FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
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)
Delaware 95-3757924
- - ------------------------------ ----------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3565 Harbor Boulevard, Costa Mesa, CA 92626
- - ----------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(714) 966-3400
- - ----------------------------------------------------------------------
(Registrant's telephone number including area code)
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 |_|
As of October 31, 1998, there were 31,815,512 shares of the Registrant's common
stock outstanding.
<PAGE>
FILENET CORPORATION
Index
Page
Number
- - --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997................. 3
Consolidated Statements of Operations
for the three and nine month periods ended September 30,
1998 and 1997.................................................. 4
Consolidated Statements of Comprehensive Income
for the three and nine month periods ended
September 30, 1998 and 1997.................................... 5
Consolidated Statements of Cash Flows
for the nine month periods ended September 30, 1998 and 1997... 6
Notes to Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 19
Item 6. Exhibits and Reports on Form 8-K............................... 19
SIGNATURE...................................................... 20
INDEX TO EXHIBITS.............................................. 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FILENET CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term marketable securities $ 69,839 $ 63,944
Accounts receivable, net 62,149 61,283
Inventories 3,030 3,541
Prepaid expenses and other current assets 9,096 8,309
Deferred income taxes 5,885 6,439
---------------- ---------------
Total current assets 149,999 143,516
Property, net 37,452 27,587
Long-term marketable securities 12,454 7,826
Other assets 1,049 941
---------------- ---------------
Total assets $ 200,954 $ 179,870
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,606 $ 15,003
Accrued compensation 15,959 14,845
Unearned maintenance revenue 13,473 8,848
Accrued royalties 1,766 2,743
Other accrued liabilities 22,478 19,190
--------------- ---------------
Total current liabilities 70,282 60,629
Deferred income taxes 460 430
Stockholders' equity:
Preferred stock - $.10 par value;
7,000,000 shares authorized; none
issued and outstanding
Common stock - $.01 par value; 100,000,000 shares authorized; 31,686,928 and
31,121,676 shares outstanding at September 30, 1998 and December 31, 1997,
respectively 143,567 130,741
Retained earnings 3,727 2,348
Accumulated other comprehensive income (2,515) (4,146)
---------------- ---------------
144,779 128,943
Treasury stock, at cost; 1,098,000 and
820,000 shares at September 30, 1998
and December 31, 1997, respectively (14,567) (10,132)
---------------- ---------------
Total stockholders' equity 130,212 118,811
---------------- ---------------
Total liabilities and
stockholders' equity $ 200,954 $ 179,870
================ ===============
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
FILENET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
-----------------------------------------------------------------------
1998 1997 1998 1997
---------------- ---------------- --------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Software $ 36,128 $ 34,684 $ 123,777 $ 87,841
Service 29,763 23,713 82,702 65,206
Hardware 5,261 6,614 18,654 21,976
---------------- --------------- ---------------- -----------------
Total revenue 71,152 65,011 225,133 175,023
Costs and expenses:
Cost of software revenue 4,850 4,058 12,801 10,223
Cost of service revenue 18,712 14,010 52,025 40,906
Cost of hardware revenue 3,043 5,063 9,641 15,230
Research and development 12,915 9,613 36,808 29,346
Selling, general and
administrative 40,877 30,624 115,030 91,411
Restructuring and other
costs 6,000
--------------- --------------- -------------- -----------------
Total costs and expenses 80,397 63,368 226,305 193,116
--------------- --------------- -------------- -----------------
Operating income (loss) (9,245) 1,643 (1,172) (18,093)
Other income, net 1,102 984 3,113 2,285
--------------- --------------- -------------- -----------------
Income (loss) before (8,143) 2,627 1,941 (15,808)
income taxes
Provision (benefit) for
income taxes (2,364) 736 560 (4,425)
--------------- --------------- -------------- ----------------
Net income (loss) $ (5,779) $ 1,891 $ 1,381 $ (11,383)
================ =============== ============== ================
Earnings (loss) per share:
Basic $ (0.18) $ 0.06 $ 0.04 $ (0.38)
Diluted $ (0.18) $ 0.06 $ 0.04 $ (0.38)
Weighted average shares
outstanding:
Basic 31,526 30,512 30,843 30,331
Diluted 31,526 31,230 33,733 30,331
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FILENET CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------------- -----------------------------------
1998 1997 1998 1997
----------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) (5,779) 1,891 1,381 (11,383)
---------------- ---------------- ---------------- ----------------
Other comprehensive income:
Foreign currency translation
adjustments, net of tax (2,238) (1,371) 1,580 (5,190)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period, net of tax (37) (66) 43 (75)
Reclassification adjustment for gains
(losses)included in net income,
net of tax 7
---------------- ---------------- ---------------- ----------------
Total other comprehensive income (loss) (2,275) (1,437) 1,630 (5,265)
---------------- ---------------- ---------------- ----------------
Comprehensive income (loss) (8,054) 454 3,011 (16,648)
================ ================ ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FILENET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
----------------------------------
1998 1997
-------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) 1,380 (11,383)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 11,090 9,947
Provision for doubtful accounts 694 264
Deferred income taxes 598 586
Changes in operating assets and
liabilities, net of acquisition:
Accounts receivable (388) 23,826
Inventories 511 3,395
Prepaid expenses and other current assets (714) 882
Accounts payable 1,463 (3,888)
Accrued compensation
983 2,257
Unearned maintenance revenue
4,652 1,819
Accrued royalties (977) (2,029)
Other 2,676 (7,316)
-------------- ----------------
Net cash provided by operating activities 21,968 18,360
-------------- ----------------
Cash flows from investing activities:
Proceeds from sale of equipment 446 407
Capital expenditures (21,117) (9,184)
Purchases of marketable securities (25,601) (22,462)
Proceeds from sales and maturities of marketable
securities 37,044 26,921
-------------- ----------------
Net cash used by investing activities (9,228) (4,318)
-------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 12,827 2,338
Common stock repurchased (4,435) -
-------------- ----------------
Net cash provided by financing activities 8,392 2,338
-------------- ----------------
Effect of exchange rate changes on cash and cash equivalents 613 (2,108)
-------------- ----------------
Net increase in cash and cash equivalents 21,745 14,272
Cash and cash equivalents, beginning of year 37,344 28,530
-------------- ----------------
Cash and cash equivalents, end of period 59,089 42,802
============== ================
Supplemental cash flow information:
Interest paid 67 187
Income taxes paid (refund) (281) 2,768
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FILENET CORPORATION
Notes To Consolidated Financial Statements
(Unaudited)
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 September 30, 1998
and the results of its operations, its comprehensive income and its cash
flows for the three and nine month periods ended September 30, 1998 and
1997. 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 Financial Condition and Results
of Operations contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and the Company's Quarterly Reports on
Form 10-Q for the quarters ended March 31 and June 30, 1998. The results of
operations for the interim periods are not necessarily indicative of the
operating results for the year.
2. In May 1998, the Company effected a two-for-one split of its common stock.
All references in the consolidated financial statements to number of shares
and per share amounts of the Company's common stock have been restated to
reflect the split.
3. Certain reclassifications have been made to the prior year's consolidated
financial statements to conform with the current year's presentation.
4. The following table is a reconciliation of the earnings and share amounts
used in the calculation of basic earnings per share and diluted earnings
per share for the three and six-month periods ended September 30, 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Per
Net Share
(In thousands, except per share amounts) Income Shares Amount
------------ ---------- -----------
Three months ended September 30, 1998
Basic earnings per share $ (5,779) $ 31,526 $ (0.18)
Effect of dilutive stock options 2,612
------------ ----------
Diluted earnings per share $ (5,779) $ 34,138 $ (0.17)
============ ==========
Three months ended September 30, 1997
Basic earnings per share $ 1,891 $ 30,512 $ 0.06
Effect of dilutive stock options -
------------ ----------
Diluted earnings per share $ 1,891 $ 30,512 $ 0.06
============ ==========
Nine months ended September 30, 1998
Basic earnings per share $ 1,380 $ 30,843 $ 0.04
Effect of dilutive stock options 2,890
------------ ----------
Diluted earnings per share $ 1,380 $ 33,733 $ 0.04
============ ==========
Nine months ended September 30, 1997
Basic earnings per share $ (11,383) $ 30,331 $ (0.38)
Effect of dilutive stock options -
------------ ----------
Diluted earnings per share $ (11,383) $ 30,331 $ (0.38)
============ ==========
</TABLE>
7
<PAGE>
5. In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires enterprises to report
comprehensive income and its components in general-purpose financial
statements. SFAS No. 130 is effective for the Company beginning January 1,
1998. Accordingly, the Company has prepared Statements of Comprehensive
Income for the three and nine month periods ended September 30, 1998 and
1997 (restatement of prior year financial statements is required by SFAS
No. 130). Accumulated other comprehensive income as of September 30, 1998
is comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Accumulated
Unrealized Gain Other
Foreign on Marketable Comprehensive
(In thousands) Currency Items Securities Income
----------------- ----------------- ------------------
Balance, December 31, 1997 $ (4,121) $ (25) $ (4,146)
Current period changes 1,586 44 1,630
----------------- ----------------- ------------------
Balance, Sept. 30, 1998 $ (2,535) $ 19 $ (2,516)
================= ================= ==================
</TABLE>
6. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which is effective for the year
ending December 31, 1998. The Company has not yet determined the impact, if
any, of adopting this standard on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. SFAS 133 will require the Company to record
all derivatives on the balance sheet at fair value. For derivatives that
are hedges, changes in the fair value of derivatives will be offset by the
change in fair value of the hedged assets, liabilities, or firm
commitments. The Company has not yet determined the impact, if any, of
adopting this standard on its financial statements.
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 (the FileNET
Case). 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 (the Watermark Case). On October 9, 1996,
Wang withdrew its claim in the FileNET Case that one of the patents it
initially asserted is infringed by the Company's products that 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.
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 (Eastman). On July
30, 1997, the court permitted Eastman and Kodak Limited of England to be
substituted in the litigation in place of Wang.
FileNET has moved for summary judgment on noninfringement as to each of the
five patents in the suit, and for summary judgment of invalidity as to one
of the patents. Eastman moved for summary judgment as to FileNET's
unenforceability defense on one of the patents. A trial date has not been
set.
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 the Company will,
depending on the product, redesign the infringing product or seek to obtain
a license to market the product. There can be no assurance that the Company
will be able to obtain such a license on acceptable terms. Based on the
Company's analysis of these patents and their respective file histories,
the Company believes that it has meritorious defenses to claims at issue;
however, the ultimate outcome or any resulting potential loss cannot be
determined at this time.
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 Goldman 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. The plaintiff alleges that the Company and other
defendants violated Cal. Corp. Code ss.ss. 25400 and 25500, Cal. Civ. Code
ss.ss. 1709-1710 and Cal. Bus. & Prof. Code ss.ss. 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. On
September 30, 1998, the Court entered an order dismissing this action
without prejudice.
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 Goldman Federal Action). The action purportedly was filed on behalf of
the same class of purchasers of the Company's common stock as the Goldman
State Action. The allegations contained in the Goldman Federal Action are
very similar to the allegations contained in the Goldman State Action,
except that the Goldman Federal Action asserts claims under Sections 10(b)
and 20(a) of the Securities Exchange Act and Rule 10b-5On September 23,
1998, the Court entered an order dismissing this action in its entirety
without prejudice.
On October 23, 1998, plaintiff Avram Gart 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 Gart State Action). The
action was purportedly filed on behalf of a class of purchasers of the
Company's common stock during the period January 13, 1998 through October
7, 1998. The plaintiff alleges that the Company and the other defendants
violated Cal. Corp. Code ss.ss. 25400 and 25500 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 damages, rescission, interest, attorneys' fees, expert witness
fees and costs, and equitable or injunctive relief. The Company has not
been served with the complaint.
On October 27, 1998, plaintiff Thomas P. Nyquist filed a 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 Nyquist Federal Action). The action was purportedly filed on behalf of
a class of purchasers of the Company's common stock during the period April
16, 1998 through October 7, 1998. The plaintiff alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 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 damages, interest, attorneys'
fees, expert witness fees and costs.
The Company believes that all of the allegations contained in the Gart
State Action and the Nyquist Federal Action 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 material adverse effect on the
Company's consolidated results of operations or financial condition.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with the unaudited consolidated
financial statements and notes thereto included in Part I--Item 1 and Factors
That May Affect Future Results in this item of this Quarterly Report, and with
the audited consolidated financial statements and notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
Results of Operations
Revenue
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
1998 1997 Change 1998 1997 Change
---------- ---------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Software revenue
Domestic $ 22.2 $ 21.9 1% $ 78.4 $ 58.3 35%
International 13.9 12.9 8% 45.3 29.6 53%
---------- ---------- ---------- -----------
Total software revenue $ 36.1 $ 34.8 4% $ 123.7 $ 87.9 41%
---------- ---------- ---------- -----------
Percentage of total revenue 51% 54% 55% 50%
Service revenue
Domestic $ 23.1 $ 17.9 29% $ 64.1 $ 49.8 29%
International 6.7 5.8 16% 18.7 15.4 21%
---------- ---------- ---------- -----------
Total service revenue $ 29.8 $ 23.7 26% $ 82.8 $ 65.2 27%
---------- ---------- ---------- -----------
Percentage of total revenue 42% 36% 37% 37%
Hardware revenue
Domestic $ 4.1 $ 4.6 (11%) $ 13.6 $ 15.7 (13%)
International 1.2 1.9 (37%) 5.0 6.2 (19%)
---------- ---------- ---------- -----------
Total hardware revenue $ 5.3 $ 6.5 (18%) $ 18.6 $ 21.9 (15%)
---------- ---------- ---------- -----------
Percentage of total revenue 7% 10% 8% 13%
Total revenue
Domestic $ 49.4 $ 44.4 11% $ 156.1 $ 123.8 26%
International 21.8 20.6 6% 69.0 51.2 35%
---------- ---------- ---------- -----------
Total revenue $ 71.2 $ 65.0 10% $ 225.1 $ 175.0 29%
========== ========== ========== ===========
</TABLE>
Software revenue from the licensing of the Company's software products increased
4% and 41% for the three and nine month periods, respectively, ended September
30, 1998 over the comparable periods of 1997. The increases were primarily
attributable to an increase in the volume of product shipments, including the
Company's Panagon product line which was released during the first quarter of
1998. Revenue in the third quarter of 1998 was impacted negatively by reduced
add-on sales of the Company's Image Management System (IMS) line of products.
The magnitude of the increase in year to date revenue over 1997 is partially
attributable to weakness in orders during the first quarter of 1997 and is not
indicative of future revenue growth.
Service revenue consists of revenue from software maintenance services,
professional services, training, repairs and supplies. Service revenue increased
26% and 27% for the three and nine month periods, respectively, ended September
30, 1998 over the comparable periods of 1997. The increases were attributable to
increased maintenance revenue due to the growth of the Company's installed base
and to increased demand for the Company's professional service offerings.
10
Hardware revenue is generated primarily from the sale of 12-inch optical storage
and retrieval libraries (OSARs) and third-party hardware. Hardware revenue
decreased by 18% and 15% for the three and nine month periods, respectively,
ended September 30, 1998 from the comparable periods of 1997 primarily due to
decreases in new orders experienced both domestically and internationally and
the Company's focus on increasing its higher margin software revenues. The
Company expects hardware revenue to continue to decline in both absolute dollars
and as a percentage of total revenues as it continues to transition its business
toward software and service-related revenue.
International revenues constituted approximately 31% and 32% of total revenues
in the three month periods ended September 30, 1998 and 1997, respectively. For
the nine month periods ended September 30, 1998 and 1997, international revenues
constituted approximately 31% and 29% of total revenues, respectively. The
increases in the proportion of international revenues for the nine months ended
September 30, 1998 is attributable to the higher level of growth experienced
internationally. A portion of this growth is attributable to weakness in
international orders during the first quarter of 1997 and is not indicative of
future international revenue growth. Management expects that the Company's
international operations will continue to account for a significant portion of
total revenues. However, the ongoing global economic crisis could adversely
affect international revenues. In addition, international revenues could be
adversely affected if the U.S. dollar strengthens against international
currencies.
Cost of Revenue
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------------- ----------------------------------
1998 1997 Change 1998 1997 Change
---------- ---------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Cost of software revenue $ 4.8 $ 4.0 20% $ 12.8 $ 10.2 25%
Percentage of software revenue 13% 11% 10% 12%
Cost of service revenue $ 18.7 $ 14.0 34% $ 52.0 $ 40.9 27%
Percentage of service revenue 63% 59% 63% 63%
Cost of hardware revenue $ 3.1 $ 5.1 (39%) $ 9.7 $ 15.2 (36%)
Percentage of hardware revenue 58% 78% 52% 69%
Total cost of revenue $ 26.6 $ 23.1 $ 74.5 $ 66.3 12%
Percentage of total revenue 37% 36% 33% 38%
</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 for the three months ended September 30, 1998 increased to 13%
from 11% for the comparable period in 1997. The increase was primarily due to
increased third party royalty costs. The cost of software revenue as a
percentage of software revenue for the nine months ended September 30, 1998
decreased to 10% from 12% for the comparable period in 1997. The decrease is
primarily attributable to the low revenue levels in the first quarter of 1997
without a corresponding decrease in fixed distribution costs. Also contributing
to the decrease was the fact that software localization costs which were
classified as cost of revenue in 1997 have been classified as research and
development in 1998.
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 for the three month period
ended September 30, 1998 increased to 63% from 59% in the comparable period of
1997. The increase is attributable to the higher proportion of lower margin
professional services in the service revenue mix.
The cost of hardware revenue includes the cost of manufacturing OSARs,
third-party purchased hardware and the cost of hardware integration personnel.
The cost of hardware revenue as a percentage of hardware revenue for the three
month period ended September 30, 1998 decreased to 58% from 78% for the
comparable period of 1997. For the nine month period ended September 30, 1998,
cost of hardware revenue decreased to 52% from 69% for the comparable period of
1997. These decreases were due to improved product mix and a reduction in fixed
manufacturing costs.
<PAGE>
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------------- ----------------------------------
1998 1997 Change 1998 1997 Change
---------- ---------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Research and development $ 12.9 $ 9.6 34% $ 36.8 $ 29.3 26%
Percentage of total revenue 18% 15% 16% 17%
Selling, general and
administrative $ 40.9 $ 30.6 34% $ 115.0 $ 91.4 26%
Percentage of total revenue 57% 47% 51% 52%
</TABLE>
Research and development expenses increased 34% and 26% for the three and nine
month periods ended September 30, 1998, respectively, compared to the comparable
periods of 1997. The increases were due to a general increase in salaries and
recruiting costs necessitated by the intense competitive environment for
software engineers; increase in cost of contract developers; and the inclusion
of software localization costs in research and development in 1998. As a
percentage of total revenue, research and development expenses increased to 18%
for the three month period ended September 30, 1998 from 15% for the comparable
period of 1997. The increase was attributable to lower revenue growth rates in
the third quarter of 1998. As a percentage of total revenue, research and
development expenses decreased to 16% for the nine month period ended September
30, 1998 from 17% for the comparable period of 1997. This decrease is primarily
attributable to the effects of the lower revenue levels in the first quarter of
1997.
The Company expects that competition for qualified technical personnel will
remain intense for the foreseeable future and may result in higher levels of
compensation expense for the Company. The Company believes that research and
development expenditures, including compensation of technical personnel, are
essential to maintaining its competitive position and expects these costs to
continue to constitute a significant percentage of revenues.
Selling, general and administrative expenses increased 34% and 26% for the three
and nine month periods ended September 30, 1998, respectively, compared to the
comparable periods of 1997. This increase was primarily due to overall increases
in salaries, higher sales incentive compensation due to increased revenues a
change in the sales channel mix, and increased marketing program costs. As a
percentage of total revenue, selling, general and administrative expenses
increased to 57% for the three months ended September 30, 1998 from 47% for the
comparable period of 1997 primarily due to sales productivity growing at a
lesser rate than sales related expenses.
Provision for Income Taxes The Company's combined federal, state and foreign
annual effective tax rate for the nine months ended September 30, 1998 was 29%
(expense) compared to 28% (benefit) for the comparable period in 1997.
Foreign Currency Fluctuations and Inflation The Company's performance can be
affected by changes in foreign currency values relative to the U.S. dollar in
relation to the Company's revenue and operating expenses. The impact to net
income from foreign exchange transactions and hedging activities is immaterial
for all periods reported. As of September 30, 1998, the Company had forward
exchange contracts outstanding totaling approximately $5 million in 11
currencies. All of these contracts mature in three months.
Other comprehensive income for the three and nine month periods ended September
30, 1998 reflects decreases of $2,238,000 and $1,580,000, respectively, in the
unrealized loss due to foreign currency translation. These decreases were
primarily attributable to unrealized gains associated with the strengthening of
the Irish currency against the U.S. dollar during the respective periods.
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 three and nine month periods ended September 30, 1998 and 1997.
Other Financial Instruments The Company enters into forward foreign exchange
contracts as a hedge against effects of fluctuating currency exchange rates on
monetary assets and liabilities denominated in currencies other than the
functional currency of the relevant entity. The Company is exposed to market
risk on the forward exchange contracts as a result of changes in foreign
exchange rates; however, the market risk should be offset by changes in the
valuation of the underlying exposures. Gains and losses on these contracts,
which equal the difference between the forward contract rate and the prevailing
market spot rate at the time of valuation, are recognized in the consolidated
statement of operations. The counterparties to these instruments are major
financial institutions. The Company uses commercial rating agencies to evaluate
the credit quality of the counterparties, and the Company does not anticipate a
loss resulting from any credit risk of these institutions.
Liquidity and Capital Resources
At September 30, 1998, combined cash, cash equivalents and short- and long-term
marketable securities totaled $82.3 million, an increase of $10.5 million from
the end of 1997. Cash provided by operating activities during the nine months
ended September 30, 1998 totaled $18.7 million and resulted primarily from an
increase in unearned maintenance revenue related to growth in the Company's
installed base; and additions to net income for depreciation and amortization
expense. Cash used by investing activities totaled $9.2 million and was a result
of capital expenditures offset by sales and maturities of marketable securities.
Cash provided by financing activities totaled $8.4 million and was a result of
proceeds received from the exercise of employee stock options and purchases
under the employee stock purchase plan offset by the repurchase of 139,000
shares of the Company's common stock.
Accounts receivable increased to $62.1 million at September 30, 1998 from $61.3
million at December 31, 1997. Days sales outstanding increased to 79 days as of
September 30, 1998 from 72 days as of December 31, 1997. The increase is
attributable to slower payments being experienced internationally and in the
Company's reseller channel. Current liabilities increased to $70.3 million at
September 30, 1998 from $60.6 million at December 31, 1997. The increase in
current liabilities is primarily a result of increases in accounts payable,
accrued incentive compensation, unearned maintenance revenue and cooperative
marketing cost accruals.
The Company has a $20 million unsecured line of credit with a commercial bank.
This line of credit expires in May 1999 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 during 1998 under which the
Company may borrow approximately $2 million. As of September 30, 1998, there
were no borrowings outstanding against any of the Company's credit lines.
During the first quarter of 1998, the Company repurchased $4.4 million of its
common stock, thereby completing its previously announced $10 million stock
repurchase program.
The Company anticipates that its present cash balances together with internally
generated funds and credit lines will be sufficient to meet its working capital
and capital expenditure needs for at least the next twelve months.
Other Matters
Year 2000 With the approach of the year 2000, the Company recognized that
significant issues could arise in connection with the computer software products
it licenses and the internal business systems which are essential to its
operations. As a result, the Company implemented a year 2000 Integrity Program
("the Program") in 1997 to ensure that the Company's computer software products
and internal business systems will function properly in the year 2000 and
thereafter. The Program as it relates to the software products licensed by the
Company includes year 2000 compliance testing and certification of certain
existing software products. All new generations of the Company's software
products will be released as year 2000 compliant. Not all current software
products of the Company are year 2000 compliant and the Company does not plan to
make them so. Upgraded, year 2000 compliant versions of such software products
are being made available to customers and resellers who will then bear the
responsibility for installing the upgraded software product in order to make
their systems year 2000 compliant. Some of the Company's customers are running
software product versions that are not year 2000 compliant. The Company has been
encouraging such customers to migrate to current software product versions. It
is possible that the Company may experience increased expenses in addressing
migration issues for such customers. The Company's customer support organization
initiated a program, Customer Service Profile 2000, to review the status of each
Company's product currently installed at a customer location and it provided the
same diagnostics to its resellers for their use at their customer locations.
Customers who have support agreements with the Company have been directly
informed as to whether or not the particular software products they have
installed are year 2000 compliant. All customers are kept informed of the
release of year 2000 compliant updates and upgrades via the Company's web site.
Risks from the inability of any of the Company's software products to properly
manage and manipulate data in the year 2000 could result in increased warranty
costs, customer satisfaction issues, potential lawsuits and other costs and
liabilities, as well as customers being unable to run software licensed from the
Company and incurring significant costs from the resultant business
interruption. Demand for the Company's software products could be adversely
impacted to the extent customers and potential customers are temporarily
distracted by their year 2000 remediation efforts, as it competes for
information technology resources that have been diverted for such remedial
efforts which may have higher priority than implementing document management
systems.
The Company has also initiated communications with its significant third party
vendors of computer software with which the Company's systems interface or upon
whom the Company's software products depend, in order to coordinate efforts with
these outside third parties to minimize the extent to which its business will be
vulnerable to such third parties' failure to remediate their own year 2000
issues. Although the Company's compliance testing utilizes the embedded
third-party software as an essential part of its software being tested, the
Program does not include certification of customer-developed applications which
run on the Company's software products or third-party software which is
incorporated in the Company's software products. Customers and third-party
vendors will remain directly responsible for year 2000 compliance testing of
their software.
The Program also includes a review of all internal systems for year 2000
compliance. The Company's significant business systems (financial, operational,
customer support) are under review and are either currently year 2000 compliant
or will be upgraded and/or replaced so as to be year 2000 compliant by July
1999. All of the hardware and software deployed in the Company's technical
infrastructure is either fully year 2000 compliant or is scheduled to be
replaced with year 2000 compliant components by the end of 1998. The Company is
also evaluating its environmental systems (heating, air conditioning, security)
and intends to make all such systems year 2000 compliant by the end of 1998. To
the extent possible, the Company will be developing and executing contingency
plans designed to allow continued operation in the event of failure of the
Company's or third parties' systems. For those business, infrastructure and
environmental systems that are to be upgraded in order to achieve year 2000
compliance, the majority were already scheduled for upgrade for other business
reasons and any additional implementation costs directly associated with the
year 2000 problem are not material.
Although the Company is not aware of any material operational issues or costs
associated with preparing its software products and internal systems for the
year 2000, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of the necessary systems and
changes to address the year 2000 issues, and the Company's inability to
implement such systems and changes could have an adverse effect on future
results of operations. The costs of the Company's year 2000 project and the date
on which the Company believes it will be completed are based on management's
best estimates and include assumptions regarding third party modification plans.
However, in particular due to the potential impact of third party modification
plans, there can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the nature and amount of programming required
to upgrade or replace each of the affected programs, and the success of the
Company's external customers, resellers and vendors and suppliers in addressing
the year 2000 issue.
The EURO Conversion On January 1, 1999, eleven of the fifteen member countries
of the European Union are scheduled to establish fixed conversion rates between
their existing sovereign currencies and the EURO. These countries have agreed to
adopt the EURO as their common legal currency on that date. The EURO will then
trade on currency exchanges and be available for non-cash transactions. These
countries will issue sovereign debt exclusively in EURO and will re-denominate
outstanding sovereign debt. Effective on this date, these countries will no
longer control their own monetary policies by directing independent interest
rate for the legacy currencies. Instead, the authority to direct monetary
policy, including money supply and official interest rates for the EURO, will be
exercised by the new European Central Bank.
Following introduction of the EURO, the legacy currencies are scheduled to
remain legal tender in these countries as a denomination of the EURO between
January 1, 1999 and January 1, 2002 (the "transition period"). During the
transition period, public and private parties may pay for goods and services
using either the EURO or the country's legacy currency on a "no compulsion, no
prohibition" basis. However, conversion rates no longer will be computed
directly from one legacy currency to another. Instead, a "triangulation" process
will be applied whereby an amount denominated in one legacy currency first will
be converted into an amount denominated in EURO, and the resultant
EURO-denominated amount is converted into the second legacy currency.
The Company is in the process of evaluating the impact the conversion to the
EURO will have on its financial condition and results of operations. Based on
this evaluation to date, the Company currently does not believe there will be a
material impact on its financial condition or results of operations as a result
of the EURO conversion, except that the Company cannot currently assess the
impact that a common EURO-based price list will have on how it markets its
products in Europe nor the impact, if any, on revenues generated in Europe.
Environmental Matters The Company is not aware of any issues related to
environmental matters that have, or are expected to, materially affect its
business.
Factors That May Affect Future Results
The Company's business, financial condition, operating results and prospects can
be impacted by a number of factors, including but not limited to those set forth
below and elsewhere in this report, any one of which could cause the Company's
actual results to differ materially from recent results or from the Company's
anticipated future results.
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, including without limitation
enhancements to certain specified Company software products to achieve year 2000
compliance. The Company could experience difficulties or delays in developing
and introducing new products or integrating some or all of the technologies and
products from acquisitions, with the technologies and products from the Company.
Delays in or non-completion of the development of newly integrated 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 the
anticipated benefits of the acquisitions. 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 including without limitation
enhancements to certain existing software products to achieve year 2000
compliance, 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, improvements in the productivity of the Company's sales
force, 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 including EURO exchange rates beginning in 1999, 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 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, computer output to laser disk 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 priced
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 that 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.
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, 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. On July 30, 1997, the Court permitted
Eastman Software, Inc. and Kodak Limited of England to be substituted in the
litigation in place of Wang. The Company cannot predict what impact, if any,
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, Hewlett-Packard Company 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.
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. In general, the
Company does not utilize employment agreements for its key employees. 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, particularly
engineers and other technical personnel, is intense, and pay scales in the
Company's industry are increasing. 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,
varying requirements for localized product, potentially adverse tax
consequences, currency exchange fluctuations including those related to the EURO
beginning in 1999, 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.
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 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 trading 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 trading price of the Company's common stock.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes to Consolidated Financial Statements.
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 8-K were filed during the third quarter of 1998.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FILENET CORPORATION
November 16, 1998 By:___________________________________________
Date Mark S. St. Clare, Chief Financial Officer
and Sr. Vice President, Finance
(Principal Financial Officer)
20
<PAGE>
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).
4.3 Amendment One dated July 31, 1998 and Amendment Two dated November 9,
1998 to Rights Agreement, between FileNET Corporation and BANKBOSTON
N.A., formerly known as the First National Bank of Boston.
10.1* Second Amended and Restated Credit Agreement (Multicurrency) by and
among the Registrant and Bank of America National Trust and Savings
Association dated June 25, 1997, effective June 1, 1997 (filed as
Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 1997).
10.2* Business Alliance Program Agreemen between the Registrant and Oracle
Corporation date 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).
10.3* 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).
10.3.1 Runtime Sublicense Addendum between the Registrant and Oracle
Corporation dated July 1, 1996, as amended by Amendment Two through Six
herein.
10.4* 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).
10.5* 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).
10.6* 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).
10.7* 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 (filed as Exhibit 10.8 to Form 10-Q for the
quarter ended March 31, 1997).
10.8* 1989 Stock Option Plan for Non-Employee Directors of FileNE
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).
10.9* Amended and Restated 1995 Stock Option Plan of FileNET (filed as
Exhibit 99.1 to Form S-8 filed on November 9, 1998; Registration No.
333-66997).
- - --------------------------------------------
* Incorporated herein by reference
21
<PAGE>
Exhibit No. Description
....................... ........................................................
10.10* 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).
10.11* Non-Statutory Stock Option Agreement (with Notice of Grant of Stock
Option and Special Addendum) between Registrant and Mr. Lee Roberts
(filed as Exhibit 99.17 to Form S-8 on August 20, 1997).
10.12* Non-Statutory Stock Option Agreement (with Notice of Grant of Stock
Option and Special Addendum) between Registrant and Mr. Ron Ercanbrack
(filed as Exhibit 99.19 to Form S-8 on August 20, 1997).
10.13* 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).
10.14* 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 for the fiscal year ended December 31,1996).
10.15* Developmen 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).
10.16* 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).
10.17* 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).
10.18* 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).
10.19* 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).
10.20* 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).
10.21* Amended and Restated FileNET Corporation 1998 Employee Stock Purchase
Plan (filed as Exhibit 99.15 to Form S-8, filed on November 9, 1998;
Registration No. 333-66997).
10.22* FileNET Corporation International Employee Stock Purchase Plan.(filed
as Exhibit 99.16 to Form S-8, filed on November 9, 1998; Registration
No. 333-66997).
27 Financial Data Schedule.
- - ---------------------------------------------
* Incorporated herein by reference
22
AMENDMENT NO. 1 TO THE RIGHTS AGREEMENT
Pursuant to Section 26 of the Rights Agreement (the "Rights Agreement")
dated as of November 4, 1988, between FileNet Corporation, a Delaware
corporation (the "Company"), and BankBoston, N.A., a national banking
association formerly known as The First National Bank of Boston (the "Rights
Agent"), the Company and the Rights Agent hereby amend the Rights Agreement as
of July 31, 1998, as provided below.
1. Name Change of Rights Agent. All references in the Rights Agreement,
and each of the Exhibits thereto, to the "The First National Bank of
Boston" shall be deleted and replaced with "BankBoston, N.A." and all
references to the "Rights Agent" shall mean BankBoston, N.A.
2. Certain Definitions. Section 1 of the Rights Agreement shall be
amended as follows:
(a) The definition of the term "Business Day" set forth in Section
1(d) of the Rights Agreement shall be amended in its entirety to
read in full as follows:
"Business Day" shall mean any day other than a Saturday, Sunday,
or a day on which banking institutions in the Commonwealth of
Massachusetts are authorized or obligated by law or executive
order to close.
(b) The definition of the term "close of business" set forth in
Section 1(e) of the Rights Agreement shall be amended in its
entirety to read in full as follows:
"close of business" on any given date shall mean 5:00 p.m.,
Eastern time, on such date; provided, however, that if such date
is not a Business Day, it shall mean 5:00 p.m., Eastern time, on
the next succeeding Business Day.
3. Appointment of Rights Agent. Section 2 of the Rights Agreement shall
be amended as follows:
(a) The second sentence in Section 2 of the Rights Agreement shall be
amended in its entirety to read in full as follows:
"The Company may from time to time appoint such Co-Rights Agents
as it may deem necessary or desirable, upon ten (10) days' prior
written notice to the Rights Agent."
(b) The following sentence shall be added after the second sentence
in Section 2 of the Rights Agreement:
"The Rights Agent shall have no duty to supervise, and shall in
no event be liable for, the acts or omissions of any such
Co-Rights Agent."
4. Exercise of Rights; Purchase Price; Expiration Date of Rights.
Sections 7(a) and 7(b) of the Rights Agreement are hereby amended in
their entirety to read in full as follows:
"Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Subject to the final sentence of Section 23(a) hereof, the
registered holder of any Right Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in
whole or in part at any time after the Distribution Date upon
surrender of the Right Certificate, with the form of election to
purchase and certification on the reverse side thereof duly
executed, to the Rights Agent at the office o f the Rights Agent
designated for such purpose, together with payment of the
Purchase Price for each Common Share as to which the Rights are
exercised, at or prior to the earliest of (i) the close of
business on November 17, 2008 (the "Final Expiration Date"), (ii)
the time at which the Rights are redeemed as provided in Section
23 hereof (the "Redemption Date"), or (iii) the closing of any
merger or other acquisition transaction involving the Company
pursuant to an agreement of the type described in Section
1(c)(ii)(A)(2) hereof.
(b) The Purchase Price for each Common Share pursuant to the exercise
of a Right shall initially be $175, shall be subject to
adjustment from time to time as provided in Sections 11, 13 and
26 hereof and shall be payable in lawful money of the United
States of America in accordance with paragraph (c) below."
5. Concerning the Rights Agent. Section 18 of the Rights Agreement shall
be amended by replacing the phrase "without negligence" with the
phrase "without gross negligence."
6. Duties of Rights Agent. Section 20(c) of the Rights Agreement shall be
amended by replacing the term "negligence" with the phrase "gross
negligence."
7. Notices. The address to which notices or demands shall be given or
made by the Company or the holder of a Right Certificate to or on the
Rights Agent set forth in Section 25 of the Agreement shall be amended
in its entirety to read in full as follows:
BankBoston, N.A.
c/o Boston Equiserve Limited Partnership
150 Royall Street
Canton, MA 02021
Attention: Client Administration
8. Form of Right Certificate. Exhibit A to the Rights Agreement, the Form
of Right Certificate ("Exhibit A"), shall be amended as follows:
(a) The legend on the first page of Exhibit A shall be amended in its
entirety to read as follows:
"NOT EXERCISABLE AFTER NOVEMBER 17, 2008 OR EARLIER IF NOTICE OF
REDEMPTION IS GIVEN OR IF THE COMPANY IS MERGER OR ACQUIRED
PURSUANT TO AN AGREEMENT OF THE TYPE DESCRIBED IN SECTION
1(c)(ii)(A)(2) OF THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER RIGHT ON
THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES (SPECIFIED IN SECTION 11(a)(ii) OF THE RIGHTS
AGREEMENT), RIGHTS BENEFICIALLY OWNED BY ACQUIRING PERSONS OR ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE
RIGHTS REPRESENTED BY THIS CERTIFICATE WERE ISSUED TO A PERSON
WHO WAS AN ACQUIRING PERSON OR AN ASSOCIATE OR AFFILIATE OF AN
ACQUIRING PERSON OR A NOMINEE THEREOF. THIS RIGHT CERTIFICATE AND
THE RIGHTS REPRESENTED HEREBY HAVE BECOME NULL AND VOID AS
SPECIFIED IN SECTION 11(a)(ii) OF THE RIGHTS AGREEMENT].1"
(b) The first paragraph of Exhibit A shall be amended in its entirety
to read in full as follows:
"This certifies that _____________________, or registered
assigns, is the registered owner of the number of Rights set
forth above, each of which entitles the owner thereof, subject to
the terms, provisions and conditions of the Rights Agreement
dated as of November 4, 1988 (the "Rights Agreement") between
FileNet Corporation, a Delaware corporation (the "Company"), and
the First National Bank of Boston, a national banking
association, as Rights Agent (the "Rights Agent"), to purchase
from the Company at any time after the Distribution Date and
prior to 5:00 p.m. (local time) on November 17, 2008, at the
offices of the Rights Agent, or its successors as rights Agent,
designated for such purpose, one fully paid, nonassessable common
share (the "Common Shares") of the Company, at a purchase price
of $175 per share (the "Purchase Price"), upon presentation and
surrender of this Right Certificate with the Form of Election to
Purchase and certification duly executed. The number of Rights
evidenced by this Right Certificate (and the number of shares
which may be purchased upon exercise thereof) set forth above,
and the Purchase Price set forth above, are the number and
Purchase Price as of November 17, 1988, based on the Common
Shares constituted at such date. Capitalized terms used in this
Right Certificate without definition shall have the meanings
ascribed to them in the Rights Agreement."
9. Summary of Rights to Purchase Common Shares. Exhibit B to the Rights
Agreement, the Summary of Rights to Purchase Shares ("Exhibit B"),
shall be amended as follows:
(a) The last two sentences of the first paragraph of Exhibit B shall
be amended in their entirety to read in full as follows:
"Each Right entitles the registered holder to purchase from the
Company one Common Share at a price of $175 per share (the
"Purchase Price"), subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and The First National
Bank of Boston, as Rights Agent (the "Rights Agent"), as
amended."
(b) The first full paragraph on page B-2 of Exhibit B shall be
amended in its entirety to read in full as follows:
"The Rights are not exercisable until the Distribution Date. The
Rights will expire on November 17, 2008 (the "Final Expiration
Date"), unless earlier redeemed by the Company as described
below."
10. Successors and Assigns. This Amendment No. 1 to the Rights Agreement
shall remain in full force and effect and shall be binding upon each
of the undersigned and any successors or assigns thereof. Except as
modified herein, the Rights Agreement shall remain in full force and
effect without change.
FILENET CORPORATION
By: ______________________________
Name: ______________________________
Title: ______________________________
Acknowledged and Agreed:
BANKBOSTON, N.A., as Rights Agent
By: _______________________________
Name: _______________________________
Title: _______________________________
AMENDMENT NO. 2 TO THE RIGHTS AGREEMENT
Pursuant to Section 26 of the Rights Agreement (the "Rights Agreement")
dated as of November 4, 1988, between FileNet Corporation, a Delaware
corporation (the "Company"), and BankBoston, N.A., a national banking
association formerly known as The First National Bank of Boston (the "Rights
Agent"), as amended, the Company and the Rights Agent hereby amend the Rights
Agreement as of November 9, 1998, as provided below.
1. Certain Definitions. Section 1 of the Rights Agreement shall be
amended as follows:
(a) The definition of Acquiring Person set forth in Section 1(a)
shall be amended in its entirety to read in full as follows:
"Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates
and Associates (as such terms are hereinafter defined) of such
Person, shall be the Beneficial Owner (as such term is
hereinafter defined) of 15% or more of the Common Shares of the
Company then outstanding but shall not include the Company, any
Subsidiary of the Company or any employee benefit plan of the
Company or of any Subsidiary of the Company or any entity holding
shares of capital stock of the Company for or pursuant to the
terms of any such plan, in its capacity as an agent or trustee
for any such plan.
(b) The definition of Continuing Director set forth in Section 1(g)
shall be deleted in its entirety and replaced with the phrase
"Intentionally Omitted."
2. Issue of Rights Certificates. The first two sentences in Section 3(a)
of the Rights Agreement shall be amended in their entirety to read in
full as follows:
(a) "Subject to the second sentence of this Section 3(a), until the
earlier of (i) the tenth day after the Shares Acquisition Date or
(ii) the tenth day after the date of the commencement of, or
first public announcement of the intent of any Person (other than
the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any Subsidiary of the Company or any
entity holding shares of capital stock of the Company for or
pursuant to the terms of any such plan, in its capacity as an
agent or trustee for any such plan) to commence, a tender or
exchange offer the consummation of which would result in any
Person becoming the Beneficial Owner of Common Shares aggregating
more than 15% of the then outstanding Common Shares of the
Company (including any such date which is after the date of this
Rights Agreement; the earlier of (i) and (ii) being herein
referred to as the "Distribution Date") (x) the Rights (unless
earlier terminated, redeemed or expired) will be evidenced
(subject to the provisions of paragraph (b) of this Section 3) by
the certificates for Common Shares registered in the names of the
holders thereof (which certificates for Common Shares shall also
be deemed to be Rights Certificates (as such term is hereinafter
defined)) and not by separate certificates, and (y) the Rights (
and the right to receive certificates therefor) will be
transferable only in connection with the transfer of the
underlying Common Shares. The preceding sentence,
notwithstanding, prior to the Distribution Date specified therein
(or such later Distribution Date as the Board of Directors of the
Company may select pursuant to this sentence), the Board of
Directors of the Company may postpone the Distribution Date
beyond the earlier of the dates set forth in the preceding
sentence."
3. Form of Rights Certificates. Section 4(b)(iii)(B) of the Rights
Agreement shall be amended by replacing the phrase "a majority of the
Continuing" with the phrase "the Board of."
4. Redemption. Section 23 of the Rights Agreement shall be amended as
follows:
(a) The proviso in the first sentence of subsection (a), which reads
"provided, however, if the Board of Directors of the Company
authorizes redemption of the Rights after the time a person
becomes an Acquiring Person, then there must be Continuing
Directors then in office and such authorization shall require the
concurrence of a majority of such Continuing Directors," shall be
deleted in its entirety.
(b) The proviso in the second sentence of subsection (a), which reads
"provided, however, there must be Continuing Directors then in
office and any such extension shall require the concurrence of a
majority of such Continuing Directors," shall be deleted in its
entirety.
5. Supplements and Amendments. Subsection (ii) in the first sentence of
Section 26 of the Rights Agreement shall be amended by deleting the
phrase "(which shortening or lengthening, following the Shares
Acquisition Date, shall be effective only if there are Continuing
Directors and shall require the concurrence of a majority of such
Continuing Directors)" in its entirety.
6. Form of Right Certificate. Exhibit A to the Rights Agreement, the Form
of Right Certificate ("Exhibit A"), shall be amended as follows:
(a) The last paragraph on Page A-3 (which continues onto page A-4) of
Exhibit A shall be amended in its entirety to read in full as
follows:
"Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Right Certificate may be redeemed by the
Company at its option at a redemption price of $.01 per Right at
any time prior to (10) days after the Shares Acquisition Date.
The period during which redemption of the Rights is permitted may
be extended by the Board of Directors of the Company. "
(b) The last paragraph on Page A-4 (which continues onto page A-5) of
Exhibit A shall be amended in its entirety to read in full as
follows:
"The Company and the Rights Agent may from time to time
supplement or amend the Rights Agreement without the approval of
any holders of Right Certificates, to cure any ambiguity, to
correct or supplement any provision contained therein which may
be defective or inconsistent with any other provisions therein,
to shorten or lengthen any time period thereunder, or, so long as
the interests of the holders of Right Certificates (other than an
Acquiring Person or an Affiliate or Associate of an Acquiring
Person) are not adversely affected thereby, to make any other
provisions in regard to matters or questions arising thereunder
which the Company and the Rights Agent may deem necessary or
desirable, including but not limited to extending the Final
Expiration Date."
7. Summary of Rights to Purchase Common Shares. Exhibit B to the Rights
Agreement, the Summary of Rights to Purchase Common Shares ("Exhibit
B") shall be amended as follows:
(a) The first two sentences of the second paragraph of Exhibit B
shall be amended in their entirety to read in full as follows:
"Until the earlier to occur of (i) ten (10) days following a
public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") acquired, or obtained
the right to acquire, beneficial ownership of 15% or more of the
Common Shares or (ii) ten (10) days following the commencement or
announcement of an intention to make a tender offer or exchange
offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the Common
Shares (the earlier of (i) and (ii) being called the
"Distribution Date"), the Rights will be evidenced, with respect
to any of the Common Share certificates outstanding as of the
Record Date, by such Common Share certificate with a copy of this
Summary of Rights attached thereto. The Rights Agreement provides
that the Board of Directors may postpone the Distribution Date
and that, until the Distribution Date, the Rights will be
transferred with and only with the Common Shares."
(b) The first sentence of the third full paragraph on page B-2 of
Exhibit B shall be amended in its entirety to read in full as
follows:
"In the event that a person were to acquire 15% or more of the
Common Shares or if the Company were the surviving corporation in
a merger and its Common Shares were not changed or exchanged,
each holder of a Right, other than the Rights that are or were
acquired or beneficially owned by the 15% stockholder (which
Rights will thereafter be void), will thereafter have the right
to receive upon exercise that number of Common Shares having a
market value of two times the exercise price of the Right."
(c) The first full paragraph on page B-3 of Exhibit B shall be
amended in its entirety to read in full as follows:
"The Rights may be redeemed, in whole, but not in part, at a
price of $.01 per Right (the "Redemption Price") by the Board of
Directors at any time until ten (10) days following the public
announcement that a person has become an Acquiring Person. The
Board of Directors may extend the period during which the Rights
are redeemable beyond the ten (10) days following the public
announcement that a person has become an Acquiring Person.
Immediately upon the action of the Board of Directors of the
Company electing to redeem the Rights, the Company shall make an
announcement thereof, and upon such election, the right to
exercise the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption Price."
(d) The second full paragraph on page B-3 of Exhibit B shall be
deleted in its entirety.
(e) The last paragraph on page B-3 of Exhibit B shall be amended in
its entirety to read in full as follows:
"The Company and the Rights Agent may amend or supplement the
Rights Agreement without the approval of any holders of Right
Certificates to cure any ambiguity, to correct or supplement any
provision contained therein which may be defective or
inconsistent with any other provisions therein, to shorten or
lengthen any time period under the Rights Agreement or, so long
as the interests of the holders of Right Certificates (other than
an Acquiring Person or an Affiliate or Associate of an Acquiring
Person) are not adversely affected thereby, to make any other
provisions in regard to matters or questions arising thereunder
which the Company and the Rights Agent may deem necessary or
desirable, including but not limited to extending the Final
Expiration Date."
8. Successors and Assigns. This Amendment No. 2 to the Rights Agreement
shall remain in full force and effect and shall be binding upon each
of the undersigned and any successors or assigns thereof. Except as
modified herein, the Rights Agreement shall remain in full force and
effect without change.
FILENET CORPORATION
By: _____________________________
Name: __________________________
Title: __________________________
Acknowledged and Agreed:
BANKBOSTON, N.A., as Rights Agent
By: ______________________________
Name: ______________________________
Title:______________________________
AMENDMENT TWO
to the
RUNTIME SUBLICENSE ADDENDUM
to the
BUSINESS ALLIANCE PROGRAM AGREEMENT
between
FILENET CORPORATION
and
ORACLE CORPORATION
This document ("Amendment Two") shall serve to amend the Runtime Sublicense
Addendum between Filenet Corporation (the "Alliance Member") and Oracle
Corporation ("Oracle") dated July 1, 1996 (the "Addendum"). The Addendum and
this Amendment Two are governed by the terms of the Business Alliance between
the Alliance Member and Oracle dated July 1, 1996 (the "Agreement").
The Addendum is amended as follows:
1. Notwithstanding any provision to the contrary in the Addendum and the
Agreement, the Alliance Member shall have the right for five (5) years from
the Effective Date of this Amendment One to the Sublicense to State Farm
(the "Sublicensee") only, for installation in the Territory as defined in
the Addendum, Runtime versions of the Programs listed below (the "Program
Set") to be used by Concurrent Devices of such Sublicensee in conjunction
with the Alliance Member's Application Program in the Alliance Member's
Image Management System Application Package ("Image Management System").
Image Management System is described in the Application Package Attachment
attached hereto. For each Sublicense of the Program Set granted pursuant to
this Amendment, the Alliance Member shall pay to Oracle a Sublicense Fee of
$xx per Concurrent Device subject to the minimum User Levels as specified
in the Oracle Price List.
Program Set
Oracle7 Server
2. For up to five (5) years from the Effective Date of this Amendment One, if,
as a result of adjustments to the then current Oracle price List or from
future negotiations between the parties, the license price of the Program
Set as specified in the then current Oracle Price List falls below the $xx
per Concurrent Device, the price the Alliance Member shall pay to Oracle
for such Sublicenses of the Program Set shall be at such lower license
price, and the Alliance Member shall not receive any refund or credits of
any kind.
Other than the modifications set forth above, the terms and conditions of the
Addendum remain unchanged and in full force and effect.
The Effective Date of this Amendment Two is December 31, 1996.
FILENET CORPORATION ORACLE CORPORATION
By: /s/ By: /s/
---------------------------- --------------------------
Name: William Kreidler Name: Monica M. Murnane
---------------------------- --------------------------
Title: V. P. Operations Title: Manager - West Region
---------------------------- Alliance Sales Support
--------------------------
<PAGE>
AMENDMENT THREE
to the
RUNTIME SUBLICENSE ADDENDUM
to the
BUSINESS ALLIANCE PROGRAM AGREEMENT
between
FILENET CORPORATION
and
ORACLE CORPORATION
This document ("Amendment Three") shall serve to amend the Runtime Sublicense
Addendum between Filenet Corporation (the "Alliance Member") and Oracle
Corporation ("Oracle") dated July 1, 1996 (the "Addendum"). The Addendum and
this Amendment Three are governed by the terms of the Business Alliance between
the Alliance Member and Oracle dated July 1, 1996 (the "Agreement").
The Addendum is amended as follows:
1. "The parties agree that the Alliance Member has the right to Sublicense to
State Farm (the "Sublicensee") Full Use and Runtime versions of Oracle7
Server subject to the terms and conditions of the Agreement. Pursuant to
this Amendment Three, Alliance Member may grant to the Sublicense the right
to use and install Full Use and Runtime licenses of Oracle7 Server on the
same hardware, provide that: (i) Alliance Member pays to Oracle all
applicable Full Use and Runtime Sublicense fees as required by the
Agreement; (ii) Sublicensee shall only use Full Use licenses of Oracle7
Server to build or modify reports or applications, alone or in conjunction
with the third-party program by BMC entitled "Patrol", and (iii)
Sublicensee's Users may not use Runtime licenses of Oracle7 Server to run
modified versions of the Alliance Member's Application Package."
2. In Section 2.1, delete the first sentence and replace it with the following:
"For each copy of the Programs Sublicensed by the Alliance Member or its
Distributor in the Application Package, the Alliance Member agrees to pay
Oracle a Sublicense fee equal to xx% of the applicable license fee for each
Oracle Server-Enterprise Edition Program, xx% of the applicable license fee
for each Oracle Server Program, and xx% of the applicable license fee for
any other Program, as specified in the applicable Price List and Alliance
Member Price List supplement to such Price List in effect at the time the
applicable Programs are Sublicensed.
Other than the modifications set forth above, the terms and conditions of the
Addendum remain unchanged and in full force and effect.
The Effective Date of this Amendment Three is ________________, 1997.
FILENET CORPORATION ORACLE CORPORATION
By: /s/ By: /s/
---------------------------- --------------------------
Name: W. Kreidler Name: Jason P. Jang
---------------------------- --------------------------
Title: Sr. Vice President Title: Contract Specialist
---------------------------- --------------------------
<PAGE>
AMENDMENT FOUR
to the
RUNTIME SUBLICENSE ADDENDUM
to the
BUSINESS ALLIANCE PROGRAM AGREEMENT
between
FILENET CORPORATION
and
ORACLE CORPORATION
This document ("Amendment Four") shall serve to amend the Runtime Sublicense
Addendum between Filenet Corporation (the "Alliance Member") and Oracle
Corporation ("Oracle") dated July 1, 1996 (the "Addendum"). The Addendum and
this Amendment Four are governed by the terms of the Business Alliance between
the Alliance Member and Oracle dated July 1, 1996 (the "Agreement").
The Addendum is amended as follows:
1. The Alliance Member shall have the right, for ninety (90) days from the
Effective Date of this Amendment Four, to Sublease Oracle7 Server in
conjunction with the Alliance Member's Application Package "Image
Management System (IMS)" to Sublicenses who currently have a valid license
for "Image Management System (IMS)" running on a Sybase database. The
Sublicense fee for each User of Oracle 7 Server sublicensed under this
Amendment Four shall be $xx.
Other than the modifications set forth above, the terms and conditions of the
Addendum remain unchanged and in full force and effect.
The Effective Date of this Amendment Four is ________________, 1997.
FILENET CORPORATION ORACLE CORPORATION
By: /s/ By: /s/
----------------------------- -------------------------
Name: W. Kreidler Name: Jason P. Jang
----------------------------- -------------------------
Title: Sr. Vice President Title: Contract Specialist
----------------------------- -------------------------
<PAGE>
AMENDMENT FIVE
to the
RUNTIME SUBLICENSE ADDENDUM
to the
BUSINESS ALLIANCE PROGRAM AGREEMENT
between
FILENET CORPORATION
and
ORACLE CORPORATION
This document ("Amendment Five") shall serve to amend the Runtime Sublicense
Addendum between Filenet Corporation (the "Alliance Member") and Oracle
Corporation ("Oracle") dated July 1, 1996 (the "Addendum"). The Addendum and
this Amendment Five are governed by the terms of the Business Alliance between
the Alliance Member and Oracle dated July 1, 1996 (the "Agreement").
The Addendum is amended as follows:
1. The Alliance Member shall have the right, until 1 year from the Effective
Date of this Amendment Five or the end of the Term of the Addendum,
whichever is earlier, to Sublicense the Runtime Program Oracle7 Server
("Oracle7 Server") in conjunction with the Alliance Member's Application
Package "IMS" to Sublicenses who currently have a valid license for "IMS"
running on the following operating systems and/or databases in order to
replace such operating systems and/or databases with Oracle7 server:
IIBM AS400
IBM MVS DB2
Optica Gupta/Proprietary
WANG WIIS/PACE
WANG Open Image
Viewstar Gupta
Viewstar Sybase
Plexus Informix
The Sublicense fee for each User of Oracle7 Server Sublicense under this
Amendment Five shall be $xx for Sublicenses installed within the United
States and $xx for Sublicenses installed outside of the United States in
the Territory (as defined in Amendment One to the Addendum dated July 1,
1996).
Other than the modifications set forth above, the terms and conditions of the
Addendum remain unchanged and in full force and effect.
The Effective Date of this Amendment Five is ________________, 1997.
FILENET CORPORATION ORACLE CORPORATION
By: /s/ By: /s/
--------------------------------- ----------------------
Name: William Kreidler Name: Jason P. Jang
--------------------------------- ----------------------
Title: Sr. Vice President, Title: Contract Specialist
--------------------------------- ----------------------
Customer Support and Operations
<PAGE>
AMENDMENT SIX
to the
RUNTIME SUBLICENSE ADEDENDUM
to the
BUSINESS ALLIANCE PROGRAM AGREEMENT
between
FILENET CORPORATION
and
ORACLE CORPORATION
This document ("Amendment Six") shall serve to amend the Runtime Sublicense
Addendum dated July 1, 1996 ("the Addendum") to the Business Alliance Program
Agreement between Filenet Corporation (the "Alliance Member") and Oracle
Corporation ("Oracle") dated July 1, 1996 (the "Agreement").
The parties shall agree to amend the Addendum as follows:
1. During the Term of the Addendum, the Alliance Member shall have the right
to market and grant Sublicense of the Runtime versions of the Programs set
forth below for use on Designated Systems in the Territory in conjunction
with the Alliance Member's Document Services ("DS") Application Program
and/or the Alliance Member's Integrated Document Management Services
("IDMS") Application Program pursuant to the terms of the Addendum and this
Amendment. The DS Application Package Attachments attached hereto as
Exhibit A. The Application Package Attachments attached herein as Exhibit A
shall be deemed added to the Agreement and the Application Programs
identified in such Addendum shall be included in the term "Application
Program" as defined in the Agreement.
Programs
Oracle 7/8 Server (NT)
Oracle 7/8 Server, Enterprise Edition (Unix)
2. After the first paragraph of Section 2.2 insert the following new paragraph:
"All Sublicense fees for Sublicenses installed outside the United
States shall be based on the standard list license fees for the
Programs as set forth on the Oracle' Global Price List."
3. Notwithstanding, any other provision of the Addendum, including, without
limitation, Section 2.3, the parties agree that the Alliance Member shall
have the right to Sublicense the Runtime version of the Oracle Server
Program with the DS Application Program and/or the IDMS Application Program
based on the maximum number of authorized Simultaneous Logged-On Users for
the applicable Application Package for installed on the applicable
Designated System. For the purposes of Sublicensing under this Amendment,
all references to Users in the Agreement of the Addendum shall be deemed to
refer to Simultaneous Logged-On Users.
"Simultaneous Logged-On Users" shall mean: the maximum number of input
devices accessing Filenet's IDMS Application Package or DS Application
Package at any given point in time. If multiplexing software or hardware
(e.g. a TP monitor, webserver product) is used, this number must be
measured at the multiplexing front-end.
Notwithstanding anything to the contrary, the user minimums for the Oracle
Programs, stated in the table in section 1 of this Amendment licensed by
the Alliance Member as part of the Application Package shall be changed
from 8 Concurrent users to 5 Simultaneous Logged on Users.
4. Delete the body of Section 4 in its entirety and insert the following:
4. TERRITORY
The Alliance Member shall have the right to market and grant
Sublicenses of Programs in the Application Package in all countries
worldwide (the "Territory"), subject to the terms of this Section.
Oracle may from time to time deny the Alliance Member the right to
Sublicense in certain countries in the Territory in order to protect
Oracle's interests if, in the reasonable opinion of Oracle's counsel, such
countries (i) do not provide for Oracle's proprietary rights through
copyright, trade secret, patent, or other laws; or (ii) have laws or
regulations or the government has committed acts which in the opinion of
Oracle's counsel, are injurious to Oracle's interest in the Programs.
The Alliance member acknowledges that the Programs are subject to
export controls imposed on Oracle and the Alliance Member by the U.S.
Export Administration Act, United States Departments of Commerce, Treasury,
and State regulations and directives, and other United States law ("Export
laws"). The Alliance Member certifies that neither the Programs nor any
direct product thereof are (i) exported, directly or indirectly, in
violation of Export laws; or (ii) are intended to be used for any purposes
prohibited by the Export laws, including, without limitation, nuclear,
chemical, or biological weapons proliferation. Furthermore, the Alliance
Member shall not transfer the Programs outside of the territory for which
the Alliance Member has sublicense rights under this Agreement.
The Alliance Member warrants that neither it nor its Distributors will
grant Sublicenses in or ship any Programs to a country until it (or the
Distributor) has completed all necessary government formalities in such
country and upon reasonable request by Oracle, the Alliance Member (or its
Distributor) provides evidence of completion of such formalities to Oracle.
The Alliance Member will indemnify Oracle for any losses, costs, liability,
and damages incurred by Oracle as a result of a failure by the Alliance
Member or its Distributors to comply with the necessary government
requirements in any country. The obligation under this Section shall
survive the expiration or termination of this Addendum. Upon Oracle's
reasonable request, the Alliance Member shall make records available to
Oracle to allow to confirm the Alliance Member's compliance with this
Section.
5. Notwithstanding any other provision in the Addendum, for each copy of the
Oracle Server Runtime Programs Sublicensed by the Alliance Member or its
Distributor in the DS Application Package or the IDMS Application Package
for use in the Territory, the Alliance Member agrees to pay Oracle a
Sublicense fee per each authorized Simultaneous Logged-On Users for the
applicable Application Package as specified below based on the applicable
operating system for the Designated System:
Application Package Operating System Sublicense Fee
IDMS Application Package Unix $xx
NT $xx
Application Package Operating System Sublicense Fee
DS Application Package Unix $xx
NT $xx
6. In addition, Alliance Member will provide quarterly reports to Oracle
Alliances, detailing Oracle's marketshare versus non-Oracle databases for
Alliance Member's Application Packages.
7. Upgrades from Filenet's IMS to IDMS Application Package for Sublicenses
will be provided at no charge provided, (a) The same number of users are
upgraded between Filenet's IMS and IDMS Application Package, (b) All
royalties have been reported and are paid in full for the IMS users being
upgraded and (c) The end users are currently being supported by Filenet for
all Runtime Sublicenses.
Other than the modifications set forth above, the terms and conditions of the
Addendum and the Agreement remain unchanged and in full force and effect.
The Effective Date of this Amendment Six is October 16, 1998.
FILENET CORPORATION ORACLE CORPORATION
By: /s/ By: /s/
------------------------------- --------------------------
Name: W. Kreidler Name: Nick Marquis
------------------------------- --------------------------
Title: Sr. Vice President, Title: Manager,
------------------------------- --------------------------
Worldwide Services & Operations Alliances Sales Support
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