be
required to disclose basic earnings per share and diluted earnings per
share for all periods for which an income statement is presented, which
will replace disclosure currently being made for primary earnings per share
and fully diluted earnings per share. SFAS 128 requires adoption for fiscal
periods ending after December 15, 1997. There is expected to be no impact
on primary or fully diluted earnings per share for the three months ended
March 31, 1997 and 1996.
4
<PAGE>
7. In October 1994, Wang Laboratories, Inc. ("Wang") filed a complaint in the
United States District Court for the District of Massachusetts alleging
that the Company is infringing five patents held by Wang. On June 23, 1995,
Wang amended its complaint to include an additional related patent. On July
2, 1996, Wang filed a complaint in the same court alleging that Watermark,
formerly a wholly-owned subsidiary that was merged into the Company, is
infringing three of the same patents asserted in the initial complaint. On
October 9, 1996, Wang withdrew its claim that one of the patents it
initially asserted is infringed by the Company's products which were
commercialized before the initial complaint was filed. Wang reserved the
right to assert that patent against the Company's products commercialized
after that date in a separate lawsuit. Based on the Company's analysis of
these Wang patents and their respective file histories, the Company
believes that it has meritorious defenses to Wang's claims; however, the
ultimate outcome or any resulting potential loss cannot be determined at
this time.
In March 1997, Eastman Kodak Company ("Kodak") purchased the Wang imaging
business unit that has responsibility for this litigation. The patents in
the suit have been transferred to a Kodak subsidiary, Kodak Limited of
England, which in turn has exclusively licensed them to another Kodak
subsidiary, Eastman Software, Inc. in the United States. The Company cannot
predict what, if any, impact this will have on the litigation. If it should
be determined that the patents at issue in the litigation are valid and are
infringed by any of the Company's products, including Watermark products,
the Company will, depending on the product, redesign the infringing
products or seek to obtain a license to market the products. There can be
no assurance that the Company will be able to obtain such a license on
acceptable terms.
On December 20, 1996, plaintiff Michael I. Goldman filed a class action
complaint against the Company and certain of its officers and directors in
the Superior Court of California, County of Orange (the "State Action").
The action was purportedly filed on behalf of a class of purchasers of the
Company's common stock during the period October 19, 1995 through July 2,
1996. Plaintiff alleges that the Company and other defendants violated Cal.
Corp. Code Sections 25400 and 25500, Cal. Civ. Code Sections 1709-1710 and
Cal. Bus. & Prof. Code Sections 17200 et seq. in connection with various
public statements made by the Company and certain of its officers and
directors during the putative class period. The complaint seeks unspecified
compensatory and punitive damages, interest, attorneys' fees, expert
witness fees, costs, and equitable or injunctive relief.
On April 1, 1997, plaintiff Michael I. Goldman filed another class action
complaint against the Company and certain of its officers and directors in
the United States District Court for the Central District of California
(the "Federal Action"). The action purportedly was filed on behalf of the
same class of purchasers of the Company's common stock as the State Action.
The allegations contained in the Federal Action are very similar to the
allegations contained in the State Action, except that the Federal Action
asserts claims under Sections 10(b) and 20(a) of the Securities Exchange
Act and Rule 10b-5. The complaint seeks unspecified compensatory damages,
interest, attorneys' fees, expert witness fees, costs and equitable or
injunctive relief. The Company has not yet responded to the complaint in
the Federal Action.
In the State Action, on April 14, 1997, the Company filed a motion to stay
all proceedings in light of the filing of the Federal Action by the same
plaintiff. This motion was denied without prejudice by the Court on May 13,
1997, and the case was assigned to the Complex Case Panel of Judges. On
April 15, 1997, the Company filed a demurrer and motion to strike in the
State Action which are scheduled to be heard by the Court on July 1, 1997,
but may be delayed in light of the newly assigned judge. Discovery is
proceeding in the State Action.
5
<PAGE>
The Company believes that all of the allegations contained in the
complaints filed in the State and Federal Actions are without merit and
intends to defend the actions vigorously.
The Company, in the normal course of business, is subject to various other
legal matters. While the results of litigation and claims cannot be
predicted with certainty, the Company believes that the final outcome of
these other matters will not have a materially adverse effect on the
Company's consolidated results of operations or financial condition.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
FILENET CORPORATION
The following should be read in conjunction with the unaudited consolidated
financial statements and notes thereto included in Part I--Item 1 and Certain
Considerations in Part II--Item 5 of this Quarterly Report, the audited
consolidated financial statements, and notes thereto, and Management's
Discussion and Analysis of Results of Operations and Financial Condition
contained in the registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, and with the Company's Current Report on Form 8-K,
dated April 1, 1997, and filed by the Company with the SEC on April 1, 1997.
Results of Operations
Revenue
Domestic and international revenues decreased approximately 29% and 27%,
respectively, in the first quarter of 1997, when compared to the corresponding
period in 1996. International revenue constituted approximately 32% and 31% of
total revenues in the first quarter of 1997 and 1996, respectively. Management
expects that the Company's international operations will continue to provide a
significant portion of total revenues; however, international revenues could be
adversely affected if the U.S. dollar strengthens against international
currencies.
<TABLE>
<CAPTION>
(Dollars in millions) First Quarter First Quarter
1997 1996 % Change
------------- ------------- --------
<S> <C> <C> <C>
Software revenue $22.1 $37.1 (40%)
................................................................................
Percentage of total revenue 46% 56%
................................................................................
Service revenue $18.3 $17.2 6%
................................................................................
Percentage of total revenue 39% 26%
................................................................................
Hardware revenue $ 7.2 $12.4 (42%)
................................................................................
Percentage of total revenue 15% 18%
................................................................................
Total revenue $47.6 $66.7 (29%)
................................................................................
</TABLE>
Software revenue decreased 40% for the quarter ended March 31, 1997, compared to
the same period of 1996. The decrease was due to a weakness in new orders
experienced both domestically and internationally. Software revenue as a
percentage of total revenue decreased to 46% for the quarter ended March 31,
1997, from 56% in the same quarter last year due to the decrease in software
revenue cited above.
Service revenue increased 6% for the quarter ended March 31, 1997, compared to
the same period of 1996. Service revenue consists of revenue from software and
hardware maintenance services provided to the Company's customers and other
revenue that includes professional services, training, repairs and supplies. The
increase was due to the growth of the Company's installed base and an increase
in repairs of spare parts associated with the transition of hardware maintenance
to HP and others. The increase was partially offset by a decrease in
professional services revenue associated with lower software revenue. Service
revenue as a percentage of total revenue increased to 39% for the quarter ended
March 31, 1997, from 26% in the same quarter last year due to the current
quarter decrease in software and hardware revenue cited herein.
7
<PAGE>
Hardware revenue decreased by 42% for the quarter ended March 31, 1997, compared
to the same period of 1996 due to similar reasons discussed above for software
revenue. Additionally, hardware revenue for 1996 included a number of
international sales with significant hardware content. Hardware revenue as a
percent of total revenue declined due to the reasons cited above. The Company
expects hardware revenue to continue to decrease as a percentage of revenue.
Cost of Revenue.
<TABLE>
<CAPTION>
(Dollars in millions) First Quarter First Quarter
1997 1996 % Change
------------- ------------- --------
<S> <C> <C> <C>
Cost of software revenue $ 3.0 $ 3.9 (23%)
................................................................................
Percentage of software revenue 14% 11%
................................................................................
Cost of service revenue $13.1 $11.4 15%
................................................................................
Percentage of service revenue 72% 66%
................................................................................
Cost of hardware revenue $ 5.3 $ 8.2 (35%)
................................................................................
Percentage of hardware revenue 74% 66%
................................................................................
Total cost of revenue $21.4 $23.5 9%
................................................................................
Percentage of total revenue 45% 35%
................................................................................
</TABLE>
The cost of software revenue includes royalties paid to third parties and the
cost of software distribution. The cost of software revenue as a percentage of
software revenue increased to 14% for the quarter ended March 31, 1997, from 11%
for same period of 1996 due to the decrease in software revenue without a
corresponding decrease in fixed costs related to the Company's distribution
activities.
The cost of service revenue includes software support and professional services
personnel, supplies, and the cost of third party hardware maintenance. The cost
of service revenue as a percentage of service revenue increased to 72% for the
quarter ended March 31, 1997, from 66% for the same period of 1996. The increase
in 1997 was primarily due to lower margins experienced internationally.
The cost of hardware revenue includes the Company's cost of OSAR manufacturing,
third-party purchased hardware, and the cost of hardware integration personnel.
The cost of hardware revenue as a percentage of hardware revenue increased to
74% for the quarter ended March 31, 1997, from 66% for the same period of 1996.
The increase in 1997 was due to the decrease in hardware revenue without a
corresponding decrease in fixed costs related to the Company's hardware
integration activities and competitive pricing pressures associated with the
hardware market.
Operating Expenses.
<TABLE>
<CAPTION>
(Dollars in millions) First Quarter First Quarter
1997 1996 % Change
------------- ------------- --------
<S> <C> <C> <C>
Research and development $10.1 $ 8.4 20%
................................................................................
Percentage of total revenue 21% 13%
................................................................................
Selling, general and administrative $29.8 $30.0 (1%)
................................................................................
Percentage of total revenue 63% 45%
................................................................................
</TABLE>
8
<PAGE>
The Company's research and development expenses increased 20% in 1997 due to the
addition of development personnel and related facilities, depreciation expense
associated with new capital equipment additions, and a general increase in
salaries due to increased demand and competition for engineers. As a percentage
of total revenue, research and development expenses increased to 21% for the
quarter ended March 31, 1997, from 13% for the same period of 1996 due to a
combination of the factors cited above and the decrease in total revenue.
Selling, general and administrative expenses as a percentage of total revenue
increased to 63% for the quarter ended March 31, 1997, from 45% for the same
period of 1996. The increase in 1997 is a consequence of the decrease in
revenues cited above.
MERGER, RESTRUCTURING AND WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND
DEVELOPMENT COSTS. The $16.0 million charge for merger, restructuring and
write-off of purchased in-process research and development costs for the three
months ended March 31, 1996, consisted of $10.0 million for the write-off of
purchased in-process research and development costs related to the IFSL
acquisition, $4.2 million in merger costs related to the Saros acquisition, and
$1.8 million in restructuring costs related to the Saros and Watermark
acquisitions.
EFFECTIVE TAX RATE. The Company's combined federal, State and foreign annual
effective tax rate for the quarter ended March 31, 1997, was 28% compared to 37%
for the same period in 1996. The 1996 effective tax rate included non-deductible
merger and other costs for the Saros and IFSL acquisitions. The effective tax
rate for 1996, exclusive of the merger and other costs, was 25%. The higher
effective tax rate in 1997 is attributable to earnings generated in certain
foreign jurisdictions.
NET LOSS. Net loss for the three months ended March 31, 1997, was $9.4 million
or $0.63 per share on 15.0 million weighted average common shares outstanding
compared to a net loss of $11.8 million or $0.79 per share on 14.9 million
weighted average common shares outstanding for the same period of 1996. The same
period of 1996 included after-tax charges for merger, restructuring and
write-off of purchased in-process research and development costs of $16.0
million. Income for the three months ended March 31, 1996, before the one-time
after-tax charges was $4.2 million or $0.25 per share on 16.6 million weighted
average common and common equivalent shares outstanding.
FOREIGN CURRENCY FLUCTUATIONS AND INFLATION. The Company's performance can be
affected by changes in foreign currency values relative to the U.S. dollar as
discussed above in relation to the Company's revenue and operating expenses. The
net impact to net income from foreign exchange transactions and hedging
activities are immaterial for all periods reported. Management believes that
inflation has not had a significant impact on the prices of the Company's
products, the cost of its materials, or its operating results for the quarters
ended March 31, 1997, and 1996
RECENT EVENT. During April 1997, the Company announced a restructuring plan to
reduce operating expenses by consolidating the Watermark business unit's
Burlington, Massachusetts engineering and marketing functions with those at
FileNet's Costa Mesa, California location as well as reduce headcount in certain
other areas of the Company. In connection with this plan, the Company plans to
record an estimated $6.0 million of restructuring and other charges during the
second quarter ended June 30, 1997. The restructuring charge will consist
primarily of severance costs, write-off of impaired assets, and facility closing
costs.
9
<PAGE>
Liquidity and Capital Resources
As of March 31, 1997, combined cash, cash equivalents and short- and long-term
marketable securities totaled $71.0 million, an increase of $3.7 million from
$67.3 million at the end of 1996. The increase is primarily a result of cash
generated by operating activities of $8.2 million, and to a lesser extent
through the exercise of employee stock options of $.9 million. This increase was
partially offset by capital expenditures of $4.1 million and net purchase of
marketable securities of $3.0 million.
Accounts receivable decreased to $43.9 million at March 31, 1997 from $75.5
million at December 31, 1996. Days sales outstanding decreased to 84 days as of
March 31, 1997 compared to 95 days as of December 31, 1996. Current liabilities
decreased to $41.5 million at March 31, 1997 from $59.5 million at December 31,
1996. The decrease is primarily a result of a decrease in accounts payable and
lower accrued sales commissions, royalties and other expenses as a result of
lower revenue.
The Company has an unsecured line of credit of $20 million available from a
commercial bank. This line of credit expires in April 1997 and is subject to the
maintenance of certain financial covenants. The Company also has several
borrowing arrangements with foreign banks which expire at various times
throughout 1997 pursuant to which the Company may borrow up to approximately $2
million. As of March 31, 1997, there were no borrowings against these credit
lines.
The Company anticipates that its present cash balances together with internally
generated funds and credit lines (which are expected to be renewed or replaced)
will be sufficient to meet its working capital and capital expenditure needs for
at least the next 12 months; however, the Company expects cash balances to
decline during the year as a result of the net loss for the quarter ended March
31, 1997, and the expected restructuring charge during the second quarter of
1997.
10
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
In October 1994, Wang filed a complaint in the United States District Court
for the District of Massachusetts alleging that the Company is infringing
five patents held by Wang. On June 23, 1995, Wang amended its complaint to
include an additional related patent. On July 2, 1996, Wang filed a
complaint in the same court alleging that Watermark, formerly a
wholly-owned subsidiary that was merged into the Company, is infringing
three of the same patents asserted in the initial complaint. On October 9,
1996, Wang withdrew its claim that one of the patents it initially asserted
is infringed by the Company's products which were commercialized before the
initial complaint was filed. Wang reserved the right to assert that patent
against the Company's products commercialized after that date in a separate
lawsuit. Based on the Company's analysis of these Wang patents and their
respective file histories, the Company believes that it has meritorious
defenses to Wang's claims; however, the ultimate outcome or any resulting
potential loss cannot be determined at this time.
In March 1997, Kodak purchased the Wang imaging business unit that has
responsibility for this litigation. The patents in the suit have been
transferred to a Kodak subsidiary, Kodak Limited of England, which in turn
has exclusively licensed them to another Kodak subsidiary, Eastman
Software, Inc. in the United States. The Company cannot predict what, if
any, impact this will have on the litigation. If it should be determined
that the patents at issue in the litigation are valid and are infringed by
any of the Company's products, including Watermark products, the Company
will, depending on the product, redesign the infringing products or seek to
obtain a license to market the products. There can be no assurance that the
Company will be able to obtain such a license on acceptable terms.
On December 20, 1996, plaintiff Michael I. Goldman filed a class action
complaint against the Company and certain of its officers and directors in
the Superior Court of California, County of Orange (the "State Action").
The action was purportedly filed on behalf of a class of purchasers of the
Company's common stock during the period October 19, 1995 through July 2,
1996. Plaintiff alleges that the Company and other defendants violated Cal.
Corp. Code Sections 25400 and 25500, Cal. Civ. Code Sections 1709-1710 and
Cal. Bus. & Prof. Code Sections 17200 et seq. in connection with various
public statements made by the Company and certain of its officers and
directors during the putative class period. The complaint seeks unspecified
compensatory and punitive damages, interest, attorneys' fees, expert
witness fees, costs, and equitable or injunctive relief.
On April 1, 1997, plaintiff Michael I. Goldman filed another class action
complaint against the Company and certain of its officers and directors in
the United States District Court for the Central District of California
(the "Federal Action"). The action purportedly was filed on behalf of the
same class of purchasers of the Company's common stock as the State Action.
The allegations contained in the Federal Action are very similar to the
allegations contained in the State Action, except that the Federal Action
asserts claims under Sections 10(b) and 20(a) of the Securities Exchange
Act and Rule 10b-5. The complaint seeks unspecified compensatory damages,
interest, attorneys' fees, expert witness fees, costs and equitable or
injunctive relief. The Company has not yet responded to the complaint in
the Federal Action.
In the State Action, on April 14, 1997, the Company filed a motion to stay
all proceedings in light of the filing of the Federal Action by the same
plaintiff. This motion was denied without prejudice by the Court on May 13,
1997, and the case was assigned to the Complex Case Panel of Judges. On
April 15, 1997, the Company filed a demurrer and motion to strike in the
State Action which are scheduled to be heard by the Court on July 1, 1997,
but may be delayed in light of the newly assigned judge. Discovery is
proceeding in the State Action.
11
<PAGE>
The Company believes that all of the allegations contained in the
complaints filed in the State and Federal Actions are without merit and
intends to defend the actions vigorously.
The Company, in the normal course of business, is subject to various other
legal matters. While the results of litigation and claims cannot be
predicted with certainty, the Company believes that the final outcome of
these other matters will not have a materially adverse effect on the
Company's consolidated results of operations or financial condition.
Item 5. Certain Considerations.
This quarterly report on form 10-Q contains forward-looking statements that
involve risks and uncertainties, including those discussed below and in the
Management's Discussion and Analysis of Results of Operations and Financial
Condition section and Notes to Consolidated Financial Statements in the
Company's Annual Report to Stockholders. The actual results that the
Company achieves may differ materially from any forward-looking statements
due to such risks and uncertainties. All such factors should be considered
by investors in the Company.
RAPID TECHNOLOGICAL CHANGE; PRODUCT DEVELOPMENT. The market for the
Company's products is characterized by rapid technological developments,
evolving industry standards, changes in customer requirements and frequent
new product introductions and enhancements. The Company's continued success
will be dependent upon its ability to continue to enhance its existing
products, develop and introduce, in a timely manner, new products
incorporating technological advances and respond to customer requirements.
To the extent one or more of the Company's competitors introduce products
that more fully address customer requirements, the Company's business could
be adversely affected. There can be no assurance that the Company will be
successful in developing and marketing enhancements to its existing
products or new products on a timely basis or that any new or enhanced
products will adequately address the changing needs of the marketplace. If
the Company is unable to develop and introduce new products or enhancements
to existing products in a timely manner in response to changing market
conditions or customer requirements, the Company's business and operating
results could be adversely affected. From time to time, the Company or its
competitors may announce new products, capabilities or technologies that
have the potential to replace or shorten the life cycles of the Company's
existing products. There can be no assurance that announcements of
currently planned or other new products will not cause customers to delay
their purchasing decisions in anticipation of such products, which could
have a material adverse effect on the Company's business and operating
results.
UNCERTAINTY OF FUTURE OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS. Prior growth rates in the Company's revenue and
operating results should not necessarily be considered indicative of future
growth or operating results. Future operating results will depend upon many
factors, including the demand for the Company's products, the effectiveness
of the Company's efforts to continue to integrate various products it has
developed or acquired through acquisition of others and to achieve the
desired levels of sales from such product integration, the level of product
and price competition, the length of the Company's sales cycle, seasonality
of individual customer buying patterns, the size and timing of individual
transactions, the delay or deferral of customer implementations, the budget
cycles of the Company's customers, the timing of new product introductions
and product enhancements by the Company and its competitors, the mix of
sales by products, services and distribution channels, levels of
international sales, acquisitions by competitors, changes in foreign
currency exchange rates, the ability of the Company to develop and market
new products and control costs, and general domestic and international
economic and political conditions. As a result of these factors, revenues
and operating results for any quarter are subject to variation and are not
12
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predictable with any significant degree of accuracy. Therefore, 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. Moreover, such factors could cause the Company's
operating results in a given quarter to be below the expectations of public
market analysts and investors. In either case, the price of the Company's
common stock could be materially adversely affected.
COMPETITION. The document imaging, workflow, COLD and document management
software markets are highly competitive, and there are certain competitors
of the Company with substantially greater sales, marketing, development and
financial resources. The Company believes that the competitive factors
affecting the market for its products and services include vendor and
product reputation; product quality, performance and price; the
availability of products on multiple platforms; product scalability;
product integration with other enterprise applications; product
functionality and features; product ease-of use; and the quality of
customer support services and training. The relative importance of each of
these factors depends upon the specific customer involved. While the
Company believes it competes favorably in each of these areas, there can be
no assurance that it will continue to do so. Moreover, the Company's
present or future competitors may be able to develop products comparable or
superior to those offered by the Company, offer lower price products or
adapt more quickly than the Company to new technologies or evolving
customer requirements. Competition is expected to intensify. In order to be
successful in the future, the Company must respond to technological change,
customer requirements and competitors' current products and innovations.
There can be no assurance that it will be able to continue to compete
effectively in its market or that future competition will not have a
material adverse effect on its business, operating results and financial
condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS. The Company's success
depends in part on its ability to protect its proprietary rights to the
technologies used in its principal products. The Company relies on a
combination of copyrights, trademarks, trade secrets, confidentiality
procedures and contractual provisions to protect its proprietary rights.
There can be no assurance that the Company's existing or future copyrights,
trademarks, trade secrets or other intellectual property rights will be of
sufficient scope or strength to provide meaningful protection or commercial
advantage to the Company. FileNet has no software patents. Also, in selling
certain of its products, the Company relies on "shrink wrap" licenses that
are not signed by licensees and, therefore, may be unenforceable under the
laws of certain jurisdictions. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. There can be no assurance that
such factors would not have a material adverse effect on the Company's
business or operating results.
The Company may from time to time be notified that it is infringing certain
patent or intellectual property rights of others. Combinations of
technology acquired through past or future acquisitions and the Company's
technology will create new products and technology which may give rise to
claims of infringement. While no actions other than the ones discussed
below are currently pending against the Company for infringement of patent
or other proprietary rights of third parties, there can be no assurance
that third parties will not initiate infringement actions against the
Company in the future. Infringement actions can result in substantial cost
to and diversion of resources of the Company. If the Company were found to
infringe upon the rights of others, no assurance can be given that licenses
would be obtainable on acceptable terms or at all, that significant damages
for past infringement would not be assessed or that further litigation
relative to any such licenses or usage would not occur. The failure to
successfully defend any claims or obtain necessary licenses or other
rights, the ultimate disposition of any claims or the advent of litigation
arising out of any claims of infringement, could have a material adverse
effect on the Company's business, financial condition or results of
operations.
13
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In October 1994, Wang filed a complaint in the United States District Court
for the District of Massachusetts alleging that the Company is infringing
five patents held by Wang. On June 23, 1995, Wang amended its complaint to
include an additional related patent. On July 2, 1996, Wang filed a
complaint in the same court alleging that Watermark, formerly a
wholly-owned subsidiary that was merged into the Company, is infringing
three of the same patents asserted in the initial complaint. On October 9,
1996, Wang withdrew its claim that one of the patents it initially asserted
is infringed by the Company's products which were commercialized before the
initial complaint was filed. Wang reserved the right to assert that patent
against the Company's products commercialized after that date in a separate
lawsuit. Based on the Company's analysis of these Wang patents and their
respective file histories, the Company believes that it has meritorious
defenses to Wang's claims; however, the ultimate outcome or any resulting
potential loss cannot be determined at this time.
In March 1997, Kodak purchased the Wang imaging business unit that has
responsibility for this litigation. The patents in the suit have been
transferred to a Kodak subsidiary, Kodak Limited of England, which in turn
has exclusively licensed them to another Kodak subsidiary, Eastman
Software, Inc. in the United States. The Company cannot predict what, if
any, impact this will have on the litigation. If it should be determined
that the patents at issue in the litigation are valid and are infringed by
any of the Company's products, including Watermark products, the Company
will, depending on the product, redesign the infringing products or seek to
obtain a license to market the products. There can be no assurance that the
Company will be able to obtain such a license on acceptable terms.
DEPENDENCE ON CERTAIN RELATIONSHIPS. The Company has entered into a number
of co-marketing relationships with other companies such as Microsoft
Corporation, Compaq Computer Corporation, SAP AG, HP and Sun Microsystems,
Inc. There can be no assurance that these companies will not reduce or
discontinue their relationships with or support of the Company and its
products. Disruption of these relationships could have a material adverse
effect on the Company's business and operating results.
DEPENDENCE ON KEY MANAGEMENT AND TECHNICAL PERSONNEL. The Company's success
depends to a significant degree upon the continued contributions of its key
management, marketing, technical and operational personnel, including
members of senior management and technical personnel of acquired companies.
The Company has no agreements providing for the employment of any of its
key employees or any fixed term contracts and the Company's key employees
may voluntarily terminate their employment with the Company at any time.
The loss of the services of one or more key employees could have a material
adverse effect on the Company's operating results. The Company also
believes its future success will depend in large part upon its ability to
attract and retain additional highly skilled management, technical,
marketing, product development and operational personnel. Competition for
such personnel is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel.
INTERNATIONAL SALES. Historically, the Company has derived approximately
one-third of its total revenues from international sales. International
business is subject to certain risks including varying technical standards,
tariffs and trade barriers, political and economic instability, reduced
protection for intellectual property rights in certain countries,
difficulties in staffing and maintaining foreign operations, difficulties
in managing foreign distributors, potentially adverse tax consequences,
currency exchange fluctuations, the burden of complying with a wide variety
of complex operations, foreign laws, regulations and treaties and the
possibility of difficulties in collecting accounts receivable. There can be
no assurance that any of these factors will not have a material adverse
effect on the Company's business or operating results.
14
<PAGE>
ACQUISITION-RELATED RISKS. The acquisitions of Watermark, Saros and IFSL
have presented and will continue to present the Company with numerous
challenges, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies and managing separate
geographic operations. The challenges have absorbed and may continue to
absorb significant management attention that would otherwise be available
for the ongoing development of the Company's business. If the Company's
management does not respond to these challenges effectively, the Company's
results of operations could be adversely affected. Moreover, there can be
no assurance that the anticipated benefits of the acquisitions will be
realized. The Company and the acquired companies could experience
difficulties or delays in integrating their respective technologies or
developing and introducing new products. In particular, one of the reasons
for FileNet's acquisition of Saros was the perceived market potential for
Saros' new products, including the recently announced @mezzanine and Saros
Document Server for BackOffice, which have yet to be proven in the
marketplace, as well as other products currently under development. Delays
in or non-completion of the development of these new products, or lack of
market acceptance of such products, could have an adverse impact on the
Company's future results of operations and result in a failure to realize
anticipated benefits of the acquisitions.
PRODUCT LIABILITY. The Company's license agreements with customers
typically contain provisions designed to limit their exposure to potential
product liability claims. However, it is possible that such limitation of
liability provisions 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 them 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.
STOCK PRICE VOLATILITY. The Company believes that a variety of factors
could cause the price of its common stock to fluctuate, perhaps
substantially, including quarter-to-quarter variations in operating
results; announcements of developments related to its business;
fluctuations in its order levels; general conditions in the technology
sector or the worldwide economy; announcements of technological
innovations, new products or product enhancements by the Company or its
competitors; key management changes; changes in joint marketing and
development programs; developments relating to patents or other
intellectual property rights or disputes; and developments in the Company's
relationships with its customers, distributors and suppliers. In addition,
in recent years the stock market in general, and the market for shares of
high technology stocks in particular, has experienced extreme price
fluctuations which have often been unrelated to the operating performance
of affected companies. Such fluctuations could adversely affect the market
price of the Company's common stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The list of exhibits contained in the accompanying Index to Exhibits
is herein incorporated by reference.
(b) No reports on Form-8K were filed during the first quarter of fiscal
1997.
15
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FILENET CORPORATION
Signature
Pursuant to the requirement 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:
FILENET CORPORATION
By: /s/ Mark S. St. Clare
-----------------
Mark S. St. Clare
Chief Financial Officer and Sr. Vice President, Finance
(Principal Financial Officer)
Date: May 14, 1997
16
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Index to Exhibits
Exhibit
No. Description
- ------- ----------------------------------------------------------------------
3.1* Restated Certificate of Incorporation, as amended (filed as Exhibit
3.1 to Form S-4 filed on January 26, 1996; Registration No.
333-00676).
3.1.1* Certificate of Amendment of Restated Certificate of Incorporation
(filed as Exhibit 3.1.1 to Form S-4 filed on January 26, 1996,
Registration No. 333-00676).
3.2* Bylaws (filed as Exhibit 3.2 of the Registrant's registration
statement on Form S-1, Registration No. 33-15004 (the "Form S-1")).
4.1* Form of certificate evidencing Common Stock (filed as Exhibit 4.1 to
the Form S-1, Registration No. 33-15004).
4.2* Rights Agreement, dated as of November 4, 1988 between FileNet
Corporation and the First National Bank of Boston, which includes the
form of Rights Certificate as Exhibit A and the Summary of Rights to
Purchase Common Shares as Exhibit B (filed as Exhibit 4.2 to Form S-4
filed on January 26, 1996; Registration No. 333-00676).
10.1* Amended and Restated Credit Agreement (Multicurrency) by and among
the Registrant and Bank of America National Trust and Savings
Association dated August 8, 1995, effective May 1, 1995 (filed as
Exhibit 10.1 to Form 10-Q for the quarter ended July 2, 1995).
10.2* Waiver and Second Amendment dated December 18, 1996, to the Amended
and Restated Credit Agreement (Multicurrency) by and among the
Registrant and Bank of America National Trust and Savings Association
dated August 8, 1995 (filed as exhibit 10.2 to Form 10-K filed on
April 4, 1997).
10.3* Business Alliance Program Agreement between the Registrant and Oracle
Corporation dated July 1, 1996, as amended by Amendment One thereto
(filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30,
1996).
10.4* Runtime Sublicense Addendum between the Registrant and Oracle
Corporation dated July 1, 1996, as amended by Amendment One thereto
(filed as Exhibit 10.4 to Form 10-QA for the quarter ended June 30,
1996).
10.5* Full Use and Deployment Sublicense Addendum between the Registrant
and Oracle Corporation dated July 1, 1996, as amended by Amendment One
thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter ended
June 30, 1996).
10.6* Lease between the Registrant and C. J. Segerstrom & Sons for the
headquarters of the Company, dated April 30, 1987 (filed as Exhibit
10.19 to the Form S-1).
10.7* Third Amendment to the Lease between the Registrant and C. J.
Segerstrom & Sons dated April 30, 1987, for additional facilities at
the headquarters of the Company, dated October 1, 1992 (filed as
exhibit 10.7 to Form 10-K filed on April 4, 1997).
10.8 Fifth Amendment to the Lease between the Registrant and C. J.
Segerstrom & Sons dated April 30, 1987, for the extension of the term
of the lease, dated March 28, 1997.
10.9* 1989 Stock Option Plan for Non-Employee Directors of FileNet
Corporation, as amended by the First Amendment, Second Amendment,
Third Amendment thereto (filed as Exhibit 10.9 to Form S-4 filed on
January 26, 1996; Registration No. 333-00676).
10.10* Amended and Restated 1995 Stock Option Plan of FileNet Corporation as
approved by stockholders at the Registrant's Annual Meeting on May 8,
1996 (filed as Exhibit 99.1 to Form S-8 filed on July 29, 1996).
- --------------------------------------------
* Incorporated herein by reference
17
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Exhibit
No. Description
- ------- ----------------------------------------------------------------------
10.11* Second Amended and Restated Stock Option Plan of FileNet
Corporation, together with the forms of Incentive Stock Option
Agreement and Non-Qualified Stock Option Agreements (filed as Exhibits
4(a), 4(b) and 4(c), respectively, to the Registrant's Registration
Statement on Form S-8, Registration No. 33-48499), and an Amendment
thereto (filed as Exhibit 4(d) to the Registrant's Registration
Statement on Form S-8, Registration No. 33-69920), and the Second
Amendment thereto (filed as Appendix A to the Registrant's Proxy
Statement for the Registrant's 1994 Annual Meeting of Stockholders,
filed on April 29, 1994).
10.12* Agreement for the Purchase of IBM products dated December 20, 1991
(filed on May 5, 1992 with the Form 8 amending the Company's Form 10-K
for the fiscal year ended December 31, 1991).
10.13* Amendment #A1011-941003-01 dated September 30, 1994, to the
Agreement for the Purchase of IBM products dated December 20,
1991(filed as exhibit 10.12 to Form 10-K filed on April 4, 1997).
10.14* Development and Initial Supply Agreement between the Registrant and
Quintar Company dated August 20, 1992 (filed as Exhibit 10.21 to Form
10-K for the year ended January 3, 1993).
10.15* Amendment dated December 22, 1992 to the Development and Initial
Supply Agreement between the Registrant and Quintar Company dated
August 20, 1992 (filed as Exhibit 10.22 to Form 10-K for the year
ended January 3, 1993).
10.16* Product License Agreement between the Registrant and Novell, Inc.
dated May 16, 1995 (filed as Exhibit 10.26 to Form 10-Q for the
quarter ended July 2, 1995).
10.17* Agreement and Plan of Merger between the Registrant and Watermark
Software Inc. dated July 18, 1995 (filed as Exhibit 10.27 to Form 10-Q
for the quarter ended July 2, 1995).
10.18* Agreement and Plan of Merger between the Registrant and Saros
Corporation, as amended, dated January 17, 1996 (filed as Exhibits
2.1, 2.2, 2.3, and 2.4 to Form 8-K on March 13, 1996).
10.19* Stock Purchase Agreement by and Among FileNet Corporation, IFS
Acquisition Corporation, Jawaid Khan and Juergen Goersch dated January
17, 1996 and Amendment 1 to Stock Purchase Agreement dated January 30,
1996 (filed as Exhibit 10.2 to form 10-K for the year ended December
31, 1995).
27 Financial Data Schedule
- ---------------------------------------------
* Incorporated herein by reference
18
FIFTH AMENDMENT TO LEASE
THIS FIFTH AMENDMENT TO LEASE (the "Amendment") is made and entered into as
of the 28th day of March, 1997 by and between C. J. SEGERSTROM & SONS, a
California general partnership ("Landlord"), and FILENET CORPORATION, a
California corporation ("Tenant"), with respect to the following:
RECITALS
A. Landlord is the landlord and Tenant is the tenant pursuant to a certain
High Technology/Research and Development Lease dated July 23, 1986 (the
"Original Lease"). The Original Lease has been modified or supplemented by the
following instruments:
(1) Letter dated July 23, 1986 (the "First Letter");
(2) Option agreement dated July 23, 1986 (the "Option Agreement");
(3) Letter agreement dated June 23, 1987 (the. "Second Letter");
(4) Letter agreement dated July 2, 1987 (the "Third Letter");
(5) Letter agreement dated March 15, 1988 (the "Fourth Letter");
(6) Letter agreement dated May 23, 1988 (the "Fifth Letter");
(7) Third amendment to lease dated October 1, 1992 (the "Third
Amendment"); and
(8) Fourth Amendment to lease dated December 1, 1992 (the "Fourth
Amendment").
The Original Lease, First through Fifth Letters, Third Amendment and Fourth
Amendment are herein, collectively, referred to as the "Lease."
B. Pursuant to the Lease, Tenant holds and occupies four complete buildings
located at Harbor Gateway Business Center, in Costa Mesa, California (the
"Center"), which four buildings (each a "Building" herein) are more particularly
described as follows:
(1) "Building 1" - 3565 Harbor Boulevard, consisting of approximately
60,000 square feet of Rentable Area;
(2) "Building 2" - 1540 Scenic Avenue, consisting of approximately
60,000 square feet of Rentable Area;
(3) "Building 3" - 1550 Scenic Avenue, consisting of approximately
50,000 square feet of Rentable Area; and
<PAGE>
(4) "Building 14" - 1535 Scenic Avenue, consisting of approximately
60,000 square feet of Rentable Area.
C. The term of the Lease as to Building 1 and Building 2 expires during
1998. Tenant has options to extend the Lease as to each such Building. Landlord
and Tenant desire to enter into this Amendment to reflect the exercise of such
options as to Building 1 and Building 2 and to modify and set forth the terms
and provisions upon which Tenant shall continue to hold and occupy Building 1
and Building 2.
AGREEMENT
IN CONSIDERATION OF the foregoing recitals and the mutual covenants set
forth herein, Landlord and Tenant agree as follows:
1. Extension of Term.
(a) The current term of the Lease as to Building 1 expires on April 30,
1998. Tenant has exercised its option to extend as to such Building, and such
term shall be extended for the period from May 1, 1998 through April 30, 2003
(the "Building 1 Extended Term").
(b) The term of the Lease as to Building 2 expires on January 31, 1998.
Tenant has exercised its option to extend as to such Building, and such term
shall be extended for the period from February 1, 1998 through April 30, 2003
(the "Building 2 Extended Term").
(c) The term of the Lease as to Building 3 and Building 14. expires on May
31, 2000 and shall not be affected by this Amendment.
(d) Tenant has the option to extend the term of the Lease for an additional
five (5) years with respect to each of the Buildings 3 and 14. Such option shall
remain as currently written in the Lease with respect to Building 3 and Building
14 (i.e., five (5) years from and after June 1, 2000). With respect to Building
1 and Building 2, the option terms resulting from Tenant's exercise as of its
options shall be as set forth in this Amendment.
2 Rent.
(a) During the current term of the Lease as to Buildings 1, 2, 3 and 14,
Tenant shall continue to pay Basic Annual Rent at the rates provided for or
determined pursuant to the Lease as to each such Building and shall pay all
additional rent provided for in the Lease with respect to each such Building.
2
<PAGE>
(b) During the Building 1 Extended Term and the Building 2 Extended Term,
Basic Annual Rent for each Building shall be as follows:
(i) For the period from the commencement date of each Extended Term
through the end of the thirtieth (30th) month of each Extended Term, Basic
Annual Rent shall be at the rate of $1.10 per square foot of Rentable Area
of each Building.
(ii) Effective at the commencement of the thirty-first (31st) month of
the Building 1 Extended Term and the commencement of the thirty-first
(31st) month of the Building 2 Extended Term, Basic Annual Rent for the
relevant Building (i.e., Building 1 or Building 2) shall be increased in
the manner provided in Section 3.4 of the Original Lease. For the purpose
of the increases provided for in this clause (ii), the following shall
pertain:
(A) The "Index" for purposes of such adjustments shall be the
"Consumer Price Index of Urban Wage Earners and Clerical Workers
(Revised Series), Los Angeles-Anaheim-Riverside Average
(1982-1984=100), subgroup all items."
(B) The Index published as of the calendar month immediately
preceding the commencement date of the relevant Extended Term shall be
considered the "Base."
(C) In no event shall the Basic Annual Rent for either Building
after such adjustment exceed one hundred ten percent (110%) of the
Basic Annual Rent immediately prior to such adjustment, and in no
event shall there be any decrease in the Basic Annual Rent for either
Building.
In addition, during the Building 1 Extended Term and the Building 2
Extended Term, Tenant shall pay all additional rent provided for in
the Lease with respect to each of Building 1 and Building 2.
(c) Subject to the provisions of paragraph 4 below, Tenant shall receive
monthly abatements or credits with respect to Basic Annual Rent for the months
of June and November, 1997 and June and November, 1998. Each such monthly credit
or abatement shall be in the amount of $93,750. Such credits shall be applied by
simply reducing the aggregate Basic Annual Rent payable by Tenant for such
months with respect to all four Buildings pursuant to the Lease.
3 Parking. Currently, Tenant has the right, under the Lease, to the
non-exclusive use of the following numbers of Allocated Parking Spaces at the
Center with respect to each Building:
Building 1 212 spaces
Building 2 172 spaces
Building 3 200 spaces
Building 14 240 spaces
3
<PAGE>
Such Allocated Parking Spaces are on a non-exclusive basis in the Parking
Areas of the Center
Effective upon the effective date of this Amendment, as provided in
paragraph 9 below, Tenant shall have the right to use, on a non-exclusive basis,
an additional 76 Allocated Parking Spaces (the "New Allocated Spaces"). The New
Allocated Spaces shall be located in that portion of the Parking Areas of the
Center indicated by hatching on Exhibit "A" attached hereto. For the purposes of
this paragraph, it is understood and agreed that:
(a) The New Allocated Spaces shall be allocated 18 spaces to Building
1 (for a total of 230 Allocated Parking Spaces) and 58 spaces to Building 2
(for a total of 230 Allocated Parking Spaces).
(b) The New Allocated Spaces are, like the balance of the Allocated
Parking Spaces with respect to the Buildings, only the right to use, in
common with other tenants of the Center, a specified number of parking
spaces and do not give to Tenant the exclusive right to use any particular
parking spaces in the Center.
(c) The provisions of this paragraph shall supplement paragraph 44.1
of the Original Lease, as previously amended, and shall supersede and
replace all inconsistent prior iterations thereof.
4. Permanent Improvements by Tenant. In consideration for the Basic Annual
Rent abatement provided for in paragraph 2(c) above, Tenant covenants to spend,
prior to the expiration of the Extended Terms as to Building 1 and Building 2,
not less than $375,000 on permanent improvements to Building 1 and Building 2
(Tenant's Improvement Work"). In connection with Tenant's Improvement Work,
Landlord and Tenant agree that:
(a) "Permanent improvements" shall mean work which is permanently
attached to the structure, shell or interior components of Building 1
and/or Building 2, and includes permanent decorative improvements such as
paint, wall coverings, floor tile and ceilings. Permanent improvements
shall not include furniture, furnishings and removable fixtures and
equipment.
(b) Tenant's Improvement Work shall be allocated between Building 1
and Building 2 (or performed all in one Building) as selected by Tenant,
and there is no minimum amount which Tenant is required to spend for
permanent improvements as to either such Building.
(c) Tenant's Improvement Work shall be in accordance with Article 9 of
the Original Lease, including the requirement to obtain Landlord's prior
written consent with respect thereto as and when required by such Article
9.
(d) Promptly upon completion of Tenant's Improvement Work, or any
portion thereof with a cost of $l0,000 or more, Tenant shall furnish to
Landlord copies of paid invoices, paid statements or other documentary
evidence reasonably satisfactory to Landlord evidencing the amount spent by
Tenant and that such amount reflects the cost of permanent improvements to
4
<PAGE>
Building 1 and/or Building 2. In addition, upon completion of any Tenant's
Improvement Work which changes the physical layout of Building 1 and/or
Building 2, Tenant shall deliver to Landlord a copy of "as built" plans and
specifications with respect to such Tenant's Improvement Work.
(e) If Tenant fails to spend the amount required by this paragraph for
permanent improvements and/or to furnish documentary evidence thereof to
Landlord pursuant to subparagraph (d) above by the expiration of the
Building 1 Extended Term, Tenant shall pay to Landlord, as additional rent
pursuant to the Lease, an amount equal to (a) $375,000 less (b) the
aggregate cost of Tenant's Improvement Work actually performed by Tenant
with respect to Building 1 and/or Building 2 as to which Tenant has
furnished to Landlord the documentary evidence required by subparagraph (d)
above. Such payment ("Tenant's Reimbursement") shall be due and payable in
full within ten (10) days after the expiration of the Building 1 Extended
Term, and failure of Tenant to pay Tenant's Reimbursement in full within
such period shall entitle Landlord to exercise all remedies available to a
landlord against a tenant pursuant to a written lease for non-payment of
rent, including but not limited to those set forth in Article 20 of the
Original Lease.
5. Other Terms and Conditions. During the Building 1 Extended Term and the
Building 2 Extended Term, Tenant shall hold and occupy Building 1 and Building 2
upon all of the terms and conditions of the Lease, except that:
(a) Basic Lease Provisions 5, 6 and 13, Sections 2.1, 2.2, 2.3, 2.4,
3.5, Articles 32 and 41 and Sections 47.9, 48.1 and Exhibit "D" to the
Original Lease shall have no application to Building 1 and Building 2
during the Building 1 Extended Term and the Building 2 Extended Term.
(b) Those provisions of the Lease which are superseded by or
inconsistent with the provisions of this Amendment shall not apply to
Building 1 or Building 2 during the Building 1 Extended Term and the
Building 2 Extended Term. In the event of any inconsistency between the
provisions of the Lease and the provisions of this Amendment, the
provisions of this Amendment shall control with respect to Building 1 and
Building 2 during the Building 1 Extended Term and the Building 2 Extended
Term.
6. First Offer Rights. During the term of the Lease, including the Building
1 Extended Term and the Building 2 Extended Term, Tenant shall have a right of
first offer with respect to each of the following buildings at the Center:
(A) Hr-B: 70,000 square feet of Rentable Area and currently occupied
by Q-Logic ("HT-B");
(B) Hr-A: 54,910 square feet of Rentable Area and currently occupied
by Emulex ("HT-A")
(C) HT-15: 82,106 square feet of Rentable Area and currently occupied
by PacifiCare ("HT-15").
5
<PAGE>
HT-B, HT-A and HT-15 are each herein referred to as a "First Offer Building" and
are collectively referred to as the "First Offer Buildings." Such right of first
offer shall be on the following terms and conditions:
(a) If a First Offer Building becomes available for lease, as defined
below, Landlord shall in writing notify Tenant of such availability and of
the terms upon which Landlord is prepared to lease such First Offer
Building to Tenant or a third party. Such written notice shall contain the
information set forth in subparagraph (b) below. As used herein, the term
"available for lease" means that the current lease for such First Offer
Building expires without an agreed extension or renewal or is terminated by
court order or mutual agreement. A First Offer Building shall not be deemed
to be "available for lease" upon expiration of the existing lease term with
respect thereto if the tenant of such building continues in occupancy
pursuant to an option set forth in such lease or an agreed extension or
renewal of the existing lease term.
(b) The notice to be provided by Landlord to Tenant as to a First
Offer Building which becomes available for lease during the term of the
Lease shall:
(i) Identify the First Offer Building;
(ii) Specify the approximate date upon which such First Offer
Building became or will become available for lease;
(iii) Set forth the rent and term for which or on which Landlord
proposes to offer such First Offer Building for lease, the Allocated
Parking Spaces with respect to such First Offer Building with an
identification of any such Allocated Parking Spaces, if any, which are
for the exclusive use of the Tenant of the First Offer Building and
whether such First Offer Building is offered "AS IS" or with any
renovation work or tenant allowance by Landlord; and
(iv) Set forth any other business terms which are specific to
Landlord's proposed leasing of such First Offer Building.
(c) Tenant may accept Landlord's offer to lease a particular First
Offer Building only by unequivocal written notice of acceptance delivered
to Landlord within ten (10) business days after Tenant's receipt of
Landlord's written notice of availability and leasing terms as to such
First Offer Building. To be effective, such notice must be delivered within
such ten (10) business day period and shall not after, amend or supplement
any of the terms set forth in Landlord's offer notice.
(d) If Tenant timely and properly accepts Landlord's offer as to a
First Offer Building in the manner provided in subparagraph (c) above,
Landlord shall promptly prepare and Landlord and Tenant shall execute and
deliver an amendment to the Lease adding such First Offer Building to the
Premises pursuant to the Lease. Tenant shall hold and occupy such First
Offer Building upon the terms set forth in Landlord's offer notice and upon
those provisions of the Lease which are not inconsistent with the terms set
forth in Landlord's offer notice.
6
<PAGE>
(e) If Tenant fails to timely and properly accept Landlord's offer as
to a particular First Offer Building, Tenant shall have no further rights
with respect to such First Offer Building, and Landlord shall be free to
offer such First Offer Building to third parties on the terms set forth in
Landlord's offer notice and to enter into a lease of such building upon
such terms as are agreed by Landlord and any third party. Neither failure
of Tenant to timely and properly accept Landlord's offer as to a particular
First Offer Building nor acceptance of such offer and addition of a
particular First Offer Building to the Premises pursuant to the Lease shall
affect Tenant's rights pursuant to this paragraph with respect to any other
First Offer Building which thereafter becomes available for lease.
(f) Notwithstanding anything to the contrary contained in this
paragraph, in no event shall Landlord be required to offer to Tenant a
First Offer Building during any period during which Tenant is in default
pursuant to the Lease. Moreover, nothing herein shall require Landlord to
hold such First Offer Building off the market for leasing to third parties
pending a cure by Tenant of a default pursuant to the Lease. In the event
that Landlord receives a third party offer to lease a First Offer Building
during any period of Tenant default pursuant to the Lease, Landlord shall
be free to accept such offer and enter into a lease of such building with a
third party upon such terms and conditions as are acceptable to Landlord
and such third party.
(g) Landlord and Tenant acknowledge and agree that the rights afforded
to Tenant pursuant to this paragraph are unusual and are not generally
afforded by Landlord to tenants of the Center. Landlord shall use
reasonable efforts to honor the rights granted to Tenant pursuant to this
paragraph. However, if Landlord inadvertently neglects to provide to Tenant
an offer notice with respect to a First Offer Building which becomes
available for lease, such failure shall not constitute a default by
Landlord pursuant to the Lease or entitle Tenant to any damages, rental
abatement or other remedy on account of such failure and Tenant shall have
no right to terminate the Lease on account of such failure.
7. No Brokers. The first sentence of Article 38 of the Original Lease shall
have no application with respect to this Amendment (i.e., there is no broker
entitled to a commission with respect to this Amendment). The representations
and covenants contained in the second and third sentences of such Article shall
apply with respect to this Amendment. For the purpose of such covenants, payment
shall not be a condition precedent to recovery upon such indemnification
provisions. Each such indemnification provision shall include a covenant by the
indemnifying party to defend the indemnified party against all claims from which
indemnification is available pursuant to such provision with legal counsel
selected by the insurance carrier for the indemnifying party or otherwise
reasonably acceptable to the indemnified party.
8. Lender Approval. Landlord and Tenant acknowledge and agree that the
continued effectiveness of this Amendment is subject to the approval of this
Amendment by Teachers Insurance and Annuity Association, Landlord's lender with
respect to the Center ("Lender"). Promptly upon the last execution and delivery
of this Amendment by Tenant and Landlord, Landlord shall submit this Amendment
to Lender with a request for approval hereof by Lender in writing. Thereafter,
Landlord shall use reasonable efforts to obtain the approval of Lender to this
7
<PAGE>
Amendment as promptly as practicable. Promptly upon receipt of such approval
from Lender, Landlord shall so notify Tenant and shall furnish a copy of any
written approval to Tenant. In the event that Landlord is unable to obtain the
approval of Lender to this Amendment within fifty (50) days after Tenant's
execution and delivery of this Amendment, either party shall have the right to
terminate this Amendment. Such right shall be exercised by either party by
written notice to the other given at any time after the expiration of such fifty
(50) day period and prior to Landlord's notice to Tenant as to such approval. If
the parties are entitled to terminate this Amendment and either party exercises
such right, then (a) this Amendment shall terminate upon the date of receipt of
such notice of termination by the recipient party, (b) each party shall bear its
own costs and fees incurred in the preparation and negotiation of this
Amendment, (c) neither party shall have any further rights or obligations
pursuant to this Amendment and (d) the Lease shall remain in full force and
effect without regard to this Amendment.
9. Effective Date. Subject to the provisions of paragraph 8 above, this
Amendment shall be effective as of March 28, 1997, notwithstanding any later
execution and delivery of this Amendment by Landlord and/or Tenant.
10. Counterparts. This Amendment may be executed in two (2) or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute a single instrument. It shall not be necessary for
Landlord and Tenant to execute the same counterpart(s) of this Amendment for
this Amendment to become effective.
11. Defined Terms. All terms used in this Amendment with initial capital
letters and not defined herein shall have the meanings given to such terms in
the Lease.
12. Lease in Effect. Landlord and Tenant acknowledge and agree that the
Lease, as hereby amended and extended, remains in full force and effect in
accordance with its terms.
8
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Fifth Amendment
to Lease to be effective as provided in paragraph 9 above.
FILENET CORPORATION, a California C.J. SEGERSTROM & SONS, a California
corporation general partnership
By __________________________ By ________________________________
Managing Partner
Title: __________________________ By ________________________________
Managing Partner
Dated: __________________________
Dated: ________________________________
"Tenant" "Landlord"
Attachment:
Exhibit "A" - Location of New Allocated Spaces
9
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<S> <C>
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Mar-31-1997
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0
0
<COMMON> 124,167
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<SALES> 29,325
<TOTAL-REVENUES> 47,562
<CGS> 8,328
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<INCOME-PRETAX> (13,082)
<INCOME-TAX> 3,662
<INCOME-CONTINUING> (9,420)
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